Starwood Euro Real - Annual Financial Report year ended 31 Dec 2015 - Part 4
18/03/2016 15:25
- Part 4: For the preceding part double click ID:nRSR6304Sc
that are either designated in this category or not classified in
any of the other categories. They are included in non-current assets unless the investment matures or management intends to
dispose of it within 12 months of the end of the reporting period.
Recognition and measurement
Regular purchases and sales of financial assets are recognised on the trade date, the date on which the Group commits to
purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial
assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are
initially recognised at fair value, and transaction costs are expensed in the Consolidated Statement of Comprehensive
Income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have
been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale
financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans
and receivables are subsequently carried at amortised cost using the effective interest method less provisions for any
impairments.
Loan syndication
Loans and receivables measured at amortised cost are derecognised following syndication if the risks and rewards of
ownership have substantially transferred to the counterparty. Transaction costs of syndications are recognised in the
Consolidated Statement of Comprehensive Income when incurred.
h) Impairment of financial assets
Impairments for specific bad and doubtful debts are made against loans and receivables, by an evaluation of
the exposure on a case-by-case basis. An assessment is made, on a quarterly basis, as to whether there is any indication
that a loan may be impaired; if any such indication exists and where the carrying value exceeds the estimated recoverable
amount based on revised future cash flows, the loan will be reduced by the estimated impairment loss. The impairment loss
is calculated as the difference between the present value of future cash flows, discounted at the loan's original effective
interest rate, and the loan's current carrying value. The amount of any impairment loss, if any, would be recorded in the
Consolidated Statement of Comprehensive Income. No impairment has been recognised to date.
i) Cash and cash equivalents
In the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash in hand, deposits held at call with
banks and other short-term highly liquid investments with original maturities of three months or less.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of new
Ordinary Shares are shown in equity as a deduction, net of tax, from the proceeds.
k) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates
of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange
gains and losses that relate to borrowings and cash and cash equivalents and all other foreign exchange gains and
losses are presented in the Consolidated Statement of Comprehensive Income within "net foreign exchange gains/(losses)".
Group companies
The results and financial position of all the Group entities that have a functional currency different from the
presentation currency of the Group are translated into the presentation currency of the Group as follows:
i. ii.
assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of
that Statement of Financial Position;
income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this
average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in
which case income and expenses are translated at the rate on the dates of the transactions); and
None of the Group entities have a functional currency different to their presentation currency.
l) Interest income
Interest income on loans advanced is recognised using the effective interest rate method. If a loan and receivable is
impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted
at the original effective interest rate of the instrument, and continues unwinding the discount as interest income.
Interest income on impaired loans and receivables is recognised using the original effective interest rate to the extent
that the Group expects to recover the interest receivable.
Interest on cash and cash equivalents is recognised on an accruals basis.
m) Origination, exit and loan arrangement fees
Origination fees paid to the Investment Manager and exit and direct loan arrangement fees received will be recognised using
the effective interest rate method under loans advanced and amortised over the lifetime of the related financial asset
through income from loans advanced in the Consolidated Statement of Comprehensive Income. Syndication costs are recognised
in the Consolidated Statement of Comprehensive Income when incurred.
n) Expenses
All other expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis.
o) Taxation
The Company is a tax-exempt Guernsey limited liability company as it is domiciled and registered for taxation purposes in
Guernsey where it pays an annual exempt status fee under The Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 (as
amended). Accordingly, no provision for Guernsey tax is made.
The Partnership is transparent for both Guernsey and Luxembourg tax purposes, and therefore no provision for taxes has been
made.
The Luxco is subject to the applicable general tax regulations in Luxembourg and taxation is provided based on the results
for the year (see note 21).
p) Other receivables
Trade and other receivables are amounts due in the ordinary course of business. They are classified as assets. Trade and
other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective
interest method, less provision for impairment.
q) Other payables
Trade and other payables are obligations to pay for services that have been acquired in the ordinary course of business.
