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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Starwood European Real Estate Finance Limited | LSE:SWEF | London | Ordinary Share | GG00BRC3R375 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 92.00 | 91.20 | 93.80 | 93.80 | 91.00 | 91.00 | 138,849 | 16:35:02 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Unit Inv Tr, Closed-end Mgmt | 34.96M | 25.25M | 0.0638 | 14.70 | 371.07M |
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Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Annual Audited Accounts 2017
27-March-2018 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
27 March 2018
Starwood European Real Estate Finance Limited
Annual Financial Report year ended 31 December 2017
The Company has today published its annual financial report for the year
ended 31 December 2017 and has made it available online at
www.starwoodeuropeanfinance.com [1].
Starwood European Real Estate Finance Limited is an investment company
listed on the main market of the London Stock Exchange with an investment
objective to 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 in the UK and the wider European Union's internal
market.
The Group is the largest London-listed vehicle to provide investors with
pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners
Limited, an indirect wholly-owned subsidiary of the Starwood Capital Group.
Year ended Year ended
Key Highlights 31 Dec 2017 31 Dec 2016
NAV per Ordinary Share 102.17 p 101.58 p
Share Price 109.50 p 109.00 p
NAV total return 7.2% 8.0%
Share Price total return 7.6% 6.8%
Total Net Assets GBP383.1 m GBP381.0 m
Loans Advanced at amortised cost GBP370.0 m GBP359.9 m
(including accrued income)
Investments at fair value through profit GBP22.1 m -
or loss
Cash and Cash Equivalents GBP11.8 m GBP31.0 m
Amount drawn under Revolving Credit GBP13.3 m -
Facility
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered 7.5% 8.5%
annualised total return(1)
Invested Loan Portfolio levered 7.7% N/A
annualised total return(2)
On-going charges percentage(3) 1.0% 1.0%
Weighted average portfolio LTV to Group 14.5% 26.7%
first GBP(4)
Weighted average portfolio LTV to Group 63.2% 66.0%
last GBP(4)
(1) Calculated on amounts outstanding at the reporting date, excluding
undrawn commitments, and assuming all drawn loans are outstanding for the
full contractual term. 13 of the loans are floating rate (partially or in
whole and some with floors) and returns are based on an assumed profile for
future interbank rates but the actual rate received may be higher or lower.
Calculated only on amounts funded at the reporting date and excluding
committed amounts and cash un-invested. The calculation excludes the
origination fee payable to the Investment Manager.
(2) The levered annualised total return is calculated as per the unlevered
return but takes into account the amount of leverage in the Group and the
cost of that leverage at current LIBOR/ EURIBOR.
(3) Prepared in accordance with the AIC's recommended methodology.
(4) LTV to Group last GBP means the percentage which the total loan commitment
less any amortisation received to date (when aggregated with any other
indebtedness ranking alongside and/ or senior to it) bears to the market
value determined by the last formal lender valuation received by the
reporting date. LTV to first Group GBP means the starting point of the loan to
value range of the loan commitments (when aggregated with any other
indebtedness ranking senior to it). For Centre Point, the Irish School,
Dublin and the Mixed Use Development, South East UK, the calculation
includes the total facility available and is calculated against the assumed
market value on completion of the project.
For further information, please contact:
Duncan MacPherson - Starwood Capital - 020 7016 3655
Full text of annual financial report for the year ended 31 December 2017
Objective and Investment Policy
INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate Finance Limited
(the "Company"), together with its wholly owned subsidiaries Starfin Public
Holdco 1 Limited, Starfin Public Holdco 2 Limited, Starfin Lux S.à.r.l,
Starfin Lux 3 S.à.r.l, and Starfin Lux 4 S.à.r.l, (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
the wider European Union's internal market.
INVESTMENT POLICY
The Company invests in a diversified portfolio of real estate debt
investments (including debt instruments) in the UK and the wider European
Union's internal market. Whilst investment opportunities in the secondary
markets will be considered from time to time, the Company'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 Company will attempt 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 per cent 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 will pursue 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 will be
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 per cent of the
portfolio, subordinated and mezzanine loans approximately 40-50 per cent and
other loans (whether whole loans or subordinated loans) between 0-20 per
cent (including bridge loans, selected loan-on-loan financings and other
debt instruments). Pure development loans will not, in aggregate, exceed 25
per cent of the Company's Net Asset Value ("NAV") calculated at the time of
investment. The Company may originate loans which are either floating or
fixed rate.
The Company 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 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.
Loan to Value ("LTV")
The Company will typically seek to originate debt where the effective loan
to real estate value ratio of any investment is between 60 per cent and 80
per cent at the time of origination or acquisition. In exceptional
circumstances that justify it, the ratio may be increased to an absolute
maximum of 85 per cent. In any event, the Company will typically seek to
achieve a blended portfolio LTV of no more than 75 per cent (based on the
initial valuations at the time of loan origination or participation
acquisition) once fully invested.
Geography
The Company's portfolio will be originated from the larger and more
established real estate markets in the European Union's internal market. UK
exposure is expected to represent the majority of the Company's portfolio.
Outside of the UK, investment in the European Union's internal market will
mainly be focussed on Northern and Southern Europe. Northern European
markets include Germany, France, Scandinavia, Netherlands, Belgium, Poland,
Switzerland, Ireland, Slovakia and the Czech Republic. Southern European
markets include Italy and Spain. The Company may however originate
investments in other countries in the European Union's internal market to
the extent that it identifies attractive investment opportunities on a risk
adjusted basis.
The Company will not invest more than 50 per cent of the Company's NAV
(calculated at the time of investment) in any single country save in
relation to the UK, where there shall be no such limit.
When the United Kingdom ceases to be a member of the European Union or in
the event that any other member state ceases to be a member of the European
Union's internal market, it will not automatically cease to be eligible for
investment.
Real Estate Sector and Property Type
The Company's portfolio will focus on lending into commercial real estate
sectors including office, retail, logistics, light industrial, hospitality,
student accommodation, residential for sale and multi-family rented
residential. Investments in student accommodation and residential for sale
are expected to be limited primarily to the UK, while multi-family
investments are expected to be limited primarily to the UK, Germany and
Scandinavia. Further, not more than 30 per cent, in aggregate, of the
Company's NAV, calculated at the time of investment, will be invested in
loans relating to residential for sale. No more than 50 per cent of the
Company's NAV will be allocated to any single real estate sector of the UK,
except for the UK office sector which is limited to 75 per cent of the
Company's NAV.
Counterparty and Property Diversification
No more than 20 per cent of the Company's NAV, calculated at the time of
investment, will be exposed to any one borrower legal entity.
No single investment, or aggregate investments secured on a single property
or group of properties, will exceed 20 per cent of the Company's Net Asset
Value, calculated at the time of investment.
Corporate Borrowings
Company or investment level recourse borrowings may be used from
time-to-time on a short term basis for bridging investments, financing
repurchases of Shares or managing working capital requirements, including
foreign exchange hedging facilities and on a longer term basis for the
purpose of enhancing returns to Shareholders and/or to facilitate the
underwriting of whole loans with a view to syndication at a later point. In
this regard, the Company is limited to aggregate short and long term
borrowings at the time of the relevant drawdown in an amount equivalent to a
maximum of 30 per cent of NAV but longer term borrowings will be limited to
20 per cent of NAV in any event.
Hedging
The Company will not enter into derivative transactions for purely
speculative purposes. However, the Company's investments will typically be
made in the currency of the country where the underlying real estate assets
are located. This will largely be in Sterling and Euros. However,
investments may be considered in other European currencies, and the Company
may implement measures designed to protect the investments against material
movements in the exchange rate between Sterling, being the Company's
reporting currency, and the currency in which certain investments are made.
The analysis as to whether such measures should be implemented will take
into account periodic interest, principal distributions or dividends, as
well as the expected date of realisation of the investment. The Company may
bear a level of currency risk that could otherwise be hedged where it
considers that bearing such risk is advisable. The Company will only enter
into hedging contracts, such as currency swap agreements, futures contracts,
options and forward currency exchange and other derivative contracts when
they are available in a timely manner and on terms acceptable to it. The
Company reserves the right to terminate any hedging arrangement in its
absolute discretion.
The Company may, but shall not be obliged to, engage in a variety of
interest rate management techniques, particularly to the extent the
underlying investments are floating rate loans which are not fully hedged at
the borrower level (by way of floating to fixed rate swap, cap or other
instrument). Any instruments chosen may seek on the one hand to mitigate the
economic effect of interest rate changes on the values of, and returns on,
some of the Company's assets, and on the other hand help the Company achieve
its risk management objectives. The Company may seek to hedge its
entitlement under any loan investment to receive floating rate interest.
Cash Strategy
Cash held by the Company pending investment or distribution will be held in
either cash or cash equivalents, or various real estate related instruments
or collateral, including but not limited to money market instruments or
funds, bonds, commercial paper or other debt obligations with banks or other
counterparties having a A- or higher credit rating (as determined by any
reputable rating agency selected by the Company), Agency RMBS (residential
mortgage backed securities issued by government-backed agencies) and AAA
rated CMBS (commercial mortgage-backed securities).
Transactions with Starwood Capital Group or Other Accounts
Without prejudice to the pre-existing co-investment arrangements described
below, the Company may acquire assets from, or sell assets to, or lend to,
companies within the Starwood Capital Group or any fund, company, limited
partnership or other account managed or advised by any member of the
Starwood Capital Group ("Other Accounts"). In order to manage the potential
conflicts of interest that may arise as a result of such transactions, any
such proposed transaction may only be entered into if the independent
Directors of the Company have reviewed and approved the terms of the
transaction, complied with the conflict of interest provisions in the
Registered Collective Investment Scheme Rules 2015 issued by the Guernsey
Financial Services Commission (the "Commission") under The Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended, and, where required
by the Listing Rules, Shareholder approval is obtained in accordance with
the listing rules issued by the UK Listing Authority. Typically, such
transactions will only be approved if: (i) an independent valuation has been
obtained in relation to the asset in question; and (ii) the terms are at
least as favourable to the Company as would be any comparable arrangement
effected on normal commercial terms negotiated at arms' length between the
relevant person and an independent party, taking into account, amongst other
things, the timing of the transaction.
Co-investment Arrangements
Starwood Capital Group and certain Other Accounts are party to certain
pre-existing co-investment commitments and it is anticipated that similar
arrangements may be entered into in the future. As a result, the Company may
invest alongside Starwood Capital Group and Other Accounts in various
investments.
Where the Company makes any such co-investments they will be made at the
same time, and on substantially the same economic terms, as those offered to
Starwood Capital Group and the Other Accounts.
UK Listing Authority Investment Restrictions
The Company currently complies with the investment restrictions set out
below and will continue to do so for so long as they remain requirements of
the UK Listing Authority:
* neither the Company nor any of its subsidiaries will conduct any trading
activity which is significant in the context of its group as a whole;
* the Company will avoid cross-financing between businesses forming part of
its investment portfolio;
* the Company will avoid the operation of common treasury functions as
between the Company and investee companies;
* not more than 10 per cent, in aggregate, of the Company's NAV will be
invested in other listed closed-ended investment funds; and
* the Company must, at all times, invest and manage its assets in a way
which is consistent with its object of spreading investment risk and in
accordance with the published investment policy. The Directors do not
currently intend to propose any material changes to the Company's investment
policy, save in the case of exceptional or unforeseen circumstances. As
required by the Listing Rules, any material change to the investment policy
of the Company will be made only with the approval of shareholders.
Financial Highlights
Year ended Year ended
Key Highlights 31 Dec 2017 31 Dec 2016
NAV per Ordinary Share 102.17 p 101.58 p
Share Price 109.50 p 109.00 p
NAV total return 7.2% 8.0%
Share Price total return 7.6% 6.8%
Total Net Assets GBP383.1 m GBP381.0 m
Loans Advanced at amortised cost GBP370.0 m GBP359.9 m
(including accrued income)
Investments at fair value through profit GBP22.1 m -
or loss
Cash and Cash Equivalents GBP11.8 m GBP31.0 m
Amount drawn under Revolving Credit GBP13.3 m -
Facility
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered 7.5% 8.5%
annualised total return(1)
Invested Loan Portfolio levered 7.7% N/A
annualised total return(2)
On-going charges percentage(3) 1.0% 1.0%
Weighted average portfolio LTV to Group 14.5% 26.7%
first GBP(4)
Weighted average portfolio LTV to Group 63.2% 66.0%
last GBP(4)
(1) Calculated on amounts outstanding at the reporting date, excluding
undrawn commitments, and assuming all drawn loans are outstanding for the
full contractual term. 13 of the loans are floating rate (partially or in
whole and some with floors) and returns are based on an assumed profile for
future interbank rates but the actual rate received may be higher or lower.
Calculated only on amounts funded at the reporting date and excluding
committed amounts and cash un-invested. The calculation excludes the
origination fee payable to the Investment Manager.
(2) The levered annualised total return is calculated as per the unlevered
return but takes into account the amount of leverage in the Group and the
cost of that leverage at current LIBOR/ EURIBOR.
(3) Prepared in accordance with the AIC's recommended methodology.
(4) LTV to Group last GBP means the percentage which the total loan commitment
less any amortisation received to date (when aggregated with any other
indebtedness ranking alongside and/ or senior to it) bears to the market
value determined by the last formal lender valuation received by the
reporting date. LTV to first Group GBP means the starting point of the loan to
value range of the loan commitments (when aggregated with any other
indebtedness ranking senior to it). For Centre Point, the Irish School,
Dublin and the Mixed Use Development, South East UK, the calculation
includes the total facility available and is calculated against the assumed
market value on completion of the project.
SHARE PRICE PERFORMANCE
As at 31 December 2017 the NAV was 102.17 pence per Ordinary Share (2016:
101.58 pence) and the share price was 109.50 pence (2016: 109.00 pence).
Chairman's Statement
STEPHEN SMITH | Chairman
26 March 2018
Dear Shareholder,
It is my pleasure to present the Annual Report and Audited Consolidated
Financial Statements of Starwood European Real Estate Finance Limited for
the year ended 31 December 2017.
OVERVIEW
The Group had a strong year in 2017 with record levels of origination and a
net increase in investments, despite receiving substantial repayments.
Notwithstanding this significant turnover in the loan book, we achieved our
dividend objectives and continued to deliver on our investment strategy. The
Group declared an aggregate dividend for the year of 6.5 pence per Ordinary
Share. The Group's NAV for the year remained very stable with its NAV total
return (including dividends) 7.2 per cent and share price total return
across the financial year was 7.6 per cent.
As at 31 December 2017, the Group had investments and commitments of GBP399.5
million (of which GBP11.4 million was unfunded at the year end). The average
maturity of the Group's loan book was 3.1 years with GBP11.8 million of cash
and substantial liquidity lines of GBP100.7 million, available to use for new
lending. The gross annualised levered total return of the invested loan
portfolio is 7.7 per cent. The Net Asset Value ("NAV") was GBP383.1 million,
being 102.17 pence per Ordinary Share.
With GBP245.8 million of new lending commitments, 2017 was the most successful
origination year since launch. 2017 was also a very significant year for
repayments, with GBP213.1 million received, and so the net position was one of
relatively modest growth in the overall loan book.
The table below shows the loan commitments and repayment profile over the
last five years.
2013 2014 2015 2016 2017
New loans to borrowers GBP139.0m GBP143.2m GBP118.7m GBP175.9m GBP245.8m
(commitment)
Loan repayments and - -GBP48.8m -GBP49.0m -GBP129.3m -GBP213.1m
amortisation
Net Investment GBP139.0m GBP94.4m GBP69.7m GBP46.6m GBP32.7m
The Company's strategy will continue to focus on equity issuance when
appropriate and the use of credit facilities where appropriate in order to
expand the loan book and to limit the cash drag impact of repayments. This
was achieved in 2017 as GBP245.8 million of new investments exceeded
repayments of GBP213.1 million; the Group was able to deploy these repayments
into markets where they are currently seeing attractive opportunities.
Whilst the Group held significant volumes of cash during the year, a number
of loans repaid during the year benefitted from prepayment protection,
sustaining the Company's income during the protected period. This income
further mitigates cash drag while the Group reinvests repayments and is a
key component of the terms the Group seeks to achieve on new loans.
SHARE ISSUANCE AND SHARE PRICE PERFORMANCE
The year-end share price was 109.50 pence reflecting a 7.2 per cent premium
to NAV and throughout 2017 the Ordinary Shares consistently traded at a
premium to NAV.
The Company will be closely monitoring potential repayments and will
continue to evaluate the impact of these when considering future growth.
During the year the new EU Prospectus Regulations came into force,
permitting companies to issue a further 20 per cent of their share capital
without having to publish a prospectus. The previous regulations set the
prospectus exemption at 10 per cent. In order to take advantage of this
increased flexibility and to reduce the cost of new issuance, the Company
held an EGM on 29 September 2017 to seek approval for authority to disapply
Pre-Emption Rights on the allotment of equity securities, increasing the
limit from 10 per cent to 20 per cent of the Ordinary Shares in issue. I am
pleased to confirm that this approval was granted by Shareholders.
This authority supplements that obtained at the last AGM which permits the
company to issue up to 300 million shares pursuant to a placing programme
(for which a prospectus is required).
The Directors believe that it is advantageous for the Company to be able to
issue new Shares to investors, particularly when the Company is presented
with attractive investment opportunities where the Company does not have
existing funds available from its credit facilities to finance these
opportunities. Often these potential investments require that the Company is
able to execute a transaction within a short time frame which would leave
insufficient time to convene a separate meeting of shareholders to approve
the resolutions required for an issue of new Shares.
The Directors believe that having access to capital within a short time
frame is important to maintaining access to attractive investment
opportunities while at the same time ensuring that the Company does not
unnecessarily incur cash drag by raising equity in advance of deployment
opportunities (which could negatively impact the Company's dividend target).
The Directors believe that such access to capital will also have the
following benefits for the Company and the shareholders:
* to enable the Company to pursue larger investment opportunities and hence
broaden the range of lending that can be undertaken;
* to enable the Company to further increase the diversification of the
Company's portfolio of investments;
* increasing the size of the Company should help to make the Company more
attractive to a wider investor base;
* having a greater number of Shares in issue is likely to provide
shareholders with increased secondary market liquidity; and
* the Company's fixed running costs would be spread across a larger equity
capital base, thereby reducing the Company's on-going expenses per Share.
In order to take advantage of such opportunities, the Directors believe it
is appropriate for the Company to renew these existing authorities at the
forthcoming AGM, in respect of issuance of up to 10 per cent of the Ordinary
Shares in issue, and at a separate EGM, to be convened for shortly after the
AGM, in respect of further equity issuance. Any new Shares issued will be
issued at a minimum issue price equal to the prevailing NAV per ordinary
Share at the time of allotment together with a premium intended to cover the
costs and expenses of the relevant issue.
The explanation of the advantages for the Company and its shareholders of
granting such authorities is set out in the Notice of the AGM and in a
notice of EGM which is intended to be published shortly.
