Starwood European Real Estate Finance Ltd (SWEF) SWEF: Full Year
Results for the Year Ended 31 December 2021 24-March-2022 / 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.
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Starwood European Real Estate Finance Limited
Full Year Results for the Year Ended 31 December 2021
Income Stability, Strong Cash Generation and Robust
Portfolio
Starwood European Real Estate Finance Limited and its
subsidiaries ("SEREF" or "the Group"), a leading investor
originating, executing and managing a diverse portfolio of
high-quality real estate debt investments in the UK and Europe,
announces strong Full Year Results for the year ended 31 December
2021.
Highlights
-- Strong cash generation - the portfolio continues to support
annual dividend payments of 5.5 pence, paidquarterly, and generates
an annual dividend yield of 5.9 per cent on the share price as at
31 December 2021
-- Continued income stability - all loan interest and scheduled
amortisation payments paid in full and ontime
-- Robust and high quality portfolio - which continues to
perform in line with expectations? Borrowers remain adequately
capitalised and are expected to continue to pay loan interest and
capitalrepayments in line with contractual obligations ? Further
strategic progress - In 2021 the Group committed a total of GBP90.8
million to three new loans,located in the UK, in the life sciences,
office and hospitality sectors
-- 11.1 per cent - Share price total return for the year ended
31 December 2021
-- 50.7 per cent - Share price total return since inception in
December 2012
-- Strong pipeline of opportunities - the Investment Manager
believes the current investment pipeline is thestrongest since the
Company was established
Portfolio Statistics - diverse, 78.0% floating rate, LTV
maintained
As at 31 December 2021, the portfolio was invested in line with
the Group's investment policy. The key portfolio statistics are
summarised below.
31 December 2021 31 December 2020
Number of investments 19 18
Percentage of currently invested portfolio in floating rate loans 78.0% 79.2%
Invested Loan Portfolio unlevered annualised total return* 6.9% 6.7%
Portfolio levered annualised total return* 7.0% 7.0%
Weighted average portfolio LTV - to Group first GBP* 16.4% 18.2%
Weighted average portfolio LTV - to Group last GBP* 61.9% 61.8%
Average loan term (stated maturity at inception) 4.9 years 4.5 years
Average remaining loan term 2.3 years 2.4 years
Net Asset Value GBP421.6m GBP426.7m
Amount drawn under Revolving Credit Facilities (excluding accrued interest) GBP8.5m GBP19.5m
Loans advanced (including accrued interest) GBP414.6m GBP442.7m
Cash GBP3.0m GBP2.9m
Other net assets (including hedges) GBP12.5m GBP0.7m
*Alternative performance measure
John Whittle, Chairman of the Company commented:
"As with the previous year, 2021 was again dominated by Covid-19
and the various restrictions as Governments and we learnt to live
with the pandemic. However, and again as with 2020, SEREF
demonstrated the unique portfolio resilience that is clear to see
in the strength of these results. Once again, all loan interest and
scheduled amortisation payments were received on time. I believe
that this excellent result is due both to the evident rigorous
underwriting of borrowers/sponsors and the very diligent ongoing
portfolio management by our Investment Adviser and Investment
Manager. Meanwhile, underlying collateral valuations continue to
provide reassuring headroom in the event of an asset
underperforming compared with expectations.
The last two years have demonstrated the positive fundamentals
of the Group's portfolio as an exceptionally attractive
risk-adjusted source of alternative income tested in the harshest
of market environments. Against these market challenges, the Group
not only maintained a stable net asset valuation but also met its
dividend targets, delivering an annualised 5.5 pence per share to
shareholders.
Going forward, the Group is seeing a strong pipeline of
opportunities for 2022, and with the increases in inflation rates
currently being anticipated, the Group, with 78 per cent of the
portfolio contracted at floating interest rates, is extremely well
placed should interest rates increase as a result. We therefore
look forward to the future with confidence."
Analyst call
A conference call for analysts will be held remotely at 9:30am,
to receive details please contact starwood@buchanan.uk.com
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company
Secretary +44 203 5303 630
Duke Le Prevost
Starwood Capital +44 (0) 20 7016 3655
Duncan MacPherson
Jefferies International Limited +44 (0) 20 7029 8000
Stuart Klein
Neil Winward
Gaudi Le Roux
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Hannah Ratcliff
Notes:
Starwood European Real Estate Finance Limited is an investment
company listed on the premium segment of 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. www.starwoodeuropeanfinance.com. The Company 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.
Starwood European Real Estate Finance Limited
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2021
Overview
Objective and Investment Policy
INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate
Finance Limited (the "Company"), together with its 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 in the UK and the European Union's internal
market.
INVESTMENT POLICY
The Company invests in a diversified portfolio of real estate
debt investments in the UK and the 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 UK and European Union's
internal market. UK exposure is expected to represent the majority
of the Company's portfolio. Investment in the European Union's
internal market will mainly be focused 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.
In the event that a 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 hospitality, office, retail,
logistics, light industrial, 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 and Guidance,
2021 issued by the Guernsey Financial Services Commission (the
"Commission") under The Protection of Investors (Bailiwick of
Guernsey) Law, 2020, 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 inthe 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 investeecompanies;
-- not more than 10 per cent, in aggregate, of the Company's NAV
will be invested in other listedclosed-ended investment funds;
and
-- the Company must, at all times, invest and manage its assets
in a way which is consistent with its objectof spreading investment
risk and in accordance with the published investment policy. The
Directors do not currentlyintend to propose any material changes to
the Company's investment policy, save in the case of exceptional
orunforeseen circumstances. As required by the Listing Rules, any
material change to the investment policy of theCompany will be made
only with the approval of shareholders.
Financial Highlights
Key Highlights Year ended Year ended
31 December 2021 31 December 2020
NAV per Ordinary Share 103.09 p 104.18 p
Share Price 94.0 p 90.0 p
NAV total return (1) 6.6% 6.3%
Share Price total return (1) 11.1% -7.5%
Total Net Assets GBP421.6 m GBP426.7 m
Loans advanced at amortised cost (including accrued income) GBP414.6 m GBP442.7 m
Financial assets held at fair value through profit or loss GBP13.3 m GBP0.9 m
Cash and Cash Equivalents GBP3.0 m GBP2.9 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP8.5 m GBP19.5 m
Dividends per Ordinary Share 5.5 p 6.5 p
Invested Loan Portfolio unlevered annualised total return (1) 6.9% 6.7%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Ongoing charges percentage (1) 1.0% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 16.4% 18.2%
Weighted average portfolio LTV to Group last GBP (1) 61.9% 61.8%
(1) Further explanation and definitions of the calculation is
contained in the section "Alternative Performance Measures" at the
end of this financial report.
