TIDMSWEF
RNS Number : 5834M
Starwood European Real Estate Finan
28 August 2013
Starwood European Real Estate Finance Limited
Interim Financial Report and Unaudited Condensed Consolidated
Financial Statements for the period from 9 November 2012 to 30 June
2013
Investment Objective
The investment objective of Starwood European Real Estate
Finance Limited ("the Company") is to provide its shareholders with
regular dividends and an attractive total return while limiting
downside risk, through the origination, execution, acquisition and
servicing of a diversified portfolio of real estate debt
investments (including debt instruments) in the UK and Continental
European markets. Whilst investment opportunities in the secondary
market are considered, the Company's main focus is to originate
direct primary real estate debt investments.
The Company attempts to limit downside risk by focusing on
secured debt with both quality collateral and contractual
protection. The typical loan term is between three and seven years
and at least 75 per cent. of total loans by value will be for a
term of seven years or less.
Once fully invested the Company intends to be appropriately
diversified by geography, real estate sector type, loan type and
counterparty. The Company pursues investments across the commercial
real estate debt asset class through senior loans, subordinated
loans and mezzanine loans, bridge loans, selected loan-on-loan
financings and other debt instruments.
Structure
The Company was incorporated with limited liability in Guernsey
under the Companies (Guernsey) Law, 2008, as amended, on 9 November
2012 with registered number 55836, and has been authorised by the
Guernsey Financial Services Commission ("GFSC") as an authorised
closed-ended investment company. The Company's ordinary shares were
admitted to the premium segment of the UK Listing Authority's
Official List and to trading on the Main Market of the London Stock
Exchange as part of its initial public offering which completed on
17 December 2012. The issued capital during the period comprises
the Company's ordinary shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l
("Luxco"), an indirect wholly-controlled subsidiary not subject to
regulation in Luxembourg or elsewhere. The Company's interest in
Luxco is held through a Guernsey limited partnership, Starfin
Public LP ("the Partnership") of which Starfin Public GP Limited
("the GP") is the general partner. The GP is wholly owned and
controlled by the Company. Starfin Carry LP ("The Special Limited
Partner") is the only other limited partner of Starfin Public LP
and the former is majority owned by the Starwood Capital Group
("Starwood") and has no control over the general partner (see
related party transactions). References to the "Group" refer to the
Company, the GP, the Partnership and Luxco .
Investment Manager and Investment Adviser
The Investment Manager during the period was Starwood European
Finance Partners Limited, 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.
Directors
Stephen Smith (Non-Executive Chairman)
Stephen was the Chief Investment Officer of British Land Company
PLC, the FTSE 100 real estate investment trust from January 2010 to
March 2013 with responsibility for the group's property and
investment strategy, leaving at the end of June 2013. He was
formerly Global Head of Asset Management and Transactions at AXA
Real Estate Investment Managers, where he was responsible for the
asset management of a portfolio of more than EUR40 billion on
behalf of life funds, listed property vehicles, unit linked and
closed end funds. Prior to joining AXA in 1999 he was Managing
Director at Sun Life Properties for five years. Stephen is a UK
resident.
Jonathan Bridel (Non-Executive Director)
Jonathan is currently a Non-Executive Chairman or Director of
listed and unlisted companies comprised mainly of investment funds
and investment managers, including Alcentra European Floating Rate
Income Fund Limited and The Renewables Infrastructure Group
Limited. He was previously Managing Director of Royal Bank of
Canada's investment business in the Channel Islands. Prior to this,
Jonathan served in senior management positions in the British Isles
and Australia in banking, specialising in credit and in private
businesses as Chief Financial Officer. Graduating from the
University of Durham with a degree of Master of Business
Administration in 1988, Jonathan also holds qualifications from the
Institute of Chartered Accountants in England and Wales, the
Chartered Institute of Marketing and the Australian Institute of
Company Directors. Jonathan is a Chartered Marketer and a member of
the Chartered Institute of Marketing, the Institute of Directors
and Chartered Fellow of the Chartered Institute for Securities and
Investment. Jonathan is a resident of Guernsey.
John Whittle (Non-Executive Director)
John is a Chartered Accountant and holds the Institute of
Directors Diploma in Company Direction. He is a non-executive
director of International Public Partnerships Ltd (FTSE 250), India
Capital Growth Fund Ltd, Globalworth Real Estate Investments
Limited and Advance Frontier Markets Fund Ltd (all AIM) and also
acts as Non-Executive Director to several other Guernsey investment
funds. He was previously Finance Director of Close Fund Services, a
large independent fund administrator, where he successfully
initiated a restructuring of client financial reporting services
and was a key member of the business transition team. Prior to
moving to Guernsey he was at Price Waterhouse in London before
embarking on a career in business services, predominantly telecoms.
He co-led the business turnaround of Talkland International (now
Vodafone Retail) and was directly responsible for the strategic
shift into retail distribution and its subsequent implementation;
he subsequently worked on the GBP20 million private equity
acquisition of Ora Telecom. John is also a resident of
Guernsey.
Chairman's Statement
Dear Shareholder,
I am delighted to present the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements of Starwood
European Real Estate Finance Limited (the "Company") for the period
from 9 November 2012 (date of incorporation) to 30 June 2013.
At the end of last year, 228,500,000 ordinary shares of the
Company, with an issue price of GBP1.00, were admitted to the
premium segment of the UK Listing Authority's Official List and to
trading on the Main Market of the London Stock Exchange as part of
the Company's initial public offering (the "IPO"), completed on 17
December 2012.
Since the IPO, the Board has worked closely with the Investment
Manager and Investment Adviser both strategically and on a deal by
deal basis. The investment deployment has been slower than
anticipated at the time of the IPO with 8.1 per cent. invested as
at 30 June 2013. However, since 30 June 2013 the Company has
committed an additional GBP22.8million of capital in two new
investments and the pipeline has matured. Terms have been agreed
for five loans with investment potential of GBP117million and the
supporting documentation is being drafted and agreed. We anticipate
these transactions all to close by the end of September and if this
were to occur the Company would be 68 per cent. invested. The
Investment Adviser's report discusses the reasons for the slower
pace of investment.
The overall risk profile of the investments made to date and in
the pipeline is arguably more conservative than anticipated without
compromising the expected returns. Furthermore, the Board is
satisfied with the progress made by the Investment Manager and
Investment Adviser during the period. Whilst market conditions have
changed since the IPO, the Investment Adviser and Investment
Manager, working in close collaboration with the Board, have
maintained a disciplined and rigorous approach to investment and
continue to operate within the risk parameters set out within the
prospectus. Notwithstanding the market circumstances, the Board
believes that substantially investing the IPO proceeds within the
twelve month timeline anticipated during the IPO is reasonably
achievable.
