TIDMSWEF
RNS Number : 8442C
Starwood European Real Estate Finan
21 March 2014
21 March 2014
Starwood European Real Estate Finance Limited
Preliminary results for the period from 9 November 2012 to 31
December 2013
Objective and Investment Policy
Objective
The investment objective of Starwood European Real Estate
Finance Limited (the "Company"), together with its subsidiaries
Starfin Lux S.à r.l., Starfin Public LP and Starfin Public GP
(collectively the "Group"), 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 Group's main focus is to originate
direct primary real estate debt investments.
Summary of Investment Policy
The Group's investment policy is to invest in a diversified
portfolio of real estate debt investments (including debt
instruments) in the UK and Continental Europe. Whilst investment
opportunities in the secondary markets will be considered from time
to time, the Group's predominant focus is to be a direct primary
originator of real estate debt investments on the basis that this
approach is expected to deliver better pricing, structure and
execution control and a client facing relationship that may lead to
further investment opportunities.
The Group attempts to limit downside risk by focusing on secured
debt with both quality collateral and contractual protections.
The typical loan term will be between three and seven years.
Whilst the Group retains absolute discretion to make investments
for either shorter or longer periods at least 75% of total loans by
value will be for a term of seven years or less.
The Group will pursue investments across the commercial real
estate debt space. At the time of the Initial Public Offering
("IPO") the initial provisional allocation was set as:
-- Senior and whole loans (targeted at 40 to 50% of the
portfolio);
-- Subordinated loans and mezzanine loans (targeted at 40 to 50%
of the portfolio); and
-- Bridge loans, selected loan-on-loan financings and other debt
instruments (targeted at 0 to 20% of the portfolio).
The Group may originate loans which are either floating or fixed
rate.
The Group will typically seek to originate debt where the
effective loan to real estate value ratio ("LTV") of any investment
is between 60% and 80% at the time of origination or
acquisition.
The Group may seek to enhance the returns of selected loan
investments through the economic transfer of the most senior
portion of such loan investments which may be by way of
syndication, sale, assignment, sub-participation or other financing
(including true sale securitisation) to the same maturity as the
original loan (i.e. "matched funding") while retaining a
significant proportion as a subordinate investment. It is
anticipated that where this is undertaken it would generate a
positive net interest rate spread and enhance returns for the
Group. It is not anticipated that, under current market conditions,
these techniques will be deployed with respect to any mezzanine or
other already subordinated loan investments. The proceeds released
by such strategies will be available to the Group for investment in
accordance with the investment policy.
Diversification
The Group expects to maintain a diversified portfolio by
geography, real estate sector type, loan type and counterparty. The
portfolio, once fully invested, will comply, as at each date an
investment is made by the Group, with the following restrictions
set out at IPO:
-- Pure development loans will not, in aggregate, exceed 25% of
the Group's Net Asset Value calculated at the time of
investment;
-- No more than 20% of the Group's Net Asset Value, calculated
at the time of investment, will be exposed to any one borrower
legal entity;
-- No more than 20% of the Group's Net Asset Value, calculated
at the time of investment, will be in loans relating to residential
for sale;
-- No single investment or aggregate investments secured on a
single property or group of properties will exceed 20% of the
Group's Net Asset Value, calculated at the time of investment;
-- An absolute maximum LTV at the time of investment of any loan
of 85%;
-- The Group will not originate investments in Portugal, Spain,
Italy and Greece and any investment in those countries in the
future would require shareholder approval to amend the investment
policy; and
-- The Group will not invest more than 50% of the Group's Net
Asset Value (calculated at the time of investment) in any single
country save in relation to the UK, where such limit will be
75%.
In addition, the Group will aim to satisfy the following
guideline criteria for the portfolio:
-- A blended portfolio LTV of no more than 75% (based on the
initial valuations at the time of loan origination or participation
acquisition) once full invested;
-- Investments in student accommodation and residential for sale
are expected to be limited to the UK; and
-- Multi-family investments are expected to be limited primarily
to the UK, Germany and Scandinavia.
The Group is proposing a number of changes to the Investment
Policy (subject to shareholder approval). These are discussed
further within the Chairman's Statement.
Financial Highlights
Key Highlights
As at 31 December
2013
------------------------------------------------- ------------------
Net Asset Value per ordinary share 99.13p
Share Price 100.75p
NAV total return 1.95%
Share Price total return 1.55%
Total Net Assets GBP236.0m
Loans advanced (including interest receivables) GBP156.4m
Cash and Cash Equivalents GBP79.7m
Dividends per share(1) 1.9p
Portfolio yield (2) 9.2%
Ongoing charges percentage 0.5%
Weighted average portfolio LTV to Group first
GBP (3) 14%
Weighted average portfolio LTV to Group last
GBP (3) 57%
------------------------------------------------- ------------------
(1) Dividends declared and paid in the period were 0.8 pence per
share. A final dividend of 1.1 pence was declared on 29 January
2014 and paid on 28 February 2014.
(2) Calculated assuming all loans are outstanding for the full
term. Four of the loans are floating rate and returns are based on
an assumed profile for future LIBOR or EURIBOR but the actual rate
received may be higher or lower. Calculated only on loans closed to
date and excluding cash uninvested.
(3) LTV to Group last GBP means the percentage which the total
loan advanced by the Group (when aggregated with any other
indebtedness ranking alongside and/or senior to it) bears to the
market value determined by the last valuation. LTV to first Group
GBP means the starting point of the loan to value range of the loan
advanced by the Group (when aggregated with any other indebtedness
ranking senior to it). For ground-up development (Lifecare
Residences) the calculation includes the total facility available
and the expected market value on completion of the project. Where
the loan relates to a redevelopment project with facilities
currently undrawn (Centre Point) the calculation includes current
debt drawn against the lower of current-use market value and vacant
possession value. Upon commencement of development, the loan to
value will be tested by reference to loans drawn plus available
loans against a value assuming completion of the development. This
calculation will therefore change as the other facilities are
drawn.LTVs are calculated for each loan and weighted by the Group's
investment in each loan.
Share Price Performance
As at 31 December 2013 the Net Asset Value ("NAV") was 99.13
pence per ordinary share and the share price was 100.75 pence.
Chairman's Statement
Overview
The Company's initial public offering (the "IPO"), completed on
17 December 2012, resulted in 228,500,000 ordinary shares of the
Company, with an issue price of 100 pence, being 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.
Shortly after the IPO the Company issued a further 9,600,000
shares 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 pace of investment activity during the year was slower than
anticipated, but picked up as we approached the calendar year end.
The Group had anticipated being substantially fully invested within
twelve months. At 31 December 2013 the Group was 66.3% invested
through seven investments. One further loan has been committed
since the year end and, after scheduled amortisation and
prepayments that took place in January 2014, the Group is now 70%
invested (based on 31 December 2013 NAV).
The Group is today capable of delivering a net portfolio yield
of approximately 5.3% (prior to any prepayments and taking
reasonable estimates of Group costs) and expects to be
substantially fully invested on the basis of completing two to
three additional transactions as soon as practicable within the
second quarter of 2014.
Results
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% of the Company's available
cash would be invested within six months of the IPO and the
remainder within twelve months.
The Company has declared and paid the following dividends to its
shareholders since inception:
Period Date declared Payment date Amount per
share
-------------------------------- -------------- ------------- -----------
9 November 2012 to 30 September 24 October 29 November 0.80 pence
2013 2013 2013
1 October to 31 December 29 January 28 February 1.10 pence
2013 2014 2014
-------------------------------- -------------- ------------- -----------
Earnings per share for the year were 1.73 pence and as such the
dividends were not fully covered by reported earnings. However this
was due to mismatches in the accounting treatment between currency
hedges and the loans being hedged. As the hedges are economically
matched with the asset and the dividend was covered by cash
earnings (generated during the year plus interest accrued at the
period end and received in January 2014), the directors elected to
pay a final dividend that was cash covered as described above but
was in excess of the reported earnings.
During the period, the share price rose from 100 pence per share
at IPO to end the year at 100.75 pence, representing a premium of
1.65% to Net Asset Value. For much of the first half of 2013, the
shares traded at a substantial premium to Net Asset Value,
reflecting in part the Company's inclusion in the FTSE UK Index
Series in March. The second half of 2013 saw the shares trade at a
more modest premium to Net Asset Value.
Investment Activity
Since the IPO, the board has worked closely with Starwood
European Finance Partners Limited (the "Investment Manager") and
Starwood Capital Europe Advisers, LLP (the "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 66.3% of net assets committed at the year end. Most of this
investment took place during the second half of the financial
period.
The overall risk profile of the investments made to date has
been more conservative than anticipated without compromising the
expected returns. The Group targeted a risk return strategy
delivering a maximum portfolio LTV of 75%. The Group currently has
weighted average portfolio LTV attachment points of 14-57%,
comfortably below this threshold and significantly lower attachment
points than targeted at IPO. As a result the Group has a high
quality portfolio of loans expected to deliver gross returns of
9.2%, within the targeted range of 9-10% per annum.
The board is satisfied with the progress made by the Investment
Manager and Investment Adviser during the period and believes that
the continued appointment of the Investment Manager is in the
interests of shareholders. 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.
Alternative Investment Fund Managers Directive ("AIFMD")
Under the AIFMD, the Company becomes an Alternative Investment
Fund and is required to appoint a manager who has the necessary
regulatory approval to act as the Company's Alternative Investment
Fund Manager ("AIFM") under the new AIFMD requirements. The Company
has appointed the Investment Manager, Starwood European Finance
Partners Limited, as its AIFM. No changes of significance are
envisaged in the management arrangements for the Company as a
result of AIFMD.
Outlook
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.
The board regularly reviews the development and strategic
direction of the Group and believes that the investment policy
remains broadly effective. However as we approach full investment,
we believe that now is an opportune moment to extend the geographic
scope to include investments in Spain and Italy and to increase the
maximum allocation for residential for sale from 20% to 30%,
although we anticipate that any future residential for sale
opportunities will be outside London. The board believes that this
is justified in light of improving market conditions, the fact that
opportunities have arisen which the Group has been unable to
participate in notwithstanding that the transaction would be
acceptable on a risk/reward basis and the increased liquidity in
the market which offers greater certainty of a successful
realisation. Such changes are focussed on the period following full
investment and contain an element of future proofing for additional
capital raises.
Alongside these changes, the board believes it is necessary to
clarify the scope and intent of the restrictions on the Group's
corporate borrowings. The board does not believe it is appropriate
to take account of foreign exchange hedging facilities within the
restriction on corporate borrowings and recommends the
clarification of the investment policy accordingly. With these
adjustments, for which we intend to request shareholder approval at
an Extraordinary General Meeting to be called, the board feels the
Group is well placed to continue to raise and prudently deploy
additional capital.
The board 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 Group's progress later this year.
Strategic Report
The Strategic Report describes the business of the Group and
details the principal risks and uncertainties associated with its
activities. These are amplified in the Investment Highlights
section.
Objective, Investment Policy and Business Model
The Objective and Investment Policy also describes the Group's
strategy and business model.
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.
Current and Future Development
A review of the year and outlook is contained in the Chairman's
Statement, the Investment Highlights and Portfolio Review.
Performance
A detailed review of performance is contained in the Investment
Highlights and Portfolio Review.
A number of performance measures are considered by the board and
the Investment Manager and Investment Adviser in assessing the
board's success in achieving its objectives. The Key Performance
Indicators ("KPIs") used to measure the progress and performance of
the Group are established industry measures and are as follows:
-- The portfolio yield;
-- The movement in net asset value per ordinary share;
-- The movement in share price and the discount / premium to NAV;
-- On-going charges as a percentage of undiluted net asset value; and
-- Weighted average loan to value for the portfolio.
Risk Management
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
performs a review of a risk matrix at each board meeting.