SHARE PRICE PERFORMANCE
As at 31 December 2021, the NAV was 103.09 pence per Ordinary
Share (2020: 104.18 pence) and the share price was 94.0 pence
(2020: 90.0 pence).
The Company's share price has been volatile since March 2020.
This volatility has been driven by market conditions and trading
flows rather than a change in the Company's NAV.
Chairman's Statement
JOHN WHITTLE | Chairman
23 March 2022
Dear Shareholder,
It is with immense pleasure that I write to you as your new
Chairman to present the Annual Report and Audited Consolidated
Financial Statements of Starwood European Real Estate Finance
Limited for the year ended 31 December 2021. I have been a director
of the Company since its inception and it is now a great honour to
be Chairman. I am looking forward to and am committed to guiding
and working alongside the Board to continue to deliver value for
all of our stakeholders.
As with the previous year, 2021 was again dominated by Covid-19
and the various restrictions as Governments and we learnt to live
with the pandemic. However, and again as with 2020, the Group
demonstrated the unique portfolio resilience that is clear to see
in the strength of these results. It is significant, and very
gratifying to note, that, again, all loan interest and scheduled
amortisation payments were received on time. I believe that this
excellent result is due both to the evident rigorous underwriting
of borrowers/sponsors and the very diligent ongoing portfolio
management by our Investment Adviser and Investment Manager.
Meanwhile, underlying collateral valuations continue to provide
reassuring headroom in the event of an asset underperforming
compared with expectations.
2022 looks like it will be dominated by concerns about the
situation in Ukraine and the wider implications for Europe of the
ongoing conflict there. My thoughts and sympathies are with those
caught up in the conflict and I hope that a quick, just and
peaceful resolution is found. The Group has no direct investment
exposure to the Ukraine or Russia. We will continue to closely
monitor any potential adverse impacts on European economies and
specifically for the potential impacts on levels of operational
disruption and liquidity flows.
Ultimately, the last two years have demonstrated the positive
fundamentals of the Group's portfolio as an exceptionally
attractive risk-adjusted source of alternative income tested in the
harshest of market environments. Against these market challenges,
the Group not only maintained a stable net asset valuation but also
met its dividend targets, delivering an annualised 5.5 pence per
share to shareholders.
Going forward, the Group is seeing a strong pipeline of
opportunities for 2022, and with the increases in inflation rates
currently being anticipated, the Group, with 78 per cent of the
portfolio contracted at floating interest rates, is extremely well
placed should interest rates increase as a result.
HIGHLIGHTS FOR 2021
-- Strong cash generation - the portfolio as a whole continues
to support annual dividend payments of 5.5pence per Ordinary Share,
paid quarterly, and generates an annual dividend yield of 5.9 per
cent on the share priceas at 31 December 2021
-- Income stability - all loan interest and scheduled
amortisation payments paid in full and on time,despite
unprecedented market disruption from Covid-19
-- 78 per cent of the portfolio is contracted at floating
interest rates (with floors) which will benefitthe Group if higher
inflation results in higher interest rates
-- Portfolio robust - despite pandemic-related disruption, the
portfolio continues to perform in line withexpectations
-- Borrowers remain adequately capitalised and are expected to
continue to pay loan interest and capitalrepayments in line with
contractual obligations
-- Further strategic progress - In 2021, the Group committed a
total of GBP90.8 million to three new loans,located in the United
Kingdom, in the life sciences, office and hospitality sectors
-- 11.1 per cent - Share price total return for the year ended
31 December 2021
-- 50.7 per cent - Share price total return since inception in
December 2012
-- 6.6 per cent - Annualized net asset value total return since
inception in December 2012
-- Over GBP1.4 billion committed since inception
-- Strong pipeline of opportunities - The Investment Adviser and
Investment Manager believe the currentinvestment pipeline is the
strongest since the Group was established
-- Portfolio remains fully invested
OVERVIEW
As at 31 December 2021, the Group had investments and
commitments of GBP456.5 million (of which GBP44.5 million was
committed but unfunded at the end of the year). The average
remaining maturity of the Group's loan book was 2.3 years. The
Group had net debt of GBP8.5 million and unused debt facilities of
GBP117.5 million available to fund undrawn commitments of GBP44.5
million and new lending. The gross annualised levered total return
at the year end was 7.0 per cent. The Net Asset Value ("NAV") was
GBP421.6 million, being 103.09 pence per Ordinary Share.
The contractual maturity of the Group's portfolio shows that 25
per cent of loans held are expected to mature in the next twelve
months. This reflects the normal turnover of the portfolio with
some limited impact from the slow down in repayments referred to
above. The Investment Adviser anticipates a strong level of
transactional activity in 2022 and continues to see compelling
value-add lending opportunities for the Group. Given the above, we
anticipate that the Group will remain fully, or close to fully,
invested going forward.
2018 2019 2020 2021
New loans to borrowers (commitment) GBP208.0m GBP224.7m GBP74.1m GBP90.8m
Loan repayments and amortisation -GBP137.2m -GBP198.3m -GBP81.4m -GBP103.5m
Net Commitment GBP70.8m GBP26.4m -GBP7.3m -GBP12.7m
INVESTMENT ACTIVITY
The Group closed three loans in 2021 - Life Sciences, UK (total
commitment - GBP26.6million), Hotel and Office, Northern Ireland
(total commitment - GBP13.5 million) and Hotels, UK (total
commitment - GBP50.7 million).
In 2020 and for the first part of 2021, as activity in the
investment and financing markets slowed, there was in general a
significant reduction in the volume of repayments compared to
previous periods. As might be expected, borrowers who had
previously decided to refinance or sell, were unable or became
reluctant to do so. Despite this we received early repayment of two
loans during the year - Hotel, Spain (GBP46.6 million) and
Residential, London (GBP24.5 million); in addition to GBP32.4
million of amortisation on other loans within the portfolio. Net
commitments for the year compared to the prior three years is shown
in the table above.
Whilst net commitments during the year fell by GBP12.7 million,
the Group funded a further GBP28.5 million in relation to loan
commitments made in prior years which were unfunded at the
beginning of the year.
PORTFOLIO PERFORMANCE
All loan interest and scheduled amortisation payments up to the
date of this annual report have been paid in full and on time.
