TIDMSWEF
RNS Number : 2182X
Starwood European Real Estate Finan
27 August 2015
Starwood European Real Estate Finance Limited
Interim Financial Report and Unaudited Condensed Consolidated
Financial Statements for the six month period from 1 January 2015
to 30 June 2015
Corporate Summary
Principal Activities and Investment Objective
The investment objective of Starwood European Real Estate
Finance Limited ("the Company"), together with its subsidiaries
Starfin Public GP Limited ("the GP"), Starfin Public LP ("the
Partnership") and Starfin Lux S.à.r.l. ("Luxco") (together "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 the wider European Union's internal
market, focusing on Northern and Southern Europe. 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
per cent of total loans by value are for a term of seven years or
less.
The Group aims to be appropriately diversified by geography,
real estate sector, 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 a registered
closed-ended investment company. The Company's ordinary shares were
first 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. Further issues took place in March 2013, April
2013 and July 2015. 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 of which Starfin Public GP Limited 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.
References to the "Group" refer to the Company, the GP, the
Partnership and Luxco.
The Investment Manager during the period was Starwood European
Finance Partners Limited ("the Investment Manager"), a company
incorporated in Guernsey with registered number 55819 and regulated
by the GFSC. The Investment Manager has appointed Starwood Capital
Europe Advisers, LLP ("the Investment Adviser"), an English limited
liability partnership authorised and regulated by the Financial
Conduct Authority, to provide investment advice, pursuant to an
Investment Advisory Agreement.
Chairman's Statement
Dear Shareholder,
I am delighted to present the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements of Starwood
European Real Estate Finance Limited for the six months from 1
January 2015 to 30 June 2015.
Investment
As at 30 June 2015, the Group was fully invested with
investments and commitments of GBP247.3 million, partly funded by
GBP8 million drawn on the Group's revolving credit facility. Since
the year end, the Group made additional loan advances of GBP38.2
million. The Group made a tap issue of shares on 23 July 2015 for a
total of GBP24 million to fund future investments.
Pipeline and Placement Program
Going into the second half of the year the Group's investment
pipeline remains robust and of such a size that the Board is
considering the publication of a prospectus in order to implement a
12 month placing programme that would allow the Company to raise
additional equity capital as needed for further investments and to
do so incrementally to limit cash drag.
Outlook
The Company is encouraged to note that market activity is
growing, but is alert to the increased competition amongst lenders
that improving conditions have stimulated. In the medium term the
increased competition amongst lenders will lead to a choice of
greater risk or an acceptance of slightly lower returns; the
Company would always favour a transaction with a slightly lower
return than a higher risk, with a resulting impact on dividends. In
the short term, and on the basis of the current portfolio, the
Company continues to target a dividend at an annualised rate of 7.0
pence per Ordinary Share and has declared a dividend of 1.75 pence
per Ordinary Share (7.0 pence annualised) for each of the first two
quarters of 2015. Whilst it is difficult to predict the timing of
any changes in the returns from new investment, the Company
considers that the 7.0 pence targeted dividend rate may not be
sustainable in the longer term without increasing the risk profile
of the portfolio and, accordingly the Company believes for 2016
onwards the dividend target should be set 0.50 pence lower per
Ordinary Share at 6.5 pence per annum.
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.
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 and having reassessed the principal risks, the
Directors considered it appropriate to adopt the going concern
basis of accounting in preparing the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements.
The Company will continue to update you on progress by way of
the quarterly fact sheets and investment updates when deals are
signed.
On behalf of the Board, I would like to close by thanking
shareholders for your commitment and I look forward to updating you
on the Company's progress early next year.
Stephen Smith
Chairman
26 August 2015
Investment Manager's Report
Investment Deployment
As at 30 June 2015, the Group had investments and commitments of
GBP247.3 million (sterling equivalent at quarter end exchange
rates) as follows:
Sterling
Balance as Sterling Sterling
at 30 June Unfunded Total (Drawn
2015 Commitments and Unfunded)
================================== ============ ============= ===============
Maybourne Hotel Group, London GBP11.2 m GBP0.0 m GBP11.2 m
West End Development, London GBP10.0 m GBP0.0 m GBP10.0 m
Lifecare Residences, London GBP13.7 m GBP0.8 m GBP14.5 m
Salesforce Tower, London GBP13.3 m GBP0.0 m GBP13.3 m
Centre Point, London GBP45.0 m GBP0.0 m GBP45.0 m
5 Star Hotel, London GBP6.9 m GBP0.0 m GBP6.9 m
Aldgate Tower, London GBP38.9 m GBP6.1 m GBP45.0 m
================================== ============ ============= ===============
GBP139.1 GBP145.9
Total Sterling Loans m GBP6.8 m m
================================== ============ ============= ===============
Retail Portfolio, Finland GBP26.3 m GBP0.0 m GBP26.3 m
Industrial Portfolio, Netherlands GBP14.2 m GBP0.0 m GBP14.2 m
Office Netherlands GBP10.0 m GBP0.0 m GBP10.0 m
W Hotel, Netherlands GBP11.9 m GBP5.8 m GBP17.7 m
============ ============= ===============
Total Euro Loans GBP62.4 m GBP5.8 m GBP68.2 m
================================== ============ ============= ===============
Industrial Portfolio, Denmark GBP27.9 m GBP5.2 m GBP33.1 m
================================== ============ ============= ===============
Total Danish Krona Loan GBP27.9 m GBP5.2 m GBP33.1 m
================================== ============ ============= ===============
GBP229.4 GBP247.3
TOTAL m GBP17.9 m m
================================== ============ ============= ===============
Since 31 December 2014, the following significant investment
activity has occurred (included in the table above):
FC200 Repayment: On 11 June 2015 the FC200 loan of GBP10.1
million was repaid following a sale of the property.
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Industrial Portfolio, Denmark: On 26 June 2015, the Group
committed to provide two facilities for a total of DKK 350.3
million (c. GBP33.1 million) for a portfolio of light industrial
assets throughout Denmark. The first facility is a mezzanine
facility to refinance a portfolio already owned by the sponsor. The
second facility is a whole loan to support the acquisition of a new
portfolio. The facilities were partially drawn on 26 June 2015,
with a further drawdown made on 15 July 2015. The final drawdown is
expected during the third quarter of 2015.
The following loans were committed after 30 June 2015 (not
included in the table above):
Retail & Residential Portfolio, Ireland: On 21 July 2015,
the Group committed to provide a EUR6.1m loan on a portfolio of
retail and residential rental properties in the Republic of
Ireland. The loan was drawn on 24 July 2015.