The board considers that the following risks are principal risks
and has identified the mitigating actions in place to manage
them.
Target Portfolio Returns and Dividend
The Group'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. In
addition, the pace of investment has and may be slower than
expected, or principal may be repaid earlier than anticipated,
causing the return on affected investments to be less than
expected. As a result 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 Investment Adviser provides the Investment Manager and the
board with a weekly report on pipeline opportunities, which
includes analysis of the returns available. The directors also
regularly receive information on the performance of the existing
loans which includes analysis of the likelihood of any early
repayments which may impact returns.
Long-term Strategic Risk
The Company is subject to the risk that its long-term strategy
and its level of performance fail to meet the expectations of its
shareholders. 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. The board monitors the level
of premium or discount of share price to NAV per share.
While the directors may seek to mitigate any discount to NAV per
share through the discount management mechanisms set out in the
Prospectus, there can be no guarantee that they will do so or that
such mechanisms will be successful and the directors accept no
responsibility for any failure of any such strategy to effect a
reduction in any discount or premium. Please see the Corporate
Governance Section for further information on the discount
management mechanisms.
The board monitors investment strategy and performance on an
on-going basis and regularly reviews the Objective and Investment
Policy in light of prevailing investor sentiment to ensure the
Company remains attractive to its shareholders.
Interest Risk
The Group is subject to the risk that the loan income and income
from the cash and cash equivalents will fluctuate due to movements
in LIBOR or EURIBOR.
The loans in place at 31 December 2013 have been structured so
that 51.2% of the loans are fixed rate which provides protection
from interest rate movements to the overall portfolio. In addition
whilst the remaining 48.8% is classified as floating, 30.2% are
subject to LIBOR or EURIBOR floors such that the interest cannot
drop below a certain level which provides significant additional
protection against downward interest risk. When reviewing future
investments the Investment Manager will continue to review such
opportunities to protect against downward interest risk.
Credit Risk
The Group's investments are subject to risk of default where a
borrower is unable or does not pay interest or principal as it
becomes due. In the event of a default the Group is generally
entitled to enforce security, but the process may be expensive and
lengthy and the outcome is dependent on sufficient capital being
available to meet the borrower's obligations. Some of the
investments made would rank behind senior debt tranches for
repayment in the event that a borrower defaults, with the
consequence of greater risk of partial or total loss. In addition,
repayment of loans could be subject to the availability of
refinancing options, including the availability of senior and
subordinated debt and is also subject to the underlying value of
the real estate collateral at the date of maturity.
The Investment Adviser undertakes detailed due diligence on each
loan. Whilst the precise scope of due diligence will depend on the
proposed investment, such diligence will typically include
independent valuations, building and measurement and environmental
surveys, legal reviews of property title and key leases, where
necessary mechanical and engineering surveys, accounting and tax
reviews and know your customer checks. The loan is first taken to
the Investment Adviser's Investment Committee for consideration and
if approved is then presented to the Investment Manager for
consideration.
The loan investments made are secured by way of a standard
security package depending on the type of asset and jurisdiction.
This will generally include, but not be limited to, a first ranking
charge or mortgage over the property (or in the case of any
mezzanine participations a second ranking entitlement or second
ranking charge) and a charge or pledge over all other assets of the
borrower accompanied, usually, by security over the shares of the
borrower.
The Investment Adviser, Investment Manager and board also
manages these risks by ensuring a diversification of investments in
terms of geography, market and type of loan. The Investment Manager
and Investment Adviser operate in accordance with the guidelines,
investment limits and restrictions policy determined by the board.
The directors review the investment of the portfolio against these
guidelines, limits and restrictions on a regular basis. The
Investment Manager provides the board with management information
including performance data on each individual loan in the
underlying portfolio. The directors monitor the implementation and
results of the investment process with the Investment Manager at
each board meeting and monitor risk factors in respect of the
portfolio. Investment strategy is reviewed at each meeting.
Liquidity Risk
The Group's investments primarily consist of loans secured on
real estate assets. Such investments are often illiquid and may be
difficult for the Group to sell, particularly at times of market
stress, and the price achieved on any such realisation is likely to
be at a discount to the face value of the relevant loan.
The Group currently has sufficient cash to manage any liquidity
issues. In addition, the Group has the ability to borrow up to 20%
of NAV in order to manage any liquidity issues that may arise. The
Company is currently engaged with two lenders with a view to
arranging such a facility.
Valuation Risk
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 Group's control. The Group is and will be exposed to the
residential and commercial real estate markets and if those markets
enter a downturn it could materially adversely affect the Group'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 Group 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 Group. Loans on residential for
sale are subject to the ability of the developer to complete the
development and sell the individual residential units. If the
developer is unable to sell the units at the price anticipated this
may impact on the borrower's ability to repay the loan.
The Investment Adviser meets with all Borrowers on a regular
basis to monitor developments in respect of each loan and reports
to the Investment Manager and the board periodically and on an ad
hoc basis where considered necessary.
The Group's loans are held at amortised cost and are reviewed
quarterly for signs of impairment by the Investment Adviser. The
results of the impairment review are discussed with the Investment
Manager and the board. The value of investments in accordance with
International Financial Reporting Standards ("IFRS") requires
considerable judgement.
Community, Social, Employee, Human Rights and Environmental
Issues
In carrying out its activities and in its relationship with the
community, the Group aims to conduct itself responsibly, ethically
and fairly, including in relation to social and human rights
issues. The Group has no employees and the board is composed
entirely of non-executive directors. As an investment company, the
Group has no direct impact on the environment. However, the Group
believes that it is in the shareholders' interest to consider
environmental, social and ethical factors when selecting and
retaining investments.
The Group believes that high standards of corporate social
responsibility ("CSR") make good business sense and have the
potential to protect and enhance investment returns. In the
forthcoming year, it is planned to adopt a more integrated approach
to assessing and reporting corporate social responsibility risks.
Sustainability risk will be included within the Group's risk
management framework and it is intended that further integration
will be evident in the reporting of these risks in future reports.
This work will be conducted in conjunction with the audit committee
to create a group assurance framework.
Board Diversity
The board considers that its members have a balance of skills,
qualifications and experience which are relevant to the Company.
The board supports the recommendations of the Davies Report and
believes in the value and importance of diversity in the boardroom
but it does not consider it is appropriate or in the interest of
the Company and its shareholders to set prescriptive targets for
gender or nationality on the board.
The Company has no employees and therefore has no disclosures to
make in this regard.
Investment Manager's Report - Investment Highlights
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 been appointed pursuant to the Investment Management
Agreement, which is summarised in note 4 of the financial
statements. 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 which is summarised in note 4 of the
financial statements.
The Investment Manager and Investment Adviser are both part of
the Starwood Capital Group, a leading global real estate investment
group.
Portfolio Statistics
The board considers that the Group is engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. The analysis presented in this report
is presented to demonstrate the level of diversification achieved
within that single segment. The board does not believe that its
investments constitute separate operating segments.
As at 31 December 2013, the portfolio was invested in line with
the Group's investment policy and is summarised below. The position
as at 19 March 2014 is also shown (as a percentage of NAV at 31
December 2013) as one further investment has been committed since
31 December 2013.
31 December 19 March
2013 2014
Number of borrowers 7 8
Number of investments 7 8
Number of industries 7 7
Invested Loan Portfolio annualised total
return(1) 9.2% 9.1%
Weighted average portfolio LTV - to Group
first GBP(2) 14% 13%
Weighted average portfolio LTV - to Group
last GBP(2) 57% 58%
Average loan term 4 years 4.1 years
Percentage of net assets in cash 33.7% 29.7%
Percentage of net assets committed to senior
and whole loans 47.0% 51.3%
Percentage of net assets committed to second
lien and mezzanine loans 11.7% 11.7%
Percentage of net assets committed to other
debt instruments 7.6% 7.3%
Percentage invested in GBP 63.8% 59.8%
Percentage invested in Euro 36.2% 40.2%
Percentage of invested portfolio in floating
rate investments 48.8% 45.0%
(1) Calculated assuming all loans are outstanding for the full
term. Four of the loans are floating rate and returns are based on
an assumed profile for future LIBOR or EURIBOR but the actual rate
received may be higher or lower. Calculated only on loans closed to
date and excluding cash uninvested.
(2) LTV to Group last GBP means the percentage which the total
loan advanced by the Group (when aggregated with any other
indebtedness ranking alongside and/or senior to it) bears to the
market value determined by the last valuation. LTV to first Group
GBP means the starting point of the loan to value range of the loan
advanced by the Group (when aggregated with any other indebtedness
ranking senior to it). For ground-up development (Lifecare
Residences) the calculation includes the total facility available
and the expected market value on completion of the project. Where
the loan relates to a redevelopment project with facilities
currently undrawn (Centre Point) the calculation includes current
debt drawn against the lower of current-use market value and vacant
possession value. Upon commencement of development, the loan to
value will be tested by reference to loans drawn plus available
loans against a value assuming completion of the development. This
calculation will therefore change as the other facilities are
drawn. LTVs are calculated for each loan and weighted by the
Company's investment in each loan
Implementation of IPO Messages
It has now been a year since the Company's IPO and it is
appropriate to review how the Group, Investment Manager and
Investment Adviser have met their objectives to date. At IPO the
Group emphasised its desire for diversification and the
transactions that have closed to date provide geographical, sector
and loan type diversification.
Future Strategy and Investment Outlook
The Group continues to benefit from a good pipeline of
opportunities, the majority of which are whole loans. Over GBP1
billion of opportunities in which the Group can participate are
being actively pursued and, in addition, we have been involved in
discussions about follow-on transactions for loans that the Group
has already made or committed to. These opportunities will meet the
Group's target return requirements.
The pipeline is geographically spread and we expect Ireland, the
Netherlands and Scandinavia to remain strong areas of focus in
addition to the UK. Indeed, the origination orientation is moving
slightly away from the UK as some of the risks associated with
Continental Europe start to recede and we start to see increased
activity. The board propose to add Spain and Italy to the permitted
geography (subject to shareholder approval) as it is felt they
offer attractive opportunities, albeit on a careful and considered
basis. Whilst the Group's pipeline includes some larger
transactions, there remains a continued focus on delivering smaller
bilateral positions.
The Group is aiming to be substantially fully invested on the
basis of completing two to three additional transactions as soon as
practicable within the second quarter of 2014.
Upon substantially full investment, the Group is likely to be
focussed on a growth strategy that envisages minimal cash drag by
utilising short term borrowing facilities that can be repaid from
further equity raisings and by the creation of a pipeline in
advance of such raisings. The Group is currently positively engaged
with two lenders to provide the permitted short term working
capital facility (capped at 20% of NAV).
Market Summary
In recent months, market interest in lending has substantially
increased. Well documented macroeconomic factors underpin this
trend, as well as excess liquidity hunting yield. The broader
economy welcomes such increased lending as a stimulus for growth. A
reasonable proportion of new lending is being undertaken by broader
generalists as opposed to specialist and experienced parties and
this, in itself, contains some warning signals. The banking
community is also active but the impending Asset Quality Reviews,
Basel 2.5 compliance in 2015 and strict credit control means the
return of the "old guard" banking universe is not dominating the
market, leading to a genuinely more diverse lending universe. In
generic terms, almost any sensible project is financeable at a
price.
Regulatory oversight is not diminishing and indeed
representatives from the Bank of England have recently observed
that further consideration should be given to the use of longer
term "sustainable" valuations as opposed to spot "market values",
the aim being to reduce volatility.
The demand for debt is still increasing, especially on the
Continent as economies start to grow. The UK and London in
particular remain a huge market and a continued safe haven for
capital. In Western Europe, there has been an acceleration in
finally addressing problem loans which adds to the need for debt
alongside new asset deals.