DIVIDS
Total dividends of 6.5 pence per Ordinary Share were declared in relation to
the year ended 31 December 2017.
Dividend Payment Amount
Period declared date per share
1 January 2017 to 31 March 2017 24 Apr 2017 18 May 1.625p
2017
1 April 2017 to 30 June 2017 25 Jul 2017 25 Aug 1.625p
2017
1 July 2017 to 30 September 19 Oct 2017 17 Nov 1.625p
2017 2017
1 October 2017 to 31 December 26 Jan 2018 23 Feb 1.625p
2017 2018
Total 6.5p
CREDIT FACILITIES
The Group has a GBP50 million revolving credit facility which has been an
important tool in liquidity management, ensuring new investments can be
warehoused in the short term while loan repayments are absorbed. During the
year the Group entered into a new GBP64 million secured borrowing facility.
The new arrangement, which provides greater flexibility and optionality for
the Group to implement its investment strategy, is a five-year revolving
credit facility allowing term financing of whole loans and additional
capacity to bridge syndication strategies. To enable the new facility to be
implemented, the Group's subsidiary companies were reorganised and the new
structure is outlined in the Investment Manager's report.
REALISATION VOTE AND INVESTMENT MANAGEMENT AGREEMENT
At the time of the Initial Public Offering (the "IPO"), the Company set out
mechanisms to deal with discount control which included the possibility of a
Realisation Offer and, in certain circumstances, a realisation vote to be
held no later than 28 February 2018. If Shareholders voted in favour of such
resolution, then the Company would ensure that a Realisation Offer would be
put to Shareholders. If Shareholders did not vote for the realisation then
the Company would continue in existence as currently constituted.
During the year the Company proposed the deferral of the Realisation Offer
and realisation vote mechanisms by five years, subject to a five year
rolling basis thereafter. These proposals were approved by Shareholders.
A number of changes to the Investment Management Agreement were proposed and
approved which were outlined in the circular dated 7 September 2017,
available on the Company's website, and are reflected in the relevant
disclosures in this Annual Report.
OUTLOOK
The strategy to grow the overall size of the Group, to minimise cash drag
from repayments and to use the revolving credit facility where appropriate
will continue to be our focus during 2018.
We anticipate that we will build on the successes of 2017 and the Directors
remain optimistic about the prospects and opportunities for the Group in the
year ahead.
The Board will continue to inform you of progress by way of the quarterly
fact sheets and investment updates as deals are signed. On behalf of the
Board, I would like to close by thanking Shareholders for your commitment
and I look forward to briefing you on the Group's progress later this year.
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and details the
principal risks and uncertainties associated with its activities. These are
detailed more fully in the Investment Manager's Report.
OBJECTIVE, INVESTMENT POLICY AND BUSINESS MODEL
The Objective and Investment Policy describes the Group's strategy and
business model.
The Investment Manager is Starwood European Finance Partners Limited, a
Company incorporated in Guernsey with registered number 55819 and regulated
by the Guernsey Financial Services Commission (the "Commission"). 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 Investment Highlights
and Portfolio Review sections of the Investment Manager's Report and also
within the Chairman's Statement.
PERFORMANCE
A review of performance is contained in the Investment Highlights and
Portfolio Review sections of the Investment Manager's Report.
A number of performance measures are considered by the Board, the Investment
Manager and Investment Adviser in assessing the Company's success in
achieving its objectives. The Key Performance Indicators ("KPIs") used are
established industry measures to show the progress and performance of the
Group and are as follows:
* The portfolio yield, both levered and unlevered;
* The payment of targeted dividends;
* The movement in NAV per Ordinary Share;
* The movement in share price and the discount/premium to NAV;
* On-going charges as a percentage of undiluted NAV; and
* Weighted average loan to value for the portfolio.
Details of the KPIs are shown in Financial Highlights.
RISK MANAGEMENT
It is the role of the Board to review and manage all risks associated with
the Group, both those impacting the performance and the prospects of the
Group and those which threaten the ongoing viability. It is the role of the
Board to mitigate these either directly or through the delegation of certain
responsibilities to the Audit Committee and Investment Manager. The Board
performs a review of a risk matrix at each Board meeting.
The Board considers the following principal risks could impact the
performance and prospects of the Group but do not threaten its ability to
continue in operation and meet its liabilities. As a consequence, it has put
in place mitigation plans to manage those identified risks.
Long Term Strategic Risk
The Group's targeted returns are based on estimates and assumptions that are
inherently subject to significant business and economic uncertainties and
contingencies and, as a consequence, the actual rate of return may be
materially lower than the targeted returns. In addition, the pace of
investment has in the past and may in the future be slower than expected or
the principal on loans may be repaid earlier than anticipated, causing the
return on affected investments to be less than expected. Furthermore, if
repayments are not promptly re-invested this may result in cash drag which
may lower portfolio returns. As a result, the level of dividends to be paid
by the Company may fluctuate and there is no guarantee that any such
dividends will be paid. The shares may, therefore, 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 Investment Adviser provides the Investment Manager and the Board with a
weekly report on pipeline opportunities, which includes an analysis of the
strength of the pipeline and the returns available. The Directors also
regularly receive information on the performance of the existing loans,
including the performance of the underlying assets and the likelihood of any
early repayments which may impact returns.
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 this Annual
Report, there can be no guarantee that they will do so or that such
mechanisms will be successful. Please see Report of the Directors for
further information on the discount management mechanisms.
The Board monitors investment strategy and performance on an ongoing basis
and regularly reviews the Investment Objective and Investment Policy in
light of prevailing investor sentiment to ensure the Company remains
attractive to its shareholders.
Interest Rate Risk
The Group is subject to the risk that the loan income and income from the
cash and cash equivalents will fluctuate due to movements in interbank
rates.
The loans in place at 31 December 2017 have been structured so that 24.8 per
cent of the loans are fixed rate which provides protection from downward
interest rate movements to the overall portfolio (but also prevents the
Group from benefitting from any interbank rate rises on these positions). In
addition, whilst the remaining 75.2 per cent is classified as floating, all
of these loans are subject to interbank rate floors such that the interest
cannot drop below a certain level, which offers some protection against
downward interest rate risk. When reviewing future investments, the
Investment Manager will continue to review such opportunities to protect
against downward interest rate risk.
The Board considers that the following principal risks could impact both the
performance and prospects of the Group and could also threaten its ability
to continue its operations and meet its liabilities but has identified the
mitigating actions in place to manage them.
Foreign Exchange Risk
The Group has some investments in Euros. The Group is subject to the risk
that the exchange rates move unfavourably and that a) foreign exchange
losses on the loan principal are incurred and b) that interest payments
received are lower than anticipated when converted back to Sterling and
therefore returns are lower than the underwritten returns.
The Group manages this risk by entering into forward contracts to hedge the
currency risk. All non-Sterling loan principal is hedged back to Sterling to
the maturity date of the loan. Interest payments are hedged for the period
for which prepayment protection is in place. However, the risk remains that
loans are repaid earlier than anticipated and forward contracts need to be
broken early. In these circumstances the forward curve may have moved since
the forward contracts were placed which can impact the rate received. In
addition, if the loan repays after the prepayment protection, interest after
the prepayment protected period may be received at a lower rate than
anticipated leading to lower returns for that period. Conversely the rate
could have improved and returns may increase.
As a consequence of the hedging strategy employed as outlined above, the
Group is subject to the risk that it will need to post cash collateral
against the mark to market on foreign exchange hedges which could lead to
liquidity issues or leave the Group unable to hedge new non-Sterling
investments.
The Company had approximately GBP199.3 million of hedged notional exposure
with two UK banks at 31 December 2017 (converted at 31 December 2017 FX
rates).
As at 31 December 2017 the hedges with one of the counterparties were out of
the money in an amount of GBP6.7 million. If at any time this mark to market
exceeds GBP15 million, the Company is required to post collateral, subject to
a minimum transfer amount of GBP1 million. This situation is monitored
closely, however, and as at 31 December 2017, the Company had sufficient
available liquidity and credit available on the revolving credit facility to
meet any cash collateral requirements.
As at 31 December 2017 the hedges with the other hedging counterparty were
out of the money in an amount of GBP18,064 which was significantly lower than
the threshold amount.
Market Deterioration Risk
The Group's investments are comprised principally of debt investments in the
UK, and the wider European Union's internal market and it is therefore
exposed to economic movements and changes in these markets. Any
deterioration in the global, UK or European economy could have a significant
adverse effect on the activities of the Group and may result in significant
loan defaults or impairments.
In the event of a loan default in the portfolio, the Group is generally
entitled to accelerate the loan and enforce security, but the process may be
expensive and lengthy and the outcome is dependent on sufficient recoveries
being made to repay the borrower's obligations and associated costs. Some of
the investments held would rank behind senior debt tranches for repayment in
the event that a borrower defaults, with the consequence of greater risk of
partial or total loss. In addition, repayment of loans by the borrower at
maturity could be subject to the availability of refinancing options,
including the availability of senior and subordinated debt and is also
subject to the underlying value of the real estate collateral at the date of
maturity.
In mitigation, the average weighted loan to value of the portfolio is 63 per
cent. Therefore, the portfolio should be able to withstand a significant
level of deterioration before credit losses are incurred.
The Investment Adviser also mitigates the risk of credit losses by
undertaking 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, measurement and
environmental surveys, legal reviews of property title and key leases, and,
where necessary, mechanical and engineering surveys, accounting and tax
reviews and know your customer checks.
The Investment Adviser, Investment Manager and Board also manage 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 portfolio against these
guidelines, limits and restrictions on a regular basis.
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 there is one investment
held at fair value through profit or loss at the reporting period end. All
loans 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.
Risk of Default Under the Revolving Credit Facility
The Group is subject to the risk that a borrower could be unable or
unwilling to meet a commitment that it has entered into with the Group as
outlined above under market deterioration risk. As a consequence of this,
the Group could breach the covenants of its revolving credit facilities, and
fall into default itself.
A number of the measures the Group takes to mitigate market deterioration
risk as outlined above, such as portfolio diversification and rigorous due
diligence on investments and monitoring of borrowers, will also help to
protect the Group from the risk of default under the revolving credit
facility as this is only likely to occur as a consequence of borrower
defaults or loan impairments.
The Board regularly reviews the balances drawn under the credit facilities
against commitments and pipeline and reviews the performance under the
agreed covenants. The loan covenants are also stress tested to test how
robust they are to withstand default of the Group's investments.
ASSESSMENT OF PROSPECTS
The Group's strategy is central to an understanding of its prospects, and
details can be found above.
The Group's focus is particularly on managing expected repayments in order
to minimise any potential for cash drag and continuing to grow the Group by
sourcing investments with good risk adjusted returns. The Group's prospects
are assessed primarily through its strategic review process which the Board
participates fully in. The Directors' have assessed the prospect of the
Group over a period of three years which has been selected because the
strategic review covers a three-year period and this is also the approximate
average remaining loan term.
The Group updates its plan and financial forecasts on a monthly basis and
detailed financial forecasts are maintained and reviewed by the Board
regularly.
ASSESSMENT OF VIABILITY
Although the strategic plan reflects the Directors' best estimate of the
future prospects of the business, they have also tested the potential impact
on the Group of a number of scenarios over and above those included in the
plan, by quantifying their financial impact. These scenarios are based on
aspects of the following selected principal risks, which are detailed above
in Risk Management paragraph, and as described below:
* Foreign Exchange Risk;
* Market deterioration risk; and
* Risk of default under the revolving credit facility.
These scenarios represent 'severe but plausible' circumstances that the
Group could experience. The scenarios tested included:
* A very high level of loan default meaning that the Group stopped receiving
interest on a substantial part of the portfolio; and
* An analysis of the robustness of the covenants under the revolving credit
facility to withstand default of the underlying investments.
The results of this stress testing showed that the Group would be able to
withstand a very high level of underlying loan default or impairment
resulting from either of the risks identified over the period of the
financial forecasts.
VIABILITY STATEMENT
Based on the assessment of prospects and viability as set out above, the
Directors confirm they have a reasonable expectation that the Group will
continue in operation and meet its liabilities as they fall due over the
three-year period ending 31 December 2020 which is also the approximate
average remaining loan term.
In connection with the viability statement the Board confirm that they have
carried out a robust assessment of the principal risks facing the company,
including those which would threaten its business model, future performance,
solvency or liquidity.
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 shareholders' interests to
consider environmental, social and ethical factors when selecting and
retaining investments.
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.
Stephen Smith | Chairman
26 March 2018
Investment Manager's Report - Investment Highlights
The Investment Manager and Investment Adviser are both part of the Starwood
Capital Group, a leading global real estate investment group.
PORTFOLIO STATISTICS
The Investment Manager and the Board of the Company 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.
As at 31 December 2017, the portfolio was invested in line with the Group's
investment policy and is summarised below.
31 Dec 31 Dec
2017 2016
Number of investments 16 16
Percentage of invested portfolio in floating 75.2% 67.3%
rate loans(1)
Invested Loan Portfolio unlevered annualised 7.5% 8.5%
total return(2)
Invested Loan Portfolio levered annualised 7.7% N/A
total return(3)
Weighted average portfolio LTV - to Group 14.5% 26.7%
first GBP(4)
Weighted average portfolio LTV - to Group 63.2% 66.0%
last GBP(4)
Average loan term (stated maturity at 4.2 years 4.7 years
inception)
Average remaining loan term 3.1 years 3.3 years
Net Asset Value GBP383.1 m GBP381.0 m
Amount drawn under Revolving Credit Facility -GBP13.3 m -
(excluding accrued interest)
Loans advanced at amortised cost (including GBP370.0 m GBP359.9 m
accrued income)
Investments at fair value through profit or GBP22.1 m -
loss
Cash GBP11.8 m GBP31.0 m
Other net assets (including the value of FX -GBP7.5 m -GBP9.9 m
hedges)
(1) Calculated on principal amounts only, excluding accrued / deferred
income.
(2) Calculated on amounts outstanding at the reporting date, excluding
undrawn commitments, and assuming all drawn loans are outstanding for the
full contractual term. 13 of the loans are floating rate (partially or in
whole and some with floors) and returns are based on an assumed profile for
future interbank rates but the actual rate received may be higher or lower.
Calculated only on amounts funded at the reporting date and excluding
committed amounts and cash un-invested. The calculation excludes the
origination fee payable to the Investment Manager.
(3) The levered annualised total return is calculated as per the unlevered
return but takes into account the amount of leverage in the Group and the
cost of that leverage at current LIBOR/EURIBOR.
(4) LTV to Group last GBP means the percentage which the total loan commitment
less any amortisation received to date (when aggregated with any other
indebtedness ranking alongside and/or senior to it) bears to the market
value determined by the last formal lender valuation received by the
reporting date. LTV to first Group GBP means the starting point of the loan to
value range of the loan commitments (when aggregated with any other
indebtedness ranking senior to it). For Centre Point, the Irish School,
Dublin and the Mixed Use Development, South East UK, the calculation
includes the total facility available and is calculated against the assumed
market value on completion of the project.
PORTFOLIO DIVERSIFICATION
% of invested
Country assets
UK - Regional England 32.4
Spain 18.5
Hungary 12.9
Republic of Ireland 10.9
UK - Central London 9.6
Channel Islands 6.9
France 6.0
Czech Republic 2.8
Loan type % of invested
assets
Whole loans 73.8
Mezzanine 20.6
Other debt instruments 5.6
Sector % of invested
assets
Hospitality 30.0
Light Industrial 22.7
Retail 12.1
Office 9.6
Residential for sale 6.8
Healthcare 6.4
Education 4.3
Logistics 3.7
Residential for rent 3.1
Other 1.3
Loan currency % of invested
assets
Sterling 49.0
Euro 51.0
* The currency split refers to the underlying loan currency; however the
capital and interest during protected periods on all non-sterling exposure
is hedged back to sterling.
RESTRUCTURE AND CREDIT FACILITIES
On 18 December 2017, the Group entered into a new GBP64 million secured
borrowing facility with Morgan Stanley (the "Secured Facility"). The Secured
Facility provides for additional flexibility and optionality for the Group
to implement its investment strategies. The Secured Facility is a five-year
revolving credit facility allowing both for term financing of whole loans
and additional capacity to bridge syndication strategies.
Previously the Group used its GBP50 million revolving credit facility with
Lloyds to manage new investments, loan repayments and equity raising. Whilst
this facility continues to be extremely useful, the Secured Facility will
provide additional investment and operational flexibility. The longer term
nature of the Secured Facility will allow the Group to flexibly apply
longer-term leverage to enhance returns on whole loans which would otherwise
generate returns lower than the Group's targets, without the cost and time
requirements of syndicating a senior note.
Alternatively, the facility may be used to provide a backstop financing to a
senior note syndication where the Group is underwriting a whole loan with
the intention of syndicating a senior note. This allows time to effect a
sale without suffering from reduced returns in the interim period. The
Secured Facility may also be used in conjunction with the Lloyds facility to
manage liquidity and repayment risk and also as a bridge to an equity raise.
To facilitate the arrangement of the Secured Facility, the Group structure
was re-organised on 6 October 2017 and, as part of the reorganisation, the
Group also extended the maturity of its GBP50 million revolving credit
facility with Lloyds to 6 October 2018. As a result of the re-organisation
Starfin Public GP Limited and Starfin Public LP were liquidated, two new
100% wholly-owned subsidiaries were set up in Guernsey, Starfin Public
Holdco 1 Limited and Starfin Public Holdco 2 Limited, and two new 100%
wholly-owned sub-subsidiaries established in Luxembourg, Starfin Lux 3
S.à.r.l and Starfin Lux 4 S.à.r.l. The Group structure at the end of the
year is as shown below:
FOREIGN EXCHANGE
The Group continues to recognise unrealised foreign exchange gains or losses
relating to investment activity. The Group has fully hedged the principal of
each individual non-sterling denominated loan with forward contracts,
together with interest receipts during the period of prepayment protection.
If the loans repay at their scheduled repayment date, the Group would expect
that this policy would be effective in protecting against realising FX
losses on capital invested.
However, the accounting treatment for the non-sterling loans is to value the
loan at the foreign exchange rate at the relevant valuation date, and to
value the hedge based on the market forward rates at the valuation date to
the maturity date of the relevant hedge (discounted back to present value).
As a result of this accounting treatment, whilst the loan principal is
economically fully hedged (if held to loan maturity), unrealised foreign
exchange gains or losses are recognised in the accounts during the life of
the loan due to changes in the shape of the relevant forward curves. For
this reason, the Group disregards unrealised foreign exchange gains and
losses when declaring dividends.
It is important to note that should any of the non-sterling denominated
loans repay early, and the Group has no alternative use for the funds repaid
and therefore breaks the hedges early, foreign exchange gains or losses
could be realised at that point. The size of this will depend on the shape
of the relevant forward curve at the point at which the relevant hedge is
broken. In general, a steeper curve would result in greater gains/losses.