They are classified as liabilities. Trade and other payables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest rate method.
r) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as a liability in the Company's financial statements in
the period in which the dividends are declared by the Board of Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported on the Consolidated Statement of Financial Position
when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and settle the liability simultaneously.
t) Financial liabilities
Financial liabilities, including bank loans are initially recognised at fair value and subsequently accounted for with
interest on an accruals basis. Financial liabilities are derecognised when the contractual obligation is
discharged, cancelled or expires.
3. Material Agreements
a) Investment management agreement
The Company and the Investment Manager have entered into an investment management agreement, dated 28 November 2012 (the
"Investment Management Agreement"), pursuant to which the Investment Manager has been given overall responsibility for the
discretionary management of the Company's assets (including uninvested cash) in accordance with the Company's investment
objectives and policy.
The Investment Manager is entitled to a management fee which is calculated and accrued monthly at a rate equivalent to 0.75
per cent per annum of NAV (excluding any cash balances until such time as 75 per cent of the Net Issue Proceeds are
invested. The Company and Investment Manager agreed to increase the 75 per cent threshold to 90 per cent during the prior
year. The 90 per cent threshold was reached in May 2014). The management fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset origination fee of 0.75 per cent of the value of all new loan
investments made or acquired by the Group (see note 23). The asset origination fee to be paid by the Group is expected to
be paid upon receipt by the Group of loan arrangement fees received on the deployment of the Group's funds.
The Investment Management Agreement is terminable by either the Investment Manager or the Company giving to the other not
less than 12 months' written notice, such notice not to be given before the fourth anniversary of Admission (17 December
2016).
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.
b) Partnership agreement
As per the Amended and Restated Limited Partnership Agreement relating to Starfin Public LP, dated 28 November 2012, the
Company commits substantially all of the net issue proceeds plus proceeds from subsequent tap issues to the Partnership.
That commitment is drawn down as required by the GP for the funding of investments. 0.01 per cent of the Company's
commitment was paid as a capital contribution shortly after admission to trading on the London Stock Exchange ("Admission")
and the balance of 99.99 per cent, is committed and is paid over when requested by the GP.
Each amount of income and capital proceeds received by the Partnership will be distributed in the following order of
priority:
· First, to the GP until the GP has received distributions equal to the GP's Share, the GP will be entitled to receive
and there will be allocated to the GP in each accounting period a sum of £1,000;
· Second, to the extent of any excess, to the Company until the Company has achieved the hurdle total return; and
· Third, 20 per cent of the excess to Starfin Carry LP ("the Special Limited Partner") and 80 per cent of the excess
to the Company.
The hurdle total return will be achieved when the NAV of the Company, plus the total of all dividends declared and paid to
ordinary shareholders, is equal to the NAV of the Company as at Admission as increased by 8 per cent per annum, on a simple
interest basis (but excluding actual carried interest accrued and deemed as a creditor on the Statement of Financial
Position). To the extent that the Company makes further issues of Ordinary Shares, the hurdle total return will be adjusted
accordingly, by reference to the issue prices of such further issues and dividends declared subsequent to such issues.
c) Administration agreement
The Company has engaged the services of Ipes (Guernsey) Limited ("the Administrator") to act as Administrator and Company
Secretary. Under the terms of the administration agreement dated 28 November 2012, the Administrator is entitled to a
fee of no less than £135,000 per annum with an additional amount chargeable of 0.035 per cent per annum on the amount by
which the Company's NAV exceeds £140 million and further amounts as may be agreed in relation to any additional services
provided by the Administrator. The Administrator is, in addition, entitled to recover third party expenses and
disbursements.
d) Registrar's agreement
The Company and Computershare Investor Services (Guernsey) Limited ("the Registrar") entered into a Registrar agreement
dated 28 November 2012, pursuant to which the Company appointed the Registrar to act as Registrar of the Company for a
minimum annual fee payable by the Company of £7,500 in respect of basic registration.
e) IPO Sponsor's and placing agreement
In connection with the IPO, the Company engaged the services of Dexion Capital plc ("Dexion") and Jefferies International
Limited ("Jefferies") (collectively "the Joint Bookrunners") to act as joint global co- ordinators, bookrunners, placement
agents, arrangers and sponsors in connection with the issue of the Ordinary Shares ("the Issue") and the application for
Admission.