This is the market the Group is participating in. Increasingly,
the Group will look to generate attractive returns through
underwriting whole loans and selling senior strips to generate
mezzanine positions. This will rebalance the overall book towards
the loan mix set out at IPO whilst maintaining high single digit
gross returns.
Investment Manager's Report - Portfolio Review
Summary as at 31 December 2013
As at 31 December 2013 the Group was 66.3% committed (as a
percentage of Net Asset Value) through the following
investments:
Investment Committed Drawn as
at 31 December
2013
--------------------------- -------------- ----------------
Maybourne Hotel Group, GBP19,000,000 GBP19,000,000
London
West End Development, GBP10,000,000 GBP10,000,000
London
Lifecare Residences, GBP12,830,542 GBP11,052,985
London
Heron Tower, London GBP17,950,000 GBP17,950,000
Centre Point, London GBP40,000,000 GBP40,000,000
Total Sterling Loans GBP99,780,542 GBP98,002,985
--------------------------- -------------- ----------------
Retail Portfolio, Finland EUR45,000,000 EUR45,000,000
Industrial Portfolio,
Netherlands EUR21,810,000 EUR21,810,000
Total Euro Loans EUR66,810,000 EUR66,810,000
--------------------------- -------------- ----------------
Further information on each investment is outlined below.
Maybourne Hotel Group, London: the Group together with Starwood
Property Trust, Inc. ("STWD") acted as one of the three partners
for the GBP147m mezzanine component of the GBP547m refinancing of
the Maybourne Hotel Group. The 5 year refinancing is secured on
three five-star luxury London hotels being Claridge's, the
Connaught and the Berkeley and consists of a GBP400m senior loan
and GBP147m of mezzanine of which the Group committed GBP19m. The
Group's investment has been undertaken on an attractive loan to
value in the low 50s and the Group will earn a double digit yield
in line with its investment criteria.
West End Development, London: the Group has provided GBP10m out
of a GBP55.75m 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 loan-to-value is 50% and the loan is expected to generate
approximately a solid single digit return. The Group remains
interested in participating in the next stage of the project but
has no obligation to do so.
Lifecare Residences, London: the Group provided a facility to
the LifeCare Residences group to fund GBP8.5m of a GBP16.75m
mezzanine loan and GBP4.3m of a GBP40m 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 Group was the mezzanine loan arranger. This investment
has been undertaken on a mid-60s loan to gross development value
and the Group will earn a blended double digit yield in line with
its investment criteria.
Heron Tower, London: the Group provided a GBP17.95m
participation in a GBP288m five year refinancing facility for the
Heron Tower, a single office property located in the EC2 district
of the City of London. The remainder of the facility was provided
by STWD. The Group expects to earn a solid single digit return in
line with its investment criteria.
Centre Point, London: the Group, together with STWD participated
in a GBP220m facility secured on Centre Point, one of London's most
iconic towers. The facility refinanced the existing loan at Centre
Point and will finance the comprehensive refurbishment of the
property. The Borrower has secured planning consent to transform
Centre Point into a world class mixed use scheme. The Group
participated in GBP40m of the facility and expects to earn a solid
single digit return in line with its investment criteria.
Retail Portfolio, Finland:the Group, together with STWD,
provided a EUR95m medium term facility to an entity sponsored by
Tristan Capital Partners and AEW Europe. The facility refinanced
225 retail hypermarket and convenience stores located in Finland.
The Group has invested EUR45m in the facility which has a low-60
loan to value. The Group expects to earn a solid single digit
return in line with its investment criteria. The portfolio will be
divested over the coming years, with reasonably rapid loan
repayment expected.
Industrial Portfolio, Netherlands: the Group provided a EUR21.8m
whole loan to finance the acquisition of an industrial and office
portfolio in the Netherlands. The Group expects to earn a single
digit return in line with its investment criteria.
Post Year end Transactions
The Group provided a EUR14.3m facility for the acquisition of an
office building in Amsterdam occupied by UPC Nederland. The Group
expects to earn a solid single digit return in line with its
investment criteria. The loan is expected to be fully drawn in
March.
In addition to the above transaction, scheduled amortisation of
GBP705,894 was made under the Heron Tower facility and a prepayment
of EUR2,054,235 was made under the Retail Portfolio, Finland
facility. Following the above transactions the Company has
committed approximately GBP165.7m of IPO proceeds and is 70.2%
invested (based on the NAV as at 31 December 2013).
Board of Directors
Stephen Smith (non-executive chairman - chairman of the
board)
Stephen is currently a director of Gatehouse Bank Plc (appointed
in June 2013) and a director of Tritax Big Box REIT Plc, which
floated on the London Stock Exchange in December 2013. Previously,
he 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 - management engagement
committee chairman)
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, Aurora Russia Limited, DP Aircraft I 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, after working at Price
Waterhouse Corporate Finance in London, 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 where he is a Fellow, 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 - audit committee
chairman)
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 Limited (FTSE 250),
India Capital Growth Fund Limited, Globalworth Real Estate
Investments Limited and Advance Frontier Markets Fund Limited (all
listed on 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 GBP20m
private equity acquisition of Ora Telecom. John is also a resident
of Guernsey.
Report of the Directors
Principal Activities and Investment Objective
The investment objective of the Group 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 Group's main focus is to
originate direct primary real estate debt investments.
The Group 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%
of total loans by value will be for a term of seven years or
less.
Once fully invested the Group intends to be appropriately
diversified by geography, real estate sector and loan type and
counterparty. The Group 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 the Partnership and
is majority owned by the Starwood Capital Group ("Starwood") and
has no control over the GP (see related party transactions).
References to the "Group" refer to the Company, the GP, the
Partnership and Luxco.
Dividend Policy
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, based on
quarterly dividend payments. This was predicted on the assumption
that 50% of the Company's available cash would be invested within
six months from Admission and the remainder within 12 months.
Changing market conditions, however, resulted in slower than
anticipated investments, therefore in the second half of 2013, the
Company advised its shareholders that it was expecting to be able
to pay a dividend up to 1.9 pence for the period to 31 December
2013, based on the completed investments at that date and deals in
the pipeline at that time. This revised amount has been met for the
period.
Dividend Proceeds
The Company has declared and paid a total of GBP1,904,800 during
the period (0.8 pence per ordinary share).
Business Review
The Group's performance during the period to 31 December 2013,
its position at that date and the Group's future developments are
detailed in the Chairman's Statement, the Strategic and Business
Review, the Investment Highlights and the Portfolio Review.
Capital
As part of the Company's initial public offering (the "IPO"),
completed on 17 December 2012, 228,500,000 ordinary shares of the
Company, with an issue price of 100 pence per share, were admitted
to the premium segment of the UK Listing Authority's Official List
and to trading on the Main Market of the London Stock Exchange.
Shortly after the IPO and 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 NAV
per share at that time, the Company issued additional shares within
the limits imposed by the Prospectus Rules. The following shows the
shares issued during the period:
Ordinary shares Number GBP
------------------------------------------- ------------ ------------
Balance at start of the period - -
Shares issued on 17 December 2012 ("IPO") 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
------------------------------------------- ------------ ------------
Following these issues, the Company currently has issued share
capital consisting of 238,100,000 ordinary shares.
Details of the Company's capital are provided in more detail in
note 14 of the consolidated financial statements.
Substantial Interests
As of 4 March 2014, the Company is aware of the following
material shareholdings:
Investor No. of ordinary % holding of
shares Issued Share
Capital
--------------------------------------- ---------------- --------------
BlackRock 27,109,316 11.39
Russell Investments 20,600,000 8.65
Quilter Cheviot Investment Management 20,245,319 8.50
Rathbones 12,978,400 5.45
SG Private Banking 11,086,832 4.66
Premier Asset Management 11,005,000 4.62
East Riding of Yorkshire 10,000,000 4.20
Thames River Capital 9,600,000 4.03
Starwood Property Trust 9,140,000 3.84
Schroder & Co, Zurich (PB) 8,709,800 3.65
Smith & Williamson 8,505,368 3.57
--------------------------------------- ---------------- --------------
Directors' Interests in Shares
The directors' interests in shares are shown below:
Name Ordinary shares Ordinary shares Ordinary shares
at Company's Launch purchased at 31 December
2013
----------------- --------------------- ---------------- ----------------
Stephen Smith 40,000 - 40,000
John Whittle - 7,000 7,000
Jonathan Bridel
and Spouse - 7,000 7,000
----------------- --------------------- ---------------- ----------------
The directors have adopted a code of directors' dealings in
ordinary shares, which is based on the Model Code for Directors'
dealings contained in the Listing Rules (the "Model Code"). The
board is responsible for taking all proper and reasonable steps to
ensure compliance with the Model Code by the directors, and review
the Code on a regular basis.
Post-Balance Sheet Events
The Group provided a EUR14.3m facility for the acquisition of an
office building in Amsterdam occupied by UPC Nederland. The Group
expects to earn a solid single digit return in line with its
investment criteria. The loan is expected to be fully drawn in
March.
The Company and Goldman Sachs International entered into an
international forward exchange master agreement dated 7 February
2014 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
agreement is governed by the laws of England and Wales.
Independent Auditor
The board of directors elected to appoint PricewaterhouseCoopers
CI LLP as auditors to the Company at the inaugural meeting of the
Company on 22 November 2012. PricewaterhouseCoopers CI LLP has
indicated their willingness to continue as auditors.
Investment Manager and Service Providers
The Investment Manager during the period was Starwood European
Finance Partners Limited (the "Investment Manager"), incorporated
in Guernsey with registered number 55819 and regulated by the
Guernsey Financial Services Commission ("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
("FCA"), to provide investment advice pursuant to an Investment
Advisory Agreement.
The administration of both the Company and Investment Manager
was delegated to Ipes (Guernsey) Limited (the "Administrator")
during the period.
Investment Objective and Policy
As per the Prospectus dated 28 November 2012, the current
investment objective and policy are as follows:
The investment objective of the Company is to provide
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.
The Company seeks to invest in a diversified portfolio of real
estate debt investments in the UK and Continental Europe. 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 Company anticipates that the typical
loan term will be between three and seven years. Whilst the Company
retains absolute discretion to make investments for either shorter
or longer periods, at least 75% of total loans by value will be for
a term of seven years or less.
The Company's portfolio is intended 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. The split between senior,
subordinated and mezzanine loans is determined by the Investment
Manager in its absolute discretion having regard to the Company's
target return objectives. However, it is anticipated that whole
loans will comprise approximately 40-50% of the portfolio,
subordinated and mezzanine loans approximately 40-50%, and other
loans between 0 and 20% (including bridge loans, selected
loan-on-loan financings and other debt instruments). Pure
development loans will not, in aggregate, exceed 25% of the
Company's Net Asset Value calculated at the time of investment. The
Company may originate loans which are either floating or fixed
rate.
The Company seeks to enhance the returns of selected loan
investments through the economic transfer of the most senior
portion of such loan investments which would be by way of
syndication, sale, assignment, sub-participation or other financing
(including true sale securitisation) to the same maturity as the
original loan (i.e. "matched funding") while retaining a
significant proportion as a subordinate investment. It is
anticipated that where this is undertaken it would generate a
positive net interest rate spread and enhance returns for the
Company. It is not anticipated that, under current market
conditions, these techniques will be deployed with respect to any
mezzanine or other already subordinated loan investments. The
proceeds released by such strategies will be available to the
Company for investment in accordance with the investment
policy.
No single investment, or aggregate investments secured on a
single property or group of properties, will exceed 20% of the
Company's Net Asset Value, calculated at the time of investment. No
more than 20% of the Company's Net Asset Value, calculated at the
time of investment, will be exposed to any one borrower legal
entity.