DIVID POLICY
The Company declared dividends of 6.5 pence per Ordinary Share in respect of
the year ended 31 December 2017 (2016: 6.5 pence per Ordinary Share). These
dividends are recognised in the Consolidated Statement of Changes in Equity
when declared, which is usually within one month after the end of the
financial period to which they relate. Dividends are usually paid within one
month of the declaration date.
The Company may pay dividends provided that the Board of Directors is
satisfied on reasonable grounds that the Company will, immediately after
payment, satisfy the solvency test (as defined in the Companies (Guernsey)
Law, 2008, as amended), and satisfy any other requirement in its memorandum
and articles.
INVESTMENT OUTLOOK AND MARKET SUMMARY
2017 was generally seen as a year of two halves for commercial real estate
lending activity, with market participants reporting a lower volume of
lending prior to the summer break followed by a very active final quarter.
According to Real Estate Capital, commercial real estate loan syndication
volumes were down in the first half of the year by 25 per cent year on year,
despite underlying investment market volumes being up. Sentiment changed
after the summer and during the final quarter of the year: we frequently
heard that borrowers were struggling to get traction on new loans because
lenders were loaded up with existing transactions in execution and so they
had little further capacity to take on more lending mandates. We also saw
issues with capacity amongst financing lawyers, valuers and other advisers
to cope with the requests in the market. The Group had a good start to the
year with GBP115.5 million of new investments by 30 June 2017, making it the
highest first half origination volume for the Group. We saw a similar
pattern to the market in the second half of the year reflected in our
origination. An additional four new loans, with a total commitment of GBP130.3
million, were all made in the period from the end of November to end of
December, also making it the largest new origination volume for the full
year for the Group.
On the underlying commercial real estate market side, despite the continuing
Brexit uncertainties, there was increased volume in the UK market with a
total of GBP26 billion of London commercial real estate transactions in 2017
versus GBP22 billion in 2016 and GBP62 billion versus GBP52 billion for the UK as
a whole, according to PropertyData. According to Savills, London still tops
the table for global office investment at $26 billion in 2017 with the next
largest contributor of Hong Kong at only $16 billion and Manhattan next at
$12 billion. The average yield is also down by 28bps for the UK as a whole
and 19bps for London. Recent data on London office leasing activity has also
been strong: according to Savills 2017 was the second highest year of
take-up for the West End and the fourth highest take-up for the City since
2000.
There has been an increase in the number of participants in the loan
brokerage market and the number of brokered loans. Loan brokers have
traditionally been a large part of the market in the U.S. but until recently
have been a small part of the market in Europe. We believe this growth
reflects a more diverse lender universe where it is harder for borrowers,
especially those who access the market less frequently, to understand the
market and so they are increasingly using brokers to help navigate the
market to source debt. One example is HFF, a large player in the U.S. who
set up in Europe at the end of 2016. The Group was the lender to their first
European loan. We are also seeing increased volume coming through from the
second tier brokerage teams at both established real estate services firms
and from an increasing group of smaller, often one-man brokers.
We continue to see anomalies in loan pricing and terms around Europe. An
example from CBRE European debt map is that Prague prime office is more
competitive than Oslo and London. This is both from a higher LTV at 70 per
cent versus 60 per cent and 55 per cent respectively and pricing of
100-125bps versus 150bps and 140bps respectively. On the face of it, this is
counterintuitive given a lower country credit rating and a smaller, less
liquid market. There are, however, many dynamics, including the size and
regulatory environment for banks, the level of cross-border lending and
currency considerations, which create these anomalies.
Overall, the more fragmented market and the market dynamics highlighted
above continue to offer the Group good opportunities with our flexible
mandate between jurisdictions, real estate asset classes and capital
structure. The UK, Ireland and Spain remain the jurisdictions that provide
the most interesting opportunities for the Group. It has been a strong start
to 2018 with 5 loans totalling GBP135 million of commitments closed already
and we expect to continue to see a robust pipeline of opportunities in line
with the Group's Investment Policy and target dividend.
INVESTMENT DEPLOYMENT
As at 31 December 2017 the Group had investments and commitments of GBP399.5
million (Sterling equivalent at year end exchange rates) as follows:
Sterling Sterling
equivalent equivalent unfunded
Transaction balance(1) commitment
Centre Point, London GBP25.4m -
Industrial Portfolio, UK GBP25.5 m -
Hospitals, UK GBP25.0 m -
Hotel, Channel Islands GBP26.9 m -
Varde Partners Mixed Portfolio, GBP9.2 m -
UK
Mixed Use Development, South East GBP10.5 m GBP2.7 m
UK
Regional Hotel Portfolio, UK GBP45.9m -
Credit Linked Notes, UK Real GBP21.8 m -
Estate
Total Sterling Loans GBP190.2 m GBP2.7 m
Residential Portfolio, Cork, GBP5.3 m -
Ireland
Residential Portfolio, Dublin, GBP6.8 m -
Ireland
Logistics, Dublin, Ireland GBP13.1 m -
Hotel, Barcelona, Spain GBP40.9 m -
School, Dublin, Ireland GBP16.8 m -
Industrial Portfolio, Central and GBP60.9 m -
Eastern Europe
Shopping Centres, Spain GBP31.0 m GBP8.7 m
Office Building, Paris, France GBP23.1 m -
Total Euro Loans GBP197.9 m GBP8.7 m
Total Portfolio GBP388.1 m GBP11.4 m
(1) Euro balances translated to Sterling at year end exchange rates.
With GBP245.8 million of new commitments made to borrowers, 2017 was the most
successful origination year since launch. During the financial year, the
following new loans were originated:
Industrial Portfolio, Central and Eastern Europe: On 30 March 2017, the
Group committed to provide a EUR68.5 million whole loan for a portfolio of
industrial assets located across Central and Eastern Europe. The 3-year
floating rate loan represents the opportunity to further diversify
geographically and support a strong sponsor with a proven track record.
EUR26.5 million of the loan was funded on 30 March 2017 with the remaining
commitment drawn on 31 May 2017.
School, Dublin, Ireland: On 31 March 2017, the Group advanced a EUR18.85
million 3-year floating rate whole loan to support the acquisition and
repositioning of a South Dublin office building in the Republic of Ireland.
The building will be converted to educational use with a new lease to a
premium global education company. The sponsor, Barry O'Callaghan, is a
highly regarded local investor with deep experience in the education sector.
Hotel, Barcelona, Spain: On 31 March 2017, the Group advanced a EUR46.0
million 4-year floating rate whole loan to finance the acquisition of a
4-star, 240-key hotel in central Barcelona's 22@ district. The borrower is a
partnership between institutional-quality investors with track records of
successful hotel acquisitions throughout Europe. The hotel is
well-positioned to benefit from the sponsors' active asset management
strategy in a Barcelona market with appealing hospitality performance
metrics and high barriers to entry.
Shopping Centres, Spain: On 24 November 2017, the Group closed a EUR44.63
million, five-year floating rate whole loan secured by three shopping
centres in Spain. The loan was made available to fund an initial acquisition
advance along with capex funding to support the sponsors' proven retail
repositioning capability to make further investment in the properties. The
properties are well-anchored, dominate their catchment areas and are
positioned to benefit from the sponsors' active asset management strategy.
Regional Hotel Portfolio, UK: On 20 December 2017, the Group closed on a
GBP45.87 million mezzanine loan secured by a well-invested portfolio of
geographically diversified mid-range hotels in strong regional UK cities.
Credit Linked Notes, UK Real Estate Loans: On 22 December 2017, the Group
acquired GBP21.77 million junior notes linked to the performance of a
portfolio of high quality UK real estate loans owned by a major commercial
bank. The underlying reference loan pool is secured by an institutional
quality, well-diversified pool of commercial real estate assets with an
average LTV of less than 50 per cent.
Office Building, Paris, France: On 22 December 2017, the Group subscribed to
a senior EUR26 million note issuance, the proceeds of which were used to
finance an office building in suburban Paris.
During the financial year, the Group received GBP213.1 million of repayments
and amortisation (approximately 56 per cent of NAV). The following loans
were repaid in full:
Industrial Portfolio, Denmark: On 28 February 2017, the Group received full
repayment of Kr. 307 million in the Danish Industrial Portfolio loans as a
result of the sale of the portfolio. A number of loans in the Group's
portfolio benefit from prepayment protection in their early years, providing
the Group with a level of income protection should such loans repay whilst
in that protected period. The Danish loan was originated in June 2015 and
benefitted from such provisions.
Industrial Portfolio, Netherlands: On 16 March 2017, the Group received full
repayment of EUR26 million in the the Industrial Portfolio, Netherlands loan
as a result of the sale of the portfolio, in line with the sponsor's
business plan.
Center Parcs, UK: On 15 June 2017, the Group received full repayment of GBP9.5
million (notional) in relation to the Center Parcs bonds at a redemption
price of 104.8%.
The repayment premium was equivalent to approximately 8 months of make-whole
interest.
Retail & Residential Portfolio, Ireland: On 6 June 2017, the Group received
full repayment of EUR4 million of the loan following completion of the
borrower's business plan.
Office, Netherlands: On 18 July 2017, the Group received full repayment of
EUR13.9 million in the Office, Netherlands loan following a successful
refinancing of the property by the owner.
Five Star Hotel, London: On 13 September 2017, the Group received full
repayment of GBP13 million in the 5 Star Hotel, London loan following a
successful refinancing of the property by the owner.
UK Regional Budget Hotel Portfolio: On 6 November 2017, the Group received
full repayment of GBP75 million following a successful refinancing of the
portfolio by the owner.
Significant amortisation was also received on the Centrepoint London,
Industrial Portfolio, UK and the Varde Partners mixed portfolio loans during
the year.
EVENTS AFTER THE REPORTING PERIOD
The following new commitments have been made since the year end, up to 26
March 2018:
Local
Currency
Student Accomodation, Dublin EUR11,250,000
Shopping Centre, Spain EUR17,000,000
Hotel, Dublin EUR60,000,000
Residential, Dublin EUR9,000,000
Hotel, Spain EUR55,000,000
GBP655,198 has also been drawn under the outstanding commitments on the Mixed
Use Development, South East UK. The Company has drawn additional funds on
its credit facilities in order to fund the new investments shown above. At
26 March 2018 the amounts drawn under each facility is:
* Morgan Stanley - EUR34 million
* Lloyds - EUR41.6 million
At 26 March 2018, the Company has approximately GBP12.5 million of cash
available for investments. The following loan amortisation (both scheduled
and unscheduled) has been received since the year end up to 26 March 2018:
Local
Currency
Varde Partners Mixed Portfolio, UK GBP2,673,464
Industrial Portfolio, Central and Eastern Europe EUR3,807,024
Industrial Portfolio, UK GBP6,883,661
Logistics, Dublin, Ireland EUR38,967
Residential Portfolio, Dublin, Ireland EUR58,029
The following loans have been repaid in full since the year end up to 26
March 2018:
Local
Currency
Residential Portfolio, Cork, Ireland EUR5,983,437
Centre Point, London GBP25,438,707
On 26 January 2018 the Company declared a dividend of 1.625 pence per
Ordinary Share payable to shareholders on the register on 9 February 2018.
Starwood European Finance Partners Limited | Investment Manager
26 March 2018
Governance
Board of Directors
STEPHEN SMITH | non-executive Chairman - Chairman of the Board
Stephen is Chairman of the The PRS REIT which currently trades on the SFS of
the London Stock Exchange. He is also Chairman of AEW UK Long Lease REIT plc
which trades on the Main Market of the London Stock Exchange. 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. 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 The Renewables Infrastructure Group Limited (FTSE
250), Alcentra European Floating Rate Income Fund Limited, Sequoia Economic
Infrastructure Income Fund Limited (FTSE 250) and Funding Circle SME Income
Fund Limited which are listed on the main market of the London Stock
Exchange, Phaunos Timber Fund Limited which is in wind up, 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, a Chartered
Director and Fellow of the Institute of Directors and a 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 Fellow of the Institute of Chartered Accountants in England and
Wales and holds the Institute of Directors Diploma in Company Direction. He
is a non-executive Director of International Public Partnerships Limited
(FTSE 250), India Capital Growth Fund Limited (LSE), Globalworth Real Estate
Investments Limited, GLI Finance Ltd and Aberdeen Frontier Markets Fund
Limited (all listed on AIM), Chenavari Toro Income Fund Limited (listed on
SFS), 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
PriceWaterhouse in London before embarking on a career in business services,
predominantly telecoms. He co-led the business turnaround of Talkland
International (which became Vodafone Retail) and was directly responsible
for the strategic shift into retail distribution and its subsequent
implementation; he subsequently worked on the private equity acquisition of
Ora Telecom. John is also a resident of Guernsey.
Report of the Directors
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The Principal Activities and Investment Objective are fully detailed in the
Objective and Investment Policy section.
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 as a registered 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 IPO which completed on 17 December
2012. Further issues have taken place since IPO and are listed under
"Capital" below. The issued capital during the year comprises the Company's
Ordinary Shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l (indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 1 Limited),
Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l. (both indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 2 Limited).
Starfin Public GP Limited and Starfin Public LP which previously held the
investment in Starfin Lux S.à.r.l, have since been liquidated as part of the
Group Restructure.
References to the Group refer to the Company and its subsidiaries.
DIVID POLICY
The Company has a target dividend of 6.5 pence per Ordinary Share per annum,
based on quarterly dividend payments.
DIVIDS PAID
The Company declared dividends of 1.625 pence for each of the calendar
quarters of 2017. The Company paid a total of GBP24,376,261 in respect 2017
(6.5 pence per Ordinary share) (2016: GBP21,303,065: 6.5 pence per Ordinary
Share).
BUSINESS REVIEW
The Group's performance during the year to 31 December 2017, its position at
that date and the Group's future developments are detailed in the Chairman's
Statement, the Strategic Report and the Investment Manager's Report.
CAPITAL
As part of the Company's 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.
The following issues have been made since IPO:
Number of Price (pence per
Admission Date Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
Following these issues, the Company now has issued share capital consisting
of 375,019,398 Ordinary Shares. There have been no further issues during
2017.
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders pursuant to the
FCA's Disclosure Guidance and Transparency Rules ("DTR") is published via a
Regulatory Information Service and is available on the Company's website.
The Company has been notified under Rule 5 of the DTR of the following
holdings of voting rights in its shares as at 31 December 2017 and as at the
date of this report.
% holding of % holding of
Ordinary Ordinary
Shares at 31 Shares at the date
December of
Name 2017 this report
Quilter Cheviot 9.66 9.66
Investment Management
SG Private Banking 8.70 9.03
Schroder Investment 7.59 7.57
Management
Old Mutual Global 7.36 7.32
Investors
Cazenove Capital 6.01 6.05
Management
Fidelity International 5.29 5.29
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown in the table below:
Ordinary Shares at 31 Ordinary Shares at 31
Name December 2017 December 2016
Stephen Smith 78,929 78,929
John Whittle 11,866 11,866
Jonathan Bridel and 11,866 11,866
Spouse
The Directors have adopted a code of Directors' dealings in Ordinary Shares,
which is based on EU Market Abuse Regulation ("MAR"). MAR came into effect
across the EU (including the UK) on 3 July 2016. The Board is responsible
for taking all proper and reasonable steps to ensure compliance with MAR by
the Directors, and reviews such compliance on a regular basis.
EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting period are contained in note 23 to the
consolidated financial statements.
INDEPENT AUDITOR
The Board of Directors elected to appoint PricewaterhouseCoopers CI LLP as
Auditor to the Company at the inaugural meeting of the Company on 22
November 2012 and they have been re-appointed at each Annual General Meeting
held since. PricewaterhouseCoopers CI LLP has indicated their willingness to
continue as Auditor. The Directors will place a resolution before the Annual
General Meeting to re-appoint them as independent Auditor for the ensuing
year, and to authorise the Directors to determine their remuneration.
INVESTMENT MANAGER AND SERVICE PROVIDERS
The Investment Manager during the year was Starwood European Finance
Partners Limited (the "Investment Manager"), incorporated in Guernsey with
registered number 55819 and regulated by the GFSC and Alternative Investment
Fund Management Directive. 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 year.
DISCOUNT CONTROL
The Company's discount management strategy has a number of elements which
were amended at an Extraordinary General Meeting held on 29 September 2017
(the "EGM").
The discount-triggered realisation mechanism that would have applied in the
event that the Ordinary Shares had traded at an average discount of five per
cent or more during the last six months of the financial year ending 31
December 2017, has been deferred. As a result of this the realisation vote
(which could have been required to be held before 28 February 2018) is no
longer required.
The Company maintains the share repurchase powers that allow the Company to
repurchase Ordinary Shares in the Market up to 14.99 per cent of the share
capital, subject to annual renewal of the Shareholder authority. In addition
the Company may raise fresh capital including through a placing programme
(subject to the publication of a prospectus of the Company) and through
opportunistic tap issues taking advantage of the recent implementation of
the Prospectus Regulation. This now enables issuers such as the Company
(subject to obtaining the requisite Shareholder authorities) to issue up to
20 per cent of the securities already listed by way of such issues over 12
months without any requirement to publish a prospectus (the previous limit
having been 10 per cent).
DISCOUNT-TRIGGERED REALISATION
The position prior to the EGM provided the Directors discretion to implement
a Realisation Offer if certain conditions were met or to propose a
realisation vote by no later than 28 February 2018 in the event that such
conditions were not met. Following the approval of the amendment to the
Articles the provisions relating to the Realisation Offer will now first
apply by reference to the last six months of the financial year ending 31
December 2022 and the realisation vote mechanism would apply (where the
discount-triggered realisation mechanism has not been activated) by no later
than 28 February 2023 and in each case on successive five year anniversaries
of such dates. Consequently the Directors have been released from any
requirement to exercise their discretion to convene a meeting to consider a
realisation vote by no later than 28 February 2018.
REALISATION VOTE POST EGM
In the event that the discount-triggered realisation mechanism is not
activated, the Directors shall exercise their discretion under the Articles
to put forward a realisation vote (as an ordinary resolution) to
Shareholders by no later than 28 February 2023. If Shareholders vote in
favour of this resolution then the Company will procure that a Realisation
Offer on substantially the same terms as that described above is offered to
Shareholders. Following the receipt of all elections, if either: (i) more
than 75 per cent of the Ordinary Shares then in issue were elected for
realisation; or (ii) the NAV of the Company following the realisation would
be less than GBP100 million, the Directors may exercise their discretion not
to proceed with the Realisation Offer and instead put forward alternative
proposals which are no less favourable to electing Shareholders and which
may include the reorganisation or winding up of the Company.
If Shareholders vote against the realisation vote then the Company will
continue in existence as it is then constituted without any liquidity event
for Shareholders.
SHARE BUYBACKS
At the Annual General Meeting held on 11 May 2017, the Company received
authority to purchase in the Market up to 14.99 per cent of the Ordinary
Shares in issue on 11 May 2017 at a price not exceeding: (i) five per cent
above the average of the mid-market values of the Ordinary Shares for the
five Business Days before the purchase is made; or (ii) the higher of the
last independent trade or the highest current independent bid for the
Ordinary Shares.