At launch, the Company had targeted a dividend of 3.5 pence per
ordinary share in respect of the period from Admission (17 December
2012) to the first financial year end (31 December 2013) and 7.0
pence per ordinary share in subsequent financial periods. This was
predicated on the assumption that 50 per cent. of the Company's
available cash would be invested within six months of the IPO and
the remainder within 12 months.
For the period to 31 December 2013, the Company now expects to
be able to pay a dividend of at least 1.2 pence based on the three
deals that have closed, and if all five pipeline deals referred to
above close, and no others, the dividend could be up to 2.4 pence.
In the event that further transactions close prior to the year end,
the total dividend will be higher and a further update in this
regard will be provided in due course.
It is currently expected that a first interim dividend will be
declared in October 2013 for the period ending 30 September 2013 of
at least 0.70 pence.
Based on detailed projections, as at the date of this statement,
the Company remains comfortable that once fully invested it would
be able to meet its dividend target of 7.0 pence per annum.
In order to meet market demand, principally following the
Company's inclusion in the FTSE UK Index Series and to manage the
higher share price premium over the net asset value per share at
that time, the Company issued additional shares within the limits
imposed by the Prospectus Rules. The following tap issues were made
during the period:
-- 21 March 2013: An additional eight million ordinary shares at
a price of 104.25 pence per ordinary share.
-- 9 April 2013: An additional one million ordinary shares at a
price of 104.50 pence per ordinary share.
-- 12 April 2013: An additional six hundred thousand shares at a
price of 104.00 pence per ordinary share.
Following these issues, the Company currently has issued share
capital consisting of 238,100,000 ordinary shares.
The Company will continue to update you on progress by way of
the quarterly fact sheets and investment updates when deals are
signed.
On behalf of the Board, I would like to close by thanking
shareholders for your commitment and I look forward to updating you
on the Company's progress later on this year.
Stephen Smith
Chairman
27 August 2013
Investment Adviser's Report
Summary
Starwood European Real Estate Finance Limited (the "Company") is
a company limited by shares incorporated in Guernsey under the
Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with
registered number 55836, and has been authorised by the Guernsey
Financial Services Commission as an authorised closed-ended
investment company. The Company's ordinary shares were admitted to
the premium segment of the UK Listing Authority's Official List and
to trading on the Main Market of the London Stock Exchange as part
of its initial public offering which completed on 17 December
2012.
The Company together with its subsidiaries, Starfin Public GP
Limited, Starfin Public LP and Starfin Lux S.à.r.l (collectively
referred to as the "Group"), as advised by Starwood European
Finance Partners Limited (the "Investment Manager"), aims to
originate, execute, acquire and service a diversified portfolio of
real estate debt investments (including debt instruments) in the UK
and Continental European markets.
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.
Investment Deployment
As at 30 June 2013, the Group had invested GBP19.1 million in a
loan to the Maybourne Hotel Group ("Maybourne"), representing 8.1
per cent. of net IPO proceeds. The Group participated as one of
three partners in the GBP147 million mezzanine component of the
GBP547 million refinancing of Maybourne. The five-year loan is
secured on three five-star luxury London hotels, being Claridge's,
the Connaught and the Berkeley, and consists of a GBP400 million
senior loan and GBP147 million of mezzanine finance, to which the
Group committed GBP19 million. This investment has been undertaken
on an attractive loan-to-value of the low fifties per cent., and
the Group will earn a double digit yield in line with its
investment criteria.
Two loans have closed subsequent to 30 June 2013 bringing the
Company to 18 per cent. invested or committed as at 27 August 2013.
Underlying loan confidentiality prohibits full disclosure but in
summary:
West End, London: The Group has provided GBP10 million out of a
GBP55.75 million three year term loan to a very strong
opportunistic property investor secured by a well located
transitional asset in the Tottenham Court Road area of the West
End. The Borrower intends to obtain a mixed use planning consent
which would then facilitate a refurbishment process at which time
the loan would be repaid. The initial LTV is 50 per cent. and the
loan is expected to generate approximately a 7 per cent. gross IRR.
The Group remains interested in participating in the next stage of
the project but has no obligation to do so.
Assisted Living Scheme, London: The Group has executed a
facility agreement with a member of the Lifecare Residences group
to fund GBP8.5 million of a GBP16.75 million mezzanine loan and
GBP4.3 million of a GBP40 million senior loan together to finance
the development of a prime London retirement village. Lifecare
Residences is a leading developer and operator of retirement care
villages in both the United Kingdom and New Zealand. The Company
was the mezzanine loan arranger. This investment has been
undertaken on a mid-sixties per cent. loan to gross development
value and the Company will earn a blended double digit yield in
line with its investment criteria.
Whilst the deployment of capital has been slower than originally
anticipated, the pipeline is strong, as described below, and the
Investment Adviser remains satisfied with the performance of the
Company for the period to 30 June 2013.
Company Performance as at 30 June 2013
As at 30 June 2013 the Net Asset Value ("NAV") was 98.65 pence
per ordinary share and the share price was 102.50 pence.
Portfolio Statistics
As at 30 June 2013, the portfolio was invested in line with the
Company's investment policy and is summarised below. The position
as at 27 August 2013 is also shown as a number of investments have
been undertaken since 30 June 2013.
30 June 27 August
2013 2013
------------------------------------------------- -------- -----------
Number of issuers 1 3
------------------------------------------------- -------- -----------
Number of investments 1 3
------------------------------------------------- -------- -----------
Number of industries 1 3
------------------------------------------------- -------- -----------
Percentage of invested portfolio in floating
rate investments 100% 79.7%
------------------------------------------------- -------- -----------
Invested Loan Portfolio annualised total return N/A (1) 10.9%
------------------------------------------------- -------- -----------
Blended portfolio LTV - to Company first GBP N/A (1) 36.2%
------------------------------------------------- -------- -----------
Blended portfolio LTV - to Company last GBP N/A (1) 52.1%
------------------------------------------------- -------- -----------
Average loan term 5 years 3.91 years
------------------------------------------------- -------- -----------
Percentage of assets invested in cash 91.9% 82.1%
------------------------------------------------- -------- -----------
Percentage of assets invested in senior loans 0% 6.1%
------------------------------------------------- -------- -----------
Percentage of assets invested in second lien
and mezzanine loans 8.1% 11.8%
------------------------------------------------- -------- -----------
Percentage of assets invested in other debt
instruments 0% 0.0%
------------------------------------------------- -------- -----------
Percentage invested in GBP 100% 100%
------------------------------------------------- -------- -----------
Percentage invested in Euro 0% 0%
------------------------------------------------- -------- -----------
(1) Unable to disclose until the Group has more than one
investment, due to confidentiality undertakings.
Currently all of the Company's investments are in London,
however, should the five deals in the pipeline close as anticipated
then the Company will achieve greater geographical diversity. The
table below shows the diversification in terms of industries.