Discount Management Strategy
The Discount Management Strategy, which has three elements, is
summarised as follows:
-- A discount-triggered realisation mechanism that would apply
if the ordinary shares trade at an average discount of 5% or more
during the last six months of the financial year ending 31 December
2017 and would provide for the realisation of up to 75% of the
outstanding ordinary share capital by means of the orderly
realisation over time of the relevant proportion of the Company's
assets and related phased distributions of capital to shareholders
who make the relevant election;
-- Save where the discount-triggered realisation mechanism has
been activated, a realisation vote by no later than 28 February
2018 to implement a realisation of up to 75% of the outstanding
capital on substantially the same basis as described above; and
-- Share repurchase powers that allow the Company to repurchase
ordinary shares in the market up to 14.99% of the share capital,
subject to annual renewal of the shareholder authority.
Directors' Remuneration Report
Remuneration Policy & Components
The board endeavours to ensure the remuneration policy reflects
and supports the Company's strategic aims and objectives throughout
the period under review. It has been agreed that, due to the small
size and structure of the Company, a separate remuneration
committee would be inefficient; therefore the board as a whole is
responsible for discussions regarding remuneration. No external
remuneration consultants were appointed during the period under
review.
As per the Company's articles of association, all directors are
entitled to such remuneration as is stated in the Company's
Prospectus or as the Company may determine by ordinary resolution;
to not exceed the aggregate overall limit of GBP128,500 for the
first period to 31 December 2013 and GBP200,000 in future periods.
Subject to this limit, it is the Company's policy to determine the
level of directors' fees, having regard for the level of fees
payable to non-executive directors in the industry generally, the
role that individual directors fulfil in respect of
responsibilities related to the board and audit committee and the
time dedicated by each director to the Company's affairs. Base fees
are set out below. As per the Prospectus dated 28 November 2012,
the audit committee chairman will be entitled to receive an
additional fee of GBP2,500 per annum from 2014.
Base Fees 2013 GBP
------------------------ ---------
Chairman 45,000
Audit Committee
Chairman 32,500
Non-executive director 32,500
------------------------ ---------
Total directors'
Fees 110,000
------------------------ ---------
As outlined in the Articles of Association, the directors may
also be paid for all reasonable travelling, accommodation and other
out-of-pocket expenses properly incurred in the attendance of board
or committee meetings, general meetings, or meetings with
shareholders or debentures of the Company or otherwise in discharge
of their duties; and all reasonable expenses properly incurred by
them seeking independent professional advice on any matter that
concerns them in the furtherance of their duties as directors of
the Company.
No director has any entitlement to pensions, paid bonuses or
performance fees, been granted share options or been invited to
participate in long-term incentive plans. No loans have been taken
on behalf of a director by the Company.
None of the directors has a service contract with the Company.
Each of the directors has entered into a letter of appointment with
the Company dated 22 November 2012, subject to election at the
first Annual General Meeting, or as determined in line with the
Company's Articles, and re-election at subsequent Annual General
Meetings in accordance with the Company's Articles and all due
regulations and provisions. The directors do not have any interests
in contractual arrangements with the Company or its investments
during the period under review, or subsequently. Each appointment
can be terminated in accordance with the Company's Articles and
without compensation. As outlined in the letters of appointment,
each appointment can be terminated at the will of both parties with
one month's notice either by (i) written resignation; (ii)
unauthorised absences from board meetings for 12 months or more;
(iii) written request of the other directors; or (iv) a resolution
of the shareholders.
Directors' and Officers' liability insurance cover is maintained
by the Company but is not considered a benefit in kind nor
constitutes a part of the directors' remuneration. The Company's
Articles indemnify each director, secretary, agent and officer of
the Company, former or present, out of assets of the Company in
relation to charges, losses, liabilities, damages and expenses
incurred during the course of their duties, in so far as the law
allows and provided that such indemnity is not available in
circumstances of fraud, wilful misconduct or negligence.
Directors' Emoluments
The directors received the following fees during the period
under review, with a total of GBP128,334:
Director Period under
Review GBP
---------------------- -------------
Stephen Smith 52,500
John Whittle 37,917
Jonathan Bridel 37,917
Aggregate emoluments 128,334
---------------------- -------------
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium
Listing on the Official List of the UKLA, the Company is required
to comply with the principles of the UK Corporate Governance Code
dated September 2012 ("UK Code").
As an AIC member, the board has also considered the principles
and recommendations of the AIC Code of Corporate Governance ("AIC
Code") by reference to the AIC Corporate Governance Guide for
Investment Companies ("AIC Guide"). The AIC Code addresses all the
principles set out in the UK Code, as well as setting out
additional principles and recommendations on issues of specific
relevance to the Company. The AIC Code was updated in 2013 to
include the new provisions of the UK Code announced in 2012, and
has been endorsed by the Financial Reporting Council as ensuring
investment company boards fully meet their obligations to the UK
Code and LR 9.8.6 of the Listing Rules. Having adopted the AIC Code
with effect from Admission (17 December 2012), the board has
therefore assessed itself, the committees and performance of the
directors against the parameters and principles outlined within the
AIC Code on a regular basis throughout 2013.
The board is of the view that throughout the period ended 31
December 2013, the Company has been fully compliant with the AIC
Code's provisions. Key issues affecting the Company's corporate
governance responsibilities, how they are addressed by the board
and application of the AIC Code are presented below. An explanation
is provided in the event that certain provisions have not been
complied with.
Chairman
Appointed to the permanent position of Chairman of the board on
22 November 2012, Stephen Smith is responsible for leading the
board in all areas, including determination of strategy, organising
the board's business and ensuring the effectiveness of the board
and individual directors. He also endeavours to produce an open
culture of debate within the board.
Prior to the chairman's appointment, a job specification was
prepared which included an assessment of the time commitment
anticipated for the role. Discussions were undertaken to ensure the
chairman was sufficiently aware of the time needed for his role,
and agreed to upon signature of his letter of appointment. Other
significant business commitments of the chairman were disclosed to
the Company prior to appointment to the board, and were publicly
disclosed in the Company's Prospectus dated 28 November 2012. Any
subsequent changes have been declared. Certain of these
commitments, and their subsequent changes, can be identified in his
biography.
The effectiveness and independence of the chairman is evaluated
on an annual basis as part of the board's performance evaluation;
the audit committee chairman is tasked with collating feedback and
discussing with the chairman on behalf of the rest of the
board.
As per the Company's Articles all directors, including the
chairman, must disclose any interest in a transaction that the
board and committees will approve. To ensure all board decisions
are independent, the said conflicted director is not entitled to
vote in respect of any arrangement connected to the interested
party.
Board
Independence and Disclosure
The board and chairman confirm that they were selected prior to
the Company's launch and were able to assume all responsibilities
at an early stage, independent of the Investment Manager and
Investment Adviser.
The board is composed entirely of non-executive directors, who
meet as required without the presence of the Investment Manager or
service providers to scrutinise the achievement of agreed goals and
objectives, and monitor performance. Through the audit committee
and the management engagement committee they are able to ascertain
the integrity of financial information and confirm that all
financial controls and risk management systems are robust, and
analyse the performance of the Investment Manager and other service
providers on a regular basis.
Following the annual performance evaluation, it was deemed that
the directors had been proven to challenge the Investment Manager
and Investment Adviser throughout the period under review, as
minuted and recorded, therefore for the purposes of assessing
compliance with the AIC Code, the board as a whole considers that
each director is independent of the Investment Manager and free
from any business or other relationship that could materially
interfere with the exercise of his independent judgment. If
required, the board is able to access independent professional
advice. The Investment Manager is also requested to declare any
potential conflicts surrounding votes, share dealing and soft
commissions on an annual basis to the board to help with the
assessment of investments.
Open communication between the Investment Manager and the board
is facilitated by regular board meetings, to which the Investment
Manager is invited to attend and update the board on the current
status of the Company's investments, along with ad hoc meetings as
required.
Coming to mutual agreement on all decisions, it was agreed the
board had acted in the best interests of the Company to the extent
that, if deemed appropriate that a director abstain or have his
objection noted, it is minuted.
Similar to the process outlined above for the appointment of the
chairman, a job specification was prepared for each directorship
which included an assessment of the time commitment anticipated for
the role to ensure each director was aware of the time commitment
needed for the role. The directors' other significant business
commitments were disclosed to the Company prior to appointment to
the board, and were publicly disclosed in the Company's Prospectus
dated 28 November 2012. Any subsequent changes have been declared.
Certain of these commitments can be identified in each director's
biography. Details of the skills and experience provided by each
director can also be found in their biographies, alongside
identification of the role each director currently holds in the
Company.
The terms and conditions of appointment for non-executive
directors are outlined in their letters of appointment, and are
available for inspection by any person at the Company's registered
office during normal business hours and at the AGM for fifteen
minutes prior to and during the meeting.
There is no executive director function in the Company; all
day-to-day functions are outsourced to external service
providers.
Development
The board believes that the Company's directors should develop
their skills and knowledge through participation at relevant
courses. The chairman is responsible for reviewing and discussing
the training and development of each director according to
identified needs. Upon appointment, all directors participate in
discussions with the chairman and other directors to understand the
responsibilities of the directors, in addition to the Company's
business and procedures. The Company also provides regular
opportunities for the directors to obtain a thorough understanding
of the Company's business by regularly meeting members of the
senior management team from the Investment Manager, Investment
Adviser and other service providers, both in person and by
phone.
Balance of the board and Diversity Policy
It is perceived that the board is well-balanced, with a wide
array of skills, experience and knowledge that ensures it functions
correctly and that no single director may dominate the board's
decisions. Having three directors appointed ensures that during any
transition period, there are at least two directors to provide
stability.
The board's position on diversity can be seen in the Strategic
Report.
All directors currently sit on all the committees; each director
also fills one chairmanship post only.
Annual Performance Evaluation
The board's balance is reviewed on a regular basis as part of a
performance evaluation review. Using a pre-determined template
based on the AIC Code's provisions as a basis for review, the board
undertook an evaluation of its performance, in addition an
evaluation focusing on individual commitment, performance and
contribution of each director was conducted. The chairman then met
with each director to fully understand their views of the Company's
strengths and to identify potential weaknesses. If appropriate, new
members are proposed to resolve the perceived issues, or a
resignation sought. Following discussions and review of the
chairman's evaluation by the other directors, the audit committee
chairman reviewed the chairman's performance. Training and
development needs are identified as part of this process, thereby
ensuring that all directors are able to discharge their duties
effectively.
Given the Company's size and the structure of the board, no
external facilitator or independent third party was used in the
performance evaluation.
Re-election and Board Tenure
There is currently no nominations committee for the Company as
it is deemed that the size, composition and structure of the
Company would mean the process would be inefficient and
counter-productive. The board therefore undertakes a thorough
process of reviewing the skill set of the individual directors, and
proposes new, or renewal of current, appointments to the board.
Each director is required to be elected by shareholders at the
Annual General Meeting following his appointment by the board, and
to submit for re-election every three years thereafter. Any
director who has served on the board for longer than nine years
will be subject to annual re-election. Stephen Smith, John Whittle
and Jonathan Bridel have all served on the board throughout the
period under review; therefore all are submitting themselves for
election at the Annual General Meeting on 2 May 2014.
The audit committee chairman and chairman of the board confirm
that the directors submitting themselves for election have proven
their ability to fulfil all legal responsibilities and to provide
effective independent judgment on issues of strategy, performance,
resources and conduct. The board therefore has no hesitation in
recommending to shareholders that each director be elected.
Appointment Process
As no new director has been appointed since the Company's launch
and the board believes there is no gap that currently needs to be
filled, no appointment process has been formalised. It is
anticipated, however, that the process will involve identifying
gaps and needs in the board's composition, then reviewing the skill
set of potential candidates. For renewal of current appointments,
all directors except the individual in question are entitled to
vote at the meeting. Similarly, no new nominations have been made
for the role of chairman of the board since prior to launch.