The total expenses of the Issue paid by the Company (including customary commissions and expenses payable to the Joint
Bookrunners, certain fees, costs and expenses of Starwood Capital Group Management, LLC and its affiliates ("Starwood"))
relating to the establishment of the Company and the fees of all other advisers and services providers to the Company and
the Joint Bookrunners were equal to 2 per cent of the gross Sterling proceeds of the Issue and were capped at this level.
On 5 February 2013, the Company appointed Dexion and Jefferies as joint Brokers to the Group. Dexion and Jefferies are each
entitled to receive a fee of £50,000 per annum plus expenses. On 24 June 2015, the Company terminated its agreenent with
Jefferies.
On 7 September 2015, the Company entered into a Placing Programme Agreement with Dexion and is subject to a maximum
aggregate commission payable to Dexion of 2 per cent of gross proceeds raised. As part of this agreement the £50,000 annual
fee is offset against any commission earned.
The Placing Programme Agreement is governed by the laws of England and Wales.
f) Licence agreement
The Company and Starwood Capital Group Management, LLC ("the Licensor") have entered into a trade mark licence agreement
dated 28 November 2012 ("the Licence Agreement"), pursuant to which the Licensor has agreed to grant to the Company a
royalty-free, non-exclusive worldwide licence for the use of the "Starwood" name for the purposes of the Company's
business.
Under the terms of the Licence Agreement, it may be terminated by the Licensor; (i) if the Investment Management Agreement
or any other similar agreement between the Company and the Investment Manager (or either of their respective affiliates) is
terminated for any reason whatsoever or expires: (ii) if the Company suffers an insolvency event or breaches any court
order relating to the Licence Agreement; or (iii) upon two months' written notice without cause.
g) Hedging agreements
The Company and Lloyds Bank plc entered into an international forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Company entered into a Professional Client Agreement with Goldman Sachs, pursuant to which the parties
can enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate
between Sterling and other currencies. Both agreements are governed by the laws of England and Wales.
h) Revolving credit facility
On 4 December 2014, the Company entered into a £50 million revolving credit facility with a major UK clearing bank which is
intended for short-term liquidity. Under its investment policy, the Company is limited to borrowing an amount equivalent to
a maximum of 20 per cent of its NAV at the time of drawdown. In calculating the Company's borrowings for this purpose, any
liabilities incurred under the Company's foreign exchange hedging arrangements shall be disregarded. The interest rate
payable will depend on how long the loan is outstanding: LIBOR plus 2.50 per cent per annum at initial draw down and
increasing for loans outstanding for more than six months. The facility is secured by a pledge over the bank accounts of
the Company, its interests in Starfin Public LP and the intercompany funding provided by the Company to Starfin Public LP.
Starfin Public LP also acts as guarantor of the facility and has pledged its bank accounts as collateral. The undertakings
and events of default are customary for a transaction of this nature. On 22 December 2015, the revolving credit facility
was increased to £60 million.
4. Directors' Fees
31 December 2015 31 December 2014
£ £
Directors' emoluments 132,500 112,500
Other expenses 6,341 2,783
138,841 115,283
5. Auditors' Remuneration
31 December 2015 31 December 2014
£ £
Audit fees 118,382 140,619
Non-audit fees 17,500 17,000
135,882 157,619
In addition, the Auditors also received £40,000 (2014: £nil) for professional services in relation to the Placing
Programme. As these fees were directly related to the Placing Pragamme, it was recognised in the Consolidated Statement of
Changes in Equity as Cost of Issues. Non-audit fees of £17,500 (2014: £17,000) relate to the Group's interim review of its
condensed consolidated financial statements.