Breakdown by Industry 30 June 27 August
2013 2013
------------------------------------ -------- ----------
Hospitality 8.1% 8.1%
------------------------------------ -------- ----------
Mixed Use 0% 4.3%
------------------------------------ -------- ----------
Residential for sale - development 0% 5.5%
------------------------------------ -------- ----------
Cash and other 91.9% 82.1%
------------------------------------ -------- ----------
Origination Process and Pipeline
The Investment Adviser seeks to originate opportunities for the
Company in three principal ways:
-- Direct Client Origination - Utilising its broad global and
local relationships to source primary business opportunities.
-- Bank Interaction - The Investment Adviser and its affiliates
have strong banking relationships given the Starwood Capital
Group's wider market position. With the growing awareness of the
Company and its capabilities, the Investment Adviser is being
actively approached by banking partners to work together.
-- Equity Business Referral - As a result of Starwood Capital
Group's involvement in equity investments, the Investment Adviser
often sees opportunities where the pricing or risk level is
inappropriate from an equity perspective but where the opportunity
to invest in the debt aspect of the investment is more
compelling.
All three approaches are active in providing opportunities. It
is encouraging to report that these origination approaches means
that the Investment Adviser has agreed indicative terms on five
other loans, all of which are in execution and more generally we
have seen our transaction pipeline continue to mature and have a
number of other small, mid and large positions that are progressing
well. The five loans in execution offer the Company a total
investment potential of approximately GBP117 million. Three are in
Continental Europe and two are in the UK. Sector exposures include
the three main commercial real estate sectors of office, retail and
light industrial/logistics as well as the residential sectors.
These loans are all in line with the Company's investment return
targets. We anticipate these transactions all to close by
end-September and if this were to occur the Company would be 68 per
cent. invested or committed.
We would however highlight that transactions in the current
market do have an above average level of uncertainty of closing to
that typically expected at such an advanced stage and, as such,
this forward guidance is caveated.
Since the IPO, the process of investment has been somewhat
slower than anticipated. There are several reasons for this. The
Investment Adviser devoted a reasonable degree of resources in the
second quarter of 2013 to bidding for a large loan book which would
have been transformational for the Company, allowing it to deploy
much of its cash in a single transaction underpinned by strong
property and loans. In the end our bid, whilst competitive, was
insufficient. However, we believe that the Company remains well
place to participate in this type of transaction.
During this time the Investment Adviser continued to focus on
direct client origination and reviewed a significant number of
potential investment opportunities. There have been numerous
reasons for not proceeding including where other bidders succeeded,
where the implied mezzanine became too slim and where tenant
fundamentals were weak.
Delay or failure to consummate transactions is also being caused
by the excessive amount of time involved in moving refinancings
forward which leads to many deals becoming derailed, by borrowers
believing they are able to refinance higher levered deals which
fall down in the due diligence stage and by the Company losing
transactions on the basis of pricing or not agreeing to
transactions where it considers the structure to be deficient (e.g.
lack of mortgage security, amortisation or weak covenants).
Future Strategy and Investment Outlook
In terms of future investment strategy, we are building a
presence in both the smaller whole loan lending market and taking a
leading role in the very large one-off structured transactions
(such as Maybourne). It is also likely a greater UK regional and
overall continental European focus will become visible in our
proactive origination strategy, as London continues to attract the
vast majority of other investors' attention.
It is expected that the principal focus will be making whole
loans that can offer "one stop" borrowing and then to carefully
consider which loans should be partially syndicated to enhance
returns.
We see good and growing prospects for the Company and believe
the original target of full investment within 12 months could
reasonably still be achieved.
There are a number of factors that can act as an impediment to
closing transactions within expected timeframes or at all. Within
the bounds of competitive confidentiality the Company wishes to be
as clear on the investment pipeline as possible and will keep
shareholders informed as events unfold.
Market Summary
The first four to five months of the year highlighted a much
greater degree of optimism within the property markets; still
cautious but certainly greater than in recent years. In the last
few months this optimism has accelerated in specific markets and
indeed could now be slightly ahead of actual fundamentals. Nowhere
is this more apparent than in London which has recently seen some
tightly priced equity investments. Notwithstanding the risk cushion
implicit in lending we have also observed a small number of lending
transactions that are questionable on either price or structure or
both. Conversely market optimism has also engendered a resurgent
desire for investors to act upon their refinancing requirements or
reinvigorated interest in new investment. This typically creates a
greater need for creative property lending. Put together, the
demand for property finance has unquestionably increased offering
greater opportunities but also requiring the Company to continue to
be diligent in its underwriting requirements.
On the supply side, many European banks continue to focus on
their withdrawal or reduction of exposure to the sector not least
to meet Basel III as well as real estate finance being a non-core
activity. Individual events, such as the recent nationalization of
SNS by the Dutch government, also underscore continued regulatory
concerns over the carrying value of many loans on bank balance
sheets. We do, however, see that global monetary easing has created
a generic "hunt for yield" and political pressure to lend is also
present, not least in the UK through the "Funding for Lending"
scheme. The UK Clearing Banks have greater lending capacity but do
remain, for the most part, cautious on business possibilities. An
increasing US and European insurance presence means there is excess
finance capacity for the prime London office market for strong
sponsors and low leverage. Similarly mainstream German lending has
become more competitive especially with the appetite and resultant
pricing for Pfandbrief, the key covered bond issuance program for
domestic German real estate lending banks. Meanwhile the mezzanine
lending space continues to develop and is summarily defined by
investment funds raising substantial third party capital for higher
return lending strategies - we expect to observe at least GBP2
billion of fund style investor commitments to the specialist fund
managers in this field by the end of 2013.
Put together the picture is fundamentally one of increased
activity and active players. The Company observes that there are
now two "bookends" in the market being the attractive efficiently
priced core senior market and a well-capitalised mezzanine market
that has the ability to embrace quite significant risk should it
choose to do so but is often hampered by quite high return
requirements. The availability of finance, both senior and mezz,
outside core locations is actually not deep, particularly for non
prime assets and the numbers of players that can embrace "one stop
shop lending" in an efficient and timely manner, such as the
Company, remains a much smaller sub set.
Principal Risks for the Remaining Six Months of the period to 31
December 2013
The Investment Adviser assesses the following as the principal
risks relating to the Company:
-- The Company's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies, and the actual rate of
return may be materially lower than the targeted returns;
-- The level of dividends and other distributions to be paid by
the Company may fluctuate and there is no guarantee that any such
distributions will be paid;
-- The shares may trade at a discount to NAV per share and
shareholders may be unable to realise their investments through the
secondary market at NAV per share; and
-- Local laws or regulations may mean that the status of the
Company or the ordinary shares is uncertain or subject to change,
which could adversely affect investor's ability to hold ordinary
shares.