Board and committees
Board
Matters reserved for the board include review of the Company's
overall strategy and business plans; approval of the Company's
half-yearly and annual report; review and approval of any
alteration to the Group's accounting policies or practices and
valuation of investments; approval of any alteration to the
Company's capital structure; approval of dividend policy;
appointments to the board and constitution of board committees;
observation of relevant legislation and regulatory requirements;
and performance review of key service providers. The board also
retains ultimate responsibility for committee decisions; every
committee is required to refer to the board, who will make the
final decision.
Terms of reference that contain a formal schedule of matters
reserved for the board of directors and its duly authorised
committee for decision has been approved and can be reviewed at the
Company's registered office.
The board met eleven times during 2013 (2012: two); the meeting
attendance record is displayed in the table below. The company
secretary acts as the secretary to the board.
Audit committee
The board has established an audit committee composed of all the
independent members of the board. The Chairman of the board is
included as a committee member to enable a full understanding of
the issues facing the Company, but cannot be audit committee
chairman. The audit committee, its membership and its terms of
reference are kept under regular review by the board, and it is
perceived all members have sufficient financial skills and
experience. John Whittle is audit committee chairman.
The audit committee met twice during 2013 (2012: nil); the
meeting attendance record is displayed in the table below. The
company secretary acts as the secretary to the audit committee.
Owing to the size and structure of the Company, there is no
internal audit function. The audit committee has reviewed the need
for an internal audit function, and perceived that the internal
financial and operating control systems in place within the Company
and its service providers, as evidenced by the internal control
reports provided by the administrator, give sufficient assurance
that a sound system of internal control is maintained that
safeguards shareholders' investment and Company assets.
The audit committee is intended to assist the board in
discharging its responsibilities for the integrity of the Company's
financial statements, as well as aiding the assessment of the
Company's internal control effectiveness and objectivity of the
external auditors. Further information on the audit committee's
responsibilities is given in the report of the audit committee.
Formal terms of reference for the audit committee are available
at the registered office, and are reviewed on a regular basis.
Management engagement committee
The Company has established a management engagement committee
which comprises all the directors, with Jonathan Bridel as the
chairman of the committee. The management engagement committee's
main function is to review and make recommendations on any proposed
amendment to the Investment Management Agreement and keep under
review the performance of the Investment Manager; and undertake an
assessment of the Investment Manager's scope and responsibilities
as outlined in the service agreement and prospectus on a formal
basis every year. Discussions on Investment Manager performance are
also conducted regularly throughout the period by the board.
Reviews of engagements with other service providers to ensure all
parties are operating satisfactorily are also undertaken by the
management engagement committee so as to ensure the safe and
accurate management and administration of the Company's affairs and
business and that they are competitive and reasonable for
shareholders.
Formal terms of reference for the management engagement
committee are available at the registered office, and are reviewed
on a regular basis.
The management engagement committee met once during 2013 (2012:
nil); the meeting attendance record is displayed in the table
below. The company secretary acts as the secretary to the
management engagement committee.
Board and committee meeting attendance
Individual attendance at board and committee meetings is set out
below:
Scheduled Ad hoc board Audit Committee Management
board Engagement
Stephen Smith(1) 3 - 2 1
John Whittle 3 8 2 1
Jonathan Bridel 3 8 2 1
Total Meetings
for Period 3 8 2 1
------------------ ---------- ------------- ---------------- ------------
(1) The ad hoc board meetings are convened at short notice to
deal with administrative matters. It is not therefore always
logistically feasible for the chairman of the board to attend such
meetings.
In addition to the scheduled quarterly and additional ad hoc
meetings, the directors and the Investment Manager have been
provided with a number of telephone and face to face investment
briefings by the Investment Adviser in order to keep the directors
and the Investment Manager fully appraised and up to date with the
current investment status and progress.
Board Remuneration
As outlined in the Prospectus, directors are paid in accordance
with agreed principles aimed at focusing on long-term performance
of the Company. Further information can be found in the directors'
remuneration report.
Company secretary
Reports and papers, containing relevant, concise and clear
information, are provided to the board and committees in a timely
manner to enable review and consideration prior to both scheduled
and adhoc specific meetings. This ensures that directors are
capable of contributing to, and validating, the development of
Company strategy and management. The regular reports also provide
information that enables scrutiny of the Company's, Investment
Manager's and other service providers' performance. When required,
the board has sought further clarification of matters with the
Investment Manager and other service providers, both by means of
further reports and in-depth discussions, in order to make more
informed decisions for the Company.
Under the direction of the chairman, the company secretary
facilitates the flow of information between the board, committees,
Investment Manager and other service providers through the
development of comprehensive, detailed meeting packs, agendas and
other media. These are circulated to the board and other attendees
in sufficient time to review the data.
Full access to the advice and services of the company secretary
is available to the board; in turn, the company secretary is
responsible for advising on all governance matters through the
chairman. The Articles and schedule of matters reserved for the
board indicate the appointment and resignation of the company
secretary is an item reserved for the full board. A review of the
performance of the company secretary is undertaken by the board on
a regular basis.
Financial and Business Information
An explanation of the directors' role and responsibility in
preparing the Annual Report and Accounts for the period ended 31
December 2013 is provided in the Statement of directors'
responsibilities.
For the purposes solely of the audit of the financial
statements, the auditors have reviewed the Company's compliance
with the AIC Code's provisions, the UK Listing Authority's Listing
Rules and other applicable rules of the Financial Conduct
Authority. This is in compliance with International Standards of
Auditing ("ISAs").
Further information enabling shareholders to assess the
Company's performance, business model and strategy can be sourced
in the Chairman's Statement, the Strategic Report, and the Report
of the Directors.
Going Concern
The board regularly reviews cash flow projections and is of the
opinion that the Group possesses sufficient resources to continue
its operational activities for the foreseeable future and will be
able to meet all its liabilities as they fall due. The board is
therefore of the opinion that the going concern basis should be
adopted in the preparation of the Consolidated Financial
Statements. Furthermore, as per the prospectus, the Company is
subject to a five year realisation vote on the ordinary shares
redeemable at no par value.
Risk Management and Risk Control
The board is required annually to review the effectiveness of
the Company's key internal controls such as financial, operational
and compliance controls and risk management. The controls are
designed to ensure that the risk of failure to achieve business
objectives is minimised, and are intended to provide reasonable
assurance against material misstatement or loss. This is not
absolute assurance that all risks are eliminated. Through regular
meetings and meetings of the audit committee, the board seeks to
maintain full and effective control over all strategic, financial,
regulatory and operational issues. The board maintains an
organisational and committee structure with clearly defined lines
of responsibility and delegation of authorities.
As part of the compilation of the risk register for the Company,
appropriate consideration has been given to the relevant control
processes and that risk is considered, assessed and managed as an
integral part of the business. The Company's system of internal
control includes inter alia the overall control exercise,
procedures for the identification and evaluation of business risk,
the control procedures themselves and the review of these internal
controls by the audit committee on behalf of the board. Each of
these elements that make up the Company's system of internal
financial and operating control is explained in further detail as
follows:
(i) Control environment
The Company is ultimately dependent upon the quality and
integrity of the staff and management of its Investment Manager,
its Investment Adviser and its Fund Administration & Company
Secretarial service provider, Ipes (Guernsey) Limited. In each
case, qualified and able individuals have been selected at all
levels. The staff of both the Investment Manager and Administrator
are aware of the internal controls relevant to their activities and
are also collectively accountable for the operation of those
controls. Appropriate segregation and delegation of duties is in
place.
The audit committee undertakes a review of the Company's
internal financial and operating controls on a regular basis. The
auditors of the Company, PricewaterhouseCoopers CI LLP, considers
internal control relevant to the Company's preparation and fair
presentation of the financial statements in order to design their
audit procedures, but not for the purpose of expressing an audit
opinion on the effectiveness of the Company's internal
controls.
In its role as a third-party fund administration services
provider, the Ipes Group, of which Ipes (Guernsey) Limited is a
part, produces an annual AAF 01/06 Assurance Report on the internal
control procedures in place within the Ipes Group, and this is
subject to review by the audit committee and the board.
(ii) Identification and evaluation of business risks
Another key business risk is the performance of the Company's
investments. This is managed by the Investment Manager, which
undertakes regular analysis and reporting of business risks in
relation to the loan portfolio, and then proposes appropriate
courses of action to the board for their review.
(iii) Key procedures
In addition to the above, the audit committee's key procedures
include a comprehensive system for reporting financial results to
the board regularly, as well as quarterly impairment reviews of
loans (including reports on the underlying investment
performance).
Although no system of internal control can provide absolute
assurance against material misstatement or loss, the Company's
system is designed to assist the directors in obtaining reasonable
assurance that problems are identified on a timely basis and dealt
with appropriately. The Company, given its size, does not have an
internal audit function. It is the view of the board that the
controls in relation to the Company's operating, accounting,
compliance and IT risks performed robustly throughout the year. In
addition, all have been in full compliance with the Company's
policies and external regulations, including:
-- Investment policy, as outlined in the IPO documentation;
-- Personal Account Dealing, as outlined in the Model Code;
-- Whistleblowing Policy;
-- Anti-Bribery Policy;
-- Applicable Financial Conduct Authority Regulations;
-- Listing Rules, and Disclosure and Transparency Rules;
-- Treatment and handling of confidential information;
-- Conflicts of interest;
-- Compliance policies; and
-- Anti-Money Laundering Regulations.
There were no protected disclosures made pursuant to the
Company's whistleblowing policy, or that of service providers in
relation to the Company, during the period to 31 December 2013.
In summary, the board considers that the Company's existing
internal financial and operating controls, coupled with the
analysis of risks inherent in the business models of the Company
and its subsidiaries, continue to provide appropriate tools for the
Company to monitor, evaluate and mitigate its risks.
Dialogue with shareholders
The directors place a great deal of importance on communication
with shareholders. The Company's chairman, Investment Manager and
the brokers, Jefferies International Limited and Dexion Capital
plc, aim to meet with large shareholders at least annually,
together with the Investment Adviser, and calls are undertaken on a
regular basis with shareholders. The board also receives regular
reports from the Brokers on shareholder issues. Publications such
as the Annual Report and Financial Statements, quarterly factsheets
and interim management statements, are reviewed and approved by the
board prior to circulation, and are widely distributed to other
parties who have an interest in the Company's performance, and are
available on the Company's website.
All directors are available for discussions with the
shareholders, in particular the chairman and the audit committee
chairman, as and when required.
Constructive Use of AGM
The Notice of AGM is sent out at least 20 working days in
advance of the meeting. All shareholders have the opportunity to
put questions to the board or Investment Manager, either formally
at the Company's Annual General Meeting, informally following the
meeting, or in writing at any time during the year via the company
secretary. The company secretary is available to answer general
shareholder queries at any time throughout the year.
Report of the audit committee
The board is supported by the audit committee, which comprised
all the directors during the period under review (including the
Chairman of the board, to enable his greater understanding of the
issues facing the Company). The board has considered the
composition of the audit committee and are satisfied it has
sufficient recent and relevant skills and experience.
Role and Responsibilities
The primary role and responsibilities of the audit committee are
outlined in the audit committee's terms of reference, available at
the registered office, including:
-- Monitoring the integrity of the financial statements of the
Company and any formal announcements relating to the Company's
financial performance, and reviewing significant financial
reporting judgements contained within said statements and
announcements;
-- Reviewing the Company's internal financial controls, and the
Company's internal control and risk management systems;
-- Monitoring the need for an internal audit function
annually;
-- Monitoring and reviewing the independence, objectivity and
effectiveness of the external auditors, taking into consideration
relevant regulatory and professional requirements;
-- Making recommendations to the board in relation to the
appointment, re-appointment and removal of the external auditors
and approving their remuneration and terms of engagement, which in
turn can be placed before the shareholders for their approval at
the Annual General Meeting;
-- Development and implementation of the Company's policy on the
provision of non-audit services by the external auditors, as
appropriate;
-- Reviewing the arrangements in place to enable directors and
staff of service providers to, in confidence, raise concerns about
possible improprieties in matters of financial reporting or other
matters insofar as they may affect the Company;
-- Providing advice to the board on whether the annual financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy; and
-- Reporting to the board on how the Committee discharged all
relevant responsibilities at each board meeting.