5 Star Hotel, London: On 24 July 2015, the Group committed to
increase its existing loan on the 5 Star London Hotel by GBP6.2
million. The loan was fully drawn by 31 July 2015.
Center Parcs B notes: On 30 July 2015, the Group purchased GBP8
million of the GBP560 million Class B2 Fixed Rate Secured Notes
issued by CPUK Finance Limited following the acquisition of the
Center Parcs group by a fund managed by Brookfield.
Industrial Portfolio, UK: On 5 August 2015 the Group provided a
GBP32.5 million whole loan to refinance a portfolio of industrial
properties throughout the UK.
The Group had GBP2.6 million of cash at 30 June 2015 with GBP8
million drawn on the revolving credit facility. In order to fund
the new deals committed after 30 June 2015 and the remaining
drawdowns on the Danish Industrial Portfolio, the Group has fully
utilised the GBP24 million proceeds of the tap issue in July 2015
and has drawn further funds on the revolving credit facility.
As at 30 June 2015, the Net Asset Value ("NAV") was 99.94 pence
per Ordinary Share and the share price was 107.25 pence.
Portfolio Statistics
As at 30 June 2015, the portfolio was invested in line with the
Group's investment policy and is summarised below.
The Board considers that the Group is engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. The analysis presented in this report
is presented to demonstrate the level of diversification achieved
within that single segment. The Board does not believe that the
Group's investments constitute separate operating segments.
30 June 2015
Number of investments 12
Percentage of portfolio currently invested in floating
rate loans (1) 50.3%
Invested Loan Portfolio annualised total return (2) 8.8%
Weighted average portfolio LTV - to Group first GBP
(3) 12.8%
Weighted average portfolio LTV - to Group last GBP
(3) 61.7%
Average loan term 3.6 years
Cash GBP2.6 m
Amount drawn on revolving credit facility GBP8.0 m
Investment Outlook
It is expected that some of the loans originated early in the
life of the Group may repay over the coming year and the Group is
continuously focussed on the need to promptly re-invest any
repayment proceeds to avoid material cash drag.
Going into the second half of the year the Group's investment
pipeline remains robust. We continue to see a variety of
opportunities which will allow the Group to achieve good risk
adjusted returns from whole loans as well as mezzanine loans.
In the first half of the year we closed loans in Denmark and
Ireland which are two new jurisdictions for the Group. There has
been a significant investment of origination effort in Ireland in
particular and as a result Ireland features strongly in the current
pipeline.
There has also continued to be a significant investment of time
in Spain and Italy and we would expect to close our first loan in
one of these countries in the second half of the year.
Another growing theme for the Group has been assisting borrowers
whose loans are with lenders that have exited the lending market or
lenders who have sold loan portfolios to private equity or hedge
funds. Examples include a number of borrowers in Scandinavia with
performing loans from international lenders who are unable to roll
those loans due to these lenders pulling out of from the region to
their home markets. There are also many opportunities arising from
non-performing loan ("NPL") books that banks have sold. The owners
of these NPLs have often bought the NPL at a price that allows them
to offer a significant discount to the borrower which allows the
borrower to refinance at an appropriate level with a new lender.
These situations are often complex and therefore can create
opportunities for the Group to achieve good risk adjusted returns.
Initially many of the NPL opportunities have been in the UK and
Ireland, however we would expect that to widen if banks continue to
divest loan portfolios in other jurisdictions.
Market Summary
The effect of the 2007-8 financial crisis
In the years following the 2007-8 financial crisis, regulators
launched a series of initiatives to reform the banking regulatory
framework to address the impact of significantly weakened financial
institutions. This led to proposals such as Basel III and the
European Banking Association's recommendation to re-capitalise
banks and decrease their levels of leverage. Certain of these
proposals have started to come into force and there has also been
market pressure to address some of the underlying structural
weaknesses. The initial result of these initiatives and proposals
was to lead banks to fundamentally reduce the amount of loans they
provided. The repair of balance sheets and the general increased
availability of liquidity for most banks has somewhat encouraged
the return of lending potential.
One of the sectors most affected by the above circumstances was
the European commercial real estate (CRE) sector. Historically,
this sector had relied almost entirely on banks for debt financing
(up to 95 per cent. of debt is provided by banks, when covered
bonds are included, according to some estimates), and CRE has
therefore been particularly vulnerable to a contraction in supply
of bank debt. In contrast, the US CRE sector sources only
approximately half of its debt financing from banks, with the
balance provided by non-banking institutions. As a result of
changes in the banking regulatory framework, it became less
attractive for banks to provide CRE loans. These loans weigh more
heavily on banks' capital adequacy ratios, require longer-dated
funding that is more expensive, and typically offer the banks
little by way of ancillary business opportunities. This erodes
banks' profitability margins, lowering returns and incentivising
banks to re-allocate capital from CRE to elsewhere.
In addition, the primary European commercial mortgage-backed
securities (CMBS) market - an alternative source of debt financing
for CRE - has seen its volume levels reduce significantly since the
peak years of 2006-07. CMBS deals are undergoing a slight recovery,
with around GBP10.5 billion issued since 2013 and approximately
GBP5 billion issued in to the UK. These deals remain muted compared
to the pre-crisis volumes where over GBP18 billion of UK CMBS
issuance occurred in 2006 alone.
The current market
United Kingdom
In the UK at year-end 2014, there was an estimated approximate
total of GBP206.8 billion of outstanding debt secured by commercial
property, including CMBS and excluding the value of relevant loans
held by Ireland's National Asset Management Agency. This compares
with GBP232.5 billion recorded at year-end 2013, and the reduction
reflected the overall deleveraging in the market.
Notwithstanding the overall deleveraging referred to above,
GBP45.2 billion of loan originations, acquisition finance and
refinancing on commercial terms, were recorded by De Montfort
University as having been undertaken in the UK in 2014. This
represents a 51 per cent. increase to the GBP29.9 billion similarly
reported at year-end 2013.
Despite the increasing lending activity in the UK, De Montfort
University reported that average senior debt loan-to-value ratios
for loans secured by UK commercial property increased slightly
during 2014 but remained near the middle of the 60-65 per cent.
range that has prevailed since the crisis and well below the levels
seen in the late 1990s. This indicates that loan activity remains
focussed on the prime markets, sectors and projects. Lending
activity outside this area is still subdued, with low LTVs, and
provides an opportunity for lenders to earn an attractive premium
for the additional risk taken.