The Investment Adviser assesses the following as the principal
risks relating to the investment strategy and investment
portfolio:
-- The Company will be exposed to the commercial real estate
market and if that market enters a downturn it could materially
adversely affect the Company's business and financial
condition;
-- Commercial mortgage loans are subject to the ability of the
property owner to generate net income from operating the
property/ies as well as the risk of delinquency and financial
difficulty of the tenants. A major occupier or tenant of a property
financed by the Company could default and / or seek to renegotiate
terms during the course of a tenancy, which would lower the value
of that property and may impact on the income to service the
related loans provided by the Company;
-- The pace of investment may be slower than expected, resulting
in a lower rate of return on the ordinary shares;
-- Real estate valuation is inherently subjective and uncertain.
In addition, the value of underlying real estate and the rental
income it produces may fluctuate as a result of factors which are
outside the Company's control;
-- The Company may invest in various types of subordinated debt,
which would rank behind senior debt tranches for repayment in the
event that a borrower defaults;
-- The Company's investments will be illiquid and may be
difficult or impossible to realise for cash at any particular
time;
-- The Company's investments may be concentrated and are subject
to risk of default. In the event of a default of any loan assets of
the Company entitling the Company to enforce security, the process
may be expensive and lengthy;
-- The due diligence process that the Investment Manager and
Investment Adviser undertakes in connection with the Company's
investments may not reveal all facts, including material facts,
that may be relevant in connection with any investment;
-- The on-going situation in the Eurozone has improved but may
have an adverse effect on investments in Europe and the break up of
the Eurozone, or the exit of any member state, would create
uncertainty and could affect the Company's investments
directly;
-- Currency and / or interest rate hedging arrangements may not
be successful or available at an acceptable price;
-- Repayment of loans could be subject to the availability of
refinancing options, including the availability of senior and
subordinated debt and is also subject to the underlying real estate
collateral at the date of maturity;
-- The Company has invested in loans for the development of
property. These loans involve an increased risk of loss;
-- The Company faces competition in sourcing and making investments;
-- The financial markets are uncertain and have been the subject of governmental intervention;
-- Principal may be repaid earlier than anticipated, causing the
return on certain investments to be less than expected;
-- The Company may sell, syndicate or finance the senior
elements of loans within its portfolio, which may increase the
Company's exposure to losses on such loans;
-- The Company has invested in loans in which the collateral and
income is controlled by a third party agent or where it only holds
a minority of the loan; and
-- Pending investment in accordance with the investment policy,
the Company's assets will be subject to credit risk of the banks or
other financial institutions with which they are deposited.
The Investment Adviser assesses the following as the principal
risks relating to the Investment Manager and Investment
Adviser:
-- The Company is dependent on the expertise of the Investment
Manager, the Investment Adviser and their key personnel to evaluate
investment opportunities and to implement the Company's investment
strategy;
-- Past performance is no indication of future results;
-- There are various conflicts of interest in the relationship
between the Company and the Starwood Capital Group which could
result in decisions that are not in the best interests of the
Company;
-- The Investment Management Agreement was not negotiated on an
arm's-length basis and may not be as favourable to the Company as
if it had been negotiated on such a basis and may be costly or
difficult to terminate; and
-- The existence of the carried interest may incentivise the
Investment Manager's and the Investment Adviser's personnel to make
or recommend risky investments.
The Investment Adviser assesses the following as the principal
risks relating to relating to regulation and taxation:
-- Changes in the Company's tax status or tax treatment may
adversely affect the Company and if the Company becomes subject to
the UK offshore fund rules there may be adverse tax consequences
for certain UK resident shareholders;
-- Failure by the Company to maintain its non-UK tax resident
status may subject the Company to additional taxes which may
materially adversely affect the Company's business, results of
operations and the value of the ordinary shares;
-- The investment activity to be undertaken by the Company and
its subsidiaries may expose the Company to the risk of regulation
in Luxembourg and other jurisdictions; and
-- The AIFM Directive may prevent the marketing of the ordinary
shares in the European Union, which would be likely to adversely
affect liquidity in the ordinary shares and the ability of
shareholders to realise their investment.
Related Party Transactions
Related party disclosures are given in note 16 to the financial
statements.
Directors' Responsibility Statement
To the best of their knowledge, the Directors of Starwood
European Real Estate Finance Limited confirm that:
a) The Unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with IAS 34, "Interim Financial
Reporting" as adopted by the European Union; and
b) The Interim Financial Report, comprising of the Chairman's
Statement and the Investment Adviser's Report, 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 since
inception 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 since
inception and that have materially affected the financial position
or performance of the Company during that period.
By order of the Board
Stephen Smith John Whittle
Chairman Director
27 August 2013 27 August 2013
Independent Review Report to Starwood European Real Estate
Finance Limited
Introduction
We have been engaged by Starwood European Real Estate Finance
Limited ("the Company") and its subsidiaries (together "the Group")
to review the Unaudited Condensed Consolidated Financial Statements
in the interim financial report for the period ended 30 June 2013,
which comprises the Unaudited Condensed Consolidated Statement of
Comprehensive Income, the Unaudited Condensed Consolidated
Statement of Financial Position as at 30 June 2013, the Unaudited
Condensed Consolidated Statement of Changes in Equity, the
Unaudited Condensed Consolidated Statement of Cash Flows and
related notes. We have read the other information contained in the
interim financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the Unaudited Condensed Consolidated Financial
Statements.
Directors' responsibilities
The interim financial report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the interim financial report in accordance with the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 3, the annual financial statements of the
Company will be prepared in accordance with International Financial
Reporting Standards as adopted by the European Union. The Unaudited
Condensed Consolidated Financial Statements included in this
interim financial report have been prepared in accordance with
International Accounting Standard 34, "Interim Financial Reporting"
as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the Unaudited Condensed Consolidated Financial Statements in the
interim financial report based on our review. This report,
including the conclusion, has been prepared for and only for the
Company for the purpose of the Disclosure and Transparency Rules of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in producing this report, 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.