6. Net Foreign Exchange Losses / (Gains)
31 December 2015 31 December 2014
£ £
Loans advanced losses (unrealised) 2,951,783 3,689,527
Loans advanced losses (realised) - 1,239,793
Forward contracts gains (unrealised) (3,525,752) (5,036,777)
Forward contracts losses (unrealised) 2,631,221 100,373
Forward contracts gains (realised) (1,873,801) (972,722)
Forward contracts losses (realised) - 141,886
Other 259,984 (43,205)
443,435 (881,125)
7. Earnings Per Share and Net Asset Value Per Share
The calculation of basic earnings per Ordinary Share is based on the operating profit of £18,755,085 (2014: £14,643,157)
and on the weighted average number of Ordinary Shares in issue during the year of 259,548,110 (2014: 238,100,000) Ordinary
Shares.
The calculation of NAV per Ordinary Share is based on a NAV of £305,473,044 (2014: £238,284,416) and the actual number of
Ordinary Shares in issue at 31 December 2015 of 304,180,000 (2014: 238,100,000).
8. Cash and Cash Equivalents
Cash and cash equivalents comprise the following:
31 December 2015 31 December 2014
£ £
Fixed deposits - 8,194,296
Cash at bank 520,558 4,978,682
520,558 13,172,978
Cash and cash equivalents comprises cash held by the Group and short term deposits held with various banking institutions
with original maturities of three months or less. The carrying amount of these assets approximates their fair value. For
further information and the associated risks refer to note 18.
9. Other Receivables and Prepayments
31 December 2015 31 December 2014
£ £
Prepayments 95,684 31,962
95,684 31,962
10. Revolving Credit Facility Capitalised Costs
The revolving credit facility capitalised costs are directly attributable costs incurred in relation to the establishment
of the £60 million loan facility.
11. Loans Advanced
The Group's accounting policy on the measurement of financial assets is discussed in note 2(g).
31 December 2015 31 December 2014
£ £
UK
Maybourne Hotel Group, London - 19,430,056
West End Development, London - 10,137,575
Lifecare Residences, London 14,027,005 13,311,980
Salesforce Tower, London 11,859,123 15,186,783
Centre Point, London 45,498,669 40,305,815
FC200, London - 9,252,934
Aldgate Tower, London 42,577,547 37,575,749
5 Star Hotel, London 13,142,848 6,871,376
Centre Parcs Bonds, UK 9,868,456 -
Industrial Portfolio, UK 32,357,364 -
Hospitals, UK 25,502,202 -
Netherlands
Office 10,362,243 11,104,334
Industrial Portfolio 20,515,407 15,873,838
W Hotel 15,865,865 9,198,302
Finland
Retail Portfolio 24,548,879 32,705,658
Denmark
Industrial Portfolio 32,404,690 -
Ireland
Retail and Residential Portfolio 4,584,580 -
Residential Portfolio, Cork 4,579,949 -
307,694,827 220,954,400
No element of loans advanced are past due or impaired. For further information and the associated risks see the Investment
Manager's Report.
The table below reconciles the movement of the carrying value of loans advanced in the year:
31 December 2015 31 December 2014
£ £
Loans advanced at the start of the year 220,954,400 156,381,277
Loans advanced 146,933,215 117,255,254
Loans repaid (63,499,033) (49,981,644)
Arrangement fees earned (1,479,139) (2,184,680)
Commitment fees earned (72,657) (57,413)
Accrued interest purchased on loan acquisition 474,589 -
Exit fees earned (227,417) (75,522)
Origination fees paid 946,069 1,072,949
Origination expenses paid 97,194
Syndication expenses paid / accrued - 313,888
Effective interest income earned 22,716,523 16,050,220
Interest payments received / accrued (16,197,134) (14,130,402)
Foreign exchange losses (2,951,783) (3,689,527)
Loans advanced at the end of the year 307,694,827 220,954,400
Loans advanced at fair value 320,752,322 231,280,183
For further information on the fair value of loans advanced, refer to note 19.