The Directors will give consideration to repurchasing Shares under this
authority, but are not bound to do so, where the market price of an Ordinary
Share trades at more than 7.5 per cent below the Net Asset Value per Share
for more than 3 months, subject to available cash not otherwise required for
working capital purposes or the payment of dividends in accordance with the
Company's dividend policy.
If not previously used, this authority shall expire at the conclusion of the
Company's Annual General Meeting ("AGM") in 2018. The Directors intend to
seek annual renewal of this buyback authority from Shareholders each year at
the Company's AGM.
John Whittle | Director
26 March 2018
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 year 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.
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 GBP200,000. 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, Management Engagement Committee and Audit Committee and the time
dedicated by each Director to the Company's affairs. Base fees are set out
in the below table.
At a Meeting of the Board of the Company held on 9 November 2017, the Board
considered and approved increases in Director remuneration to take effect
from 1 January 2018. The decision was taken following review of a report
prepared by Optimus Group Limited which had been commissioned by the Board.
Optimus Group Limited are independent consultants with no connection
to the Company. The Chairman's remuneration will increase to GBP50,000 per
annum, the Audit Committee Chairman's remuneration will increase to GBP45,000
per annum and Director remuneration will increase to GBP42,500 per annum.
Total Fee 2017 Total Fee 2016
Director GBP GBP
Stephen Smith 47,500 47,500
John Whittle 40,000 40,000
Jonathan Bridel 35,000 35,000
Aggregate Fees 122,500 122,500
Aggregate Expenses 2,916 2,307
Total 125,416 124,807
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, has been granted share options or been invited to participate in
long-term incentive plans. No loans have been originated by the Company for
the benefit of any Director.
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 re-election every three years thereafter at the
AGM. Any Director who has served on the Board for longer than nine years
will be subject to annual re-election. The Directors do not have any
interests in contractual arrangements with the Company or its investments
during the year 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.
By order of the Board
John Whittle | Director
26 March 2018
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium Listing on the
Official List and admission to trading on the Main Market for Listed
Securities of the London Stock Exchange, the Company is required to comply
with the principles of the UK Corporate Governance Code dated April 2016
("UK Code").
As an AIC member, the Board has also considered the principles and
recommendations of the AIC Code of Corporate Governance dated July 2016
("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 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 during the year.
Except as disclosed within the report, the Board is of the view that
throughout the year ended 31 December 2017, the Company complied with the
recommendations of the AIC Code and the relevant provisions of the UK Code.
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.
The AIC Code includes provisions relating to: the role of the chief
executive; executive Directors' remuneration; and the need for an internal
audit function which are not considered by the Board to be relevant to the
Company, being an externally managed investment company. The Company has
therefore not reported further in respect of these provisions.
The Guernsey Financial Services Commission Finance Sector Code of Corporate
Governance ("GFSC Code") came into force in Guernsey on 1 January 2012 and
was amended in February 2016. The Company is deemed to satisfy the GFSC Code provided that it continues to conduct its governance in accordance with the requirements of the UK Code. 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 in Board of Directors section. 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 consider. 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, but may be counted in the quorum. STEPHEN SMITH | Chairman 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 throughout the year 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, a Director would abstain or have his objection noted, which would be reflected within the minutes. 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 in Board of Directors section. 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 any perceived issues, or a resignation is 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 AGM following his appointment by the Board, and to be re-elected once every three years thereafter. Mr John Whittle is therefore submitting himself for re-election at the AGM on 15 May 2018. Any Director who has served on the Board for more than nine years is required to submit themselves for re-election annually. The Audit Committee Members and the Board confirm that Mr Whittle has proven his 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 Mr Whittle be re-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 or Director 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 meeting attendance record is displayed in the Corporate Governance
statement. 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
confident all members have sufficient financial skills and experience, and
competence relevant to the Company's Sector. Mr John Whittle is Audit
Committee Chairman.
The Audit Committee met three times during 2017 (2016: three times); the
meeting attendance record is displayed in the Board and Committee Meeting
Attendance section. 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, for example
as evidenced by the Audit and Assurance Faculty Report ("AAF 01/06 Assurance
Report") on the internal procedures of 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 consolidated 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 on the Company's website, and are
reviewed on a regular basis.
Management Engagement Committee
The Company has established a Management Engagement Committee which
comprises all the Directors, with Mr 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 the Investment Manager's performance
are also conducted regularly throughout the year by the Board. Reviews of
engagements with other service providers, such as the Administrator, 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.
The Management Engagement Committee met once during 2017 (2016: twice) and
undertook a review of the key service providers to the Group and the
Company, utilising a service provider questionnaire. No material weaknesses
were identified and the recommendation to the Board was that the current
arrangements were appropriate and provided good quality services and advice
to the Company and the Group.
Formal terms of reference for the Management Engagement Committee are
available at the registered office and the Company's website, and are
reviewed on a regular basis.
The Company Secretary acts as the secretary to the Management Engagement
Committee.
BOARD AND COMMITTEE MEETING ATTANCE
Individual attendance at Board and Committee meetings is set out below:
In addition to the scheduled quarterly and additional offshore 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
apprised and up to date with the current investment status and progress.
During the year Committees were also set up to consider and approve matters
specific to the Restructuring of the Company and leading up to the EGM held
on 29 September 2017 and the subsequent Refinancing which was completed in
December 2017.
Management
Scheduled Ad hoc Audit Engagement
Board Board1 Committee Committee
Stephen Smith1 4 2 3 1
John Whittle 4 6 3 1
Jonathan Bridel 4 6 3 1
Total Meetings for year 4 6 3 1
1 The ad hoc Board meetings are convened at short notice to deal with
administrative matters. It is not therefore always logistically feasible, or
a necessity, for the Chairman of the Board to attend such meetings.
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 ad-hoc 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 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' roles and responsibilities in preparing the
Annual Report and Audited Consolidated Financial Statements for the year
ended 31 December 2017 is provided in the Statement of Directors'
Responsibilities.
For the purposes solely of the audit of the consolidated financial
statements, the Auditors have reviewed the Company's compliance with certain
of the AIC Code's provisions, the UK Listing Authority's Listing Rules and
other applicable rules of the Financial Conduct Authority.
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 Directors also considered it appropriate to prepare the financial
statements on the going concern basis, as explained in the Basis of
preparation paragraph in Note 2 of the financial statements.
RISK CONTROL
In addition to the earlier assessment of principal risks and uncertainties
contained within the Strategic Report, the Board is required annually to
review the effectiveness of the Group'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 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.
RISK MANAGEMENT
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 below.
(i) Control Environment
The Company is ultimately dependent upon the quality and integrity of the
staff and management of the Investment Manager, the Investment Adviser and
its Fund Administration & Company Secretarial service provider. 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,
consider internal controls relevant to the Company's preparation and fair
presentation of the consolidated 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 conducted by the Board as a
whole (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, and subsequently
amended by EGM's held on 2 May 2014, 9 March 2015 and 6 May 2016;
* 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 year to 31 December 2017.
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.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE ("AIFMD")
The AIFMD, which was implemented across the EU on 22 July 2013 with the
transition period ending 22 July 2014, aims to harmonise the regulation of
Alternative Investment Fund Managers ("AIFMs") and imposes obligations on
managers who manage or distribute Alternative Investment Funds ("AIFs") in
the EU or who market shares in such funds to EU investors.
After seeking professional regulatory and legal advice, the Company was
established in Guernsey such that, upon implementation of AIFMD it would be
a Non-EU AIF, with Starwood European Finance Partners Limited appointed to
act as the Non-EU AIFM.
In accordance with AIFMD disclosure obligations, note 6 provides a summary
of realised and unrealised gains and losses.
The Investment Manager does not receive an additional fee, to that stated in
note 22, as a result of acting as the AIFM. The Board of the Investment
Manager received an aggregate fee of GBP47,500 for the year ended 31 December
2017.
The marketing of shares in AIFs that are established outside the EU (such as
the Company) to investors in an EU member state is prohibited unless certain
conditions are met. Certain of these conditions are outside the Company's
control as they are dependent on the regulators of the relevant third
country (in this case Guernsey) and the relevant EU member state entering
into regulatory co-operation agreements with one another.
The AIFM has given written notification to the United Kingdom Financial
Conduct Authority ("FCA"), pursuant to Regulation 59 of the Alternative
Investment Fund Managers Regulations 2013 (SI 1773/2013) (the "AIFM
Regulations") of its intention to market the shares to investors in the
United Kingdom in accordance with the AIFM Regulations and the rules and
guidance of the FCA.
The AIFM has given written notification to the Netherlands Authority for the
Financial Markets ("AFM") pursuant to Article 1:13b section 1 and 2 of the
Act on the Financial Supervision (Wet op het financieel toezicht) (the
"AFS") of its intention to market the shares to investors in the Netherlands
in accordance with the AFS, any rules and regulations promulgated pursuant
thereto and the rules and guidance of the AFM.
On 12 February 2016, the AIFM obtained a marketing licence in Sweden in
accordance with Chapter 5, Section 10 of the Swedish Alternative Investment
Fund Managers Act (Sw. lag (2013:561) om förvaltare av alternativa
investeringsfonder). This enables shares in the Company to be marketed to
professional investors in Sweden.
Currently, the National Private Placement Regime ("NPPR") provides a
mechanism to market Non-EU AIFs that are not allowed to be marketed under
the AIFMD domestic marketing regimes. The Board is utilising NPPR in order
to market the Company, specifically in the UK, Sweden and the Netherlands.
The Board works with the Company's advisers to ensure the necessary
conditions are met, and all required notices and disclosures are made under
NPPR. Eligible AIFMs will be able to continue to use NPPR until at least 22
July 2018, and at present NPPR remains the sole regime available to market
in the EEA. A non-EEA marketing passport may be introduced, but this depends
on a number of conditions being satisfied (as set out in the AIFMD and its
Regulations).
Any regulatory changes arising from implementation of the AIFMD (or
otherwise) that limit the Company's ability to market future issues of its
shares may adversely affect the Company's ability to carry out its
investment policy successfully and to achieve its investment objective,
which in turn may adversely affect the Company's business, financial
condition, results of operations, NAV and/or the market price of the
Ordinary Shares.
The Board, in conjunction with the Company's advisers, will continue to
monitor the development of the AIFMD and its impact on the Company. The
Company will continue to use NPPR pending further consultation from the
European Securities and Markets Authority ("ESMA").
The Board has considered the disclosure obligations under Articles 22 and 23
and can confirm that the Company complies with the various organisational,
operational and transparency obligations.
FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA") AND THE OECD COMMON REPORTING
STANDARDS ("CRS")
FATCA became effective on 1 January 2013 and is being gradually implemented
internationally. The legislation is aimed at determining the ownership of US
assets in foreign accounts and improving US Tax compliance with respect to
those assets.
More than 90 jurisdictions, including all 34 member countries of the
Organisation for Economic Co-operation and Development ("OECD") and the G20
members, have committed to implement the Common Reporting Standard for
automatic exchange of tax information ("CRS"). Building on the model created
by FATCA, the CRS creates a global standard for the annual automatic
exchange of financial account information between the relevant tax
authorities.
The Board in conjunction with the Company's service providers and advisers
have ensured that the Company complies with FATCA and CRS's requirements to
the extent relevant to the Company.
DIALOGUE WITH SHAREHOLDERS
The Directors place a great deal of importance on communication with
shareholders. The Company's Chairman, Investment Manager and the Brokers,
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 Consolidated
Financial Statements and quarterly factsheets 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 AGM, informally
following the meeting, or in writing at any time during the year via the
Company Secretary. The Company Secretary is also available to answer general
shareholder queries at any time throughout the year.
By order of the Board
John Whittle | Director
26 March 2018
Report of the Audit Committee
The Board is supported by the Audit Committee, which comprised all the
Directors during the year under review (including the Chairman of the Board,
to enable his greater understanding of the issues facing the Group). The
Board has considered the composition of the Audit Committee and is satisfied
it has sufficient recent and relevant skills and experience, in particular
the Board has considered the requirements of the UK Code that the Audit
Committee should have at least one Member who has recent and relevant
financial experience and that the Audit Committee as a whole has competence
relevant to the sector in which the Company invests. The Board considers all
of the relevant requirements to have been met.
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 consolidated financial statements of the
Group and any formal announcements relating to the Group's financial
performance, and reviewing significant financial reporting judgements
contained within said statements and announcements;
* Reviewing the Group's internal financial controls, and the Group's
internal control and risk management systems;
* Monitoring the need for an internal audit function annually;
* Monitoring and reviewing the scope, 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 AGM;
* Development and implementation of the Group'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 Group;
* Providing advice to the Board on whether the consolidated financial
statements, taken as a whole, are fair, balanced and understandable and
provide the information necessary for shareholders to assess the Group's
performance, business model and strategy; and
* Reporting to the Board on how the Committee discharged all relevant
responsibilities at each Board meeting.
Financial Reporting
The primary role of the Audit Committee in relation to the financial
reporting is to review with the Administrator, Investment Manager and the
Auditors the appropriateness of the Annual Report and Audited Consolidated
Financial Statements and Interim Condensed Consolidated Financial
Statements, concentrating on, amongst other matters:
* The quality and acceptability of accounting policies and practices;
* The clarity of the disclosures and compliance with financial reporting
standards and relevant financial and governance reporting requirements;
* Material areas in which significant judgements have been applied or there
has been discussion with the Auditors;
* Whether the Annual Report and Audited Consolidated Financial Statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for the shareholders to assess the Group's
performance, business model and strategy; and
* Any correspondence from regulators in relation to the Group's financial
reporting.
To aid its review, the Audit Committee considers reports from the
Administrator and Investment Manager and also reports from the Auditors on
the outcomes of their half-year review and annual audit. The Audit Committee
supports PricewaterhouseCoopers CI LLP ("PwC") in displaying the necessary
professional scepticism their role requires.
The Audit Committee met three times during the year under review; individual
attendance of Directors is outlined in Board and Committee Meeting
Attendance section. The main matters discussed at those meetings were:
* Review and approval of the annual audit plan of the external Auditors;
* Discussion and approval of the fee for the external audit;
* Detailed review of the Annual Report and Audited Consolidated Financial
Statements and recommendation for approval by the Board;
* Review and approval of the interim review plan of the external Auditors;
* Detailed review of the Interim Condensed Consolidated Financial Statements
and recommendation for approval by the Board;
* Discussion of reports from the external Auditors following their interim
review and annual audit;
* Assessment of the effectiveness of the Auditors as described below;
* Assessment of the independence of the external Auditors;
* Review of the Group's key risks and internal controls; and
* Consideration of the 2016 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.
Annual General Meeting
The Audit Committee Chairman, or other members of the Audit Committee
appointed for the purpose, shall attend each AGM of the Company, prepared to
respond to any shareholder questions on the Audit Committee's activities.
Internal Audit
The Audit Committee considers at least once a year whether or not there is a
need for an internal audit function. Currently, the Audit Committee does not
consider there to be a need for an internal audit function, given that there
are no employees in the Group and all outsourced functions are with parties
/ administrators who have their own internal controls and procedures. This
is evidenced by the annual 01/06 AAF Assurance Report provided by the
Administrator, which gives sufficient assurance that a sound system of
internal control is maintained at the Administrator.
SIGNIFICANT ISSUES IN RELATION TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year, the Audit Committee considered a number of significant
issues in respect of the Annual Report and Audited Consolidated Financial
Statements. The Audit Committee reviewed the external audit plan at an early
stage and concluded that the appropriate areas of audit risk relevant to the
Group had been identified and that suitable audit procedures had been put in
place to obtain reasonable assurance that the consolidated financial
statements 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
Recoverability and impairment to The Audit Committee reviews
the carrying values of loan the investment process of
investments the Investment Manager and
Investment Adviser including
the controls in place around
deal sourcing, investment
analysis, due diligence and
the role of the Investment
Adviser's investment
committee and the Investment
Manager's Board. The Audit
Committee also reviews the
controls in place around the
effective interest loan
models and is notified
regularly by the Investment
Manager of any changes to
underlying assumptions made
in the loan models.
The Audit Committee receives
regular updates on the
performance of each loan and
discusses whether there are
any indicators of impairment
with the Investment Manager
and Investment Adviser.
Formal, detailed impairment
reviews are also prepared by
the Investment Adviser and
Investment Manager which are
reviewed at each Audit
Committee meeting and the
Audit Committee considers
whether there are any
indicators of impairment.
Credit linked notes fair valuation The Group closed its first
investment in Credit Linked
Notes ("CLNs") on 22
December 2017. This
investment is held at fair
value through profit or
loss.
The fair value of the CLNs
will be determined by the
Investment Adviser using a
valuation model. The main
inputs into the valuation
model for the CLNs are
discount rates, market risk
premium adjustments to the
discount rate, probabilities
of default and cash flow
forecasts. The Investment
Adviser also performs a full
analysis of the performance
of each underlying loan and
with reference to other
inputs such as third party
valuations of the underlying
collateral.
At 31 December 2017 the
Group considers the fair
value to be equal to the
transaction price given the
proximity of the closing of
the transaction to the year
end and no significant
market movements or changes
to the underlying reference
portfolio in the gap period
from purchase date of the
CLNs to the year end.
The Audit Committee has
discussed this approach and
made appropriate enquires of
the Investment Manager and
Investment Adviser and
considers the approach
reasonable.
Risk of fraud or error in revenue The Audit Committee
recognition discusses with the
Investment Manager and
Investment Adviser the
reasons for the changes in
key assumptions made in the
loan models such as changes
to expected drawdown or
repayment dates or other
amendments to expected cash
flows such as changes in
interbank rates on floating
loans. The Audit Committee
ensures that any changes
made to the models are
justifiable based on the
latest available
information.
A separate income
rationalisation which is
prepared outside of the
detailed loan models is
provided to the Board on a
quarterly basis as a
secondary check on the
revenue being recognised in
the loan models. This is
also reviewed by the Audit
Committee and questions
raised where appropriate.
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 efficiency 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 consolidated financial statements 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 year, 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 audit findings 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' performance.
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.
AUDITORS' TENURE AND OBJECTIVITY
The Group has developed an audit tender policy which the Board will
re-consider after five years from the appointment date of the current
Auditor. A review of policy will therefore occur during 2018, subject to
regular reviews by the Board and shareholder approval.
The Group's current Auditors, PwC, have acted in this capacity since the
Company's inaugural meeting on 22 November 2012. The Committee reviews the
Auditors' performance on a regular basis to ensure the Group receives an
optimal service. Subject to annual appointment by shareholder approval at
the AGM, the appointment of the Auditor is formally reviewed by the Audit
Committee on an annual basis. PwC has now moved to adopt the IESBA Ethical
Standards during 2017 and their rotation rules now require the lead audit
partner to rotate every 7 years, key partners involved in an audit every 7
years and PwC's own internal policy would generally expect senior staff to
rotate after 10 years. Rotation ensures a fresh look without sacrificing
institutional knowledge.