Scope of review
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.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the Unaudited Condensed Consolidated
Financial Statements in the interim financial report for the period
ended 30 June 2013 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 and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
PricewaterhouseCoopers CI LLP
Chartered Accountants
Guernsey, Channel Islands
27 August 2013
Unaudited Condensed Consolidated Statement of Comprehensive
Income
For the period from incorporation on 9 November 2012 to 30 June
2013
9 November
2012 to 30
Unaudited Notes June 2013
GBP
-------------------------------------------------------- -------- ------------
Income
Income from loans advanced 1,183,053
Income from cash and cash equivalents 382,128
Total Income from Investments 1,565,181
-------------------------------------------------------- -------- ------------
Expenses
Investment management fees 4(a) 77,051
Directors' fees and travel expenses 17 74,042
Administration fees 4(c) 93,685
Auditors' fees 54,089
Broker's fees 53,699
Legal and professional fees 72,901
Insurance 33,165
Net foreign exchange loss 8,189
Other expenses 62,927
-------------------------------------------------------- -------- ------------
Total operating expenses 529,748
-------------------------------------------------------- -------- ------------
Operating profit for the period an total comprehensive
income 1,035,433
-------------------------------------------------------- -------- ------------
Weighted average number of shares in issue 5 233,348,205
Basic and diluted earnings per ordinary share
(pence) 5 0.44
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 2013
30 June 2013
Unaudited Notes GBP
--------------------------------------------- -------- -------------
Assets
Cash and cash equivalents 6 215,545,841
--------------------------------------------- -------- -------------
Other receivables and prepayments 7 81,650
Loans advanced 8 19,491,134
--------------------------------------------- -------- -------------
Total assets 235,118,625
Liabilities
Trade and other payables 9 240,030
--------------------------------------------- -------- -------------
Total liabilities 240,030
--------------------------------------------- -------- -------------
Net assets 234,878,595
--------------------------------------------- -------- -------------
Capital and reserves
Share capital 11 233,843,162
Retained earnings 1,035,433
--------------------------------------------- -------- -------------
Total equity 234,878,595
--------------------------------------------- -------- -------------
Number of sterling ordinary shares in issue 5 238,100,000
Net asset value per sterling ordinary share
(pence) 5 98.65
These Unaudited Condensed Consolidated Financial Statements were
approved and authorised for issue by the Board of Directors on 27
August 2013, and signed on its behalf by:
Stephen Smith
Chairman
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Changes of
Equity
For the period from incorporation on 9 November 2012 to 30 June
2013
Notes Share capital Retained earnings Total equity
GBP
GBP GBP
------------------------- ------ -------------- ------------------ -------------
Balance at 9 November - - -
2012
------------------------- ------ -------------- ------------------ -------------
Issue of share capital 11 238,509,000 - 238,509,000
Costs of issues 11 (4,665,838) - (4,665,838)
Operating profit and
total comprehensive
income - 1,035,433 1,035,433
Balance at 30 June 2013 233,843,162 1,035,433 234,878,595
------------------------- ------ -------------- ------------------ -------------
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Cash Flows
For the period from incorporation on 9 November 2012 to 30 June
2013
9 November
2012 to 30
Unaudited June 2013
GBP
--------------------------------------------------- -------------
Operating activities:
Operating profit for the period and total
comprehensive income 1,035,433
Adjustments for non-cash items
Net interest income (1,565,181)
Increase in prepayments (60,163)
Increase in other payables and accrued expenses 240,030
Net foreign exchange losses 8,189
--------------------------------------------------- -------------
(341,692)
--------------------------------------------------- -------------
Loans advanced (19,060,999)
Interest income from loans advanced 752,918
--------------------------------------------------- -------------
Net cash outflow from operating activities (18,649,773)
--------------------------------------------------- -------------
Cash flows from investing activities
Interest income from cash and cash equivalents 360,641
Net cash outflow from investing activities (360,641)
--------------------------------------------------- -------------
Cash flows from financing activities
Net share issue proceeds received 234,878,549
Costs of share issues (1,035,387)
--------------------------------------------------- -------------
Net cash inflows provided by financing activities 233,843,162
--------------------------------------------------- -------------
Net increase in cash and cash equivalents 215,554,030
Cash and cash equivalents at start of the -
period
Net foreign exchange losses (8,189)
--------------------------------------------------- -------------
Cash and cash equivalents at the end of the
period 215,545,841
--------------------------------------------------- -------------
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements.
Notes to the Unaudited Condensed Financial Statements
For the period from incorporation on 9 November 2012 to 30 June
2013
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 GFSC as an
authorised closed-ended investment company. 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
initial public offering, which raised net proceeds of GBP223.93
million. The Company's ordinary shares were admitted to the premium
segment of the UK Listing Authority's Official List and to trading
on the Main Market of the London Stock Exchange as part of its
initial public offering which completed on 17 December 2012. A
further GBP9.9 million of net proceeds was raised via tap issues
throughout the period.
The Unaudited Condensed Consolidated Financial Statements
comprise the financial statements of the Company, Starfin Public GP
Limited (the "GP"), the Starfin Public LP (the "Partnership") and
Starfin Lux S.à.r.l ("Luxco") (together "the Group") as at 30 June
2013.
The Company's investment objective is to provide its
shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments (including debt instruments) in the UK and
Continental European markets. To pursue its investment objective,
the Company, through the Partnership, will invest in the Luxco
through both equity and profit participation instruments or other
funding instruments. The Luxco will then grant or acquire loans (or
other debt instruments) to borrowers in accordance with the
Company's investment policy. Some investments may be made via
special purpose vehicles wholly owned by the Luxco or the Company.
The Company expects all of its investments to be debt obligations
of corporate entities domiciled or with significant operations in
the United Kingdom and Continental Europe.
The Company has appointed Starwood European Finance Partners
Limited as the Investment Manager ('the Investment Manager"), which
is 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. The administration of
the Company is delegated to Ipes (Guernsey) Limited ("the
Administrator").
2. 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 Company is a going concern.
Note 13 includes the Group's objectives, policies and processes
for managing its capital, its financial risk management objectives,
details of financial instruments and exposure to credit risk and
liquidity risk. The Directors have undertaken a rigorous review of
the Group's ability to continue as a going concern including
reviewing the ongoing cash flows and the level of cash balances as
of the reporting date.
After making enquiries of the Investment Manager and the
Administrator, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future. Accordingly, they continue to adopt a
going concern basis in preparing these financial statements.
3. Basis of Preparation and Principal Accounting Policies
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied to the period presented, unless otherwise
stated.
a) Statement of compliance
The Group will in due course produce Consolidated Financial
Statements in accordance with The Companies (Guernsey) Law, 2008
(as amended) and International Financial Reporting Standards
("IFRS") as adopted by the European Union, which comprise standards
and interpretations approved by the International Accounting
Standards Boards ("IASB") together with the interpretations of the
International Accounting Standards and Standards Interpretations
Committee ("IFRIC") as approved by the International Accounting
Standards Committee ("IASC") which remain in effect.