12. Financial Assets 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 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 fair value of derivative instruments held are set out
below:
Goldman Sachs:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2015 £ £ £ £
Foreign exchange derivatives
Currency forwards 22,551,503 2,072,414 (87,249) 1,985,165
Total 22,551,503 2,072,414 (87,249) 1,985,165
Lloyds Bank plc:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2015 £ £ £ £
Foreign exchange derivatives
Currency forwards 96,295,877 5,426,435 (1,493,485) 3,932,950
Total 96,295,877 5,426,435 (1,493,485) 3,932,950
Total:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2015 £ £ £ £
Foreign exchange derivatives
Currency forwards 118,847,380 7,498,849 (1,580,734) 5,918,115
Total 118,847,380 7,498,849 (1,580,734) 5,918,115
1 Euro and Danish Krone amounts are translated at the year end exchange rate
Goldman Sachs:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2014 £ £ £ £
Foreign exchange derivatives
Currency forwards 20,952,906 983,938 - 983,938
Total 20,952,906 983,938 - 983,938
Lloyds Bank plc:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2014 £ £ £ £
Foreign exchange derivatives
Currency forwards 52,791,971 4,039,646 - 4,039,646
Total 52,791,971 4,039,646 - 4,039,646
Total:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2014 £ £ £ £
Foreign exchange derivatives
Currency forwards 73,744,877 5,023,584 - 5,023,584
Total 73,744,877 5,023,584 - 5,023,584
1 Euro and Danish Krone amounts are translated at the year end exchange rate
13. Revolving Credit Facility
Under the Company's investment policy, the Company is limited to borrowing an amount equivalent to a maximum of 20 per cent
of its NAV at the time of drawdown. In calculating the Company's borrowings for this purpose, any liabilities incurred
under the Company's foreign exchange hedging arrangements shall be disregarded. The interest rate payable will depend on
how long the loan is outstanding: LIBOR plus 2.50 per cent per annum at initial draw down and increasing for loans
outstanding for more than six months. The facility is secured by a pledge over the bank accounts of the Company, its
interests in Starfin Public LP and the intercompany funding provided by the Company to Starfin Public LP. Starfin Public LP
also acts as guarantor of the facility and has pledged its bank accounts as collateral. The undertakings and events of
default are customary for a transaction of this nature. As at 31 December 2015 an amount of £8,155,816 (31 December 2014: £
nil) was drawn and interest of £6,589 (31 December 2014: £ nil) was payable.
14. Trade and Other Payables
31 December 2015 31 December 2014
£ £
Investment management fees payable 575,154 446,949
Administration fees payable 55,490 52,515
Audit fees payable 42,261 54,644
Broker fees payable - 25,009
Other expenses payable 18,466 8,449
Syndication costs payable - 133,200
Origination fees payable - 426,375
Legal and professional fees payable 94,163 169,099
Revolver commitment fees payable 20,549 25,278
806,083 1,341,518
15. Commitments
As at 31 December 2015 the Company had outstanding commitments in respect of loans not fully drawn of £7,617,154 (2014:
£28,048,863).
As at 31 December 2015 the Company has entered into forward contracts under the Hedging Master Agreement with Lloyds Bank
plc to sell E82,317,292 (2014: E67,534,823) and Kr365,315,294 (2014: Kr nil) to receive Sterling. At the year end, these
forward contracts have a fair value of £3,932,950 (2014: £4,039,646).
As at 31 December 2015 the Company has entered into forward contracts under the Professional Client Agreement with Goldman
Sachs to sell E30,686,492 (2014: E 26,804,280) and receive Sterling. At the year end, these forward contracts have a fair
value of £1,985,165 (2014: £983,938).