Rotation of audit engagement partners, key partners involved in the audit
and other staff in senior positions is reviewed on a regular basis by the
lead audit engagement partner.
PwC regularly updates the Audit Committee on the rotation of audit partners,
staff, level of fees, details of any relationships between the Auditors and
the Group and also provides overall confirmation of its independence and
objectivity. There are no contractual obligations that restrict the Group's
choice of Auditors. Any non-audit work would be 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 PwC remains
independent of the Group, the Investment Manager and other service providers
and the Audit Committee has no current plans for re-tendering for the
position of auditor to the Company. The Audit Committee therefore recommends
the continuing appointment of PwC by the Board.
CONCLUSIONS IN RESPECT OF THE CONSOLIDATED FINANCIAL STATEMENTS
The production and the audit of the Annual Report and Audited Consolidated
Financial Statements is a comprehensive process requiring input from a
number of different contributors. In order to reach a conclusion on whether
the Group's consolidated financial statements are fair, balanced and
understandable, as required under the UK Code and the AIC Code, the Board
has requested that the Audit Committee advise on whether it considers that
the Annual Report and Consolidated 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 and Audited Consolidated
Financial Statements, 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 Group'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
service 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 Audit Committee has concluded that it
has acted in accordance with its' terms of reference and has ensured the
independence and objectivity of the external Auditors. It has reported to
the Board that the Annual Report for the year ended 31 December 2017, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group's performance,
business model and strategy. The Board's conclusions in this respect are set
out in the Statement of Directors' Responsibilities.
The Audit Committee has recommended to the Board that the external auditor
is re-appointed.
John Whittle | Audit Committee Chairman
26 March 2018
Statement of Directors' Responsibilities
The Directors are responsible for preparing consolidated 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 or loss of the Company for that year.
Company law requires the Directors to prepare financial statements for each
financial year. The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"). In preparing the consolidated financial
statements, the Directors are required to:
* Select suitable accounting policies and apply them consistently;
* Make judgments 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 consolidated
financial statements; and
* Prepare the consolidated 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 consolidated financial statements since they are
initially presented on the website. Legislation in Guernsey governing the
preparation and dissemination of the consolidated 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 consolidated financial
statements comply with the Companies (Guernsey) Law, 2008, as amended. 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
consolidated 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 consolidated 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 Group; and
* The Chairman's Statement, Strategic Report, Investment Manager's Report,
Report of the Directors and Corporate Governance Statement include a fair
review of the development and the position of the Company and the Group,
together with a description of the principal risks and uncertainties that
they face.
The UK Code, as adopted through the AIC Code by the Company, also requires
Directors to ensure that the Annual Report and Consolidated Financial
Statements 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 Consolidated
Financial Statements fulfill 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 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 year ended 31 December
2017, 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 Audited Consolidated Financial Statements for the year
ended 31 December 2017, 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.
For Starwood European Real Estate Finance Limited
Stephen Smith | Chairman
26 March 2018
Financial Statements
Independent Auditor's report to the Members of Starwood European Real Estate
Finance Limited
Report on the audit of the consolidated financial statements
OUR OPINION
In our opinion, the consolidated financial statements give a true and fair
view of the financial position of Starwood European Real Estate Finance
Limited (the "Company") and its subsidiaries (together the "Group") as at 31
December 2017, and of their consolidated financial performance and their
consolidated cash flows for the year then ended in accordance with
International Financial Reporting Standards as adopted by the European Union
and have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
WHAT WE HAVE AUDITED
The Group's consolidated financial statements comprise:
* the Consolidated Statement of Financial Position as at 31 December 2017;
* the Consolidated Statement of Comprehensive Income for the year then
ended;
* the Consolidated Statement of Changes in Equity for the year then ended;
* the Consolidated Statement of Cash Flows for the year then ended; and
* the notes to the consolidated financial statements, which include a
summary of significant accounting policies.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on
Auditing ("ISAs"). Our responsibilities under those standards are further
described in the Auditor's responsibilities for the audit of the
consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
INDEPENCE
We are independent of the Group in accordance with the International Ethics
Standards Board for Accountants' Code of Ethics for Professional Accountants
("IESBA Code") and at the request of the Directors SEC Independence Rules
that are relevant to our audit of the consolidated financial statements. We
have fulfilled our other ethical responsibilities in accordance with the
IESBA Code.
OUR AUDIT APPROACH
Overview
MATERIALITY
* Overall materiality was GBP7.7 million (2016: GBP7.6 million), which
represents 2.0% of consolidated net assets.
AUDIT SCOPE
* The Company is based in Guernsey with underlying subsidiaries located in
Guernsey and Luxembourg and engages Starwood European Finance Partners
Limited (the "Investment Manager") to manage its assets. The consolidated
financial statements are a consolidation of the Company and all of the
underlying subsidiaries.
* We conducted our audit of the consolidated financial statements from
information provided by Ipes (Guernsey) Limited (the "Administrator") to
whom the board of directors has delegated the provision of certain
functions. We also had significant interaction with Starwood Capital Europe
Advisers LLP (the "Investment Adviser") in completing aspects of our overall
audit work.
* We conducted our audit work in Guernsey and we tailored the scope of our
audit taking into account the types of investments within the Group, the
involvement of the third parties referred to above, the accounting processes
and controls, and the industry in which the Group operates.
* We performed an audit of the complete financial information of the
Guernsey and Luxembourg components of the Group.
* The components of the Group where we performed full scope audit procedures
accounted for 100% of total net assets and total operating profit.
KEY AUDIT MATTERS
* Valuation of loans advanced
* Risk of fraud in income from loans advanced
* Valuation of Credit Linked Notes
AUDIT SCOPE
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the consolidated financial statements. In
particular, we considered where the directors made subjective judgements;
for example, in respect of significant accounting estimates that involved
making assumptions and considering future events that are inherently
uncertain. As in all of our audits, we also addressed the risk of management
override of internal controls, including among other matters, consideration
of whether there was evidence of bias that represented a risk of material
misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the consolidated financial statements as
a whole, taking into account the structure of the Group, the accounting
processes and controls, and the industry in which the Group operates.
The Company is based in Guernsey with five underlying subsidiaries located
in Guernsey and Luxembourg. The consolidated financial statements are a
consolidation of the Company and all of the underlying subsidiaries.
Scoping was performed at the Group level, irrespective of whether the
underlying transactions took place within the Company or within the
subsidiaries. The Group audit was led, directed and controlled by
PricewaterhouseCoopers CI LLP and all audit work for material items within
the consolidated financial statements was performed in Guernsey by
PricewaterhouseCoopers CI LLP.
The transactions relating to the Company and the subsidiaries are maintained
by the Administrator and therefore we were not required to engage with
component auditors from another PwC global network firm operating under our
instructions. Our testing was therefore performed on a consolidated basis
using thresholds which are determined with reference to the overall Group
materiality and the risks of material misstatement identified.
As noted in the overview, the components of the Group where we performed
full scope audit procedures accounted for 100% of total net assets and total
operating profit.
MATERIALITY
The scope of our audit was influenced by our application of materiality. An
audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement. Misstatements may arise due
to fraud or error. They are considered material if individually or in
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the consolidated financial
statements.
Based on our professional judgement, we determined certain quantitative
thresholds for materiality, including the overall Group materiality for the
consolidated financial statements as a whole as set out in the table below.
These, together with qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent of our audit procedures
and to evaluate the effect of misstatements, both individually and in
aggregate on the financial statements as a whole.
Overall materiality GBP7.7 million (2016: GBP7.6
million)
How we determined it 2.0% of overall consolidated
net assets
Rationale for the materiality We believe consolidated net
benchmark assets to be the appropriate
basis for determining
materiality since this is a
key consideration for
investors when assessing
financial performance. It is
also a generally accepted
measure used for companies in
this industry.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.4 million (2016: GBP0.4
million), as well as misstatements below that amount that, in our view,
warranted reporting for qualitative reasons.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgment, were
of most significance in our audit of the consolidated financial statements
of the current period. These matters were addressed in the context of our
audit of the consolidated financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matter How our audit addressed the
Key audit matter
Valuation of loans advanced We evaluated management's
processes and assumptions
used to measure the loans at
amortised cost and to assess
Loans advanced at the year-end of whether the loans advanced
?370.0 million (2016: ?359.9 showed any indicators for
million) are measured at amortised impairment and the impact of
cost and comprise of both fixed and any such indicators. Our
floating rate loans. procedures included:
Loans advanced make up a * Detailed testing over the
significant part of the effective interest models
consolidated statement of financial used by management to value
position and due to the nature of the loans at amortised cost
these transactions their ongoing using the effective interest
recoverability and impairment is rate method;
subject to judgment and estimation.
* Validating the assumptions
and inputs into the
amortised cost models and
reading the associated
agreements and other legal
The judgements exercised in documentation. Detailed
determining the potential for back-testing procedures were
impairment provisions could also performed to assist in
significantly impact the net asset our conclusions as to the
value of the Group and this is cash flow forecasting
considered to be a key source of reliability displayed by the
estimation uncertainty as described Investment Adviser;
in note 2c of the consolidated
financial statements. The specific
areas of judgement include:
* Obtaining management's
impairment reviews for each
loan and assessing whether
any indicators of impairment
existed at the year-end;
* How management determine the
underlying assumptions when * Obtaining evidence to
preparing impairment review support significant
analysis such as changes in assumptions presented in the
valuation of underlying collateral, impairment reviews,
the ability of the borrowers to including consideration of
deliver on their business plans and the financial information on
projected financial performance the borrower to assess their
figures; and ability to meet future
payment commitments; and
* The impact of changes in the
expected cash flows for each loan * Inspecting compliance
on the carrying values. certificates signed by each
underlying borrower which
confirmed compliance with
any covenants as at the
year-end.
We did not identify any
material issues from our
procedures.
Valuations of Credit Linked Notes We updated our understanding
and evaluated the controls
in place surrounding the
investment process including
The Group's investments in Credit deal sourcing, investment
Linked Notes ("CLNs") of ?22.1m analysis, due diligence and
(2016: ?nil) held as at the the role of the investment
year-end are measured at fair value committee when the Group was
through profit or loss. seeking to acquire the CLN
investments. We held
discussions with the
Investment Adviser on how
the investment in the CLNs
was structured and the
original investment
underwrite.
This is the first investment held
by the Group that is required to be
recognised and measured at fair
value through profit or loss in
line with IFRS. The fair valuation
of the CLNs represents a
significant risk that we have
focused on as the fair value is Our procedures included;
determined by the Investment
Adviser using an internal model
with inputs and assumptions that
are subjective and therefore * Inspection of the CLNs'
judgmental. In determining the fair deal origination documents,
value, the Investment Adviser also including contract notes and
considers the original transaction legal agreements to review
price as well as relevant general the specific terms and
market movements and recent market conditions of the underlying
transactions for comparable reference loans as well as
instruments (where available) and reviewing the documentation
adjusts the valuation model where to confirm the existence of
deemed necessary. the investment.
* Discussions with our
internal experts on the
appropriate valuation
methodology for CLNs and
As the CLNs were acquired at fair consideration of the
value on 22 December 2017 with rationale supporting the
management concluding that there fair value determined by
have been no material market management for the CLNs as
movements or changes to the at 31 December 2017.
expected returns of the CLNs from
that date to 31 December 2017,
management therefore considers that
the transaction price of ?22.1m is * Concluding that we concur
the key determinant for the fair with management's use of the
value as at 31 December 2017. 22 December 2017 transaction
price as a proxy for the
fair value as at 31 December
2017 with these associated
considerations;
- There was a competitive
bidding process for the
Group to acquire the CLNs;
and
- There were no material
market developments or
changes to the underlying
reference portfolio in the
period from 22 December 2017
to 31 December 2017.
We did not identify any
material issues from our
procedures.
Risk of fraud in income from loans Our procedures included:
advanced
Income from loans advanced for the
year was ?32.0 million (2016: ?27.8
million) and was measured in
accordance with the effective * Assessing the judgements
interest rate requirements set out made in respect of the
in IAS 39. The Group has a key estimated cash flows
investment objective to provide including arrangement,
shareholders with regular dividends origination and commitment
through investment in debt fees, through testing of the
instruments and therefore we amortised cost models for
focussed on this risk. each loan to assess
compliance with the
requirements of IAS 39;
* Recalculating interest
income using the original
The requirement to estimate the effective interest rate
expected cash flows when forming an paying due consideration to
effective interest rate model is any early partial or full
subject to significant management prepayments;
judgements and estimates, and as
such could be open to manipulation
by management of factors including:
* Inspecting supporting
documents, such as
correspondence with the
underlying borrower and
timing of cash receipts, as
part of our assessment of
management's estimates and
* Timing of repayments; assumptions; and
* Expectations of partial or full * For those debt investments
prepayments; and also held at 31 December
2016, comparing the
estimated cash flows in the
amortised cost models as at
* Associated exit fees and 31 December 2017 and
make-whole payments. evaluating the rationale
behind any significant
changes to those cash flows
from the 31 December 2016
models.
Changes to the estimated timings of
cash flows can have a significant
impact on the recognition of income
from loans advanced and is
considered to be a key source of We did not identify any
estimation uncertainty as described material issues from our
in note 2c of the consolidated procedures.
financial statements.
OTHER INFORMATION
The directors are responsible for the other information. The other
information comprises the Objective and Investment Policy, the Financial
Highlights, the Chairman's Statement, the Strategic Report, the Investment
Manager's Report, the Board of Directors, the Report of the Directors, the
Directors' Remuneration Report, the Corporate Governance Statement, the
Report of the Audit Committee, the Statement of Directors' Responsibilities
and the Corporate Information (but does not include the consolidated
financial statements and our auditor's report thereon).
Other than as specified in our report, our opinion on the consolidated
financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information identified above and, in
doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If, based on the
work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing
to report in this regard.
RESPONSIBILITIES OF DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS
The directors are responsible for the preparation of the consolidated
financial statements that give a true and fair view in accordance with
International Financial Reporting Standards as adopted by the European
Union, the requirements of Guernsey law and for such internal control as the
directors determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the Group's ability to continue as a going
concern, disclosing, as applicable, matters relating to going concern and
using the going concern basis of accounting unless the directors either
intend to liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's
report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with
ISAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if,
individually or in aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with ISAs, we exercise professional
judgment and maintain professional scepticism throughout the audit. We also:
* Identify and assess the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control.
* Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Group's internal control.
* Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.
* Conclude on the appropriateness of the directors' use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Group's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or conditions
may cause the Group to cease to continue as a going concern.
* Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
* Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group to
express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the Group
audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable,
related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
consolidated financial statements of the current period and are therefore
the key audit matters. We describe these matters in our auditor's report
unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of
such communication.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Under The Companies (Guernsey) Law, 2008 we are required to report to you
if, in our opinion:
* we have not received all the information and explanations we require for
our audit;
* proper accounting records have not been kept; or
* the consolidated financial statements are not in agreement with the
accounting records.
We have no exceptions to report arising from this responsibility.
We have nothing to report in respect of the following matters which we are
required to review under the Listing Rules:
* the directors' statement set out in Corporate Governance Statement in
relation to going concern. As noted in the directors' statement, the
directors have concluded that it is appropriate to adopt the going concern
basis in preparing the financial statements. The going concern basis
presumes that the Group has adequate resources to remain in operation, and
that the directors intend it to do so, for at least one year from the date
the financial statements were signed. As part of our audit we have concluded
that the directors' use of the going concern basis is appropriate. However,
because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Group's ability to continue as a
going concern;
* the directors' statement that they have carried out a robust assessment of
the principal risks facing the Group and the directors' statement in
relation to the longer-term viability of the Group. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the directors' process supporting their
statements; checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code; and considering whether the
statements are consistent with the knowledge acquired by us in the course of
performing our audit; and
* the part of the Corporate Governance Statement relating to the Group's
compliance with the ten further provisions of the UK Corporate Governance
Code specified for our review.
This report, including the opinion, has been prepared for and only for the
members as a body in accordance with Section 262 of The Companies (Guernsey)
Law, 2008 and for no other purpose. We do not, in giving this opinion,
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.
John Roche
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and
Recognised Auditor, Guernsey,
Channel Islands
26 March 2018
We have audited the accompanying consolidated financial statements of
Starwood European Real Estate Finance Limited and its subsidiaries (the
"Group"), which comprise the Consolidated Statement of Financial Position as
of 31 December 2017, and the Consolidated Statement of Comprehensive Income,
the Consolidated Statement of Changes in Equity and the Consolidated
Statement of Cash Flows for the year then ended.
MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with International Financial
Reporting Standards as adopted by the European Union; this includes the
design, implementation and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on the consolidated financial
statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider
internal control relevant to the Company's preparation and fair presentation
of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal
control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Starwood
European Real Estate Finance Limited and its subsidiaries as of 31 December
2017, and the results of their operations, changes in their net assets, and
their cash flows for the year then ended, in accordance with International
Financial Reporting Standards as adopted by the European Union.