Standards and Interpretations in issue and not yet
effective:
New Standards Effective date
------------------------------------------------------ -----------------
IFRS Financial Instruments - Classifications 1 January
9 and Measurement 2015
IFRS Consolidated Financial Statements 1 January
10 2013
IFRS Joint Arrangements 1 January
11 2013
IFRS Disclosure of Interests in Other Entities 1 January
12 2013
IFRS Fair Value Measurement 1 January
13 2013
Revised and amended standards
-------------------------------------------------------------------------
IAS 28 Investments in Associates and Joint Ventures 1 January
(revised) 2013
IAS 1 Presentation of Items of Other Comprehensive 1 January
Income (amended) 2012
IFRS Disclosures - Offsetting Financial Assets 1 January
7 and Financial Liabilities (amended) 2013
IAS 32 Offsetting Financial Assets and Financial 1 January
Liabilities (amended) 2014
IFRS Mandatory Effective Date and Transition 1 January
7/9 Disclosure (amended) 2015
The Group has elected to adopt the new standards IFRS 10, IFRS
11, IFRS 12 and IFRS 13 early, but the Directors do not anticipate
that the adoption of these and other standards and interpretations
will have a significant impact on the Consolidated Financial
Statements of the Group.
b) Basis of preparation
These Unaudited Condensed Consolidated Financial Statements have
been prepared on a going concern basis in accordance with IAS 34
and IFRIC interpretations and the Disclosure and Transparency Rules
of the Financial Services Conduct Authority. The Unaudited
Condensed Consolidated Financial Statements have been prepared
under the historical cost convention.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Company's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the Unaudited
Condensed Consolidated Financial Statements relate to:
- the impairment of financial assets held as loans advanced, the
key area of judgement being, as to whether there is any indication
that a loan may be impaired (see Note 3(g));
- the functional currency of subsidiary undertakings of the
Company, which is considered to be not different from the Company
(see Notes 3(d) and 3(j)); and
- the operating segments, of which the Directors are currently
of the opinion that the Company and its subsidiaries are engaged in
a single segment of business, which is based on the loan advanced
as at the reporting date (see Note 3(e)).
c) Basis of consolidation
The Unaudited Condensed Consolidated Financial Statements
incorporate the financial statements of the Company and entities
controlled by the Company (its subsidiary undertakings) made up to
the statement of financial position date. Control is achieved where
the Company has the power to govern the financial and operating
policies of an investee entity so as to obtain benefits directly
from its activities. The existence and effect of potential voting
rights that are currently exercisable or convertible are considered
when assessing whether the Company controls another entity. The
Company also assesses existence of control where it does not have
more than 50 per cent. of the voting power but is able to govern
the financial and operating policies by virtue of de-facto
control.
Subsidiary undertakings Date of Control Ownership Country
% of Incorporation
------------------------- ----------------- ---------- ------------------
Starfin Public GP 20 November 2012 100 Guernsey
Limited
Starfin Public LP 22 November 2012 100 Guernsey
Starfin Lux S.à.r.l 30 November 2012 100 Luxembourg
Subsidiary undertakings are fully consolidated from the date on
which control is transferred to the Group. They are de-consolidated
from the date that control ceases.
The Group applies the acquisition method to account for business
combinations. The consideration transferred for the acquisition of
a subsidiary is the fair values of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the
equity interests issued by the Group. The consideration transferred
includes the fair value of any asset or liability resulting from a
contingent consideration arrangement. Identifiable assets acquired
and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the
acquisition date. The Group recognises any non-controlling interest
in the acquiree on an acquisition-by-acquisition basis, either at
fair value or at the non-controlling interest's proportionate share
of the recognised amounts of acquiree's identifiable net
assets.
Acquisition-related costs are expensed as incurred.
Inter-company transactions, balances, income and expenses on
transactions between Group companies are eliminated. Profits and
losses resulting from inter-company transactions that are
recognised in assets are also eliminated. Accounting policies of
subsidiary undertakings are consistent with the policies adopted by
the Group.
d) Functional and presentation currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates ('the functional
currency'). The Unaudited Condensed Consolidated Financial
Statements are presented in Sterling, which is the Group's
presentation currency.
e) Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision--maker.
The chief operating decision--maker, who is responsible for
allocating resources and assessing performance of the operating
segments, has been identified as the Board, as the Board makes
strategic decisions. As at the reporting date only one loan had
been advanced, and as such the Directors are currently of the
opinion that the Company and its subsidiaries are engaged in a
single segment of business, being the provision of a diversified
portfolio of real estate backed loans. As additional loans are
advanced, and the internal reporting of the Group develops, the
Directors will consider the way in which internal reporting is
provided to them and will ensure any impact on segment reporting
will be appropriately updated and disclosed in the annual financial
statements for the year ended 31 December 2013.
f) Financial assets
Classification
The Group classifies its financial assets in the following
categories: at fair value through profit or loss, loans and
receivables, and available for sale. The classification depends on
the purpose for which the financial assets were acquired.
Management determines the classification of its financial assets at
initial recognition.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are
financial assets held for trading. A financial asset is classified
in this category if acquired principally for the purpose of selling
in the short term. Derivatives are also categorised as held for
trading unless they are designated as hedges.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. The Group's loans and receivables comprise secured loans
advanced, trade and other receivables and cash and cash
equivalents.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives 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 income statement.
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.
g) Impairment of financial assets
Impairment 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 is recorded in the Income
Statement.
h) 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.
i) 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.
j) 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 income statement, except when deferred in
other comprehensive income as qualifying cash flow hedges and
qualifying net investment hedges. 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 are translated into the presentation currency as
follows:
i. assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance
sheet;
ii. income and expenses for each income statement 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
iii. all resulting exchange differences are recognised in other comprehensive income.
k) Interest income
Interest income on loans advanced is recognised using the
effective interest method. When 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.
Interest on cash and cash equivalents is recognised on an
accruals basis.
l) Origination, exit and loan arrangement fees
Origination, exit and direct loan arrangement fees paid or
received will be recognised using the effective interest method
under loans advanced and amortised over the lifetime of the related
financial asset through profit and loss.
m) Expenses
All other expenses are included in the Consolidated Statement of
Comprehensive Income on an accruals basis.
n) 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.
o) 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.
p) 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 method.
q) 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, or in the case of final dividends for which shareholder
approval is required, in the period which they are approved by the
Company's shareholders.
4. 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 daily at a rate equivalent to 0.75 per cent.
per annum of Net Asset Value (excluding any cash balances until
such time as 75 per cent. of the Net Issue Proceeds are invested).
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 Company. The asset origination
fee to be paid by the Company is expected to be paid upon receipt
by the Company of all loan arrangement fees received on the
deployment of the Company'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 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 will be paid 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 GBP1,000;
-- 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") (further information in Related Party
Transactions) and 80 per cent. of the excess to the Company.
The hurdle total return will be achieved when the Net Asset
Value ("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 balance sheet). 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 GBP135,000 per annum with an additional amount chargeable of
0.035 per cent. per annum on the amount by which the Company's Net
Asset Value exceeds GBP140,000,000 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 GBP7,500 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 are
equal to two per cent. of the gross Sterling proceeds of the Issue
and were capped at this level.
The Sponsor and Placing Agreement is governed by the laws of
England and Wales.
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 GBP50,000 per annum plus expenses.