Average interest margins for the UK investment sector, as
reported by De Montfort University, have declined each year since
mid-2012 and this has been reflected in the Company's updated
dividend target described in the Chairman's Statement. The average
margin for prime office financing offered by UK lenders according
to the De Montford Lending Survey stood at 219 basis points over
LIBOR at the end of 2014, having peaked at 335 basis points over
LIBOR in mid-2012.
In light of LTVs remaining lower than the historical averages,
and margins still significantly higher, the Company considers that
this is a healthy market that is not becoming overheated.
The Company has observed areas where the market is very
competitive. Prime office financing for large lot sizes continues
to see tightening spreads across Europe, with London now in the low
100s basis point margins for 65 per cent LTV on interest-only
senior debt. In addition, widely marketed mezzanine loans of large
lot sizes are also subject to a high level of competition on
pricing.
Europe ex-United Kingdom
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The Investment Manager considers that the rest of Europe is also
entering a different stage of the CRE lending market where
availability of finance has become generally better. This increased
interest in lending across Europe is highlighted in a recent
Cushman & Wakefield report that indicates a 123 per cent. year
on year increase in tracked new investment and development lending
in 2014, and a 55 per cent. increase in overall loan origination,
when refinance lending is included.
Markets such as Spain, Italy and the Netherlands have emerged
from the post-crisis conservatism of 50 per cent. LTV levels with
increased LTVs of up to 60 per cent. for certain sponsors and
assets.
The emergence of non-bank lenders
In the UK and in Europe as a whole, non-bank lenders are
becoming a more important source of debt capital for CRE. In the
UK, over 25 per cent. by value of all loan originations in 2014 (23
per cent. in 2013) were provided by insurance companies and other
non-banks. In Europe, where Cushman tracked and monitored 186
active lenders in 2014, non-bank lenders accounted for 47 per cent.
by number (45 per cent. in 2013).
As discussed above, the Company believes that banks will
continue to focus their CRE lending on core assets. Any lending
opportunity that involves moderately higher leverage, assets in
"transition" that require more active management, certain sectors
or geographical locations may find debt harder to obtain. This may
be relatively little influenced by how attractive the underlying
risk/return metrics might be and provides an opportunity for
non-bank lenders in particular to earn an attractive premium for
the risk taken. The Company has always sought to exploit these
niches to earn attractive returns for the risks taken.
Loan sales
A total of EUR80.6 billion of closed European commercial real
estate loan sales and "real estate owned" sale transactions were
tracked by Cushman in 2014 more than twice the figure for 2013. Of
this amount, the UK and Ireland accounted for EUR29.8 billion and
EUR22.4 billion respectively, with sales also taking place in
Spain, Denmark, Austria and Romania.
The area of non-performing loans presents opportunities when the
individual loan positions are resolved and the underlying real
estate requires refinancing on sustainable terms. These
transactions are often complex and this complexity can reduce
competition between lenders, providing an opportunity for the
lender of the new loan to earn an additional premium return. The
Company has already lent on such opportunities and believes this is
a growth area for its business.
CRE loan terms
The senior debt in the capital structure of a real estate
investment usually constitutes the largest part of the capital
structure. It also provides the greatest level of security as its
mortgage ranks first against the underlying properties. It is
furthermore protected by the equity and junior debt tranches in the
capital structure which would be first to absorb any losses.
The junior debt tranche, also called mezzanine debt, sits
between senior debt and equity. Because its recovery entitlements
rank behind the senior tranche, mezzanine debt carries a higher
rate of interest than the senior debt to compensate for the higher
risk. Mezzanine debt is usually subject to detailed arrangements to
govern the relationship between the debt classes and benefits from
protective features which often include a second-ranking mortgage
on properties and the capital buffer provided by the equity tranche
in the capital structure.
The Company is typically seeking to earn "high yield returns"
(considered to be returns of approximately 6.5 per cent. to 10 per
cent.) either from the direct provision of mezzanine or providing
"whole loans" (i.e. senior/mezzanine combined) on harder-to-finance
projects that can deliver similar style returns. In the Investment
Manager's experience, the typical average return in the EMEA region
is now at 7.5-10 per cent. for average LTVs at 75 per cent.
Investment characteristics
The maturity of European CRE senior and mezzanine loans is
typically five years. Senior or whole loans generally require
amortization over their term. Typically however, loans are
refinanced one to two years prior to maturity, either because of
prudent financing management by the borrower or because the asset
is sold. The repayment is at par, and, provided that the borrower
is solvent, is therefore independent of the asset's capital
appreciation or depreciation.
Interest payments are typically paid quarterly in cash, except
for mezzanine loans where some interest may be accrued for a bullet
payment at loan maturity. Interest payments on senior and mezzanine
loans typically have priority over some other property expenditures
and therefore offer a higher level of payment certainty.
CRE loans almost always benefit from a mortgage claim on the
underlying property assets, first or second ranking for senior or
junior loans respectively. In addition, this form of lending
usually benefits from a comprehensive approach to security which
will include shares in the borrowing entity being provided as
collateral along with a charge over the rental income, insurance
proceeds (to the extent available to the borrower), bank accounts,
hedging and other receivables. This means that if the borrower is
in default, lenders have the ability to accelerate their debt claim
and seek recovery through the enforcement of the security held over
the assets of the borrower (and the shares in the borrower itself).
The claim of the subordinated lenders for satisfaction of their
debt ranks after those of the senior lenders. Asset
characteristics, advance rate, lending terms and structure and
borrower type, therefore, are important factors for assessing the
quality of the loan.
Relative to real estate equity investment, debt provides
substantial downside protection in a flat or falling market. For
example (based on certain assumptions, including that interest is
paid on schedule) on a simple five year 75 per cent. LTV structure,
an amortising whole loan could sustain more than a 50 per cent.
decline in the underlying property value and the junior debt could
sustain a 35 per cent. value decline before total returns are at
break-even level. This is in contrast to equity where the decline
required to break even would be de minimis on a similarly leveraged
investment. Such terms are indicative only.
Principal Risks for the Remaining Six Months of the year to 31
December 2015
The principal risks assessed by the board relating to the Group
were disclosed in the Annual Report and Audited Consolidated
Financial Statements for the period to 31 December 2014. The Board
and Investment Manager do not consider these risks to have changed.
Therefore, the following are the principal risks assessed by the
Board and the Investment Manager as relating to the Group for the
remaining six months of the year to 31 December 2015.