The Committee met twice during the period under review;
individual attendance of directors is outlined within the Corporate
Governance Statement. The main matters discussed at those meetings
were:
-- Detailed review of the Half Year Report and Accounts and
recommendation for approval by the board;
-- Discussion of reports from the external auditors following
their interim review;
-- Review and approval of the annual audit plan of the external
auditors;
-- Discussion and approval of the fee for the external
audit;
-- Review and approval of the interim review plan of the
external auditors;
-- Assessment of the effectiveness of the auditors as described
below;
-- Assessment of the independence of the external auditors;
-- Review of the Company's key risks and internal controls;
and
-- Consideration of the 2012 UK Corporate Governance Code,
Guidance on audit committees and other regulatory guidelines, and
the subsequent impact upon the Company.
The Committee has also reviewed and considered the
whistleblowing policy in place for the Administrator and other
service providers, and is satisfied the relevant staff can raise
concerns in confidence about possible improprieties in matters of
financial reporting or other matters insofar as they may affect the
Company.
Significant Issues in Relation to the Financial Statements
During the period, the audit committee identified a number of
significant issues and areas of key audit risks in respect of the
Annual Report and Accounts. The audit committee reviewed the
external audit plan at an early stage and concluded that the
appropriate areas of audit risk relevant to the Company had been
identified and that suitable audit procedures had been put in place
to obtain reasonable assurance that the Accounts as a whole would
be free of material misstatements. The table below sets out the
audit committee's view of the key areas of risk and how they have
addressed the issues.
Significant Issues Actions to Address Issue
Possible impairment The audit committee reviewed the investment
to the carrying values process and associated documentation, as
of loan investments. well as the effective interest models and
impairment reviews used by the Investment
Manager. The audit committee also regularly
discusses and challenges the Investment
Adviser and Investment Manager on proposed
and current investments to ascertain the
due diligence, analysis, deal sourcing
and assumptions on returns. The audit committee
considered the estimated cash flows and
repayments outlined in the models provided
by the Investment Manager. Furthermore,
regular reports are received and reviewed
by the board.
Management override The audit committee also reviews the AAF
of controls - potential 01/06 Assurance Report produced each year
management override by the Administrator on the internal procedures
by Investment Manager within the Ipes Group. The audit committee
and Administrator to reviews the risk and overall control environment
perpetrate fraud as in place, including regular interaction
a result of the ability with the Investment Manager and service
to manipulate accounting providers to ensure all relevant risks
records that otherwise are identified. The business rationale
appear to be operating behind reports and documents, alongside
effectively. a review of accounting estimates used in
the development of financial statements
ensures that the Committee is comfortable
that the financial statements are supported
by evidence and a clear, justifiable rationale.
-------------------------- --------------------------------------------------
Review of External Audit Process Effectiveness
The audit committee communicated regularly with the Investment
Manager, Investment Adviser and Administrator to obtain a good
understanding of the progress and efficiency of the audit process.
Similarly, feedback in relation to the efficacy of the Investment
Manager, Investment Adviser and other service providers in
performing their relevant roles was sought from relevant involved
parties, including the audit partner and team. The external auditor
is invited to attend the audit committee meetings at which the
semi-annual and annual accounts are considered, also enabling the
auditors to meet and discuss any matters with the audit committee
without the presence of the Investment Manager or the
Administrator.
During the period, the audit committee reviewed the external
auditors' performance, considering a wide variety of factors
including:
-- The quality of service, the auditors' specialist expertise,
the level of audit fee, identification and resolution of any areas
of accounting judgement, and quality and timeliness of papers
analysing these judgements;
-- Review of the audit plan presented by the auditors, and when
tabled, the final auditors report;
-- Meeting with the auditors regularly to discuss the various
papers and reports in detail;
-- Furthermore, interviews of appropriate staff in the
Investment Manager, Investment Adviser and Administrator to receive
feedback on the effectiveness of the audit process from their
perspective; and
-- Compilation of a checklist with which to provide a means to
objectively assess the auditors' objectives.
The audit committee is satisfied with the auditors'
effectiveness, and therefore does not consider it necessary to
require the auditors to tender for the audit work.
Auditor Tenure and Objectivity
The Company intends to develop an audit tender policy which the
board will consider this after five years from the appointment date
of the current auditor. A review of policy will therefore occur in
the second half of 2017, subject to regular reviews by the board
and shareholder approval.
The Company's current auditors, PricewaterhouseCoopers CI LLP,
have acted in this capacity since the Company's inaugural meeting
on 22 November 2012. The committee reviews the auditor's
performance on a regular basis to ensure the Company receives an
optimal service. Subject to annual appointment by shareholder
approval at the Annual General Meeting, the appointment of the
auditor is formally reviewed by the audit committee on an annual
basis. The auditors are required to rotate the audit partner every
five years, and the current partner has been in place since the
Company's launch.
PricewaterhouseCoopers CI LLP regularly updates the audit
committee on the rotation of audit partners, staff, level of fees,
details of any relationships between the auditor, the Company and
its loan portfolio, and also provides overall confirmation of its
independence and objectivity. There are no contractual obligations
that restrict the Company's choice of auditors.
The auditor provided the Company with non-audit services during
the period under review in relation to the financial reporting
procedures memorandum prior to the Company's launch. All non-audit
work is reviewed by the audit committee and approved by the audit
committee Chairman prior to the auditors undertaking any work, if
the fees are over GBP12,500. This threshold is reviewed
periodically to ensure it is set at an appropriate value.
As a result of its review, the audit committee is satisfied that
PricewaterhouseCoopers CI LLP is independent of the Company, the
Investment Manager and other service providers and recommends the
continuing appointment of the auditors by the board.
Conclusions in Respect of the Financial Statements
The production and the audit of the Company's Annual Report and
Financial Statements is a comprehensive process requiring input
from a number of different contributors. In order to reach a
conclusion on whether the Company's financial statements are fair,
balanced and understandable, as required under the UK Corporate
Governance Code dated September 2012, the board has requested that
the audit committee advise on whether it considers that the Annual
Report and Financial Statements fulfils these requirements. In
outlining its advice, the audit committee has considered the
following:
-- The comprehensive documentation that is in place outlining
the controls in place for the production of the Annual Report,
including the verification processes in place to confirm the
factual content;
-- The detailed reviews undertaken at various stages of the
production process by the Investment Manager, Investment Adviser,
Administrator, auditors and the audit committee that are intended
to ensure consistency and overall balance;
-- Controls enforced by the Investment Manager, Investment
Adviser, Administrator and other third party service providers to
ensure complete and accurate financial records and security of the
Company's assets; and
-- The existence and content of a satisfactory control report
produced by the Ipes Group that has been reviewed and reported upon
by the Administrator's external auditors to verify the
effectiveness of the internal controls of the Administrator, such
as the Audit and Assurance Faculty (AAF) Report.
As a result of the work performed, the Committee has concluded
and reported to the board that the Annual Report for the period
ended 31 December 2013, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company's performance, business model
and strategy. The board's conclusions in this respect are set out
in the Statement of directors' responsibilities.
Statement of Directors' Responsibilities
The directors are responsible for preparing financial statements
for each financial year which give a true and fair view, in
accordance with applicable laws and regulations, of the state of
affairs of the Company and of the profit and loss of the Company
for that period.
Company law requires the directors to prepare financial
statements for each financial year. The financial statements have
been prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union. In preparing
the financial statements, the directors are required to:
-- Select suitable accounting policies and apply them
consistently;
-- Make judgements and estimates that are reasonable and
prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The maintenance and integrity of the Company's website is the
responsibility of the directors; the work conducted by the auditors
does not involve consideration of the maintenance and integrity of
the website and, accordingly, the auditors accept no responsibility
for any changes that may have occurred to the financial statements
since they are initially presented on the website. Legislation in
Guernsey governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the financial statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding
the assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
Each of the directors confirms that, to the best of their
knowledge:
-- They have complied with the above requirements in preparing
the financial statements;
-- There is no relevant audit information of which the Company's
auditors are unaware;
-- All directors have taken the necessary steps that they ought
to have taken to make themselves aware of any relevant audit
information and to establish that the auditors are aware of said
information;
-- The financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company; and
-- The Chairman's Statement, Strategic and Business Review,
Report of the directors and Corporate Governance Statement include
a fair review of the development and the position of the Company,
together with a description of the principal risks and
uncertainties that they face.
The 2012 UK Corporate Governance Code, as adopted through the
AIC Code by the Company, also requires directors to ensure that the
Annual Report and Accounts are fair, balanced and understandable.
In order to reach a conclusion on this matter, the board has
requested that the audit committee advise on whether it considers
that the annual report and Accounts fulfils these requirements. The
process by which the committee has reached these conclusions is set
out in the report of the audit committee. Furthermore, the board
believes that the disclosures set out in the strategic and business
review of the annual report provide the information necessary for
shareholders to assess the Company's performance, business model
and strategy.
Having taken into account all the matters considered by the
board and brought to the attention of the board during the period
ended 31 December 2013, as outlined in the Corporate Governance
Statement, Strategic Report and the Report of the audit committee,
the board has concluded that the Annual Report and Accounts for the
period ended 31 December 2013, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Company's performance, business model
and strategy.