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) Lock up Agreement
The Company, the Joint Bookrunners, Starwood and Starwood
Property Trust Inc ("STWD") entered into a lock up agreement dated
28 November 2012 ("the Lock Up Agreement"), pursuant to which (i)
STWD agreed not to transfer, dispose of or grant any options over
any of the ordinary shares acquired by STWD under the Placing; and
(ii) Starwood has agreed to procure that any Starwood personnel to
whom any ordinary shares are transferred by Starwood do not
transfer, dispose of or grant any options over any of the ordinary
shares to be acquired by Starwood under the Placing, in each case
for a period of 6 months following Admission.
h) Hedging Master Agreement
The Company and Lloyds TSB Bank Plc entered into an
international forward exchange master agreement dated 5 April 2013
("the Hedging Master Agreement"), 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 Hedging Master Agreement is governed by
the laws of England and Wales.
5. Earnings Per Share and Net Asset Value Per Share
The calculation of basic earnings per ordinary share is based on
the operating profit of GBP1,035,433 and on the weighted average
number of ordinary shares in issue during the period of 233,348,205
ordinary shares.
The calculation of net asset value per ordinary shares is based
on a net asset value of GBP234,878,595 and the actual number of
ordinary shares in issue at 30 June 2013 of 238,100,000.
6. Cash and Cash Equivalents
Cash and cash equivalents comprise as follows:
30 June 2013
Unaudited GBP
----------------------------- -------------
Fixed deposits of one month 107,600,000
Cash at bank 107,945,841
----------------------------- -------------
215,545,841
----------------------------- -------------
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 see Note 13.
7. Other Receivables and Prepayments
30 June 2013
Unaudited GBP
-------------------------- -------------
Bank interest receivable 21,487
Prepayments 60,163
-------------------------- -------------
81,650
-------------------------- -------------
8. Loans Advanced
The Group's accounting policy on the measurement of financial
assets is discussed in Note 3(f)
30 June 2013
Unaudited GBP
------------------------- -------------
UK
Maybourne Hotel Group 19,491,134
19,491,134
------------------------- -------------
The Directors believe that the carrying value of the financial
asset approximates its fair value. No element of loans advanced are
past due or impaired. For further information and the associated
risks see the Investment Adviser's Report and note 14.
9. Other Payables and Accrued Expenses
30 June 2013
Unaudited GBP
--------------------------------------------- -------------
Investment management fees 35,882
Administration and company secretarial fees 45,772
Audit fees 54,089
Legal fees 38,331
Broker fees 41,199
Other expenses 24,757
--------------------------------------------- -------------
240,030
--------------------------------------------- -------------
10. Commitments
The Company and the GP (acting in its capacity as General
Partner of the Partnership) entered into a loan agreement ("the
loan") dated 17 December 2012 committing the principal amount of
GBP223,930,000 to the Partnership. The arrangement is based on the
understanding that the commitment will be used primarily to fund
the advancing of loans, and as such the commitment will only be
drawn down once loans have been approved for issue by the
Company.
As at 30 June 2013 GBP19,145,980 had been drawn by the GP
(acting in its capacity as General Partner of the Partnership under
the agreement).
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.
As at 30 June 2013 the Company had issued and fully paid up
share capital as follows:
30 June 2013
--------------------------------- -------------
Ordinary shares of no par value
Issued and fully paid 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
9 November 2012 to 30 June 2013
Ordinary Shares Number GBP
----------------------------------- ------------ ------------
Balance at start of the period - -
Shares issued on 17 December 2012 228,500,000 228,500,000
Shares issued on 21 March 2013 8,000,000 8,340,000
Shares issued on 09 April 2013 1,000,000 1,045,000
Shares issued on 12 April 2013 600,000 624,000
----------------------------------- ------------ ------------
Balance at end of the period 238,100,000 238,509,000
----------------------------------- ------------ ------------
During the period the Company issued 238,100,000 shares, raising
total proceeds of GBP238,509,000. The proceeds net of issue costs
of GBP4,665,838 amounted to GBP233,843,162.
12. Dividends
In any financial year, the Company makes distributions to
shareholders of not more than the cash income it receives less its
running costs paid in the year. Cash income comprises cash received
by the Company attributable to the investment portfolio and income
received on cash and cash equivalents.
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).
Dividends will be declared by the Directors and paid in
compliance with the solvency test prescribed by Guernsey law.
During the period ended 30 June 2013 no dividends were declared
by the Directors.
13. Risk Management Policies and Procedures
The Group through its investment in senior loans, subordinated
loans and mezzanine loans, bridge loans, loan-on-loan financings
and other debt instruments is exposed to a variety of financial
risks, including market risk (including currency risk and interest
rate risk), credit risk and liquidity risk. The Group's overall
risk management programme focuses on the unpredictability of
financial markets and seeks to minimise potential adverse effects
on the Group's financial performance.
The Group's Investment Manager is responsible for identifying
and controlling risks. The Board of Directors is ultimately
responsible for the overall risk management approach within the
Group.
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:
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 ongoing basis.
Currency risk
The Group, via the subsidiaries, will operate across Europe and
will invest in loans that may be denominated in currencies other
than the functional or presentational currency of the Company.
Consequently the Group will be exposed to risks arising from
foreign exchange rate fluctuations related to currency flows from
revenues and expenses and from the translation of income statement
and statement of financial position items which are denominated in
foreign currencies. Exposure to foreign currency risk is monitored
by the Investment Manager on an ongoing basis and is reported to
the Board accordingly.
The Company and Lloyds TSB Bank Plc entered into an
international forward exchange master agreement dated 5 April 2013
("the Hedging Master Agreement"), 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. At the reporting date no foreign exchange
transactions had been entered in to under the terms of this
agreement.
30 June 2013 Sterling Euro Total
GBP GBP GBP
----------------------------- ------------ -------- ------------
Assets
Loans advanced 19,491,134 - 19,491,134
Bank interest receivables 21,487 - 21,487
Cash and cash equivalents 215,509,411 36,430 215,545,841
Liabilities
Trade and other payables (237,285) (2,745) (240,030)
Total net currency exposure 234,784,747 33,685 234,818,432
----------------------------- ------------ -------- ------------
Currency sensitivity analysis
Should the exchange rate against Sterling increase or decrease
by 5 per cent. with all other variables held constant, the net
assets of the Group at 30 June 2013 would increase or decrease by
GBP1,684. These percentages have been determined based on potential
volatility and deemed reasonable by the Directors.
In accordance with the Company's policy, the Investment Manager
monitors the Group's currency position, and the Board of Directors
reviews it.
Interest rate risk
Interest rate risk is the risk that the value of financial
instruments and related income from the 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 LIBOR-based exposure
for investments designated as loans advanced.