OTHER MATTER
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The other items listed
in the Index to the Annual Report are presented for purposes of additional
analysis and are not a required part of the consolidated financial
statements. The information is the responsibility of management and was
derived from and relates directly to the underlying accounting and other
records used to prepare the financial statements. The information has been
subjected to the auditing procedures applied in the audit of the financial
statements and certain additional procedures, including comparing and
reconciling such information directly to the underlying accounting and other
records used to prepare the financial statements or to the financial
statements themselves and other additional procedures, in accordance with
auditing standards generally accepted in the United States of America. In
our opinion, the information is fairly stated, in all material respects, in
relation to the consolidated financial statements taken as a whole.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
26 March 2018
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2017
1 January 2017 1 January 2016
to to
Notes 31 December 31 December 2016
2017
GBP GBP
Income
Income from loans 10 31,969,225 27,826,368
advanced
Income from cash and cash 19,535 17,195
equivalents
Other income - 577
Total income 31,988,760 27,844,140
Expenses
Investment management 22 2,844,140 2,527,199
fees
Credit facility 359,000 324,040
commitment fees
Administration fees 3(b) 335,048 271,587
Legal and professional 239,999 239,158
fees
Other expenses 236,529 124,113
Credit facility 195,327 221,002
amortisation of fees
Audit and non-audit fees 5 204,609 130,970
Directors' fees and 4, 22 125,416 124,807
expenses
Broker's fees and 3(d) 76,525 950
expenses
Credit facility interest 72,834 308,523
Net foreign exchange 6 734,926 (1,679,501)
losses / (gains)
Total operating expenses 5,424,353 2,592,848
Operating profit for the 26,564,407 25,251,292
year before tax
Taxation 20 2,120 3,022
Operating profit for the 26,562,287 25,248,270
year and total
comprehensive income
Other comprehensive
income
Items that may be
reclassified to profit or
loss
Exchange differences on 2,484 -
translation of foreign
operations
Other comprehensive 2,484 -
income for the year
Total comprehensive 26,564,771 25,248,270
income for the year
Weighted average number 7 375,019,398 332,051,239
of shares in issue
Basic and diluted 7 7.08 7.60
earnings per Ordinary
Share (pence)
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Financial Position
as at 31 December 2017
Notes 31 December 2017 31 December 2016
GBP GBP
Assets
Cash and cash 8 11,750,356 31,018,181
equivalents
Other receivables and 9 378,103 53,381
prepayments
Credit facility 12 1,433,462 28,846
capitalised costs
Financial assets at fair 11 22,112,820 -
value through profit or
loss
Loans advanced 10 369,955,983 359,876,862
Total assets 405,630,724 390,977,270
Liabilities
Financial liabilities at 11 6,726,268 9,156,088
fair value through
profit or loss
Credit facility 12 13,338,329 -
Trade and other payables 13 2,426,591 870,156
Total liabilities 22,491,188 10,026,244
Net assets 383,139,536 380,951,026
Capital and reserves
Share capital 15 371,929,982 371,929,982
Retained earnings 11,207,070 9,021,044
Translation reserve 2,484 -
Total equity 383,139,536 380,951,026
Number of Ordinary 15 375,019,398 375,019,398
Shares in issue
Net asset value per 102.17 101.58
Ordinary Share (pence)
These consolidated financial statements were approved and authorised for
issue by the Board of Directors on 26 March 2018, and signed on its behalf
by:
Chairman Director
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2017
Year ended 31 December 2017
Retained Translation
Share earnings reserves Total
capital Equity
GBP GBP
Balance at 1 371,929,982 9,021,044 - 380,951,026
January 2017
Issue of share - - - -
capital
Cost of issues - - - -
Dividends paid - (24,376,261) - (24,376,261
)
Operating - 26,562,287 - 26,562,287
profit for the
year
Other
comprehensive
income:
Other - - 2,484 2,484
comprehensive
income for the
year
Balance at 31 371,929,982 11,207,070 2,484 383,139,536
December 2017
Year ended 31
December 2016
Retained Translation
Share earnings reserves Total
capital Equity
GBP GBP GBP GBP
Balance at 1 300,397,205 5,075,839 - 305,473,044
January 2016
Issue of share 73,000,000 - - 73,000,000
capital
Cost of issues (1,467,223) - - (1,467,223)
Dividends paid - (21,303,065) - (21,303,065
)
Operating - 25,248,270 - 25,248,270
profit for the
year
Balance at 31 371,929,982 9,021,044 - 380,951,026
December 2016
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2017
1 January 2017 to 1 January 2016 to
31 December 2017 31 December 2016
GBP GBP
Operating activities:
Operating profit for the 26,562,287 25,248,270
year
Adjustments:
Net interest income (31,969,225) (27,826,368)
Interest income on cash and (19,535) (17,195)
cash equivalents
Decrease in prepayments and 21,871 42,303
receivables
Increase in trade and other 55,234 54,704
payables
Net (gains) / losses on (2,429,820) 15,074,203
financial instruments held
at fair value through profit
or loss
Net foreign exchange gains (5,104,358) (18,256,954)
Credit facility interest 72,834 308,523
Credit facility amortisation 195,327 221,002
of fees
Credit facility commitment 359,000 324,040
fees
(12,256,385) (4,827,472)
Loans advanced1 (215,175,030) (168,567,654)
Loans repaid 213,114,663 129,269,039
Origination fees paid3 (1,668,811) (1,316,353)
Origination expenses paid (23,273) -
Interest, commitment and 30,171,530 33,855,722
exit fee income from loans
advanced
Acquisition of financial (21,773,000) -
assets at fair value through
profit or loss
Net cash outflow from (7,610,306) (11,586,718)
operating activities
Cash flows from investing
activities
Interest income from cash 19,535 17,195
and cash equivalents
Net cash inflow from 19,535 17,195
investing activities
Cash flows from financing
activities
Net share issue proceeds - 71,532,777
received2
Credit facility arrangement (451,632) (37,500)
fees and expenses paid
Credit facility utilised / 13,284,000 (8,155,816)
(repaid)
Credit facility interest (65,005) (315,112)
paid
Credit facility commitment (281,939) (314,671)
fees paid
Dividends paid (24,376,261) (21,303,065)
Net cash (outflow) / inflow (11,890,837) 41,406,613
from financing activities
Net (decrease) / increase in (19,481,608) 29,837,090
cash and cash equivalents
Cash and cash equivalents at 31,018,181 520,558
the start of the year
Net foreign exchange gains 213,783 660,533
on cash and cash equivalents
Cash and cash equivalents at 11,750,356 31,018,181
the end of the year
1 Net of arrangement fees of GBP2,679,765 (2016: GBP2,212,322) withheld.
2 Net of share issue costs of GBPnil (2016: GBP1,467,223) withheld.
3 Including CLNs origination fees of GBP288,150.
The accompanying notes form an integral part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2017
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (the "Company") was
incorporated with limited liability in Guernsey under the Companies
(Guernsey) Law, 2008, as amended, on 9 November 2012 with registered number
55836, and has been authorised by the Guernsey Financial Services Commission
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 IPO, 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 IPO which completed on 17 December 2012. A further GBP9.9 million of net
proceeds was raised via tap issues throughout the period ended 31 December
2013 and GBP66.6 million for the year ended 31 December 2015. On 10 August
2016 the Company issued a further 70,839,398 Ordinary Shares raising net
proceeds of GBP71.5 million.
The Group structure was re-organised on 6 October 2017. As a result of the
re-organisation Starfin Public GP Limited and Starfin Public LP were
liquidated, two new subsidiaries were set up in Guernsey, Starfin Public
Holdco 1 Limited and Starfin Public Holdco 2 Limited, and two new
sub-subsidiaries established in Luxembourg, Starfin Lux 3 S.à.r.l and
Starfin Lux 4 S.à.r.l.
The consolidated financial statements comprise the financial statements of
the Company, Starfin Public GP Limited (the "GP"), Starfin Public LP (the
"Partnership"), Starfin Public Holdco 1 Limited (the "Holdco 1"), Starfin
Public Holdco 2 Limited (the "Holdco 2"), Starfin Lux S.à.r.l ("Luxco"),
Starfin Lux 3 S.à.r.l ("Luxco 3") and Starfin Lux 4 S.à.r.l ("Luxco 4")
(together the "Group") as at 31 December 2017.
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 wider European Union's internal market. To pursue
its investment objective, the Company, through the Holdco 1 and Holdco 2
(the "Holdcos"), invests in the Luxco, Luxco 3 and Luxco 4 (the "Luxcos")
through both equity and profit participation instruments or other funding
instruments. The Luxcos then grant or acquire loans (or other debt
instruments) to borrowers in accordance with the Group's investment policy.
The Group expects all of its investments to be debt obligations of corporate
entities domiciled or with significant operations in the United Kingdom and
wider European Union's internal market.
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. 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 years presented, unless otherwise stated.
a) Going Concern
Note 17 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 and available liquidity facilities 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 at least one year from
the date the consolidated financial statements were signed. Accordingly, the
Directors continue to adopt a going concern basis in preparing these
consolidated financial statements.
b) 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 as adopted by the European Union ("IFRS"),
which comprise standards and interpretations approved by the International
Accounting Standards Boards ("IASB") together with the interpretations of
the IFRS 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 and not separate financial statements
for the year.
(i) Standards and amendments to existing standards effective 1 January 2017
Amendments to IAS 7, "Statement of Cash Flows" became effective for annual
periods beginning on or after 1 January 2017. These amendments require an
entity to provide disclosures that enable users of financial statements to
evaluate changes in liabilities arising from financing activities, including
both changes arising from cash flows and non-cash changes. The changes in
liabilities arising from financing activities as required by the Amendments
to IAS 7 are disclosed in Note 12.
There are no other standards, amendments to standards or interpretations
that are effective for annual periods beginning on 1 January 2017 that have
a material effect on the financial statements of the Group.
(ii) New standards, amendments and interpretations effective after 1 January
2017 and have not been early adopted
New standards Effective date
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 9 "Financial Instruments" addresses the classification, measurement and
recognition of financial assets and liabilities. It replaces the multiple
classification and measurement models in IAS 39 and is effective for
reporting periods beginning on or after 1 January 2018.
The Group does not anticipate that IFRS 9 will have a material impact on the
financial statements for the following reasons:
* The majority of the Group's investments will continue to be recognised at
amortised cost as they are financial assets with terms that give rise to
interest and principal cash flows only and they are held in a business model
whose objective is to hold financial assets to collect their cash flow;
* The Group does not currently apply hedge accounting. Foreign exchange
derivatives are measured at fair value through profit or loss and this
treatment is expected to continue under IFRS 9;
* Credit linked notes are measured at fair value through profit or loss and
this treatment will also be applied under IFRS 9;
* Due to the detailed underwriting process, strong security packages in
place and significant loan-to-value headroom on each of the Group's loans,
in most circumstances it is not expect to recognise expected credit losses
("ECL") on the majority of the Group's portfolio, either at initial
recognition or during the life of the loans.
IFRS 15 "Revenue from Contracts with Customers" replaces IAS 18 which covers
contracts for goods and services and IAS 11 which covers construction
contracts. The new standard is based on the principle that revenue is
recognised when control of a good or service transfers to a customer, so the
notion of control replaces the existing notion of risks and rewards. The
Group does not expect IFRS 15 will have a material effect on the financial
statements.
In addition to the above, a number of new standards, amendments to standards
and interpretations are effective for annual periods beginning after 1
January 2017, and have not been applied in preparing these financial
statements. None of these are expected to have a material effect on the
financial statements of the Group.
c) 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 Group'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:
(i) Critical accounting estimates and assumptions
* Models used for loans accounted at amortised cost use assumptions and
estimates of the receipt of and estimated timing of scheduled and
unscheduled pre-payments of loans advanced. Changes in these assumptions and
estimates could impact on liquidity risk and the interest income (see note
17).
* The discounted cash flow models used to calculate the fair value of the
credit linked notes involves approximates and estimates of the timing of
cash flows and uses significant unobservable inputs that will directly
impact the valuation of financial assets at fair value through profit or
loss (see note 11).
(ii) Critical judgements
* 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 2(h)).
* The functional currency of subsidiary undertakings of the Company, which
is considered by the Directors to be Euro for Luxco 3; Sterling for all
other subsidiaries (see notes 2(e) and 2(k)).
* 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, being the provision of a diversified portfolio of real
estate backed loans (see note 2(f)).
* The syndication of loans, and the assessment of how the syndicated
facility should be treated under the relevant accounting standards. The key
area of judgement being whether substantially all of the risks and rewards
of ownership have transferred to the transferee and whether the syndicated
loan is derecognised or not (see note 2(g)).
* The credit linked notes fair value at the end of the current reporting
period, the key area of judgement being that the fair value has been deemed
to be equal to the transaction price of the CLN investment given the
proximity of closing of the transaction close to the end of the reporting
period and no significant market movements or changes to the underlying
reference portfolio in the gap period from purchase date of the CLNs to the
year end.
* The valuation of the credit linked notes for subsequent periods will be
derived from a model prepared by the Investment Adviser. The main inputs
into the valuation model for the CLNs are discount rates, market risk
factors, probabilities of default, expected credit loss levels and cash flow
forecasts. The key area of judgement would be the methodology and approach
to model the fair value of credit linked notes.
d) 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 end of the reporting period. Control is
achieved where the Company has the power to govern the financial and
operating policies of an investee entity so as to obtain benefits directly
from its activities. The existence and effect of potential voting rights
that are currently exercisable or convertible are considered when assessing
whether the Company controls another entity. The Company also assesses
existence of control where it does not have more than 50 per cent of the
voting power but is able to govern the financial and operating policies by
virtue of de-facto control.
Subsidiary undertakings 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.
Acquisition-related costs are expensed as incurred unless directly
attributable to the acquisition. 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.
Intercompany transactions, balances, income and expenses on transactions
between Group companies are eliminated on consolidation. Profits and losses
resulting from intercompany transactions that are recognised in assets are
also eliminated.
Principal
Date of Ownership Country of place of
Subsidiary Control % Establishment business
undertakings
Starfin Public GP 20/11/12 100 Guernsey Guernsey
Limited1
Starfin Public LP1 22/11/12 100 Guernsey Guernsey
Starfin Lux S.à.r.l 30/11/12 100 Luxembourg Luxembourg
Starfin Public 11/09/17 100 Guernsey Guernsey
Holdco 1 Limited
Starfin Public 11/09/17 100 Guernsey Guernsey
Holdco 2 Limited
Starfin Lux 3 19/09/17 100 Luxembourg Luxembourg
S.à.r.l
Starfin Lux 4 11/12/17 100 Luxembourg Luxembourg
S.à.r.l
(1) Starfin Public GP Limited and Starfin Public LP entered into voluntarily dissolution on 5 December 2017, date when a liquidator was appointed and the Group ceased to control the subsidiaries. e) 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"). Therefore the Directors have considered in assessing the functional currency of each of the Group's entities: * the share capital of all members of the Group is denominated in Sterling except for Lux 3 share capital which is denominated in Euro; * the dividends are paid in Sterling; * Euro non-investment transactions represent only a small proportion of transactions in the Luxembourg entities; The functional and presentation currency of each Group entity is Sterling, apart from Starfin Lux 3 S.à.r.l for which the functional currency is Euro. Starfin Lux 3 S.a.r.l holds loans and investments in Euro currencies. The Directors have also adopted Sterling as the Group's presentation currency and therefore the consolidated financial statements for the Company are presented in Sterling. f) 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. g) Financial assets and liabilities 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 have two sub-categories: derivatives not designated as hedges and debt securities, comprising of credit linked notes, which are evaluated on a fair value basis. 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 after 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. Financial assets not carried at fair value through profit or loss are initially recognised at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the Consolidated Statement of Comprehensive Income. Financial assets at fair value through profit or loss and available-for-sale financial assets 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. 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. Financial liabilities are derecognised when they are extinguished, that is, when the obligation specified in the contract is discharged or cancelled or expires. Gains and losses arising from changes in the fair value of the debt securities which are evaluated on a fair value basis are presented in the Consolidated Statement of Comprehensive Income within "net changes in fair value of financial assets and liabilities at fair value through profit or loss" in the period in which they arise. Interest on debt securities at fair value through profit or loss are recognised in the Consolidated Statement of Comprehensive Income within interest income based on the effective interest rate. Fair value estimation The fair value of financial assets and liabilities, which comprise financial instruments such as debt securities, not traded in an active market, is determined using valuation techniques. The fair value of the CLNs will be determined by the Investment Adviser using a valuation model. The main inputs into the valuation model for the CLNs are discount rates, market risk premium adjustments to the discount rate, probabilities of default and cash flow forecasts. The Investment Adviser also performs a full analysis of the performance of each underlying loan and with reference to other inputs such as third party valuations of the underlying collateral. The fair value of financial assets and liabilities, which comprise derivatives not designated as hedges, are valued based on the difference between the agreed price of selling or buying the financial instruments on a future date and the price quoted on the year end date for selling or buying the same or similar financial instruments. Loan syndication Loans and receivables measured at amortised cost are derecognised following syndication if the risks and rewards of ownership have substantially transferred to the counterparty. Transaction costs of syndications are recognised in the Consolidated Statement of Comprehensive Income when incurred. h) Impairment of financial assets Impairments for specific bad and doubtful debts are made against loans and receivables, by an evaluation of the exposure on a case-by-case basis. An assessment is made, on a quarterly basis, as to whether there is any indication that a loan may be impaired; if any such indication exists and where the carrying value exceeds the estimated recoverable amount based on revised future cash flows, the loan will be reduced by the estimated impairment loss. The impairment loss is calculated as the difference between the present value of future cash flows, discounted at the loan's original effective interest rate, and the loan's current carrying value. The amount of any impairment loss, if any, would be recorded in the Consolidated Statement of Comprehensive Income. No impairment has been recognised to date. i) Cash and cash equivalents In the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. j) Share capital Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of new Ordinary Shares are shown in equity as a deduction, net of tax, from the proceeds. k) Foreign currency translation Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents and all other foreign exchange gains and losses are presented in the Consolidated Statement of Comprehensive Income within "net foreign exchange losses/(gains)". Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency of the Group are translated into the presentation currency of the Group as follows: i. assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the end of the reporting period; ii. income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and iii. all resulting exchange differences are recognised in other comprehensive income. The cumulative amount of translation exchange differences is presented in a separate component of equity until disposal of the entity. Starfin Lux 3 S.à.r.l has Euro as its functional currency. l) Interest income Interest income on loans advanced is recognised using the effective interest rate method. If a loan or receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate to the extent that the Group expects to recover the interest receivable.
Interest on cash and cash equivalents is recognised on an accruals basis.
m) Origination, exit and loan arrangement fees
Origination fees paid to the Investment Manager and exit and direct loan
arrangement fees received will be recognised using the effective interest
rate method under loans advanced and amortised over the lifetime of the
related financial asset through income from loans advanced in the
Consolidated Statement of Comprehensive Income. Syndication costs are
recognised in the Consolidated Statement of Comprehensive Income when
incurred.
n) Expenses
All other expenses are included in the Consolidated Statement of
Comprehensive Income on an accruals basis.
o) Taxation
The Company is a tax-exempt Guernsey limited liability company as it is
domiciled and registered for taxation purposes in Guernsey where it pays an
annual exempt status fee under The Income Tax (Exempt Bodies) (Guernsey)
Ordinances 1989 (as amended). Accordingly, no provision for Guernsey tax is
made.
The Holdcos are exempted for Guernsey tax purposes, and therefore no
provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations in
Luxembourg and taxation is provided based on the results for the year (see
note 20).
p) Other receivables
Trade and other receivables are amounts due in the ordinary course of
business. They are classified as assets. Trade and other receivables are
recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method, less provision for impairment.
q) Other payables
Trade and other payables are obligations to pay for services that have been
acquired in the ordinary course of business. They are classified as
liabilities. Trade and other payables are recognised initially at fair value
and subsequently measured at amortised cost using the effective interest
rate method.
r) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as a
liability in the Company's financial statements in the period in which the
dividends are declared by the Board of Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported on
the Consolidated Statement of Financial Position when there is a legally
enforceable right to offset the recognised amounts and there is an intention
to settle on a net basis or realise the asset and settle the liability
simultaneously.
t) Financial liabilities
Financial liabilities, including bank loans are initially recognised at fair
value and subsequently accounted for with interest on an accruals basis.
Financial liabilities are derecognised when the contractual obligation is
discharged, cancelled or expires.
u) Capitalised expenses on credit facilities
Expenses in connection with the process of originating, prolongation, or
restructuring of a credit facility, such as application and underwriting
fees, are capitalised and subsequently amortised over the period of the
relevant credit facility in the Consolidated Statement of Comprehensive
Income within "credit facility amortisation of fees".