The Investment Manager and Investment Adviser have performed
well during this period of disruption. Robust underwriting,
extensive due diligence and considered loan structuring have been
combined to produce a resilient portfolio which continues to
perform in spite of very considerable and obvious stress tests. In
some instances, the Investment Manager and Investment Adviser have
worked closely with borrowers to agree loan amendments and changes
to business plans, where appropriate. The loan amendments such as
income covenant reliefs or additional time to reach development
milestones did not impact the economic returns forecast from the
loans. In the sectors that are most affected by the pandemic,
hospitality and retail, borrowers continue to meet their
obligations including regular interest and capital repayments in
line with the agreed business plans which were revised to reflect
the anticipated impact of the pandemic.
In light of the considerable disruption from Covid-19, the Board
has sought to provide more detailed updates and disclosure to our
shareholders during the last two years through its quarterly
factsheets. Please refer to the Investment Manager's report for
more detailed updates on portfolio performance.
STABILITY OF NET ASSET VALUE ("NAV")
Loans made by the Group are measured at amortised cost less
expected credit losses ("ECLs"). This treatment is governed by IFRS
9 with which the Group is obliged to comply. We are not eligible to
follow fair value accounting for the vast majority of our loans,
and since inception only one loan has been eligible to be measured
at fair value (the credit linked notes which repaid in 2020).
Therefore, our NAV does not show significant fluctuations during
periods of market volatility. The NAV would show a more significant
change if we had to recognise an expected credit loss ("ECL"). At
this point in time, we have no reason to believe that any ECLs
should be recognised against any of the loans. The reasons,
estimates and judgements supporting our current assessment are
described in the Investment Manager's report.
SHARE BUYBACKS AND SHARE PRICE PERFORMANCE
The year end share price was 94.0 pence reflecting an 8.8 per
cent discount to NAV. While the share price has been less volatile
in 2021 compared with 2020, trading during the year in a range of
between 84.0 pence and 100.0 pence, it has still been more volatile
than your Board would like or than your Board feels is justified
given the Group's strong long-term performance track record, stable
NAV and positive outlook.
The share price was supported by the share buy-back programme
which commenced in the second half of 2020 and continued until the
first quarter of 2021. During the first quarter of the year the
Company bought back 660,000 shares at an average cost per share of
89.54 pence per share and these shares are held in treasury. Since
then, no additional share buy backs have been made although the
Board retains the authority to recommence them if deemed necessary
and may do so again if it deems the circumstances to be
appropriate.
The Company received the authority at the 2020 AGM to purchase
up to 14.99 per cent of the Ordinary Shares in issue at that date;
this authority was renewed at the 2021 AGM.
The Board continues to believe that the shares represent very
attractive value at their current price and certain members of the
Board and individuals at the Investment Adviser have made personal
purchases during the year, and their holdings are disclosed in note
22, Related party transactions.
FUTURE SHARE ISSUANCE
At the last Annual General Meeting ("AGM"), the Company sought
and received authority to disapply Pre-Emption Rights on the
allotment of equity securities for up to 10 per cent of the
Ordinary Shares in issue. As at the date of this report, this
authority has not been utilised.
While the discount to NAV persists, we do not intend to raise
additional equity. Nevertheless, the Board believes that the Group
should maintain its capacity to access equity capital within a
short time frame in expectation of improved markets. As markets
begin to recover, the Board fully expect to see attractive risk
adjusted opportunities of which immediate access to capital could
have the following additional benefits for the Company and
shareholders:
-- to enable the Company to pursue larger investment
opportunities and broaden its lending range andcapacity;
-- to enable the Company to increase diversification and the
depth of its portfolio;
-- increased scale is attractive to a wider investor base;
-- a greater volume of shares, creating increased secondary
market activity; and
-- fixed running costs spread across a larger equity capital
base reducing the Company's ongoing expensesper Share.
To take advantage of opportunities as and when they present
themselves, the Directors believe it is appropriate for the Company
to renew the existing authorities at the forthcoming AGM, in
respect of issuance of up to 10 per cent of the Ordinary Shares in
issue.
DIVIDS
Total dividends of 5.5 pence per Ordinary Share were declared in
relation to the year ended 31 December 2021.
The 2021 dividends were covered 0.98x by earnings (excluding
unrealised FX gains). The Company maintains a dividend reserve
(within retained earnings) built up over several years which was
partially utilised to ensure dividends were not paid out of
capital.
The Board recognises that a sustainable and consistent dividend
is of paramount importance to our investors and intends to continue
to target 5.5 pence per annum (payable quarterly) going forward.
This will provide a level of dividend which should be fully covered
by earnings whilst ensuring the Company maintains strong credit
discipline. The Board will review this target periodically with a
view to potentially increasing it if conditions allow, for example,
if changes to the broader lower interest rate environment lead to
more earnings for the Company (given that 78% of our portfolio is
on a floating rate basis).
Dividend Payment Amount
Period
declared date per share
1 January 2021 to 31 March 2021 23 April 2021 4 June 2021 1.375p
1 April 2021 to 30 June 2021 23 July 2021 3 September 2021 1.375p
1 July 2021 to 30 September 2021 22 October 2021 3 December 2021 1.375p
1 October 2021 to 31 December 2021 21 January 2022 25 February 2022 1.375p
Total 5.5p
OUTLOOK
The focus of the Group for 2022 is twofold: i. the continued
robust asset management of the existing loan portfolio; and ii. the
continued efforts, alongside the Investment Manager and the
Investment Adviser, to enhance bothorigination capacity and
portfolio construction of the Group in order to continue to deliver
attractive riskadjusted returns to its investors.
Industry wide we are continuing to see a significant reduction
in lending by balance sheet bank lenders, particularly to
development, refurbishment and non-core property asset classes.
This ongoing trend will inevitably produce interesting
opportunities for alternative lenders which we fully expect to
benefit our shareholders accordingly.
As set out in more detail in the Report of the Directors, and
subject to the discount triggered realisation mechanism not being
activated, the Directors shall exercise the discretion afforded to
them under the Articles to put forward a realisation vote (as an
ordinary resolution) to Shareholders by no later than 28 February
2023. The Board believes that, as a result of the strong
fundamentals supporting the Company's investment strategy, robust
operating metrics displayed by the Company which include a
consistent dividend yield and stable NAV, combined with the strong
financial position of the Company, there is a compelling rationale
for shareholders to vote against a realisation offer and
realisation vote put them. The Board looks forward to shareholder
engagement on this matter in the run up to 31 December 2022.
Finally, the Board note that one positive outcome of the
pandemic could be the recognition by the global business community
of the need for affirmative action in relation to climate change
and other related environmental, social and governance
considerations. The Board itself is aware of its own
responsibilities for environmental, social and governance matters
and has taken additional professional advice regarding these during
the year. The Board believes that the Group is meeting its
regulatory obligations on these matters but is looking at ways to
enhance its reporting, monitoring and influencing of environmental,
social and governance issues.