-- A number of the loans originated early in the life of the
Group may repay in the near future. Principal may be repaid earlier
than anticipated, causing the return on certain investments to be
less than expected. In addition, the Group may be unable to
re-invest repayment proceeds at the same returns and there may be a
delay in reinvesting funds which could lead to cash drag;
-- The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies, including but not limited
to the risk that loan income will fluctuate due to movements in
interbank rates. The actual rate of return may therefore be
materially lower than the targeted returns. 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 Company hedges currency exposures in a prudent manner.
However, the currency hedging strategies may not eliminate all
currency risk due to, among other things, uncertainties in the
timing and / or amount of payments received on the related
investments. Additionally the Company may be required under certain
circumstances to collateralise its currency hedges for the benefit
of the hedge counterparty, which could adversely affect its
liquidity;
-- The Group's investments are subject to risk of default where
a borrower is unable or does not pay interest 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;
-- 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; and
-- Real estate valuation is inherently subjective and uncertain.
In addition, the value of the real estate underlying the Group's
portfolio of loans, 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.
Related Party Transactions
Related party disclosures are given in the notes to the
financial statements.
Starwood European Finance Partners Limited
Investment Manager
26 August 2015
Board of Directors
Stephen Smith (non-executive Director - Chairman of the
Board)
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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. These include Alcentra European Floating
Rate Income Fund Limited, The Renewables Infrastructure Group
Limited and Sequoia Economic Infrastructure Income Fund Limited,
which are listed on the main market of the London Stock Exchange
and Aurora Russia Limited, DP Aircraft I Limited and Fair Oaks
Income Fund 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 holds qualifications from the Institute of Chartered
Accountants in England and Wales where he is a Fellow and 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, Advance Frontier Markets Fund Limited
(all listed on AIM), Toro Ltd (listed on SFM) and also acts as
non-executive Director to several other Guernsey investment funds.
He was previously Finance Director of Close Fund Services, a large
independent fund administrator, where he successfully initiated a
restructuring of client financial reporting services and was a key
member of the business transition team. Prior to moving to Guernsey
he was at Price Waterhouse in London before embarking on a career
in business services, predominantly telecoms. He co-led the
business turnaround of Talkland International (now Vodafone Retail)
and was directly responsible for the strategic shift into retail
distribution and its subsequent implementation; he subsequently
worked on the GBP20 million private equity acquisition of Ora
Telecom. John is also a resident of Guernsey.
Statement of Directors' Responsibilities
To the best of their knowledge, the directors of Starwood
European Real Estate Finance Limited confirm that:
1. The Unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with IAS 34, "Interim Financial
Reporting" as adopted by the European Union; and
2. The Interim Financial Report, comprising of the Chairman's
Statement and the Investment Manager's Report, meets the
requirements of an interim management report and includes a fair
review of information required by DTR 4.2.4 R:
(i) DTR 4.2.7R of the UK Disclosure and Transparency Rules,
being an indication of important events that have occurred during
the first six months and their impact on the Unaudited Condensed
Consolidated Financial Statements, and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(ii) DTR 4.2.8R of the UK Disclosure and Transparency Rules,
being related party transactions that have taken place in the first
six months and that have materially affected the financial position
or performance of the Company during that period, and any material
changes in the related party transactions disclosed in the last
Annual Report.
By order of the Board
For Starwood European Real Estate Finance Limited
Stephen Smith John Whittle
Chairman Director
26 August 2015 26 August 2015
Independent Review Report
Introduction
We have been engaged by Starwood European Real Estate Finance
Limited ("the Company") to review the Unaudited Condensed
Consolidated Financial Statements in the Interim Financial Report
for the half year ended 30 June 2015, which comprises the Unaudited
Condensed Consolidated Statement of Comprehensive Income, the
Unaudited Condensed Consolidated Statement of Financial Position,
the Unaudited Condensed Consolidated Statement of Changes in
Equity, the Unaudited Condensed Consolidated Statement of Cash
Flows and related notes. We have read the other information
contained in the Interim Financial Report and considered whether it
contains any apparent misstatements or material inconsistencies
with the information in the Unaudited Condensed Consolidated
Financial Statements.
Directors Responsibilities
The Interim Financial Report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the Interim Financial Report in accordance with the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Company are prepared in accordance with International Financial
Reporting Standards as adopted by the European Union. The Unaudited
Condensed Consolidated Financial Statements included in this
Interim Financial Report have been prepared in accordance with
International Accounting Standard 34, "Interim Financial Reporting"
as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the Unaudited Condensed Consolidated Financial Statements in the
Interim Financial Report based on our review. This report,
including the conclusion, has been prepared for and only for the
Company for the purpose of the Disclosure and Transparency Rules of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements 2410, 'Review of Interim Financial
Information Performed by the Independent Auditor of the Entity'
issued by the International Auditing and Assurance Standards Board.
A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
and consequently does not enable us to obtain assurance that we
would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the Unaudited Condensed Consolidated
Financial Statements in the Interim Financial Report for the half
year ended 30 June 2015 are not prepared, in all material respects,
in accordance with International Accounting Standard 34, "Interim
Financial Reporting" as adopted by the European Union, and the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
PricewaterhouseCoopers CI LLP Chartered Accountants
Guernsey, Channel Islands
26 August 2015
Publication of Interim Financial Report
The maintenance and integrity of the Starwood European Real
Estate Finance Limited website is the responsibility of the
Directors; the work carried out by the auditors does not involve
consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to
the Interim Financial Report and Unaudited Condensed Consolidated
Financial Statements since they were initially presented on the
website.
Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions
(MORE TO FOLLOW) Dow Jones Newswires
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Unaudited Condensed Consolidated Statement of Comprehensive
Income for the period ended 30 June 2015
1 January 1 January 1 January 2014
2015 to 2014 to to
30 June 2015 30 June 2014 31 December 2014
Notes GBP GBP GBP
(unaudited) (unaudited) (audited)
Income
Income from loans advanced 6 9,793,289 7,011,394 16,050,220
Income from cash and cash
equivalents 22,811 102,377 130,311
Total income from investments 9,816,100 7,113,771 16,180,531
------------------------------- ------ ------------- ------------- -----------------
Expenses
Investment management fees 13 881,192 636,764 1,528,333
Directors' fees and travel
expenses 13 58,261 57,929 115,283
Administration fees 121,090 112,554 220,999
Auditors' fees 80,507 103,123 157,619
Broker's fees 50,000 49,786 97,736
Legal and professional
fees 60,471 66,806 112,691
Insurance 6,265 27,583 60,564
Net foreign exchange losses
/ (gains) 349,388 938,645 (881,125)
Revolving credit facility
commitment fees 159,963 - 25,278
Revolving credit facility
amortised 115,405 - 16,990
Revolving credit facility
interest 3,298 - -
Other expenses 35,742 46,457 80,344
Total operating expenses 1,921,582 2,039,647 1,534,712
------------------------------- ------ ------------- ------------- -----------------
Operating profit for the
period / year before tax 7,894,518 5,074,124 14,645,819
------------------------------- ------ ------------- ------------- -----------------
Taxation 12 1,856 3,967 2,662
------------------------------- ------ ------------- ------------- -----------------
Operating profit for the
period / year and total
comprehensive income 7,892,662 5,070,157 14,643,157
------------------------------- ------ ------------- ------------- -----------------
Weighted average number
of shares in issue 3 238,100,000 238,100,000 238,100,000
Basic and diluted earnings
per Ordinary Share (pence) 3 3.31 2.13 6.15
Unaudited Condensed Consolidated Statement of Financial Position
as at 30 June 2015
As at As at As at
30 June 2015 30 June 2014 31 December 2014
Notes GBP GBP GBP
(unaudited) (unaudited) (audited)
Assets
Cash and cash equivalents 4 2,604,326 22,300,171 13,172,978
Other receivables and prepayments 231,685 244,445 31,962
Revolving credit facility
capitalised cost 10 327,605 - 443,010
Loans advanced 6 232,143,801 211,798,229 220,954,400
Financial assets at fair
value through profit and
loss 7 11,395,469 2,026,618 5,023,584
Total assets 246,702,886 236,369,463 239,625,934
----------------------------------- ------ ------------- ------------- -----------------
Liabilities
Revolving credit facility 8 8,003,298 - -
Trade and other payables 736,960 872,197 1,341,518
Total liabilities 8,740,258 872,197 1,341,518
----------------------------------- ------ ------------- ------------- -----------------
Net assets 237,962,628 235,497,266 238,284,416
----------------------------------- ------ ------------- ------------- -----------------
Capital and reserves
Share capital 233,843,162 233,843,162 233,843,162
Retained earnings 4,119,466 1,654,104 4,441,254
Total equity 237,962,628 235,497,266 238,284,416
----------------------------------- ------ ------------- ------------- -----------------
Number of Ordinary Shares
in issue 238,100,000 238,100,000 238,100,000
Net asset value per Ordinary
Share (pence) 99.94 98.91 100.08
These consolidated financial statements were approved and
authorised for issue by the Board of Directors on
26 August 2015, and signed on its behalf by:
Stephen Smith John Whittle
Chairman Director
Unaudited Condensed Consolidated Statement of Changes in Equity
for the period ended 30 June 2015
Period ended 30 June 2015 Share capital Retained Total equity
earnings
GBP GBP GBP
(unaudited) (unaudited) (unaudited)
Balance at 1 January 2015 233,843,162 4,441,254 238,284,416
-------------------------------------------- -------------- ------------- -------------
Dividends paid - (8,214,450) (8,214,450)
Operating profit and total comprehensive
income - 7,892,662 7,892,662
Balance at 30 June 2015 233,843,162 4,119,466 237,962,628
-------------------------------------------- -------------- ------------- -------------
Period ended 30 June 2014 Share capital Retained Total equity
earnings
GBP GBP GBP
(unaudited) (unaudited) (unaudited)
Balance at 1 January 2014 233,843,162 2,179,297 236,022,459
-------------------------------------------- -------------- ------------- -------------
Dividends paid - (5,595,350) (5,595,350)
Operating profit and total comprehensive
income - 5,070,157 5,070,157
Balance at 30 June 2014 233,843,162 1,654,104 235,497,266
-------------------------------------------- -------------- ------------- -------------
Year ended 31 December Share capital Retained Total equity
2014 earnings
GBP GBP GBP
(audited) (audited) (audited)
Balance at 1 January 2014 233,843,162 2,179,297 236,022,459
-------------------------------------------- -------------- ------------- -------------
Dividends paid - (12,381,200) (12,381,200)
Operating profit and total comprehensive
income - 14,643,157 14,643,157
-
Balance at 31 December
2014 233,843,162 4,441,254 238,284,416
-------------------------------------------- -------------- ------------- -------------
Unaudited Condensed Consolidated Statement of Cash Flows
for the period ended 30 June 2015
1 January 1 January 1 January
2015 to 2014 to 2014 to
30 June 30 June 31 December
2015 2014 2014
GBP GBP GBP
(unaudited) (unaudited) (audited)
Operating activities:
Operating profit for the period /
year and total comprehensive income 7,892,662 5,070,157 14,643,157
Adjustments
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Net interest income (9,793,289) (7,011,394) (16,050,220)
Interest income on cash and cash
equivalents (22,811) (102,377) (130,311)
Decrease in prepayments and receivables 20,824 43,025 246,776
(Decrease) / increase in trade and
other payables (44,983) 432,645 197,394
Net gain on financial instruments
held at fair value through profit
and loss (6,371,885) (1,939,438) (4,936,404)
Net foreign exchange losses 6,931,247 2,878,083 3,689,527
Revolving credit facility interest 3,298 - -
Revolving credit facility amortised 115,405 - -
Other non-cash items (220,547) 3,338 (188,247)
(1,490,079) (625,961) (2,528,328)
---------------------------------------- ----------------------- ---------------------- ------------------------
Loans advanced (1) (37,557,709) (61,351,264) (115,070,574)
Loans repaid 21,939,143 3,956,189 49,981,644
Origination fees paid (677,579) (497,605) (646,574)
Origination expenses paid - (5,454) (5,454)
Interest, commitment and exit fee
income from loans advanced 7,833,961 6,583,632 14,468,574
Syndication expenses paid (133,200) 36,480 (180,690)
Net cash outflow from operating
activities (10,085,463) (51,903,983) (53,981,402)
----------------------------------------- ----------------------- ---------------------- ------------------------
Cash flows from investing activities
Interest income from cash and cash
equivalents 22,811 110,180 139,043
Net cash inflow from investing
activities 22,811 110,180 139,043
----------------------------------------- ----------------------- ---------------------- ------------------------
Cash flows from financing activities
Revolving credit facility cost paid - - (315,064)
Revolving credit facility utilised 8,000,000 - -
Dividends paid (8,214,450) (5,595,350) (12,381,200)
Net cash outflow from financing
activities (214,450) (5,595,350) (12,696,264)
----------------------------------------- ----------------------- ---------------------- ------------------------
Net decrease in cash and cash
equivalents (10,277,102) (57,389,153) (66,538,623)
Cash and cash equivalents at the
start of the period / year 13,172,978 79,706,084 79,706,084
Net foreign exchange (loss) / gain
on cash and cash equivalents (291,550) (16,760) 5,517
Cash and cash equivalents at the
end of the period / year 2,604,326 22,300,171 13,172,978
----------------------------------------- ----------------------- ---------------------- ------------------------
1 Net of arrangement fees of GBP 654,984 (30 June 2014: GBP 1,152,830;
31 December 2014: GBP 2,184,680) withheld.
Unaudited Condensed Notes to the Consolidated Financial
Statements for the period ended 30 June 2015
1. General Information
The Company is a close-ended investment company incorporated in
Guernsey. The Unaudited Condensed Consolidated Financial Statements
comprise the financial statements of the Company, the GP, the
Partnership and the Luxco (together "the Group") as at 30 June
2015.