3. MATERIAL AGREEMENTS
a) Investment management agreement
The Company and the Investment Manager have entered into an investment
management agreement, dated 28 November 2012 (the "Investment Management
Agreement"), (which was amended on 7 March 2014, 14 May 2014, 7 September
2015 and 6 October 2017) pursuant to which the Investment Manager has been
given overall responsibility for the discretionary management of the
Company's assets in accordance with the Company's investment objectives and
policy.
The Investment Manager is entitled to a management fee which is calculated
and accrued monthly at a rate equivalent to 0.75 per cent per annum of NAV.
In calculating such fee, there shall be excluded from the Net Asset Value
attributable to the Ordinary Shares the uninvested portion of the cash
proceeds of any new issue of Shares (or C Shares) until at least 90 per cent
of such proceeds are invested in accordance with the Company's investment
policy (or deployed to repay borrowings under any credit facility of the
Group or other liabilities of the Group) for the first time. The management
fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset origination fee
of 0.75 per cent of the value of all new loan investments made or acquired
by the Group (see note 22). The asset origination fee to be paid by the
Group is expected to be paid upon receipt by the Group of loan arrangement
fees received on the deployment of the Group's funds.
The Investment Management Agreement is terminable by either the Investment
Manager or the Company giving to the other not less than 12 months' written
notice. The Company is also able to terminate the appointment of the
Investment Manager in the event of a change of control of the Investment
Manager. A change of control shall be deemed to occur where a person
acquires a direct or indirect interest in the Investment Manager, which is
calculated by reference to 15 per cent or more of the voting rights. In
addition the Investment Management Agreement can be terminated by the
Company for any failure to act in good faith with the due skill, care and
diligence which would reasonably be expected from an experienced manager in
the sector and to exercise appropriate prudence in the management of the
Group's portfolio.
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.
During the year the Investment Manager's performance entitlements were
changed. This entitlement was previously part of the Amended and Restated
Limited Partnership Agreement relating to Starfin Public LP, dated 28
November 2012, (the "Partnership Agreement") but is now incorporated within
the Investment Management Agreement and Starfin Public LP has been
dissolved.
The provisions relating to the performance fee will apply from 1 January
2018 and no performance fee was due in relation to prior periods. As with
the Partnership Agreement, the amount of such Performance Fee is 20 per cent
of the excess (if any) of the returns generated by the Group over the Hurdle
Total Return (described below). In addition, however, the measurement period
over which the Performance Fee is calculated was shortened from fiive years
under the Partnership Agreement to two years, with the payment of any
performance fee earned being made at the end of each such two year period.
The other material terms of the Partnership Agreement were substantially
grandfathered into the performance fee within the Investment Management
Agreement (with appropriate changes to refllect the modifiication from a
limited partnership interest to a contractual payment mechanism under the
Investment Management Agreement).
The Hurdle Total Return will be achieved when the NAV of the Company at the
end of the two year period, plus the total of all dividends declared and
paid to Ordinary Shareholders in that two year period, is equal to the NAV
of the Company at the start of each two year measurement period, as
increased by 8 per cent per annum, on a simple interest basis (but excluding
performance fees accrued and deemed as a creditor on the balance sheet at
the start of the two year measurement period). No performance fee will be
payable in relation to performance that recoups previous losses (if any).
b) Administration agreement
The Company has engaged the services of Ipes (Guernsey) Limited (the
"Administrator") to act as Administrator and Company Secretary. Under the
terms of the administration agreement dated 28 November 2012, the
Administrator is entitled to a fee of no less than GBP135,000 per annum with
an additional amount chargeable of 0.035 per cent per annum on the amount by
which the Company's NAV exceeds GBP140 million and further amounts as may be
agreed in relation to any additional services provided by the Administrator.
The Administrator is, in addition, entitled to recover third party expenses
and disbursements.
c) 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.
d) Brokerage agreement
On 21 March 2018, the Company appointed Stifel Nicolaus Europe Limited
("Stifel") to act as Broker to the Group. Stifel is entitled to receive a
fee of GBP50,000 per annum plus expenses. The previous brokerage agreement
with Fidante Partners Europe Limited was terminated on 19 March 2018.
e) 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.
f) Hedging agreements
The Company and Lloyds Bank plc entered into an international forward
exchange master agreement dated 5 April 2013 and on 7 February 2014 the
Company entered into a Professional Client Agreement with Goldman Sachs,
pursuant to which the parties can enter into foreign exchange transactions
with the intention of hedging against fluctuations in the exchange rate
between Sterling and other currencies. Both agreements are governed by the
laws of England and Wales.
g) Revolving credit facility
Under its investment policy, the Company is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Company's borrowings for this purpose, any liabilities
incurred under the Company's foreign exchange hedging arrangements shall be
disregarded.
On 4 December 2014, the Company entered into a GBP50 million revolving credit
facility with a major UK clearing bank which is intended for short-term
liquidity. This facility was amended and extended on 22 December 2015, 28
October 2016 and 6 October 2017. The current maturity date is 6 October
2018. The facility is secured by a pledge over the bank accounts of the
Company, its interests in Starfin Public Holdco 1 Limited and the
intercompany funding provided by the Company to Starfin Public Holdco 1
Limited. Starfin Public Holdco 1 Limited also acts as guarantor of the
facility and has pledged its bank accounts as collateral. The undertakings
and events of default are customary for a transaction of this nature.
On 18 December 2017, the Group entered into a new GBP64 million secured
borrowing facility with Morgan Stanley (the "MS Facility"). The debt can be
drawn in respect of underlying loans which are eligible under the facility.
Certain loans will not be eligible, for example mezzanine loans and loans
above 75 per cent loan to value. It is secured by a customary security
package of bank account pledges, intercompany receivables security, share
security over the two borrower entities (Starfin Lux 3 S.à.r.l and Starfin
Lux 4 S.à.r.l) and their shares. The MS Facility does not have recourse to
the Company. The undertakings and events of default are customary for a
facility of this nature.
4. DIRECTORS' FEES
31 December 31 December
2017 2016
GBP GBP
Directors' emoluments 122,500 122,500
Other expenses 2,916 2,307
125,416 124,807
5. AUDIT AND NON-AUDIT FEES
31 December 2017 31 December
2016
GBP GBP
Audit and non-audit fees expensed in the
Consolidated Statement of Comprehensive Income
Audit of company 87,600 62,750
Audit of subsidiaries 62,788 48,220
Total audit 150,388 110,970
Audit related assurance 20,500 20,000
services (Interim review)
Other assurance services 18,000 -
Total assurance services 188,888 130,970
Other non-audit services not 15,721 -
covered above
Total other non-audit services 15,721 -
Total non-audit services 15,721 -
Total fees expensed 204,609 130,970
Audit and non-audit fees not expensed into
Consolidated Statement of Comprehensive income
Assurance services
Placing programme (Equity - 5,000
raising)
Total assurance services 5,000
Tax compliance services (i.e.
related to assistance with
corporate restructuring)
Tax advisory services 150,000 -
Total non-audit services 150,000 -
Auditor's other assurance expenses of GBP18,000 incurred during the year
(2016: GBPnil) relate to Auditor's work on the Investment Circular. Auditor's
professional services in relation to the Placing Programme of GBPnil (2016:
GBP5,000) were recognised in the Consolidated Statement of Changes in Equity
as Cost of Issues. Non-audit fees of GBP150,000 (2016: GBPnil) relate to the
Group's restructuring and refinancing and these were capitalised to
revolving credit facility costs.
6. NET FOREIGN EXCHANGE (LOSSES)/GAINS
31 December 2017 31 December 2016
GBP GBP
Loans advanced gains 12,830,447 3,289,183
(realised)
Loans advanced losses (670,240) (2,309,471)
(realised)
Forward contracts gains 191,365 1,201,629
(realised)
Forward contracts losses (8,459,530) (1,942,172)
(realised)
Other gains (realised) 210,388 800,094
Other losses (realised) (46,526) (901,618)
Loans advanced gains 3,033,221 16,616,059
(unrealised)
Loans advanced losses (10,253,871) -
(unrealised)
Forward contracts gains 7,473,888 359,219
(unrealised)
Forward contracts losses (5,044,068) (15,433,422)
(unrealised)
(734,926) 1,679,501
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 GBP26,562,287 (2016: GBP25,248,270) and on the weighted
average number of Ordinary Shares in issue during the year of 375,019,398
(2016: 332,051,239) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of GBP383,139,536
(2016: GBP380,951,026) and the actual number of Ordinary Shares in issue at 31
December 2017 of 375,019,398 (2016: 375,019,398).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2017 31 December 2016
GBP GBP
Cash at bank 11,750,356 31,018,181
11,750,356 31,018,181
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
17.
9. OTHER RECEIVABLES AND PREPAYMENTS
31 December 2017 31 December 2016
GBP GBP
Arrangement fees receivable 346,593 -
Prepayments 31,510 38,131
Sundry debtors - 15,250
378,103 53,381
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial assets is
discussed in note 2(g).
31 December 2017 31 December 2016
GBP GBP
UK
Regional Hotel Portfolio, UK 46,329,933 -
Hotel, Channel Islands 27,262,859 27,096,842
Centre Point, London 26,379,420 45,599,157
Industrial Portfolio, UK 26,039,509 32,177,066
Hospitals, UK 25,356,064 25,354,320
Mixed Use Development, South 10,886,017 8,063,336
East UK
Varde Partners Mixed 9,235,610 25,037,555
Portfolio, UK
Regional Budget Hotel - 74,998,597
Portfolio, UK
5 Star Hotel, London - 12,962,754
Center Parcs Bonds, UK - 9,796,319
Ireland
School, Dublin 17,111,265 -
Logistics, Dublin 13,077,887 12,714,596
Residential Portfolio, Dublin 6,947,895 6,750,309
Residential Portfolio, Cork 5,437,250 5,263,215
Retail and Residential - 3,687,359
Portfolio
Spain
Hotel, Barcelona 41,042,007 -
Shopping Centres, Spain 30,860,627 -
France
Office Building, Paris 22,969,095 -
Central and Eastern Europe
Industrial Portfolio, Europe 61,020,545 -
Netherlands
Office - 12,058,598
Industrial Portfolio - 22,624,425
Denmark
Industrial Portfolio - 35,692,414
369,955,983 359,876,862
No element of loans advanced are past due or impaired. For further
information and the associated risks see the Investment Manager's Report.
The table below reconciles the movement of the carrying value of loans
advanced in the year:
31 December 2017 31 December 2016
GBP GBP
Loans advanced at the start of 359,876,862 307,694,827
the year
Loans advanced 217,854,795 170,779,976
Loans repaid (213,114,663) (129,269,039)
Arrangement fees earned (3,026,358) (2,212,322)
Commitment fees earned (297,117) (112,404)
Accrued interest - (474,589)
(received)/purchased on loan
acquisition
Exit fees earned (1,662,413) (2,624,796)
Origination fees for the year 1,656,491 1,316,353
Origination expenses paid 23,273 -
Effective interest income 31,917,555 27,826,368
earned
Interest payments (28,212,000) (30,643,933)
received/accrued
Foreign exchange 4,939,558 17,596,421
gains/(losses)
Loans advanced at the end of 369,955,983 359,876,862
the year
Loans advanced at fair value 382,689,045 382,064,552
For further information on the fair value of loans advanced, refer to note
18.
11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise currency
forward contracts which represent contractual obligations to purchase
domestic currency and sell foreign currency on a future date at a specified
price and financial instruments designated at fair value through profit and
loss which are debt securities that are managed by the Group and their
performance is evaluated on a fair value basis.
The underlying instruments of currency forwards become favourable (assets)
or unfavourable (liabilities) as a result of fluctuations of foreign
exchange rates relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which
instruments are favourable or unfavourable, and thus the aggregate fair
values of derivative financial assets and liabilities, can fluctuate
significantly from time to time.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Notional
contract Fair values
31 December 2017 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through profit or
loss
Credit Linked N/A 22,112,820 - 22,112,820
Notes, UK Real
Estate
Total - 22,112,820 - 22,112,820
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 198,329,630 17,858 (6,726,062) (6,708,204)
Goldman Sachs 945,136 - (18,064) (18,064)
Total 199,274,766 17,858 (6,744,126) (6,726,268)
1 Euro amounts are translated at the
year end exchange rate
Notional
contract Fair values
31 December 2016 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through profit or
loss
Credit Linked N/A - - -
Notes, UK Real
Estate
Total - - - -
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 89,622,755 99,549 (8,533,965) (8,434,416)
Goldman Sachs 16,225,478 - (721,672) (721,672)
Total 105,848,233 99,549 (9,255,637) (9,156,088)
1 Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Company is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Company's borrowings for this purpose, any liabilities
incurred under the Company's foreign exchange hedging arrangements shall be
disregarded. The Group has two credit facilities as described in note 3(g)
of these financial statements.
As at 31 December 2017 an amount of GBP13,330,500 (2016: GBPnil) was drawn and
interest of GBP7,829 (2016: GBP nil) was payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities.
The changes in liabilities arising from financing activities as required by
the Amendments to IAS 7 are shown in the below table.
Revolving Credit Facility
2017 2016
Borrowings as at 1 January - (8,162,405)
Proceeds (34,784,000) (45,954,376)
Repayments 21,500,000 55,010,900
Interest accrued (72,834) (308,523)
Interest paid 65,005 315,112
Foreign exchange (46,500) (900,708)
Borrowings as at 31 December (13,338,329) -
13. TRADE AND OTHER PAYABLES
31 December 2017 31 December 2016
GBP GBP
Refinancing and restructuring 1,148,310 -
fees payable
Investment management fees 713,498 716,308
payable
Origination fees payable 275,830 -
Administration fees payable 109,354 67,329
Revolver commitment fees 106,979 29,918
payable
Audit fees payable 72,620 56,601
2,426,591 870,156
14. COMMITMENTS
As at 31 December 2017 the Company had outstanding commitments in respect of
loans not fully drawn of GBP11,305,160 (2016: GBP6,851,061).
As at 31 December 2017 the Company has entered into forward contracts under
the Hedging Master Agreement with Lloyds Bank plc to sell EUR223,168,257
(2016: EUR59,886,719) and Kr nil (2016: Kr333,042,060) to receive Sterling.
At the end of the reporting period, these forward contracts have a fair
value of GBP6,708,204 liability (2016: GBP8,434,416 liability).
As at 31 December 2017 the Company has entered into forward contracts under
the Professional Client Agreement with Goldman Sachs to sell EUR1,063,504
(2016: EUR18,932,880) and receive Sterling. At the end of the reporting
period, these forward contracts have a fair value of GBP18,064 liability
(2016: GBP721,672 liability).
15. SHARE CAPITAL
The share capital of the Company consists of an unlimited number of
redeemable Ordinary Shares of no par value which upon issue the Directors
may classify into such classes as they may determine. The Ordinary Shares
are redeemable at the discretion of the Board.
At the year end the Company had issued and fully paid up share capital as
follows:
31 December 2017 31 December 2016
GBP GBP
Ordinary Shares of no par 375,019,398 375,019,398
value Issued and fully paid
Rights attached to shares
The Company's share capital is denominated in Sterling. At any general
meeting of the Company each ordinary share carries one vote. The Ordinary
Shares also carry the right to receive all income of the Company
attributable to the Ordinary Shares, and to participate in any distribution
of such income made by the Company, such income shall be divided pari passu
among the holders of Ordinary Shares in proportion to the number of Ordinary
Shares held by them.
Significant share movements
1 January 2017 to 31 December 2017:
Ordinary Shares Number GBP
Balance at start of the year 375,019,398 379,480,650
Shares issued in 2017 - -
Balance at the end of the year 375,019,398 379,480,650
Issue costs to date (7,550,668)
Net proceeds 371,929,982
1 January 2016 to 31 December 2016:
Ordinary Shares Number GBP
Balance at start of the year 304,180,000 306,480,650
Shares issued on 12 August 2016 70,839,398 73,000,000
Balance at the end of the year 375,019,398 379,480,650
Issue costs to date (7,550,668)
Net proceeds 371,929,982
16. DIVIDS
Dividends will be declared by the Directors and paid in compliance with the
solvency test prescribed by Guernsey law. Under Guernsey law, companies can
pay dividends in excess of accounting profit provided they satisfy the
solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency
test considers whether a company is able to pay its debts when they fall
due, and whether the value of a company's assets is greater than its
liabilities. The Company passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the Company and the
investment outlook, it is the Directors' intention to pay quarterly
dividends to shareholders (for more information see Chairman's Statement).
The Company paid the following dividends in respect of the year to 31
December 2017:
Dividend rate Net dividend
per
Period to: Share (pence) paid (GBP) Payment date
31 March 2017 1.625 6,094,065 16 May 2017
30 June 2017 1.625 6,094,065 25 August 2017
30 September 2017 1.625 6,094,065 17 November
2017
After the end of the year, the Directors declared a dividend in respect of
the financial year ended 31 December 2017 of 1.625 pence per share,
GBP6,094,065 to be paid as at 23 February 2018 to shareholders on the register
as at 9 February 2018.
The Company paid the following dividends in respect of the year to 31
December 2016:
Dividend rate Net dividend
per
Period to: Share (pence) paid (GBP) Payment date
31 March 2016 1.625 4,942,925 19 May 2016
30 June 2016 1.625 4,942,925 25 August 2016
30 September 2016 1.625 6,094,065 4 November 2016
31 December 2016 1.625 6,094,065 17 February
2017
17. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated loans,
mezzanine loans, bridge loans, loan-on-loan financings and other debt
instruments is exposed to a variety of financial risks, including market
risk (including currency risk and interest rate risk), credit risk and
liquidity risk. The Group's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential
adverse effects on the Group's financial performance.
It is the role of the Board to review and manage all risks associated with
the Group, mitigating these either directly or through the delegation of
certain responsibilities to the Audit Committee, Investment Manager and
Investment Adviser.
The Board of Directors has established procedures for monitoring and
controlling risk. The Group has investment guidelines that set out its
overall business strategies, its tolerance for risk and its general risk
management philosophy.
In addition, the Investment Manager monitors and measures the overall risk
bearing capacity in relation to the aggregate risk exposure across all risk
types and activities. Further details regarding these policies are set out
below:
i) Market risk
Market risk includes market price risk, currency risk and interest rate
risk. If a borrower defaults on a loan and the real estate market enters a
downturn it could materially and adversely affect the value of the
collateral over which loans are secured. However, this risk is considered by
the Board to constitute credit risk as it relates to the borrower defaulting
on the loan and not directly to any movements in the real estate market. The
Group considers that there is no material market price risk at the end of
the reporting period for CLNs due to the CLNs investments having been
acquired close to the year end and the Directors' assessment that there are
no significant market movements in the gap period to the year end.
The Investment Manager moderates market risk through a careful selection of
loans within specified limits. The Group's overall market position is
monitored by the Investment Manager and is reviewed by the Board of
Directors on an ongoing basis.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in loans
that are denominated in currencies other than the functional currency of the
Company. Consequently the Group is exposed to risks arising from foreign
exchange rate fluctuations in respect of these loans and other assets and
liabilities which relate to currency flows from revenues and expenses.