The Board believes it is important to have clear messaging to
you, our shareholders, and we will continue to inform you of the
Group's progress by way of the quarterly fact sheets. During the
year we have contracted the services of a public relations provider
to make our factsheets, and all our communications, more relevant
to our stakeholders.
We hope that you have seen this enhanced accessibility and
welcome any comments you have on our communication and supply of
information to you.
BOARD COMPOSITION
I am delighted to welcome Gary Yardley to the Board (Gary was
appointed on 6 September 2021). Gary's biography is set out in the
Report of the Directors and he brings considerable experience to
the Board as well as a range of skills that we believe will be both
additive and complimentary to those of the existing Board.
The Board is now well advanced in the programme of board
rotations with only my own planned retirement at the end of 2023 in
sight. I am very pleased with the composition of the Board and I
believe we have a very relevant diversity of skills and expertise
which places us well for the future.
I would like to thank Steve Smith, who left the Board in
December, for his outstanding contribution to the establishment and
success of the Group. Steve's departure is in line with the
Company's succession planning process for the phased retirement of
Board members. Steve leaves with our very best wishes.
FINALLY
In 2021, we have continued to be mindful of the health and
wellbeing of everyone associated with the Group while ensuring that
our systems have remained fully functional throughout this
continued period of intense disruption. My thanks to the Investment
Adviser, Investment Manager and all of our service providers for
their perseverance in extraordinarily difficult times.
On behalf of the Board, I would like to close by thanking
shareholders for your commitment. I sincerely hope that we all have
a more stable time in 2022, that the situation in Ukraine can be
swiftly resolved and I look forward to briefing you on the Group's
progress later this year.
John Whittle | Chairman 23 March 2022
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and
details the uncertainties, principal and emerging risks associated
with its activities.
CORPORATE PURPOSE
As an investment company, the general corporate purpose is to
provide long-term prosperity to our shareholders through providing
regular dividends and preserving capital by limiting downside risk.
In addition to this, the Board and Investment Manager also
recognise that by furthering their understanding of the needs of
other relevant stakeholders, the Company can provide better returns
to its shareholders.
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 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 movement in NAV per Ordinary Share;
-- The movement in share price and the discount / premium to
NAV;
-- The payment of targeted dividends;
-- The portfolio yield, both levered and unlevered;
-- Ongoing charges as a percentage of undiluted NAV; and
-- Weighted average loan to value for the portfolio.
Details of the KPIs achieved are shown in the Financial
Highlights section.
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
ability of the Company to continue in operation and meet its
liabilities. In deciding which risks are principal risks the Board
considers the potential impact and probability of the related
events or circumstances, and the timescale over which they may
occur. Consequently, it has put in place mitigation plans to manage
those identified risks. Details of the principal and emerging risks
considered as part of the review of the risk matrix are highlighted
below.
Principal Risks
Financial Market Volatility (risk that dividends and/or share
price is lower than anticipated)
The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies and, consequently, 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. Since March 2020
and as a direct impact of the uncertainty caused by the Covid-19
pandemic the shares have traded at a discount to NAV per share and
shareholders may be unable to realise their investments through the
secondary market at NAV per share.
The Board, along with the Investment Manager and the Investment
Advisor, monitor, review and consider the estimates and assumptions
that underpin the targeted return of the business and, where
necessary, communicate any changes in those estimates and
assumptions to the market. The Group has met its targeted returns
since inception.
The Board monitors the level of premium or discount of share
price to NAV per share and announced a share buyback programme
during 2020 in order to support the share price following the drop
in share price as a direct result of the Covid-19 pandemic. 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 further information on
the discount management mechanisms in the Report of the
Directors.
Long-Term Strategic Risk (risk that the business model is no
longer attractive)
The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies and, consequently, 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.
The Board, along with the Investment Manager and the Investment
Advisor, monitor, review and consider the estimates and assumptions
that underpin the targeted return of the business and, where
necessary, refocus the Group's strategy to respond to changes in
the market.
The Investment Adviser provides the Investment Manager and the
Board with a regular 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 underlying assets versus underwritten business plan and the
likelihood of any early repayments, the need for any loan
amendments to allow the loans continue to perform in different
economic circumstances which may impact returns.
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.
Market Deterioration Risk (risk of the economies in which the
Group operates either stagnate or go into recession)
The Group's investments are comprised principally of debt
investments in the UK and the 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.
The Covid-19 pandemic has had a material impact on global
economies and on the operations of the Group's borrowers during
2021 (as it had in 2020). The Covid-19 pandemic presented and
potentially presents a continued risk to growth and the full impact
of the consequences for the world economy is unclear.
The situation in Ukraine, which has become more unstable since
February 2022 with the incursion into Ukraine by Russia, also
presents a significant risk to European and Global economies and,
potentially, world peace. While the Group has no direct or known
indirect involvement with Ukraine, Russia or Belarus it may be
impacted by the consequences of the usability caused by the
Ukrainian/Russian conflict.
The impact of the United Kingdom's departure from the European
Union in 2020 still represents a potential threat to the UK economy
as well as wider Europe. On a cyclical view, the national economies
across Europe appear to be heading towards lower growth, and
alongside the economic impact of Covid-19 and the destabilising
impact of the conflict in Ukraine, towards recession.
The Board have considered the impact of market deterioration on
the current and future operations of the Group and its portfolio of
loans advanced. Because of the cash and loan facilities available
to the Group and the underlying quality of the portfolio of loans
advanced, both the Investment Manager and the Board still believe
the fundamentals of the portfolio remain optimistic and that the
Group can adequately support the portfolio of loans advanced
despite current market conditions.
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. The Group is mitigated against this with an average
weighted loan to value of the portfolio of 61.9 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, assessment of the strength of the
borrower's management team 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. The performance of
each loan is reviewed quarterly by the Investment Adviser for any
indicators of significant increase in credit risk, impaired or
defaulted loans. The Investment Adviser also provides their
assessment of any expected credit loss for each loan advanced. The
results of the performance review and allowance for expected credit
losses are discussed with the Investment Manager and the Board.
Six loans (one of which was fully repaid in 2021), predominantly
in the retail and hospitality sectors, were moved to Stage 2
(increased risk of default) during 2020 as a result of the
uncertainty caused by the impact of the Covid-19 pandemic. Two of
these loans have now stabilised to the extent that they have now
been moved back to Stage 1 (which indicates that they are judged to
be at the same risk of default as they were when they were
originally underwritten). The three loans currently classified as
Stage 2 account for 14 per cent of the loans advanced by the Group
as at 31 December 2021. No expected credit losses have been
recognised against any of the loans, because of the strong LTVs
across the loan portfolio and strong contractual agreements with
Borrowers, including against these Stage 2 loans. The reasons,
estimates and judgements supporting this assessment are described
in the Investment Manager's report.