2. Basis of Preparation and Principal Accounting Policies
The Company has prepared these Unaudited Condensed Consolidated
Financial Statements on a going concern basis in accordance with
the Disclosure and Transparency Rules of the United Kingdom
Financial Conduct Authority and IAS 34 Interim Financial Reporting
as adopted by the European Union. This interim financial report
does not comprise statutory financial statements within the meaning
of the Companies (Guernsey) Law, 2008, and should be read in
conjunction with the Consolidated Financial Statements of the Group
as at and for the year ended 31 December 2014, which have been
prepared in accordance with International Financial Reporting
Standards as adopted by the European Union. The statutory financial
statements for the year ended 31 December 2014 were approved by the
Board of Directors on 27 March 2015. The opinion of the auditors on
those financial statements was unqualified. The accounting policy
in this Interim Financial Report is unchanged since 31 December
2014 except for a new policy as described in note 2.1 below. This
Interim Financial Report for the period ended 30 June 2015 has been
reviewed by the auditors but not audited.
Standards and Interpretations in issue and not yet
effective:
New standards Effective date
------------------------------------------------------- ---------------
IFRS 9 Financial Instruments - Classifications and
Measurement 1 January 2018
IFRS 15 Financial Instruments - Revenue from Contracts
from Customers 1 January 2017
The Directors are assessing the impact of these future
changes.
2.1. Financial Liabilities
Financial liabilities, including bank loans are recognised
initially at fair value and subsequently measured at amortised cost
using the effective interest rate method. Financial liabilities are
derecognised when the contractual obligation is discharged,
cancelled or expires.
3. Earnings Per Share and Net Asset Value Per Share
The calculation of basic earnings per Ordinary Share is based on
the operating profit of GBP7,892,662 (31December 2014: GBP
14,643,157) and on the weighted average number of Ordinary Shares
in issue during the period of 238,100,000 (31 December 2014:
238,100,000) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of
GBP237,962,628 (31 December 2014: GBP238,284,416) and the actual
number of Ordinary Shares in issue at 30 June 2015 of 238,100,000
(31December 2014: 238,100,000).
4. Cash and Cash Equivalents
Cash and cash equivalents comprise
the following:
30 June 2015 30 June 2014 31 December
2014
GBP GBP GBP
----------------------------------- -------------- -------------------- ---------------------
Fixed deposits - 16,200,000 8,194,296
Cash at bank 2,604,326 6,100,171 4,978,682
----------------------------------- -------------- -------------------- ---------------------
2,604,326 22,300,171 13,172,978
----------------------------------- -------------- -------------------- ---------------------
Cash and cash equivalents comprises cash 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.
5. Revolving Credit Facility Capitalised Costs
The revolving credit facility capitalised costs are directly
attributable costs incurred in relation to the establishment of the
GBP50 million loan facility.
6. Loans Advanced
31 December
30 June 2015 30 June 2014 2014
GBP GBP GBP
------------------------ ----------------------- -------------------------- ---------------------------
UK
Maybourne Hotel Group,
London 11,238,404 19,449,353 19,430,056
West End Development,
London 10,157,547 10,141,129 10,137,575
Lifecare Residences, London 13,686,114 12,934,260 13,311,980
Salesforce Tower,
London 13,577,468 16,796,796 15,186,783
Centre Point, London 45,412,853 40,360,893 40,305,815
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FC200, London - 21,581,647 9,252,934
Aldgate, London 39,704,307 - 37,575,749
5 Star Hotel, London 6,901,727 - 6,871,376
Netherlands
Office 10,034,985 11,416,703 11,104,334
Industrial 14,382,543 44,625,393 15,873,838
W Hotel 12,073,845 - 9,198,302
Finland
Retail Portfolio 27,293,162 34,492,055 32,705,658
Denmark
Industrial
Portfolio 27,680,846 - -
232,143,801 211,798,229 220,954,400
------------------------ ----------------------- -------------------------- ---------------------------
No element of loans advanced are past due or impaired. For
further information and the associated risks see the Investment
Manager's Report.
The table below reconciles the movement of the carrying value of
loans advanced in the period / year
31 December
30 June 2015 30 June 2014 2014
GBP GBP GBP
-------------- -------------- --------------
Loans advanced at the start
of the period / year 220,954,400 156,381,277 156,381,277
---------------------------------- -------------- -------------- --------------
Loans advanced 38,212,693 62,504,094 117,255,254
Loans repaid (21,939,143) (3,956,189) (49,981,644)
Arrangement fees
earned (654,984) (1,152,830) (2,184,680)
Commitment fees
earned (51,081) (17,495) (57,413)
Exit fees
earned (126,532) (49,277) (75,522)
Origination fees
paid 251,204 497,605 1,072,949
Syndication expenses paid
/ accrued - - 313,888
Effective interest income
earned 9,793,289 7,011,394 16,050,220
Interest payments received
/ accrued (7,656,348) (6,512,173) (14,130,402)
Foreign exchange
losses (6,639,697) (2,908,177) (3,689,527)
Loans advanced at the end
of the period / year 232,143,801 211,798,229 220,954,400
---------------------------------- -------------- -------------- --------------
Loans advanced at fair value 241,188,965 216,606,020 231,280,183
---------------------------------- -------------- -------------- --------------
For further information on the fair value of loans advanced,
refer to note 11.