Consolidated Statement of Comprehensive Income
For the period from incorporation on 9 November 2012 to 31
December 2013
9 November 2012
to 31 December
2013
Notes GBP
--------------------------------------- ------ ----------------
Income
Income from loans advanced 5,336,230
Income from cash and cash equivalents 635,797
--------------------------------------- ------ ----------------
Total income from investments 5,972,027
--------------------------------------- ------ ----------------
Expenses
Investment management fees 4(a) 417,951
Directors' fees and travel expenses 5 132,267
Administration fees 4(c) 225,071
Auditors' fees 6 88,150
Broker's fees 104,110
Legal and professional fees 130,341
Insurance 61,205
Net foreign exchange losses 639,461
Other expenses 86,656
--------------------------------------- ------ ----------------
Total operating expenses 1,885,212
--------------------------------------- ------ ----------------
Operating profit for the period
before tax 4,086,815
--------------------------------------- ------ ----------------
Taxation 19 2,718
Operating profit for the period
and total comprehensive income
after tax 4,084,097
Weighted average number of shares
in issue 7 235,655,145
Basic and diluted earnings per
ordinary share (pence) 7 1.73
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Financial Position
For the period from incorporation on 9 November 2012 to 31
December 2013
31 December
2013
Notes GBP
Assets
Cash and cash equivalents 8 79,706,084
Other receivables and prepayments 9 287,470
Loans advanced 10 156,381,277
Financial assets at fair value
through profit and loss 11 87,180
------------------------------------ ------ ------------
Total assets 236,462,011
------------------------------------ ------ ------------
Liabilities
Trade and other payables 12 439,552
------------------------------------ ------ ------------
Total liabilities 439,552
------------------------------------ ------ ------------
Net assets 236,022,459
------------------------------------ ------ ------------
Capital and reserves
Share capital 14 233,843,162
Retained earnings 2,179,297
------------------------------------ ------ ------------
Total equity 236,022,459
------------------------------------ ------ ------------
Number of ordinary shares in issue 238,100,000
Net asset value per ordinary share
(pence) 99.13
The accompanying notes form an integral part of these
consolidated financial statements
Consolidated Statement of Changes in Equity
For the period from incorporation on 9 November 2012 to 31
December 2013
Share capital Retained Total equity
earnings
Notes GBP GBP GBP
------------------------ ------ -------------- ------------ -------------
Balance at 9 November - - -
2012
------------------------ ------ -------------- ------------ -------------
Issue of share capital 14 238,509,000 - 238,509,000
Costs of issues 14 (4,665,838) - (4,665,838)
Dividends paid 15 - (1,904,800) (1,904,800)
Operating profit and
total comprehensive
income - 4,084,097 4,084,097
Balance at 31 December
2013 233,843,162 2,179,297 236,022,459
------------------------ ------ -------------- ------------ -------------
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Cash Flows
For the period from incorporation on 9 November 2012 to 31
December 2013
9 November 2012
to 31 December
2013
GBP
--------------------------------------------------- ----------------
Operating activities:
Operating profit for the period and total
comprehensive income 4,084,097
Adjustments for non-cash items:
Net interest income (5,972,027)
Increase in prepayments and receivables (287,470)
Increase in other payables and accrued expenses 439,552
Net gain on financial instruments held at
fair value through profit and loss (87,180)
Total net foreign exchange losses 726,641
Other non-cash items 205,237
--------------------------------------------------- ----------------
(891,150)
--------------------------------------------------- ----------------
Loans advanced(1) (152,864,924)
Origination fees paid (1,171,890)
Origination expenses (75,413)
Interest income from loans advanced 2,140,736
Net cash outflow from operating activities (152,862,641)
--------------------------------------------------- ----------------
Cash flows from investing activities
Interest income from cash and cash equivalents 627,065
Net cash inflow from investing activities 627,065
--------------------------------------------------- ----------------
Cash flows from financing activities
Net share issue proceeds received(2) 234,878,549
Costs of share issues (1,035,387)
Dividends paid (1,904,800)
---------------------------------------------------
Net cash inflows provided by financing activities 231,938,362
--------------------------------------------------- ----------------
Net increase in cash and cash equivalents 79,702,786
Cash and cash equivalents at start of the -
period
Net foreign exchange gain on cash and cash
equivalents 3,298
--------------------------------------------------- ----------------
Cash and cash equivalents at the end of
the period 79,706,084
--------------------------------------------------- ----------------
(1) Net of arrangement fees of GBP1,674,212 withheld.
(2) Gross share issue proceeds net of fees and expenses of
GBP3,630,451 withheld by brokers.
The accompanying notes form an integral part of these
consolidated financial statements.
Notes to the Consolidated Financial Statements
For the period from incorporation on 9 November 2012 to 31
December 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 GBP223.9
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 consolidated financial statements comprise the financial
statements of the Company, Starfin Public GP Limited (the "GP"),
Starfin Public LP (the "Partnership") and Starfin Lux S.à.r.l
("Luxco") (together "the Group") as at 31 December 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 Group's
investment policy. Some investments may be made via special purpose
vehicles wholly owned by the Luxco or the Company. The Group
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"), a
company incorporated in Guernsey and regulated by the GFSC. The
Investment Manager has appointed Starwood Capital Europe Advisers,
LLP ("the Investment Adviser"), an English limited liability
partnership authorised and regulated by the 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 16 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 on-going cash flows and the level of cash balances as
of the reporting date as well as taking forecasts of future cash
flows into consideration.
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 consolidated 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 Company has prepared its consolidated financial statements
in accordance with The Companies (Guernsey) Law, 2008 (as amended)
and International Financial Reporting Standards ("IFRS") as adopted
by the European Union, which comprise standards and interpretations
approved by the International Accounting Standards Boards ("IASB")
together with the interpretations of the International Accounting
Standards and Standards Interpretations Committee ("IFRIC") as
approved by the International Accounting Standards Committee
("IASC") which remain in effect. The directors of the Company have
taken the exemption in Section 244 of The Companies (Guernsey) Law,
2008 (as amended) and have therefore elected to only prepare
consolidated financial statements for the period.
Standards and Interpretations in issue and not yet
effective:
New Standards Effective date
------------------------------------------------------ -----------------
IFRS Financial Instruments - Classifications 1 January
9 and Measurement 2018
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
IFRS Disclosures - Offsetting Financial Assets 1 January
7 and Financial Liabilities (amended) 2013
IFRS Aggregation of Segments and Reconciliation 1 July 2014
8 of Segment Assets
IFRS Amendments for Investment Entities 1 January
10 2014
IFRS Amendments for Investment Entities 1 January
12 2014
IFRS Scope of Portfolio Exception (amended) 1 July 2014
13
IAS 24 Management Entities (amended) 1 July 2014
IAS 32 Offsetting Financial Assets and Financial 1 January
Liabilities (amended) 2014
IFRS Mandatory Effective Date and Transition 1 January
7/9 Disclosure (amended) 2018
The Company 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 Company. Unless stated otherwise the directors do
not consider the changes to have a material impact.
b) Basis of preparation
These consolidated financial statements have been prepared on a
going concern basis and under the historical cost convention as
modified by the revaluation of certain assets and liabilities to
fair value.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires 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 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 by the directors to be Sterling (see
notes 3(d) and 3(j));
- 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 loans advanced
as at the reporting date (see note 3(e)); and
- the receipt of unscheduled pre-payments of loans advanced and
its impact on liquidity risk (see note 16).
c) Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiary undertakings) made up to the 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% 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 Principal
% Incorporation place of
business
------------------------- ---------------- ---------- --------------- -----------
Starfin Public 20 November 100 Guernsey Guernsey
GP Limited 2012
Starfin Public 22 November 100 Guernsey Guernsey
LP 2012
Starfin Lux S.à.r.l 30 November 100 Luxembourg Luxembourg
2012
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. No
consideration, other than for the par value of any share capital or
capital contributions, has been paid in respect of the acquisition
of subsidiary undertakings. The Company acquired the subsidiaries
at the time of their initial establishment and hence they had no
net assets at the date of the acquisition.
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 functional currency of the Group of is considered
to be Sterling for the following reasons:
- the share capital of all members of the Group is denominated in Sterling;
- the majority of loans advanced are denominated in Sterling; and
- Euro transactions represent only a small proportion of
transactions in the Luxembourg entity.
The consolidated financial statements for the Company 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. The directors, after having considered the way
in which internal reporting is provided to them, are of the opinion
that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. Equally, based on the internal
reporting provided, the directors do not analyse the portfolio
based on geographical segments.
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 comprise
derivatives not 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 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.
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
consolidated statement of comprehensive income.
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 consolidated statement of comprehensive
income, 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 rate 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 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.
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 and taxation is provided based on the results for the
period (see note 19).
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 rate 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.
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 monthly at a rate equivalent to 0.75% per
annum of Net Asset Value (excluding any cash balances until such
time as 75% 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% of the value of all new loan investments
made or acquired by the Company (see note 21). The asset
origination fee to be paid by the Company is expected to be paid
upon receipt by the Company of 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% 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%, 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 GBP1,000;
-- Second, to the extent of any excess, to the Company until the
Company has achieved the hurdle total return; and
-- Third, 20% of the excess to Starfin Carry LP ("the Special
Limited Partner") (further information in Related Party
Transactions) and 80% 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 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 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 2% 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. Directors' emoluments
Directors' remuneration is shown in the directors' remuneration
report; the total paid and accrued during the period was
GBP128,334.
6. Auditors' remuneration
During the period PricewaterhouseCoopers CI LLP earned total
fees payable of GBP88,150 with regard to audit related activities.
Additional fees of GBP9,750 were payable in the period in relation
to non audit related activities.
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 GBP4,084,097 and on the weighted average
number of ordinary shares in issue during the period of 235,655,145
ordinary shares.
The calculation of net asset value per ordinary share is based
on a net asset value of GBP236,022,459 and the actual number of
ordinary shares in issue at 31 December 2013 of 238,100,000.
8. Cash and Cash Equivalents
Cash and cash equivalents comprise as follows:
31 December
2013
GBP
----------------------------- ------------
Fixed deposits of one month 50,853,621
Cash at bank 28,852,463
-----------------------------
79,706,084
----------------------------- ------------
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 16.
9. Other Receivables and Prepayments
31 December 2013
GBP
-------------------------- -----------------
Bank interest receivable 8,732
Prepayments 73,501
Loan interest receivable 205,237
-------------------------- -----------------
287,470
-------------------------- -----------------
10. Loans Advanced
The Group's accounting policy on the measurement of financial
assets is discussed in note 3(f).
31 December
2013
GBP
--------------------------------- ------------
UK
Maybourne Hotel Group, London 19,594,651
West End Development, London 10,140,091
Lifecare Residences, London 11,215,462
Heron Tower, London 18,420,006
Centre Point, London 40,211,361
Netherlands
Industrial Portfolio 18,245,998
Finland
Retail Portfolio 38,553,708
156,381,277
--------------------------------- ------------
No element of loans advanced are past due or impaired. For
further information and the associated risks see the Strategic and
Business Review and note 16.
The table below reconciles the movement of the carrying value of
loans advanced in the period.
GBP
------------
Loans advanced at start of -
the period
------------------------------
Loans advanced 154,539,136
Arrangement fees earned (1,674,212)
Commitment fees earned (16,085)
Origination fees paid 1,171,890
Origination expenses paid 75,413
Effective interest earned 5,336,230
Interest payments received/
accrued (2,345,973)
Foreign exchange losses (705,122)
------------------------------ ------------
Loans advanced at end of the
period 156,381,277
------------------------------ ------------
Loans advanced at fair value 165,736,511
------------------------------ ------------
11. Financial assets at fair value through profit and loss
Financial assets at fair value through profit and 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 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:
Fair values
Notional contract Assets Liabilities
amount(1)
GBP GBP GBP
------------------------------ ------------------ -------- ------------
Foreign exchange derivatives
Currency forwards 62,758,485 225,453 (138,273)
Total 62,758,485 225,453 (138,273)
------------------------------ ------------------ -------- ------------
(1) Euro amounts translated at period end exchange rate.
12. Trade and other payables
31 December 2013
GBP
--------------------------------------------- -----------------
Investment management fees 255,107
Administration and company secretarial fees 67,700
Audit fees 33,417
Legal fees 19,205
Broker fees 29,110
Other expenses 35,013
---------------------------------------------
439,552
--------------------------------------------- -----------------
13. 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
Investment Manager.
As at 31 December 2013 GBP152,411,756 had been drawn by the GP
(acting in its capacity as General Partner of the Partnership under
the loan agreement).
As at 31 December 2013 the Company had outstanding commitments
in respect of loans not fully drawn of GBP1,372,169.
As at 31 December 2013 the Company had outstanding commitments
in respect of the forward contracts entered into under the Hedging
Master Agreement of EUR75,096,907 (GBP62,758,485 translated at
period end exchange rate).
14. 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.
As at 31 December 2013 the Company had issued and fully paid up
share capital as follows:
31 December 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 31 December 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.
15. Dividends
Dividends will be declared by the directors and paid in
compliance with the solvency test prescribed by Guernsey law.
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 the period to 31
December 2013:
Dividend rate
per Share Net dividend
Period to: (pence) payable (GBP)
------------------- -------------- --------------
30 September 2013 0.80 1,904,800
------------------- -------------- --------------
The directors declared after the end of the period a final
dividend in respect of the financial period ended 31 December 2013
of 1.1 pence per share payable on 28 February 2014 to Shareholders
on the register on 7 February 2014.
16. Risk Management Policies and Procedures
The Group through its investment in whole 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.
It is the role of the Board to review and manage all risks
associated with the Company, 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:
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.
Currency risk
The Group, via the subsidiaries, operates across Europe and
invests in loans that are denominated in currencies other than the
functional or presentational currency of the Company. Consequently
the Group is exposed to risks arising from foreign exchange rate
fluctuations related to currency flows from revenues and expenses
and from the translation of statement of comprehensive income 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 on-going 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 Company 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 balance sheet date and movements in the fair
value are included in the 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 27 open forward contracts.