Prepayment Risk (risk of more favorable loan terms being
available to borrowers which would lead to the early prepayment of
loans advanced)
All loans are provided to borrowers on a contractual basis which
will ensure a minimum return to the Group in the event of early
repayment.
The Investment Adviser provides the Investment Manager and the
Board with a regular 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 underlying assets versus underwritten business plan and the
likelihood of any early repayments, the need for any loan
amendments to allow the loans continue to perform in different
economic circumstances which may impact returns.
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 Investment Adviser is managing the transition from LIBOR to
SONIA on behalf of the Group. The Group has ensured that loan
agreements for the current portfolio are in a form which
accommodates the flexibilities required to manage the
transition.
The loans in place at 31 December 2021 have been structured so
that 22 per cent by value of the loans are fixed rate, which
provides protection from downward interest rate movements to the
overall portfolio (but also prevents the Group from benefiting from
any interbank rate rises on these positions). In addition, whilst
the remaining 78 per cent is classified as floating, 100 per cent
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.
Foreign Exchange Risk
The majority of the Group's investments are Sterling denominated
(circa 58 per cent as at 31 December 2021) with the remainder being
Euro denominated. The Group is subject to the risk that the
exchange rates move unfavourably and that a) foreign exchange
losses on the Euro loan principals are incurred and b) that Euro
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 normally 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 GBP183.8 million of hedged
notional exposure with Lloyds Bank plc at 31 December 2021
(converted at 31 December 2021 FX rates).
As at 31 December 2021, the hedges were in the money. If the
hedges move out of the money and 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
2021, the Company had sufficient liquidity and credit available on
the revolving credit facility to meet any cash collateral
requirements.
Risk of Default under the Revolving Credit Facilities
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
facility 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.
Cybercrime
The Group is subject to the risk of unauthorised access into
systems, identification of passwords or deleting data, which could
result in loss of sensitive data, breach of data physical and
electronic, amongst other potential consequences. This risk is
managed and mitigated by regular reviews of the Group's operational
and financial control environment. The matter is also contained
within service providers surveys which is completed by Group's
service providers and is regularly reviewed by the Board. No
adverse findings in connection with the service provider surveys
have been found. The Company and its service providers have
policies and procedures in place to mitigate this risk, the
cybercrime risk continues to be closely monitored.
Regulatory risk
The Group is also subject to regulatory risk as a result of any
changes in regulations or legislation. Constant monitoring by the
Investment Advisor, Investment Manager and the Board is in place to
ensure the Group keeps up to date with any regulatory changes and
compliance with them.
Operational risk
The Group has no employees and is reliant on the performance of
third-party service providers. Failure by the Investment Manager,
Investment Adviser, Administrator or any other third-party service
provider to perform in accordance with the terms of its appointment
could have a material detrimental impact on the operation of the
Company.
The Board maintains close contact with all service providers to
ensure that the operational risks are minimised.
Emerging Risks
Emerging risks to the Group are considered by the Board to be
trends, innovations and potential rule changes relevant to the real
estate mortgage and financial sector. The challenge to the Group is
that emerging risks are known to some extent but are not likely to
materialise or have an impact in the near term. The Board regularly
reviews and discusses the risk matrix and has identified climate
change as an emerging risk.
Climate change
The consequences that climate change could have are potentially
severe but highly uncertain. The potential high impact of possible
losses has done a lot to raise the awareness of this risk in
investment circles. The Board, in conjunction with the Investment
Adviser, considers the possible physical and transitional impact of
climate change on properties secured on loans provided by the Group
and includes the consideration of such factors in valuation
instructions of the collateral properties and in considering any
potential expected credit losses on loans. The Investment Adviser
considers the possible physical and transitional impact of climate
change as part of the origination process. In addition, the Board,
in conjunction with the Investment Adviser, is monitoring closely
the regulation and any developments in this area (see
'Environmental, Social and Corporate' section for further
information).
ASSESSMENT OF PROSPECTS
The Group's strategy is central to an understanding of its
prospects. The Group's focus is twofold:
i) to manage expected repayments, including proactively managing
the investments already made to ensure that during times of
economic instability on either a macro (as experienced during the
year as a result of the Covid-19 pandemic) or micro level, the
loans continue to perform and provide positive returns to the
Group, and
ii) continuing to grow the Group, by sourcing investments with
good risk adjusted returns in order to minimise any potential for
cash drag and improve the Group's returns. The Group's prospects
are assessed primarily through its strategic review process, which
the Board participates fully in. The Directors' have assessed the
prospects of the Group over a period of three years which has been
selected because the strategic review covers a three-year period.
The Group updates its plan and financial forecasts on a monthly
basis and detailed financial forecasts are maintained and reviewed
by the Board regularly.
In addition, the Directors have considered the realisation vote
which will, under the Articles, take place no later than 28
February 2023. As a result of the strong fundamentals supporting
the Company's investment strategy, robust operating metrics
displayed by the Company which include a consistent dividend yield
and stable NAV, combined with the strong financial position of the
Company, the Directors believe there is a compelling rationale for
shareholders to vote against a Realisation Offer and Realisation
Vote and that the Company will continuing as constituted.
ASSESSMENT OF VIABILITY
Although the strategic review 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 review, by quantifying their
financial impact. These scenarios are based on aspects of the
following selected principal risks, which are detailed in this
Strategic Report, and as described below:
-- Foreign exchange risk;
-- Market deterioration risk; specifically the risk that the all
the Stage 2 loans held default, resultingin a loss of interest
income and delay in the repayment of capital; and
-- Risk of default under the revolving credit facilities.
These scenarios represent 'severe but plausible' circumstances
that the Group could experience. The scenarios tested included:
-- A high level of loan default meaning that the Group stopped
receiving interest on the Stage 2 loans inthe portfolio and that
the outstanding capital on these loans was not received until 12
months after the loanmaturity date;
-- An analysis of the robustness of the covenants under the
revolving credit facility to withstand defaultof the underlying
investments; and
-- A deterioration in the valuation of the foreign exchange
hedges such that the company is required to postcollateral up to
GBP5m.
The results of this stress testing showed that the Group would
be able to withstand a high level of underlying loan default or
impairment resulting from either of the risks identified over the
period of the financial forecasts albeit the dividend may need to
be reduced to reflect the reduced cash received.