Exposure to foreign currency risk is hedged and monitored by the Investment
Manager on an on-going basis and is reported to the Board accordingly.
The Company and Lloyds Bank plc entered into an international forward
exchange master agreement dated 5 April 2013 and on 7 February 2014 the
Company entered into a Professional Client Agreement with Goldman Sachs,
pursuant to which the parties can enter into foreign exchange transactions
with the intention of hedging against fluctuations in the exchange rate
between Sterling and other currencies. The Company does not trade in
derivatives but holds them to hedge specific exposures and have maturities
designed to match the exposures they are hedging. The derivatives are held
at fair value which represents the replacement cost of the instruments at
the Consolidated Statement of Financial Position date and movements in the
fair value are included in the Consolidated Statement of Comprehensive
Income under net foreign exchange losses/(gains). The Company does not adopt
hedge accounting in the financial statements. At the end of the reporting
period the Company had 114 (2016: 106) open forward contracts.
As at 31 December 2017 the Company had the following currency exposure:
Danish Krone Sterling Euro Total
31 December GBP GBP GBP GBP
2017
Assets
Loans - 171,489,412 198,466,571 369,955,983
advanced
Financial - 22,112,820 - 22,112,820
assets at
fair value
through
profit or
loss
Other - 31,510 346,593 378,103
receivables
and
prepayments
Cash and cash (2,618) 11,297,839 455,135 11,750,356
equivalents
Liabilities
Financial - (6,726,268) - (6,726,268)
liabilities
at fair value
through
profit or
loss
Revolving - - (13,338,329) (13,338,329)
credit
facility
Trade and - (297,883) (2,128,708) (2,426,591)
other
payables
Net currency (2,618) 197,907,430 183,801,262 381,706,074
exposure
As at 31 December 2016 the Company had the following
currency exposure:
Danish Krone Sterling Euro Total
31 December GBP GBP GBP GBP
2016
Assets
Loans 35,692,414 261,085,946 63,098,502 359,876,862
advanced
Other - 53,381 - 53,381
receivables
and
prepayments
Cash and cash 1,287,053 29,007,907 723,221 31,018,181
equivalents
Liabilities
Financial - (9,156,088) - (9,156,088)
liabilities
at fair value
through
profit or
loss
Trade and - (870,156) - (870,156)
other
payables
Net currency 36,979,467 280,120,990 63,821,723 380,922,180
exposure
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase or decrease
by 10 per cent with all other variables held constant, the net assets of the
Group at 31 December 2017 would increase or decrease by GBP18,380,126 (2016:
GBP6,382,172). Should the exchange rate of the Danish Krone against Sterling
increase or decrease by 10 per cent with all other variables held constant,
the net assets of the Group at 31 December 2017 would increase or decrease
by GBP262 (2016: GBP3,697,947). These percentages have been determined based on
potential volatility and deemed reasonable by the Directors. This does not
include the impact of hedges in place which would be expected to reduce the
impact.
In accordance with the Company's policy, the Investment Manager monitors the
Group's currency position, and the Board of Directors reviews this risk on a
regular basis.
b) Interest rate risk
Interest rate risk is the risk that the value of financial instruments and
related income from loans advanced and cash and cash equivalents will
fluctuate due to changes in market interest rates.
The majority of the Group's financial assets are loans advanced at amortised
cost, credit linked notes, 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 and
75.2% of investments designed as loans advanced at 31 December 2017 have a
floating interbank interest rate. The interest rate risk is mitigated by the
inclusion of interbank rate floors on floating rate loans, preventing
interest rates from falling below certain levels.
The following table shows the portfolio profile of the financial assets at
31 December 2017:
31 December 2017 31 December 2016
GBP GBP
Floating rate
Loans advanced1 292,103,935 242,693,741
Cash and cash equivalents 11,750,356 31,018,181
Fixed rate
Financial assets at fair value 22,112,820 -
through profit or loss
Loans advanced 77,852,048 117,183,121
Total financial assets subject 403,819,159 390,895,043
to interest rate risk
1 Loans advanced at floating rates include loans with interbank rate floors.
If interest rates had changed by 25 basis points, with all other variables
remaining constant, the effect on the net profit and equity would have been
as shown in the table below:
31 December 2017 31 December 2016
GBP GBP
Floating rate
Increase of 25 basis points1 814,918 684,280
Decrease of 25 basis points (814,918) (684,280)
1 The calculation assumes no interbank rate floors.
These percentages have been determined based on potential volatility and
deemed reasonable by the Directors.
ii) Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in
full when due. The Group's main credit risk exposure is in the investment
portfolio, shown as loans advanced at amortised cost and credit linked notes
designated at fair value through profit or loss, where the Group invests in
whole loans and also subordinated and mezzanine debt which rank behind
senior debt for repayment in the event that a borrower defaults. There is a
spread concentration of risk as at 31 December 2017 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 foreign
exchange derivatives which is diversified between hedge providers in order
to spread credit risk to which the Group is exposed.
With respect to the credit linked notes designated at fair value through
profit or loss, the Group holds junior notes linked to the performance of a
portfolio of high quality UK real estate loans owned by a major commercial
bank. The transaction is structured as a synthetic securitisation with risk
transfer from the bank to the Group achieved via the purchase of credit
protection by the bank on the most junior tranches. The credit risk to the
Group is the risk that one of the underlying borrowers defaults on their
loan and the Group is required to make a payment under the credit protection
agreement. Despite the different way in which the transaction has been
structured the Group considers the risks to be fundamentally the same as any
other junior loan in the portfolio and monitors and manages this risk in the
same way as the other loans advanced by the Group.
The total exposure to credit risk arises from default of the counterparty
and the carrying amounts of financial assets best represent the maximum
credit risk exposure at the year end date. As at 31 December 2017, the
maximum credit risk exposure was GBP404,165,752 (2016: GBP390,910,293).
The Investment Manager has adopted procedures to reduce credit risk exposure
by conducting credit analysis of the counterparties, their business and
reputation which is monitored on an on-going basis. After the advancing of a
loan a dedicated debt asset manager employed by the Investment Adviser
monitors on-going credit risk and reports to the Investment Manager, with
quarterly updates also provided to the Board. The debt asset manager
routinely stresses and analyses the profile of the Group's underlying risk
in terms of exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are typically
agreed at the time of the original loan underwriting, forecasting headroom
against covenants, reviewing market data and forecast economic trends to
benchmark borrower performance and to assist in identifying potential future
stress points. Periodic physical inspections of assets that form part of the
Group's security are also completed in addition to monitoring the identified
capital expenditure requirements against actual borrower investment.
The Group maintains its cash and cash equivalents across various different
banks to diversify credit risk which have been all rated A1 or higher by
Moody's and this is subject to the Group's credit risk monitoring policies
as mentioned above.
Total as at
31 December 2017
31 December 2017 GBP
Barclays Bank plc 11,596,030
Lloyds Bank plc 854
HSBC Bank plc 76
Royal Bank of Scotland International 123
ING Luxembourg, SA 153,273
Total cash and cash equivalents 11,750,356
Total as at
31 December 2016
31 December 2016 GBP
Barclays Bank plc 31,001,274
Lloyds Bank plc 894
HSBC Bank plc 74
Royal Bank of Scotland International 193
ING Luxembourg, SA 15,746
Total cash and cash equivalents 31,018,181
The carrying amount of cash and cash equivalents approximates their fair
value.
iii) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient resources
available to meet its liabilities as they fall due. The Group's loans
advanced are illiquid and may be difficult or impossible to realise for cash
at short notice.
The Group manages its liquidity risk through short term and long term cash
flow forecasts to ensure it is able to meet its obligations. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has entered
into revolving credit facilities totalling GBP114,000,000 (2016: GBP60,000,000)
of which GBP13,330,500 (2016: GBPnil) was drawn at the end of the reporting
period.
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 end of the reporting date. The amounts
disclosed under assets are contractual, undiscounted cash flows and may
differ from the actual cash flows received in the future as a result of
early repayments:
Between 3
and
Up to 3 12 months Over 1 Total
months year
31 December 2017 GBP GBP GBP GBP
Assets
Loans advanced - 26,379,420 343,576,5 369,955,98
63 3
Financial assets - - 22,112,82 22,112,820
at fair value 0
through profit
or loss
Liabilities and
commitments
Loan (613,241) (7,237,382) (3,454,53 (11,305,16
commitments1 7) 0)
(613,241) 19,142,038 362,234,8 380,763,64
46 3
1 Loan commitments are estimated
forecasted drawdowns at year end.
Between 3
and
Up to 3 12 months Over 1 Total
months year
31 December 2016 GBP GBP GBP GBP
Assets
Loans advanced - 51,694,797 308,182,0 359,876,86
65 2
Liabilities and
commitments
Loan commitments (156,734) (3,365,607) (3,328,72 (6,851,061
0) )
(156,734) 48,329,190 304,853,3 353,025,80
45 1
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 end of the reporting date. The amounts disclosed
are the contractual undiscounted cash flows:
31 December 2017
Total as at
Between 3 and More than 31 December
Up to 3 12 months 1 year 2017
months
Derivatives GBP GBP GBP GBP
Goldman Sachs:
Foreign exchange
derivatives
Outflow1 - - 1,945,136 1,945,136
Inflow - - 981,260 981,260
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow1 2,464,050 29,834,871 166,030,71 198,329,631
0
Inflow 2,466,405 29,962,789 171,725,18 204,154,383
9
31 December 2016
Total as at
Between 3 and More than 31 December
Up to 3 12 months 1 year 2016
months
Derivatives held GBP GBP GBP GBP
for trading
Goldman Sachs:
Foreign exchange
derivatives
Outflow1 259,152 3,870,200 12,096,127 16,225,479
Inflow 249,619 3,336,270 12,174,796 15,760,685
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow1 1,016,205 2,645,809 85,960,740 89,622,754
Inflow 894,776 3,099,571 80,185,670 84,180,017
1 Euro amounts translated at year 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 attribute 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 and subsequent tap issues and
placings) 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 ongoing basis. The
Company has no imposed capital requirements.
The Company's capital at the end of the reporting period comprises:
31 December 2017 31 December 2016
GBP GBP
Equity
Equity share capital 371,929,982 371,929,982
Retained earnings and 11,209,554 9,021,044
translation reserves
Total capital 383,139,536 380,951,026
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment rates, credit risks and default rates) or
other market corroborated inputs (level 2).
(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:
31 December 2017
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - 22,112,820 22,112,820
value through profit
or loss
Total - - 22,112,820 22,112,820
Liabilities
Derivative - (6,726,268) - (6,726,268)
liabilities
Total - (6,726,268) - (6,726,268)
31 December 2016
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Derivative - (9,156,088) - (9,156,088)
liabilities
Total - (9,156,088) - (9,156,088)
Investments classified within Level 3 consist of Credit Linked Notes
("CLNs"). The fair value of the CLNs is determined by the Investment Adviser
using a discounted cash flow valuation model. The main inputs into the
valuation model for the CLNs are discount rates, market risk factors,
probabilities of default, expected credit loss levels and cash flow
forecasts. The Investment Adviser also considers the original transaction
price and recent transactions of comparable instruments (where available)
and adjusts the valuation model as deemed necessary.
The Directors are responsible for considering the methodology and
assumptions used by the Investment Adviser and for approving the fair values
reported at the financial period end.
The fair value of the CLNs held as at 31 December 2017 is GBP22 million (2016:
GBPnil). The CLNs were purchased on 22 December 2017, and hence the
transaction price has been deemed to be a proxy for the fair value since
there were no significant market movements or changes to the underlying cash
flow forecasts in the period from purchase date of the CLNs to the year end.
The most significant input to the valuation model is the discount rate
applied to the cash flows. As at 31 December 2017, if the discount rate was
to increase/decrease by 1%, the fair value of the CLNs would reduce/increase
by GBP637/GBP665 thousand.
No Level 3 investments movement schedule has been presented for the
financial year ended 31 December 2017, as the purchase amount of GBP22 million
is the fair value as at the period end, and there were no disposals or
unrealised fair value gains in relation to Level 3 investments in the
period.
There have been no transfers between levels for the year ended 31 December
2017 (2016: nil).
The following tables summarise within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 31 December
2017 and 31 December 2016 but for which fair value is disclosed:
31 December 2017
Level 1 Level 2 Level 3 Total Total
fair carrying
values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 11,750,356 - 11,750,35 11,750,35
equivalents 6 6
Other - 378,103 - 378,103 378,103
receivables and
prepayments
Loans advanced - - 382,689,0 382,689,0 369,955,9
45 45 83
Total - 12,128,459 382,689,0 394,817,5 382,084,4
45 04 42
Liabilities
Trade and other - 2,426,591 - 2,426,591 2,426,591
payables
Credit facility - 13,338,329 - 13,338,32 13,338,32
9 9
Total - 15,764,920 - 15,764,92 15,764,92
0 0
31 December
2016
Level 1 Level 2 Level 3 Total Total
fair carrying
values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 31,018,181 - 31,018,18 31,018,18
equivalents 1 1
Other - 53,381 - 53,381 53,381
receivables and
prepayments
Loans advanced - - 382,064,5 382,064,5 359,876,8
52 52 62
Total - 31,071,562 382,064,5 413,136,1 390,948,4
52 14 24
Liabilities
Trade and other - 870,156 - 870,156 870,156
payables
Total - 870,156 - 870,156 870,156
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 consolidated financial statements.
Cash and cash equivalents include cash at hand and fixed deposits held with
banks. Other receivables and prepayments include the contractual amounts and
obligations due to the Group and consideration for advance payments made by
the Group. Credit facility and trade and other payables represent the
contractual amounts and obligations due by the Group for contractual
payments.
19. 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.
20. 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 GBP1,200.
The Luxembourg indirect subsidiaries of the Company are subject to the
applicable tax regulations in Luxembourg. The table below analyses the tax
charges incurred at Luxembourg level:
31 December 31 December
2017 2016
GBP GBP
Current tax
Current tax on profit for the 3,310 3,022
year
Tax refund for previous periods (1,190) -
Total current tax 2,120 3,022
The Luxco had no operating gain on ordinary activities before taxation and
was therefore for the year ended 31 December 2017 subject to the Luxembourg
minimum net wealth tax at EUR3,210 (2016: EUR3,210). The Luxco 3 and Luxco 4
were not subject to minimum net wealth tax in 2017 due to formation closer
to year end.
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment Advisers 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 Independent Auditor's Report,
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 IFRS 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.
The Directors have assessed the operating profit and NAV of the Company and
Group under both IFRS and US GAAP and have concluded that no material
differences were identified and therefore no reconciliation has been
presented in these financial statements.
22. 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 3 to the
consolidated financial statements.
The following tables summarise the transactions occurred with related
parties during the reporting period and outstanding at 31 December 2017 and
31 December 2016:
2017
Outstanding at For the year
ended
31 December 31 December 2017
2017
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 47,500
John Whittle - 40,000
Jonathan Bridel - 35,000
Expenses paid - 2,916
Investment Manager
Investment management fees 716,498 2,844,140
Origination fees 275,830 1,944,641
Expenses - 47,636
2016
Outstanding at For the year
ended
31 December 31 December 2016
2016
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 47,500
John Whittle - 40,000
Jonathan Bridel - 35,000
Expenses paid - 2,307
Investment Manager
Investment management fees 716,308 2,527,199
Origination fees - 1,316,353
Expenses - 39,885
Sundry debtors 15,250 -
The following tables summarise the dividends paid to related parties during
the reporting period and number of Company's shares held by related parties
at 31 December 2017 and 31 December 2016:
2017
Dividends paid
for
the year ended As at
31 December 2017 31 December
2017
Shareholdings and dividends GBP Number of
paid shares
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel 771 11,866
2016
Dividends paid
for
the year ended As at
31 December 2016 31 December
2016
Shareholdings and dividends GBP Number of
paid shares
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel 771 11,866
Other
The Group continues to participate in a number of loans in which Starwood
Property Trust, Inc. ("STWD") and Starfin European Debt TC, L.P. ("Starfin
TC") acted as a co-lender. The details of these loans are shown in the table
below.
Loan Related party
co-lenders
Centre Point, London STWD, Starfin TC
Mixed Use Development, South East UK STWD
Credit Linked Notes, UK Real Estate STWD
Loans
23. EVENTS AFTER THE REPORTING PERIOD
The following new commitments have been made since the year end, up to 26
March 2018:
Local Currency
Student Accomodation, Dublin EUR11,250,000
Shopping Centre, Spain EUR17,000,000
Hotel, Dublin EUR60,000,000
Residential, Dublin EUR9,000,000
Hotel, Spain EUR55,000,000
GBP655,198 has also been drawn under the outstanding commitments on the Mixed
Use Development, South East UK.
The Company has drawn additional funds on its credit facilities in order to
fund the new investments shown above. At 26 March 2018 the amounts drawn
under each facility is:
* Morgan Stanley - EUR34 million
* Lloyds - EUR41.6 million
The following loan amortisation (both scheduled and unscheduled) has been
received since the year end up to 26 March 2018:
Local Currency
Varde Partners Mixed Portfolio, UK GBP2,673,464
Industrial Portfolio, Central and Eastern Europe EUR3,807,024
Industrial Portfolio, UK GBP6,883,661
Logistics, Dublin, Ireland EUR38,967
Residential Portfolio, Dublin, Ireland EUR58,029
The following loans have been repaid in full since the year end up to 26
March 2018:
Local Currency
Residential Portfolio, Cork, Ireland EUR5,983,437
Centre Point, London GBP25,438,707
On 26 January 2018 the Company declared a dividend of 1.625 pence per
Ordinary Share payable to shareholders on the register on 9 February 2018.
Further Information
Corporate Information
Directors
Stephen Smith (Non-executive Chairman)
Jonathan Bridel (Non-executive Director)
John Whittle (Non-executive Director)
(all care of the registered office)
Investment Manager
Starwood European Finance
Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities law)
Norton Rose LLP
3 More London Riverside
London
SE1 2AQ
United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
3rd Floor
Natwest House
Le Truchot
St Peter Port
Guernsey
GY1 1WD
Broker
Stifel Nicolaus Europe Limited
trading as Stifel
150 Cheapside
London
EC2V 6ET
United Kingdom
Administrator, Designated Manager and Company Secretary
Ipes (Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Investment Adviser
Starwood Capital Europe Advisers, LLP
2nd Floor
One Eagle Place
St. James's
London
SW1Y 6AF
United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques
St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Website:
www.starwoodeuropeanfinance.com
ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 5333
End of Announcement EQS News Service
668999 27-March-2018
1: http://public-cockpit.eqs.com/cgi-bin/fncls.ssp?fn=redirect&url=becc5c83790358f02808a7970e9d8d13&application_id=668999&site_id=vwd_london&application_name=news
(END) Dow Jones Newswires
March 27, 2018 02:06 ET (06:06 GMT)
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