As at 31 December 2013 the Company had the following currency
exposure:
31 December 2013 Sterling Euro Total
GBP GBP GBP
----------------------------------- ------------ ----------- ------------
Assets
Loans advanced 99,581,571 56,799,706 156,381,277
Other receivables and prepayments 287,470 - 287,470
Cash and cash equivalents 79,368,687 337,397 79,706,084
Financial assets at fair value
through profit and loss 87,180 - 87,180
Liabilities
Trade and other payables (404,736) (34,816) (439,552)
Total net currency exposure 178,920,172 57,102,287 236,022,459
----------------------------------- ------------ ----------- ------------
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase
or decrease by 10% with all other variables held constant, the net
assets of the Group at 31 December 2013 would increase or decrease
by GBP5,710,229. 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 this risk on a regular basis.
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 LIBOR/EURIBOR-based
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 EURIBOR
floors, preventing interest rates from falling below certain
levels.
The following table shows the portfolio profile of the financial
assets at 31 December 2013:
31 December 2013
GBP
-------------------------------------------- -----------------
Floating rate
Loans advanced(1) 77,408,055
Cash 28,852,463
Fixed rate
Loans advanced 78,973,222
Cash equivalents 50,853,621
--------------------------------------------
Total financial assets subject to interest
rate risk 236,087,361
-------------------------------------------- -----------------
(1) Loans advanced at floating rates include loans with EURIBOR
floors.
If interest rates had changed by 100 basis points, with all
other variables remaining constant, the effect on the net profit
and equity would have been as shown in the table below(1) :
31 December 2013
GBP
------------------------------ -----------------
Increase of 100 basis points 1,062,605
Decrease of 100 basis points (1,062,605)
------------------------------ -----------------
(1) The calculation assumes no Euribor floors.
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 whole loans, subordinated and mezzanine debt which rank
behind senior debt for repayment in the event that a borrower
defaults. There is a reduced concentration risk as at 31 December
2013 versus the interim review due to several loans being in
existence. 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 31 December 2013, the
maximum credit risk exposure was GBP236,301,330.
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 to 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 six
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 31 December
2013
--------------------------------------
GBP GBP GBP
-------------------------------------- -------------- ------------
Barclays Bank plc 28,261 25,850,000 25,878,261
Santander UK plc 1,789 - 1,789
Lloyds TSB Bank plc 7,968,672 - 7,968,672
HSBC Bank plc - 25,003,621 25,003,621
Royal Bank of Scotland International 18,385,213 - 18,385,213
ING Luxembourg, SA 2,468,528 - 2,468,528
Total cash and cash equivalents 28,852,463 50,853,621 79,706,084
-------------------------------------- ----------- -------------- ------------
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 arising in respect of other financial
liabilities of the Group are those due to counterparties. The Group
manages its liquidity risk through long term cash flow forecasts to
ensure it is able to meet its obligations. In addition, the Company
can borrow up to 20% of NAV and is in the process of setting up a
borrowing facility. However, at 31 December 2013, there was
sufficient liquidity in the form of cash and cash equivalents to
satisfy the Company's obligations.
The table below shows the maturity of the Group's non-derivative
financial assets and liabilities arising from the advancement of
loans by remaining contractual maturities at the date of the
consolidated statement of financial position. The amounts disclosed
are contractual, undiscounted cash flows and may differ from the
actual cash flows received in the future as a result of early
repayments:
Up to Between 3 Between 1
31 December 2013 3 months and 12 months and 5 years Total
GBP GBP GBP GBP
--------------------------- ------------ -------------- ------------ ------------
Assets
Loans advanced 705,894 2,311,579 150,818,628 153,836,101
Loan interest receivables 3,236,256 9,654,250 38,143,119 51,033,625
Liabilities
Loans payable (1,372,169) - - (1,372,169)
--------------------------- ------------ -------------- ------------ ------------
2,569,981 11,965,829 188,961,747 203,497,557
--------------------------- ------------ -------------- ------------ ------------
The table below analyses the Group's derivative financial
instruments that will be settled on a gross basis into relevant
maturity groupings based on the remaining period at the date of the
consolidated statement of financial position. The amounts disclosed
are the contractual undiscounted cash flows:
Derivatives held Up to 3 months More than Total as at
for trading
------------------------------
3 months to 1 year 1 year 31 December
2013
------------------------------
GBP GBP GBP GBP
------------------------------ ---------- ---------- ----------- ------------
Foreign exchange - - -
derivatives
* Outflow(1) 1,330,494 2,514,683 58,913,308 62,758,485
* Inflow 1,346,805 2,553,602 60,402,519 64,302,926
------------------------------ ---------- ---------- ----------- ------------
(1) Euro amounts translated at period end exchange rate.
Capital management policies and procedures
The Group's capital management objectives are:
- To ensure that the Group will be able to continue as a going concern; and
- To maximise the income and capital return to equity
shareholders through an appropriate balance of equity capital and
long-term debt.
The capital of the Company is represented by the net assets
attributable to the holders of the Company's shares.
In accordance with the Group's investment policy, the Group's
principal use of cash (including the proceeds of the IPO) has been
to fund investments in the form of loans sourced by the Investment
Adviser and the Investment Manager, as well as initial expenses
related to the issue, on going 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
on-going basis.
The Company has no imposed capital requirements.
The Company's capital at 31 December 2013 comprises:
31 December 2013
--------------------------------------
GBP
-------------------------------------- -----------------
Equity
Equity share capital 233,843,162
Retained earnings and other reserves 2,179,297
--------------------------------------
236,022,459
-------------------------------------- -----------------
17. Fair Value Measurement
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflect the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical
assets or liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1
that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices
including interest rates, yield curves, volatilities, prepayment
speeds, credit risks and default rates)or other market corroborated
inputs (level 2).
(iii) Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The following table analyses within the fair value hierarchy the
Group's financial assets and liabilities (by class) measured at
fair value for the period ended 31 December 2013:
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
------------ --------- -------- -------- -------
Assets
Derivative
assets - 87,180 - 87,180
Total - 87,180 - 87,180
------------ --------- -------- -------- -------
There have been no transfers between levels for the year ended
31 December 2013.
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2013 but for which fair value is
disclosed:
Total
Total fair carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
------------------- --------- ----------- ------------ ------------ ------------
Assets
Cash and
cash equivalents - 79,706,084 - 79,706,084 79,706,084
Other receivables
and prepayments - 287,470 - 287,470 287,470
Loans advanced - - 165,736,511 165,736,511 156,381,277
Total - 79,993,554 165,736,511 245,730,065 236,374,831
------------------- --------- ----------- ------------ ------------ ------------
Total
Total fair carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
----------------- --------- -------- -------- ----------- ---------
Liabilities
Trade and
other payables - 439,552 - 439,552 439,552
Total - 439,552 - 439,552 439,552
----------------- --------- -------- -------- ----------- ---------
The carrying values of the assets and liabilities included in
the above table are considered to approximate their fair values,
except for Loans advanced. The fair value of the Loans advanced has
been determined by discounting the expected cash flows using a
discounted cash flow model.
Cash and cash equivalents include cash in hand and fixed
deposits held with banks. Other receivables and prepayments include
the contractual amounts and obligations due to the Group and
consideration for advance payments made by the Group. Trade and
other payables represent the contractual amounts and obligations
due by the Group for contractual payments.
18. 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.
19. Taxation
The Company is exempt from Guernsey taxation under the Income
Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an
annual fee of GBP600.
The Luxembourg indirect subsidiary of the Company is subject to
the applicable tax regulations in Luxembourg. The table below
analyses the tax charges incurred at Luxembourg level:
31 December 2013
------------------------
GBP
------------------------ -----------------
Current tax
Current tax on profits
for the year 2,718
Total current tax 2,718
The Luxco had no operating gain on ordinary activities before
taxation and was therefore subject to the Luxembourg minimum
corporate income taxation at EUR3,210 for the period ended at 31
December 2013. The Company is also subject to the Luxembourg Net
Wealth Tax at a minimum of EUR25 per year.
20. Reconciliation of IFRS to US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment
Advisors Act 1940 (the "Custody Rule") the consolidated financial
statements of the Company have also been audited in accordance with
Generally Accepted Auditing Standards applicable in the United
States ("US GAAS"). As such two independent auditors' reports are
included in the Consolidated Financial Statements, one under
International Standards on Auditing as required by the Crown
Dependencies Audit Rules and the other under US GAAS. Compliance
with the Custody Rule also requires a reconciliation of the
operating profit and net assets under IFRS to US GAAP.
The principal differences between International Financial
Reporting Standards and US GAAP relate to accounting for financial
assets that are carried at amortised cost. Under US GAAP the
calculation of the effective interest rate is based on contractual
cash flows over the asset's contractual life. International
Financial Reporting Standards, however, base the effective interest
rate calculation on the estimated cash flows over the expected life
of the asset. In addition, expenses in relation to loans acquired
are expensed instead of amortised over the contractual life.
A reconciliation of the operating profit according to IFRS
versus US GAAP is as follows:
Period ended 31 December
2013
GBP
------------------------------ -------------------------
Operating profit before
tax in accordance with IFRS 4,086,815
Difference on income from
loans advanced (117,176)
Difference on treatment
of loan related expenses (72,415)
Operating profit before
tax in accordance with US
GAAP 3,897,224
------------------------------ -------------------------
A reconciliation of the net asset value according to IFRS versus
US GAAP is as follows:
Period ended 31 December
2013
GBP
-------------------------------- -------------------------
Net asset value in accordance
with IFRS 236,022,459
Difference on interest accrued
from loans advanced (117,176)
Difference on treatment of
loan related expenses (72,415)
Net asset value in accordance
with US GAAP 235,832,868
-------------------------------- -------------------------
21. Related Party Transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions. Details on the Investment Manager and other related
party transactions are included in note 4 to the consolidated
financial statements. For further related party disclosure see also
notes 5, 13 and 18.
Fees, expenses and other payments
As at 31 December 2013
Outstanding Total
GBP GBP
Directors' fees and expenses
paid
Stephen Smith - 52,500
John Whittle - 37,917
Jonathan Bridel - 37,917
Expenses paid - 3,933
Investment Manager
Investment management fees
earned 255,107 417,951
Origination fees earned - 1,171,890
Expenses paid 14,259 58,625
StarConsult S.à.r.l(1)
Administrative services - 15,929
Expenses paid - 4,611
Starwood
IPO related costs paid - 244,098
Fees received from Joint
Bookrunners(2) - 171,735
(1) StarConsult S.à.r.l is a company managed by Thierry Drinka,
who is also a director of Luxco.
(2) 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
Starwood and its Affiliates. These fees are part of the initial
expenses incurred on listing and included in the 2% fee cap.
Shareholdings and dividends paid
Dividends paid As at December
2013
GBP Number of shares
Starwood 73,120 9,140,000
SCG Starfin Investor LP 18,280 2,285,000
Stephen Smith 320 40,000
John Whittle - 7,000
Jonathan Bridel - 7,000
Other
The Group participated in a number of loans in the period in
which STWD acted as a co-lender. The details of these loans are
shown in the Investment Manager's Report - Portfolio Review.
22. Post Balance Sheet Events
On 29 January 2014 the directors declared a final dividend in
respect of the period from admission on 17 December 2012 to 31
December 2013 of 1.1 pence per Share (see note 15).
The Company and Goldman Sachs International entered into an
international forward exchange master agreement dated 7 February
2014 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
agreement is governed by the laws of England and Wales.
The Group committed to a EUR14.3m facility for the acquisition
of an office building in Amsterdam occupied by UPC Nederland. The
Group expects to earn a solid single digit return in line with its
investment criteria. The loan is expected to be fully drawn in
March.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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