VIABILITY STATEMENT
In addition to the assessment of prospects and viability above,
the Directors also have a reasonable expectation, based on the
scenarios testing, that the Group will continue to meet its
liabilities as they fall due over the three-year period ending 31
December 2024, and therefore the Group is expected to remain viable
from both a business model, strategic opportunity and financial
perspective.
Notwithstanding the above, and as disclosed in note 2 to these
financial statements, there is a material uncertainty as to the
outcome of the realisation offer and realisation vote that may cast
substantial doubt on the Group's ability to continue as a going
concern. The financial statements have not been modified in respect
of this matter.
In connection with the viability statement, the Board confirm
that they have carried out a robust assessment of the principal and
emerging risks facing the company, including those that would
threaten its business model, future performance, solvency or
liquidity.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ("ESG")
As an investment company, the Board and the Investment Adviser
consider the Group's direct activities to have a minimal direct
impact on the environment. Nevertheless, the Board regularly
monitors and discusses ESG matters both at the Board meetings and
with the Investment Manager and Investment Adviser.
The Investment Manager and Investment Adviser are part of the
Starwood Capital Group (SCG), which is a signatory to the UN
Principles for Responsible Investments (UNPRI). In assessing new
loans SCG evaluates environmental risks associated with any
investments as part of the underwriting process. A formal scope of
work is followed by the Investment Adviser, which requires an
environmental site assessment to be performed which identifies
environmental conditions that may have a material adverse impact on
the property being assessed or its immediate surrounding area and
an assessment of a property's sustainability and marketability
through the review of its environmentally friendly
characteristics.
The Board recognises that it has no direct control over a
borrower's company policy towards environment and social
responsibility and whilst it is an important part of the due
diligence process in understanding the impact of such issues,
decisions are not weighted towards those investments with stronger
environmental and social characteristics. It should be noted that a
number of the loans made by the Group involve refurbishment
projects and these will often improve the environmental impact of
the real estate concerned. Additionally, whilst it is not an
investment criteria, the Group's loan portfolio is significantly
funded in sectors with positive social impact such as hospitality,
healthcare and residential.
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. This approach is built into the Investment Adviser's
origination and underwriting process. Our risk management framework
is intended to facilitate an enterprise wide view of risk that
supports a strong and collaborative risk management culture within
the Board and with its relationship with SCG.
The Board (through its relationships with SCG, its brokers and
other advisers) is focused on maintaining a productive dialogue
with shareholders and gathering feedback to inform the decision
making at Board level.
The SCG, with in excess of 4,100 employees worldwide, takes its
social responsibilities to its employees very seriously offering a
challenging, fast-paced and collegial environment to its employees.
SCG strives to create diverse and inclusive workplaces where all
employees can perform to their full potential and to be a good
corporate citizen for their communities by supporting charitable
organisations that promote education and social wellbeing.
As an investment fund, the Group outsources many of its
activities to external service providers and, therefore, the Group
has no direct Greenhouse Gas Emissions to report from its own
operations and is currently not required to report on any other
emission producing sources.
While there is some travel involved for the Directors and
representatives from the Investment Adviser, the Company's service
providers are Guernsey office-based companies, and the majority of
the Directors are based in Guernsey, thus having a relatively low
impact on the environment and negating the need for long commutes
or flights to and from Board meetings. As a result of Covid-19
there has been an acceleration in the use of interactive and
virtual technology for meetings, further reducing the need for
travel.
The Group has no employees and the Board is composed entirely of
non-executive Directors. Therefore, the Group is not within scope
of the Modern Slavery Act 2015 and is therefore not obliged to make
a human trafficking statement. However, the business of the Company
is conducted ethically and with integrity and has a zero tolerance
policy towards modern slavery.
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, the
Hampton Alexander Review and the Parker Review and believes in the
value and importance of diversity in the boardroom and it continues
to consider the recommendations of these reports and reviews as
part of its succession planning.
The Company has no employees and therefore has no disclosures to
make in this regard.
John Whittle | Chairman
23 March 2022
Investment Manager's Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
2021 was a very active year in many markets and was a record
year for Starwood's European real estate credit business with new
business of GBP2.8 billion and a pipeline that continues to be at
record volumes. We saw similar trends in other areas of non-bank
lending to real estate. European CMBS volume in 2021 was three
times higher than in 2020 and over twice the past 5-year average
with EUR7.2 billion of new issuance. It was a record-breaking year
in the real estate corporate bond space with issuance in the
unsecured market growing approximately 50 per cent compared to
2020. There was over EUR66 billion of new issuance in 2021 driven
both by new issuers making their debut in the unsecured market and
by M&A financing.
In the equity markets, there were also healthy levels of
activity in the real estate sector during 2021. CBRE transaction
data showed total European transaction volume of EUR359 billion
topping the pre-pandemic volume of EUR333 billion from 2019. In
public markets 2021 volumes are significantly higher than recent
years at EUR111 billion (versus EUR51 billion, EUR72 billion and
EUR53 billion for 2018, 2019 and 2020, respectively). For the full
year, the real estate equities have out-performed UK equities as a
whole. The iShares UK Property ETF increased in 2021 by 25.5 per
cent versus an increase in the FTSE All-Share of 14.6 per cent.
The Investment Adviser recently spent time with PWC discussing
their Emerging Trends in Real Estate 2022 report where many themes
resonated, and it is well worth a read. PWC found sentiment in the
industry at a high level with business confidence, profitability
and headcount indices at some of the highest levels of the last ten
years. The top four real estate business risks stated were
construction costs and resource availability, availability of
suitable assets, sustainability / decarbonisation and government
intervention. It was interesting that only a relatively low 61 per
cent of respondents were concerned about sustainability /
decarbonisation. As a rapidly changing area, it will require even
best in class businesses to evolve with maturing approaches to this
important area. We can see all four of these top risks at play in
the pipeline and our loan underwriting is tailored to consider the
specific risks. For example, we are seeing good opportunities for
lending in the residential development space but amongst other
things we will be particularly focussed on areas such as
appropriate cost overrun protections, understanding the carbon
impact of the project and regulatory uncertainties such as the
potential burden of new levies on developers to address historical
cladding issues in the UK.
London regained the top spot from Berlin for overall investment
and development prospects in the PWC report this year with Paris
retaining third place. UK and German volumes taken together are
greater than the rest of Europe altogether. The dynamism, volume
and liquidity of the UK investment market are some of the reasons
that the UK makes up the highest proportion of our European loan
book. Furthermore, PWC's report highlights strong investor
sentiment to alternate real estate asset classes. This is an area
where we continue to see good opportunities for the Group with
investments in life sciences, healthcare, student, leisure and
hospitality already having featured. Working with high quality
operators in these specialist areas is key and the Investment
Adviser's experience and hands-on approach to underwriting
operational real estate and the operating partners continues to
position us well to serve borrowers in these markets while
achieving excellent risk adjusted returns for the Group.