7. 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 rates relative to their terms. The
aggregate contractual or notional amount of derivative financial
instruments, the extent to which instruments are favourable or
unfavourable, and thus the aggregate fair values of derivative
financial assets and liabilities, can fluctuate significantly from
time to time. The fair value of derivative instruments held are set
out below:
Goldman Sachs:
Notional contract Fair values
amount 1
Assets Liabilities Total
30 June 2015 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards GBP22,354,581 2,792,273 - 2,792,273
Total 22,354,581 2,792,273 - 2,792,273
------------------------- ------- -------------- ----------- ------------ -----------
Lloyds Bank
plc:
Notional contract Fair values
amount 1
Assets Liabilities Total
30 June 2015 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards GBP78,729,378 8,603,196 - 8,603,196
Total 78,729,378 8,603,196 - 8,603,196
------------------------- ------- -------------- ----------- ------------ -----------
Total:
Notional contract Fair values
amount 1
Assets Liabilities Total
30 June 2015 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards 101,083,959 11,395,469 - 11,395,469
Total 101,083,959 11,395,469 - 11,395,469
------------------------- ------- -------------- ----------- ------------ -----------
Goldman Sachs:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2014 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards 20,952,906 983,938 - 983,938
Total 20,952,906 983,938 - 983,938
------------------------ -------- -------------- ----------- ------------ -----------
Lloyds Bank
plc:
Notional contract Fair values
amount ((1) )
Assets Liabilities Total
31 December 2014 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards 52,791,971 4,039,646 - 4,039,646
Total 52,791,971 4,039,646 - 4,039,646
------------------------ -------- -------------- ----------- ------------ -----------
Total:
Notional contract Fair values
amount 1
Assets Liabilities Total
31 December 2014 GBP GBP GBP GBP
---------------------------------- -------------- ----------- ------------ -----------
Foreign exchange derivatives
Currency forwards 73,744,877 5,023,584 - 5,023,584
Total 73,744,877 5,023,584 - 5,023,584
------------------------ -------- -------------- ----------- ------------ -----------
1 Euro amounts are translated at the
period / year end exchange rate
8. Revolving Credit Facility
Under the Company's investment policy, the Company is limited to
borrowing an amount equivalent to a maximum of 20 per cent of its
NAV at the time of drawdown. In calculating the Company's
borrowings for this purpose, any liabilities incurred under the
Company's foreign exchange hedging arrangements shall be
disregarded. The interest rate payable will depend on how long the
loan is outstanding: LIBOR plus 2.50 per cent per annum at initial
draw down and increasing for loans outstanding for more than six
months. The facility is secured by a pledge over the bank accounts
of the Company, its interests in Starfin Public LP and the
intercompany funding provided by the Company to Starfin Public LP.
Starfin Public LP also acts as guarantor of the facility and has
pledged its bank accounts as collateral. The undertakings and
events of default are customary for a transaction of this nature.
As at 30 June 2015 an amount of GBP8,000,000 (31 December 2014: GBP
nil) was drawn and interest of GBP 3,298 (31 December 2014: GBP
nil) was accrued.
9. Dividends
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Dividends will be declared by the Directors and paid in
compliance with the solvency test prescribed by Guernsey law. Under
Guernsey law, companies can pay dividends in excess of accounting
profit provided they satisfy the solvency test prescribed by the
Companies (Guernsey) Law, 2008. The solvency test considers whether
a company is able to pay its debts when they fall due, and whether
the value of a company's assets is greater than its liabilities.
The Company passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the
Company and the investment outlook, it is the Directors' intention
to pay quarterly dividends to shareholders (for more information
see Chairman's Statement).
The Company paid the following dividends in respect of the
period to 30 June 2015:
Dividend Net dividend Payment date
rate per paid (GBP)
Share (pence)
Period to:
----------------- --------------- ------------- ----------------
31 March 2015 1.75 4,166,750 30 April 2015
After the end of the period, the Directors declared a dividend
in respect of the financial period ended 30 June 2015 of 1.75 pence
per share paid on 24 August 2015 to shareholders on the register on
7 August 2015.
The Company paid the following dividends in respect of the year
to 31 December 2014:
Dividend Net dividend Payment date
rate per paid (GBP)
Share (pence)
Period to:
--------------------- --------------- ------------- ------------------
31 March 2014 1.25 2,976,250 30 April 2014
30 June 2014 1.35 3,214,350 30 July 2014
30 September 2014 1.50 3,571,500 27 October 2014
31 December 2014 1.70 4,047,700 31 January 2015
10. Risk Management Policies and Procedures
The Group through its investment in whole loans, subordinated
loans, mezzanine loans, bridge loans, loan-on-loan financings and
other debt instruments is exposed to a variety of financial risks,
including market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group's overall risk
management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the
Group's financial performance.
The Directors monitor and measure the overall risk bearing
capacity in relation to the aggregate risk exposure across all risk
types and activities. Even though the risks detailed in the Annual
Report and Financial Statements for the year ended 31 December 2014
still remain appropriate, further information regarding these risk
policies are outlined below:
i) Market risk
Market risk includes market price risk, currency risk and
interest rate risk. If a borrower defaults on a loan and the real
estate market enters a downturn it could materially and adversely
affect the value of the collateral over which loans are secured.
However, this risk is considered by the Board to constitute credit
risk as it relates to the borrower defaulting on the loan and not
directly to any movements in the real estate market. As such the
Directors do not consider that the Group is subject to market price
risk. The Investment Manager moderates market risk through a
careful selection of loans within specified limits. The Group's
overall market position is monitored by the Investment Manager and
is reviewed by the Board of Directors on an on-going basis.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and
invests in loans that are denominated in currencies other than the
functional currency of the Company. Consequently the Group is
exposed to risks arising from foreign exchange rate fluctuations in
respect of these loans and other assets and liabilities which
relate to currency flows from revenues and expenses. Exposure to
foreign currency risk is hedged and monitored by the Investment
Manager on an on-going basis and is reported to the Board
accordingly.
b) Interest rate risk
Interest rate risk is the risk that the value of financial
instruments and related income from loans advanced and cash and
cash equivalents will fluctuate due to changes in market interest
rates.
The majority of the Group's financial assets are loans advanced,
receivables and cash and cash equivalents. The Group's investments
have some exposure to interest rate risk but this is limited to
interest earned on cash deposits and floating interbank rate
exposure for investments designated as loans advanced. Loans
advanced have been structured to include a combination of fixed and
floating interest rates to reduce the overall impact of interest
rate movements. Further protection is provided by including
interbank rate floors, preventing interest rates from falling below
certain levels.
ii) Credit risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. The Group's main credit risk exposure
is in the loan portfolio, shown as loans advanced, where the Group
invests in whole loans and also subordinated and mezzanine debt
which rank behind senior debt for repayment in the event that a
borrower defaults. There is a spread concentration of risk as at 30
June 2015 due to several loans being advanced since inception.