The following table shows the portfolio profile of the financial
assets at 30 June 2013:
30 June 2013
GBP
-------------------------------- -------------
Floating rate
Loans advanced 19,491,134
Cash 107,945,841
Fixed rate
Loans advanced -
Cash equivalents 107,600,000
-------------------------------- -------------
Total interest sensitivity gap 235,036,975
-------------------------------- -------------
If interest rates had changed by 100 basis points, with all
other variables remaining constant, the effect on the net profit
and equity would have been as shown on the table below.
30 June 2013
------------------------------ -------------
Increase of 100 basis points 2,350,370
Decrease of 100 basis points (2,350,370)
------------------------------ -------------
These percentages have been determined based on potential
volatility and deemed reasonable by the Directors.
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 subordinated and mezzanine debt, which rank behind
senior debt for repayment in the event that a borrower
defaults.
There is a concentration risk as at 30 June 2013 due to only one
advanced loan being in existence, however this risk is offset as
the loan is secured by collateral. There is also credit risk in
respect of other financial assets as a significant 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 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 period end date.
As at 30 June 2013, the maximum credit risk exposure was
GBP235,036,975.
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.
The Group maintains its cash and cash equivalents across five
different banks to diversify credit risk which have been all rated
A- or higher by Moody's and this is subject to the Group's credit
risk monitoring policies as mentioned above
1 month Total as at
Cash fixed deposit 30 June 2013
GBP GBP GBP
--------------------------------- ------------ --------------- --------------
Barclays Bank plc 33,773,570 26,900,000 60,673,570
Santander UK plc 24,416,851 26,900,000 51,316,851
Lloyds TSB Bank plc 24,389,386 26,900,000 51,289,386
HSBC Bank plc 24,392,284 26,900,000 51,292,284
ING Luxembourg, SA 973,750 - 973,750
Total cash and cash equivalents 107,945,841 107,600,000 215,545,841
--------------------------------- ------------ --------------- --------------
The carrying amount of these assets approximates their fair
value.
Liquidity risk
Liquidity risk is the risk that the Group will not be able 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.
Liquidity risks arise in respect of other financial liabilities
of the Group are those due to counterparties. However, at 30 June
2013, there was sufficient liquidity in the form of cash and cash
equivalents to satisfy the Company's obligations.
Except for the loans advanced, the Group's financial assets and
financial liabilities all have maturity dates within one year. An
analysis of the maturity of financial assets classified as loans
advanced is shown in the table below:
Less Between one After Total as at
than and five years five 30 June 2013
one year GBP years GBP
GBP GBP
----------------- ----------- ---------------- ------- --------------
Senior Loans - - - -
Mezzanine Loans - 19,491,134 - 19,491,134
----------------- ----------- ---------------- ------- --------------
- 19,491,134 - 19,491,134
----------------------------- ---------------- ------- --------------
Capital management policies and procedures
The Group's capital management objectives are:
- To ensure that the Group will be able to continue as a going concern; and
- To maximise the income and capital return to equity
shareholders through an appropriate balance of equity capital and
long-term debt.
In accordance with the Group's investment policy, the Group's
principal use of cash (including the proceeds of the IPO) has been
to fund investments in the form of loans sourced by the Investment
Adviser and Investment Manager, as well as initial expenses related
to the issue, ongoing operational expenses and payment of dividends
and other distributions to shareholders in accordance with the
Company's dividend policy.
The Board with the assistance of the Investment Manager monitors
and reviews the broad structure of the Company's capital on an
ongoing basis.
The Company has no imposed capital requirements.
The Company's capital at 30 June 2013 comprises:
30 June 2013
GBP
-------------------------------------- -------------
Equity
Equity share capital 233,843,162
Retained earnings and other reserves 1,035,433
-------------------------------------- -------------
234,878,595
-------------------------------------- -------------
14. Controlling Party
In the opinion of the Directors on the basis of shareholdings
advised to them, the Company has no immediate or ultimate
controlling party.
15. Taxes
The Company is exempt from Guernsey taxation under the Income
Tax (Exempt Bodies)(Guernsey) Ordinance 1989 for which it pays an
annual fee of GBP600.
The Luxembourg indirect subsidiary of the Company is subject to
the applicable tax regulations in Luxembourg.
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. Details on the Investment Manager are included in note 4
to the Unaudited Condensed Consolidated Financial Statements.
Total investment management fees for the period amounted to
GBP77,051, with outstanding fees of GBP35,882 at 30 June 2013. In
addition, the Investment Manager has been paid an origination fee
of GBP142,500 in respect of the Maybourne loan and has been
reimbursed GBP4,104 in expenses.
In December 2012 SCG Starfin Investor LP, majority owned by
Starwood, subscribed for 2,285,000 ordinary shares in the Company
for a consideration of GBP2,285,000. As at 30 June 2013, SCG
Starfin Investor LP held 2,285,000 ordinary shares in the
Company.
In December 2012 STWD, a company managed and advised by
Starwood, subscribed for 9,140,000 ordinary shares in the Company
for a consideration of GBP9,140,000. As at 30 June 2013, STWD held
9,140,000 ordinary shares in the Company.
Starwood has been reimbursed GBP244,098 in fees and expenses in
relation to IPO costs paid on behalf of the Company pre receipt of
the share issue proceeds and other expenses in the period to 30
June 2013. In addition, under the Sponsor and Placing Agreement,
and as disclosed in the Prospectus, the Joint Bookrunners were
entitled to pay part of the commissions received by them to certain
investors, including the Starwood Capital Group and its Affiliates.
Under this agreement, the Joint Bookrunners made a payment to
Starwood and its Affiliates of GBP171,375.
The Special Limited Partner is entitled to receive any carried
interest earned as a result of the performance of the Group's
investments. The Special Limited Partner is owned by Starwood (for
more information see note 4).
StarConsult S.a.r.l, a company managed by Thierry Drinka who is
also a director of Luxco, has been reimbursed GBP4,611 in fees
related to the setup of the company. In addition fees of GBP1,465
were paid for administrative services in the period to 30 June
2013.
On 17 December 2012 Stephen Smith, Chairman of the Board,
subscribed to 40,000 ordinary shares, for a consideration of
GBP40,000. As at 30 June 2013, Stephen Smith held 40,000 ordinary
shares in the Company.
The Directors of the Company are remunerated individually per
annum as follows:
Chairman - GBP45,000
Other Directors - GBP32,500
The total Directors' fees and travel expenses for the period
amounted to GBP74,042, with outstanding fees of GBPnil due to the
Directors at 30 June 2013.
The Chairman of the Audit Committee, John Whittle, will be
entitled to receive an additional fee of GBP2,500 per annum from 1
January 2014. No such additional fees were payable in the period
ending 30 June 2013.
17. Post Balance Sheet Events
After the period end the Group closed two further investments
with commitments of GBP10 million and GBP12.8 million respectively
(for more information see the Investment Adviser's report on page
5).
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR NKODQABKDAFB
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