16. 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 year end the Company had issued and fully paid up share capital as follows:
31 December 2015 31 December 2014
Ordinary Shares of no par value
Issued and fully paid 304,180,000 238,100,000
Rights attached to shares
The Company's share capital is denominated in Sterling. At any general meeting of the Company each ordinary share carries
one vote. The Ordinary Shares also carry the right to receive all income of the Company attributable to the Ordinary
Shares, and to participate in any distribution of such income made by the Company, such income shall be divided pari passu
among the holders of Ordinary Shares in proportion to the number of Ordinary Shares held by them.
Significant share movements
1 January 2015 to 31 December 2015:
Ordinary Shares Number £
Balance at start of the year 238,100,000 238,509,000
Shares issued on 3 July 2015 23,780,000 24,493,400
Shares issued on 24 September 2015 42,300,000 43,478,250
Balance at the end of the year 304,180,000 306,480,650
Issue costs to date (6,083,445)
Net proceeds 300,397,205
1 January 2014 to 31 December 2014:
Ordinary Shares Number £
Balance at start of the year 238,100,000 238,509,000
Balance at the end of the year 238,100,000 238,509,000
Net proceeds 238,509,000
17. 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 pay quarterly dividends to shareholders (for more information see Chairman's Statement).
The Company paid the following dividends in respect of the year to 31 December 2015:
Dividend rate per Share (pence) Net dividend Payment date
paid (£)
Period to:
31 March 2015 1.75 4,166,750 30 April 2015
30 June 2015 1.75 4,582,900 31 July 2015
30 September 2015 1.75 5,323,150 31 October 2015
After the end of the year, the Directors declared a dividend in respect of the financial year ended 31 December 2015 of
1.75 pence per share (£5,323,150) to be paid as at 18 February 2016 to shareholders on the register as at 4 February 2016.
The Company declared the following dividends in respect of the year to 31 December 2014:
Dividend rate per Share (pence) Net dividend Payment date
paid (£)
Period to:
31 March 2014 1.25 2,976,250 30 April 2014
30 June 2014 1.35 3,214,350 30 July 2014
30 September 2014 1.50 3,571,500 27 October 2014
31 December 2014 1.70 4,047,700 27 February 2015
18. 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
Market risk includes market price risk, currency risk and interest rate 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. As such the Directors do not consider that the
Group is subject to market price risk. 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 on-going 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 on-going basis and is
reported to the Board accordingly.
The Company and Lloyds Bank plc entered into an international forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Company entered into a Professional Client Agreement with Goldman Sachs, pursuant to which the parties
can enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate
between Sterling and other currencies. The Company 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 Consolidated Statement of Financial Position date and
movements in the fair value are included in the Consolidated Statement of Comprehensive Income under net foreign exchange
gains/(losses). The Company does not adopt hedge accounting in the financial statements. At the reporting date the Company
had 75 (2014: 34) open forward contracts.
As at 31 December 2015 the Company had the following currency exposure:
Danish Krone Sterling Euro Total
31 December 2015 £ £ £ £
Assets
Loans advanced 32,404,690 194,833,214 80,456,923 307,694,827
Other receivables and prepayments - 33,056 62,628 95,684
Cash and cash equivalents 33,118 481,502 5,938 520,558
Financial assets at fair value through profit or loss - 5,918,115 - 5,918,115
Liabilities
Revolving credit facility - (8,162,405) - (8,162,405)
Trade and other payables - (797,993) (8,090) (806,083)
Net currency exposure 32,437,808 192,305,489 80,517,399 305,260,696
Danish Krone Sterling Euro Total
31 December 2014 £ £ £ £
Assets
Loans advanced - 152,072,268 68,882,132 220,954,400
Other receivables and prepayments - 31,962 - 31,962
Cash and cash equivalents - 10,826,808 2,346,170 13,172,978
Financial assets at fair value through profit and loss - 5,023,584 - 5,023,584
Liabilities
Trade and other payables - (1,075,973) (265,545) (1,341,518)
Net currency exposure - 166,878,649 70,962,757 237,841,406
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase or decrease by 10 per cent with all other variables held
constant, the net assets of the Group at 31 December 2015 would increase or decrease by £8,051,740 (2014: £7,096,276).