There is also credit risk in respect of other financial assets as a
portion of the Group's assets are cash and cash equivalents or
accrued interest. The banks used to hold cash and cash equivalents
have been diversified to spread the credit risk to which the Group
is exposed. The Group also has credit risk exposure in its
financial assets through profit and loss which is diversified
between hedge providers in order to spread credit risk to which the
Group is exposed. The total exposure to credit risk arises from
default of the counterparty and the carrying amounts of financial
assets best represent the maximum credit risk exposure at the year
end date. As at 30 June 2015, the maximum credit risk exposure was
GBP246,702,886 (31 December 2014: GBP239,625,934).
The Investment Manager has adopted procedures to reduce credit
risk exposure by conducting credit analysis of the counterparties,
their business and reputation which is monitored on an on-going
basis. After the advancing of a loan a dedicated debt asset manager
employed by the Investment Adviser monitors on-going credit risk
and reports to the Investment Manager, with quarterly updates also
provided to the Board. The debt asset manager routinely stresses
and analyses the profile of the Group's underlying risk in terms of
exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are
typically agreed at the time of the original loan underwriting,
forecasting headroom against covenants, reviewing market data and
forecast economic trends to benchmark borrower performance and to
assist in identifying potential future stress points. Periodic
physical inspections of assets that form part of the Group's
security are also completed in addition to monitoring the
identified capital expenditure requirements against actual borrower
investment.
iii) Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient resources available to meet its liabilities as they fall
due. The Group's loans advanced are illiquid and may be difficult
or impossible to realise for cash at short notice.
The Group manages its liquidity risk through short term and long
term cash flow forecasts to ensure it is able to meet its
obligations. In addition, the Company is permitted to borrow up to
20 per cent of NAV and has entered into a revolving credit facility
of GBP50million of which GBP8million was drawn on 25 June 2015.
As at 30 June 2015, the Group had GBP2,604,326 (31 December
2014: GBP13,172,978) available in cash and GBP736,960 (31 December
2014: GBP1,341,518) trade payables. The Directors considered this
to be sufficient cash available, together with the undrawn
facilities on the revolving credit facility, to meets the Group's
liabilities.
11. Fair Value Measurement
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels
-- Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
-- 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).
-- Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
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The following table analyses within the fair value hierarchy the
Group's financial assets and liabilities (by class) measured at
fair value:
30 June 2015 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative
assets - 11,395,469 - 11,395,469
Total - 11,395,469 - 11,395,469
-------------------- --------- ----------- -------- -----------
31 December 2014 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative
assets - 5,023,584 - 5,023,584
Total - 5,023,584 - 5,023,584
-------------------- --------- ----------- -------- -----------
There have been no transfers between levels for the period ended
30 June 2015 (31 December 2014: nil).
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 30 June 2015 but for which fair value is disclosed.
Level Total fair Total carrying
1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
------------------- ------- ---------- ------------ ------------ ---------------
Assets
Cash and
cash equivalents - 2,604,326 - 2,604,326 2,604,326
Other receivables
and prepayments - 231,685 - 231,685 231,685
Loans advanced - - 241,188,965 241,188,965 232,143,801
Total - 2,836,011 241,188,965 244,024,976 234,979,812
--------------------- ------- ---------- ------------ ------------ ---------------
Level Level 2 Level 3 Total fair Total carrying
1 values amount
GBP GBP GBP GBP GBP
------------------- ------- ---------- ------------ ------------ ---------------
Liabilities
Trade and
other payables - 736,960 - 736,960 736,960
Total - 736,960 - 736,960 736,960
--------------------- ------- ---------- ------------ ------------ ---------------
Level Total fair Total carrying
1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
------------------- ------- ----------- ------------ ------------ ---------------
Assets
Cash and cash
equivalents - 13,172,978 - 13,172,978 13,172,978
Other receivables
and prepayments - 31,962 - 31,962 31,962
Loans advanced - - 231,280,183 231,280,183 220,954,400
Total - 13,204,940 231,280,183 244,485,123 234,159,340
--------------------- ------- ----------- ------------ ------------ ---------------
Level Level 2 Level 3 Total fair Total carrying
1 values amount
GBP GBP GBP GBP GBP
------------------- ------- ----------- ------------ ------------ ---------------
Liabilities
Trade and
other payables - 1,341,518 - 1,341,518 1,341,518
Total - 1,341,518 - 1,341,518 1,341,518
--------------------- ------- ----------- ------------ ------------ ---------------
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 loans advanced has
been determined by discounting the expected cash flows using a
discounted cash flow model. For the avoidance of doubt, the Group
carries its loans advanced at amortised cost in the financial
statements. In Directors' opinion, amortised cost better reflects
the carrying value of loans advanced than fair value as disclosed
in this note.
Cash and cash equivalents include cash at hand and fixed
deposits held with banks. Other receivables and prepayments include
the contractual amounts and obligations due to the Group and
consideration for advance payments made by the Group. Trade and
other payables represent the contractual amounts and obligations
due by the Group for contractual payments.
12. 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 GBP1200.
The Luxembourg indirect subsidiary of the Company is subject to
the applicable tax regulations in Luxembourg, as it is incorporated
under the securitization Law of 22 March 2004.
13. 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.
Fees, expenses and other payments
Outstanding For the period
at ended
30 June 2015 30 June 2015
GBP GBP
------------------------------------ ---------------------------- -----------------------------------
Directors' fees and expenses
paid
Stephen Smith 11,250 22,500
John Whittle 8,750 17,500
Jonathan Bridel - 16,250
Expenses paid - 2,011
Investment Manager
Investment management fees
earned 442,219 881,192
Origination fees
earned - 251,204
Outstanding
at
31 December For the year ended
2014 31 December 2014
GBP GBP
------------------------------------ ---------------------------- -----------------------------------
Directors' fees and expenses
paid
Stephen Smith - 45,000
John Whittle - 35,000
Jonathan Bridel - 32,500
Expenses paid - 2,783
Investment Manager
Investment management fees
earned 446,949 1,528,333
Origination fees
earned 426,375 1,072,949
Expenses 5,216 16,010
StarConsult S.à.r.l
1
Administrative
services - 8,369
1 StarConsult S.à.r.l is a Company managed by Thierry Drinka,
who is also a Director of Luxco.
Shareholdings and dividends paid
Dividends
paid for the
period ended As at
30 June 2015 30 June 2015
GBP Number of shares
------------------------------------ ---------------------------- -----------------------------------
Starwood Property Trust
Inc 315,330 9,140,000
SCG Starfin Investor
LP 78,833 2,285,000
Stephen Smith 1,380 40,000
John Whittle 242 7,000
Jonathan Bridel 242 7,000
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