In the capital markets, the early days of 2022 saw markets
dominated by inflation considerations. New record inflation levels
continue month to month with January headline inflation for the
Eurozone coming in at the highest recorded figure since the
inception of the Euro currency at 5.8 per cent well ahead of
economists' expectations of 5.3 per cent. The UK CPI rate for
January was 5.5 per cent and, in the US, the February CPI level was
7.5 per cent. Much of the increase in these inflation numbers comes
from increased energy costs, which are likely to plateau at some
point. Energy prices were up 31.7 per cent compared to a year
earlier for Europe. After stripping out energy and food, core
inflation was 2.7 per cent for Europe. This has been reflected in
interest rate markets where rates have risen rapidly since the
beginning of 2022. 5 year sterling swap rates are currently at 1.76
per cent having increased significantly from 0.37 per cent since
this time last year. The knock on effect of higher interest rates
has been felt in growth stocks with non-profitable tech in
particular being negatively impacted. Overall indices values are
hiding some big differences between winners and losers. In January
already the number of Nasdaq stocks was down by 50 per cent or more
and it was almost at a record with 40 per cent of the index's firms
having fallen by half from one-year highs.
Markets that had already been jittery in early 2022 became
increasingly volatile following the invasion of Ukraine by Russia.
In addition to the broad market reaction, the rapid and decisive
high levels of coordinated sanctions imposed on Russia have led to
especially sharp moves in companies with exposure to Russia. Oil
rose to its highest level for 14 years and at its peak of USD140 a
barrel in early March it almost touched all time highs.
Persistently higher oil and gas will compound pre-existing
inflationary pressures further. We are likely to see continued
reduced activity and higher volatility levels in markets generally
until a clear picture of the consequences of Russia's actions
emerges.
PORTFOLIO STATISTICS
As at 31 December 2021, the portfolio was invested in line with
the Group's investment policy and is summarised below.
31 December 31 December
2021 2020
Number of investments 19 18
Percentage of invested portfolio in floating rate loans (1) 78.0% 79.2%
Invested Loan Portfolio unlevered annualised total return (1) 6.9% 6.7%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Weighted average portfolio LTV - to Group first GBP (1) 16.4% 18.2%
Weighted average portfolio LTV - to Group last GBP (1) 61.9% 61.8%
Average loan term (stated maturity at inception) 4.9 years 4.5 years
Average remaining loan term 2.3 years 2.4 years
Net Asset Value GBP421.6 m GBP426.7 m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP8.5 m) (GBP19.5 m)
Loans advanced at amortised cost (including accrued income) GBP414.6 m GBP442.7 m
Cash GBP3.0 m GBP2.9 m
Other net assets / (liabilities) (including the value of FX hedges) GBP12.5 m GBP0.7 m
(1) Alternative Performance Measure - refer to the end of
document for definitions and methodology.
The maturity profile of investments as at 31 December 2021 is
shown below.
Value of loans % of invested
Remaining years to contractual maturity* (GBPm) portfolio
0 to 1 years 104.6 25.4%
1 to 2 years 85.3 20.7%
2 to 3 years 106.5 25.8%
3 to 5 years 115.6 28.1%
* excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
PORTFOLIO DIVERSIFICATION
The Group continues to achieve good portfolio diversification as
shown in the tables below:
% of invested
Country
assets
UK 56.8
Republic of Ireland 19.9
Spain 16.9
Netherlands 2.9
Germany 2.6
Finland 0.9
% of invested
Sector
assets
Hospitality 40.8
Office 22.1
Retail 12.4
Residential 11.3
Healthcare 6.1
Life Sciences 4.7
Light Industrial 1.2
Logistics 1.2
Other 0.2
% of invested
Loan type
assets
Whole loans 64.4
Mezzanine 35.6
% of invested
Loan currency
assets*
Sterling 56.8
Euro 43.2
* 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.
INVESTMENT DEPLOYMENT
As at 31 December 2021, the Group had 19 investments and
commitments of GBP456.5 million as follows:
Sterling Sterling Sterling Total
(Drawn
Transaction equivalent equivalent unfunded
and Unfunded)
balance (1) commitment (1)
Hotels, UK GBP30.4 m GBP20.3 m GBP50.7 m
Hotel & Residential, UK GBP49.9 m - GBP49.9 m
Hotel, Scotland GBP42.6 m - GBP42.6 m
Life Science, UK GBP19.5 m GBP7.1 m GBP26.6 m
Hospitals, UK GBP25.0 m - GBP25.0 m
Hotel, Oxford GBP21.5 m GBP1.5 m GBP23.0 m
Office, London GBP13.9 m GBP6.6 m GBP20.5 m
Hotel, North Berwick GBP14.1 m GBP0.9 m GBP15.0 m
Hotel and Office, Northern Ireland GBP12.5 m - GBP12.5 m
Office, Scotland GBP5.0 m - GBP5.0 m
Total Sterling Loans GBP234.4 m GBP36.4 m GBP270.8 m
Hotel, Dublin GBP50.3 m - GBP50.3 m
Three Shopping Centres, Spain GBP29.9 m - GBP29.9 m
Office Portfolio, Ireland GBP26.6 m - GBP26.6 m
Mixed Portfolio, Europe GBP21.5 m - GBP21.5 m
Office, Madrid, Spain GBP15.5 m GBP0.8 m GBP16.3 m
Shopping Centre, Spain GBP14.3 m - GBP14.3 m
Mixed Use, Dublin GBP5.1 m GBP7.2 m GBP12.3 m
Office Portfolio, Spain GBP9.5 m GBP0.1 m GBP9.6 m
Logistics Portfolio, Germany GBP4.9 m - GBP4.9 m
Total Euro Loans GBP177.6 m GBP8.1 m GBP185.7 m
Total Portfolio GBP412.0 m GBP44.5 m GBP456.5 m
(1) Euro balances translated to sterling at period end exchange
rates.
Between 1 January and 31 December 2021, the following
significant investments activity occurred (included in the table
above):
New Loan: Life Science, UK: On 22 April 2021, the Group
announced that it had closed a GBP26.6 million floating rate whole
loan secured by a portfolio of four properties. The properties
consist of laboratory and office spaces let to a diverse range of
life science occupiers in the UK. The financing has been provided
in the form of an initial advance along with a smaller capex
facility to support the borrower's value-enhancing capex
initiatives. The loan term is 4 years, and the Group expects to
earn an attractive risk-adjusted return in line with its stated
investment strategy.