Should the exchange rate of the Danish Krone against Sterling increase or decrease by 10 per cent with all other variables
held constant, the net assets of the Group at 31 December 2015 would increase or decrease by £3,243,781 (2014: £nil).These
percentages have been determined based on potential volatility and deemed reasonable by the Directors. This does not
include the impact of hedges in place which would be expected to reduce the impact.
In accordance with the Company's policy, the Investment Manager monitors the Group's currency position, and the Board
of Directors reviews this risk on a regular basis.
b) Interest rate risk
Interest rate risk is the risk that the value of financial instruments and related income from loans advanced and cash
and cash equivalents will fluctuate due to changes in market interest rates.
The majority of the Group's financial assets are loans advanced, receivables and cash and cash equivalents. The Group's
investments have some exposure to interest rate risk but this is limited to interest earned on cash deposits and floating
interbank rate exposure for investments designated as loans advanced. Loans advanced have been structured to include a
combination of fixed and floating interest rates to reduce the overall impact of interest rate movements. Further
protection is provided by including interbank rate floors, preventing interest rates from falling below certain levels.
The following table shows the portfolio profile of the financial assets at 31 December 2015:
31 December 2015 31 December 2014
£ £
Floating rate
Loans advanced1 148,059,663 93,280,342
Cash and cash equivalents 520,558 4,978,682
Fixed rate
Loans advanced 159,635,164 127,674,058
Cash and cash equivalents - 8,194,296
Total financial assets subject to interest rate risk 308,215,385 234,127,378
1 Loans advanced at floating rates include loans with interbank rate floors.
If interest rates had changed by 25 basis points, with all other variables remaining constant, the effect on the net profit
and equity would have been as shown in the table below:
31 December 2015 31 December 2014
£ £
Increase of 25 basis points1 371,451 245,648
Decrease of 25 basis points (371,451) (245,648)
1The calculation assumes no interbank rate floors.
These percentages have been determined based on potential volatility and deemed reasonable by the Directors.
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 loan portfolio, shown as loans advanced, where the Group invests in whole loans and also subordinated
and mezzanine debt which rank behind senior debt for repayment in the event that a borrower defaults. There is a spread
concentration of risk as at 31 December 2015 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 through profit and loss which is diversified
between hedge providers in order to spread credit risk to which the Group is exposed. The total exposure to credit risk
arises from default of the counterparty and the carrying amounts of financial assets best represent the maximum credit risk
exposure at the year end date. As at 31 December 2015, the maximum credit risk exposure was £314,441,532 (2014:
£239,625,934).
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 on-going basis. After the advancing of a loan a
dedicated debt asset manager employed by the Investment Adviser monitors on-going 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 maintains its cash and cash equivalents across various different banks to diversify credit risk which have been
all rated A1 or higher by Moody's and this is subject to the Group's credit risk monitoring policies as mentioned above.
31 December 2015 Cash 1 month fixed Total as at
deposit 31 December 2015
£ £ £
Barclays Bank plc 248,291 - 248,291
Lloyds Bank plc 892 - 892
HSBC Bank plc 37 - 37
Royal Bank of Scotland International 208 - 208
ING Luxembourg, SA 271,130 - 271,130
Total cash and cash equivalents 520,558 - 520,558
31 December 2014 Cash 1 month fixed Total as at
deposit 31 December 2014
£ £ £
Barclays Bank plc 3,342,107 7,186,601 10,528,708
Lloyds Bank plc 930 - 930
HSBC Bank plc 205,139 1,007,695 1,212,834
Royal Bank of Scotland International 677 - 677
ING Luxembourg, SA 1,429,829 - 1,429,829
Total cash and cash equivalents 4,978,682 8,194,296 13,172,978
The carrying amount of cash and cash equivalents approximates their fair value.
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 20 per cent of NAV and has entered into a revolving
credit facility of £60 million of which £8 million was drawn at year end.
The table below shows the maturity of the Group's non-derivative financial assets and liabilities
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