New Loan: Hotel & Office, Northern Ireland: On 21 July 2021,
the Group announced that it had closed a GBP13.5 million floating
rate whole loan secured by a mixed use portfolio of hotel and
office property. The financing has been provided in the form of an
acquisition loan. The loan term is 3 years, and the Group expects
to earn an attractive risk-adjusted return in line with its stated
investment strategy.
New Loan: Hotels, United Kingdom: In November 2021, the Group
announced that it closed a GBP76 million floating rate, acquisition
and capital expenditure whole loan secured on a portfolio of two UK
based hotel assets. This loan was closed in conjunction with
Starwood European Real Debt Finance I and its subsidiaries, a newly
launched, Guernsey domiciled, private debt fund acting as
co-lender. The Group has taken on two thirds of the GBP76 million
commitment, with the private debt fund taking the other third. The
loan term is five years, and the Group expects to earn an
attractive risk-adjusted return in line with its stated investment
strategy. The portfolio consists of two hotels in attractive city
centre locations in Manchester and Edinburgh. The hotels will be
rebranded, targeting domestic and international visitors in two of
Europe's best performing markets in 2021.
Loan Repayments
The following material loan repayments were received during the
year:
Repayment Of Loan: Residential, London -
This loan which had a balance outstanding of GBP25.1 million on
31 December 2020 was fully repaid during the first four months of
2021.
Repayment Of Loan: Hotel, Spain -
In July 2021, the Group received the full and final repayment of
its EUR54.2m loan on a resort hotel in Spain.
Amortisation
The following material loan amortisation amounts were received
during the year:
-- EUR7.1 million of unscheduled amortisation on the loan on the
mixed portfolio in Europe, following aportfolio of asset sales
which was in line with the borrower's business plan;
-- GBP12.0 million of unscheduled amortisation on Logistics
Portfolio, UK, following a portfolio of assetsales which was in
line with the borrower's business plan; the UK portion of this loan
is now fully repaid but theEuro portion is still outstanding;
-- EUR0.6 million of unscheduled amortisation on Logistics
Portfolio, Germany, following a portfolio of assetsales which was
in line with the borrower's business plan; and
-- EUR10.5 million of unscheduled amortisation and partial
repayment on Office Portfolio, Spain, following anasset sale and
successful refinancing of that loan.
The Group also advanced GBP28.5 million to borrowers to which it
had outstanding commitments during the year ended
31 December 2021.
PORTFOLIO OVERVIEW
The portfolio performed robustly throughout 2021 despite the
backdrop of the pandemic. Since year end the Russian / Ukrainian
crisis has fully emerged, however up to the date of this report,
there are no direct adverse impacts on the portfolio and we will be
monitoring closing any indirect impact related to matters such as
energy cost inflation, supply chain disruption, impacts on global
travel, liquidity flows etc. All loan interest and scheduled
amortisation payments up to the date of 23 March 2022 have been
paid in full and on time in line with expectations. There were no
closures of trading assets, construction or refurbishment projects
as a result of the Omicron variant related disruption which emerged
in late Q4 2021. The office portfolio also continues to perform
very satisfactorily, and we have seen positive instances of
borrowers successfully leasing refurbished office space above
underwritten projections and completing strong sales processes
where business plans have been executed. All loans remain
adequately capitalised by sponsors.
All income producing assets securing the loans undergo regular
third party valuations, with assets under development or heavy
refurbishment typically being valued prior to commencement of
projects and upon achieving completion. The weighted average age of
the valuations for the income producing portfolio (i.e. excluding
loans for development or heavy refurbishment) is 1.04 years as at
31 December 2021. The Group had an average last GBP LTV of 61.9 per
cent across the total loan portfolio (see Loan to Value section
below also).
Key updates in relation to pandemic impacted sectors are
outlined below:
Hospitality (41 per cent of funded investment portfolio)
-- The Group's hospitality exposure is currently weighted to
leisure-dominated assets located in the UK.Approximately 72 per
cent of the Group's hotel exposure is secured on assets that are
leisure focused rather thancorporate or meeting and events driven
assets. 75 per cent of the Group's hospitality exposure is located
in theUK, where over the past six months, there have been
significantly fewer restrictions on the hospitality trade thanin
other jurisdictions and these UK markets have seen strong domestic
led demand following re-opening of hotels inlate Q2 2021.
-- Furthermore, approximately 72 per cent of the Group's
hospitality exposure is secured on assets that haveeither been
comprehensively refurbished during 2021 or are in a phase of
refurbishment or construction with thecapital in place to complete
the projects. These assets will therefore have a strong new product
with which tocompete and are expected to perform well in their
respective markets.
-- The Group's only exposure to a large meeting and event driven
hotel is "Hotel, Dublin" (approximately 25per cent of the total
hospitality exposure) which remained subject to an occupational
contract with the IrishHealth Executive during 2021. The hotel
successfully re-opened and resumed normal trading activity in
earlyFebruary 2022, shortly following the maturity of this
contract. It is expected that the hotel will recover well,with
trading ramping back up during 2022 as the hotel is domestic market
focused, with a strong order book ofcustomers wishing to run annual
events that have been postponed for up to two years.
Retail (12 per cent of funded investment portfolio)
-- All retail loans have continued to pay interest and scheduled
amortisation since the onset of thepandemic.
-- The Group's exposure to retail is predominantly comprised of
the "Three Shopping Centres, Spain" and"Shopping Centre, Spain"
loans. These are the only stand-alone retail loans in the portfolio
and comprise 11 percent of the Group's total funded investment
portfolio and 87 per cent of total retail exposure. All other
retailexposure is contained in a limited number of mixed use
portfolios.
-- As previously reported, with restrictions being eased over
the second half of 2021 in Europe, along withhigh vaccination
rates, retail footfall traffic had recovered on average to over 70
per cent in 2021 versus 2019and the positive trajectory is expected
to continue into 2022.
-- The sponsor continues active asset management of the centres,
having executed a number of new lettings tostrong tenants during
2021 and deployed additional equity to support tenant fit out and
incentives where warranted.Tenant occupancy in aggregate across the
centres has continued to be robust and is on average higher
thanpre-pandemic levels.
Office (22 per cent of funded investment portfolio)
-- There has been much debate about the future of the office and
what the quantum and shape of demand willbe going forward. There
is, however, an established consensus that having good quality
office space for employeesto gather and collaborate is of vital
importance to business successes. The Group's exposure to office
isconsidered to be well placed and is highly diversified across
eight loan investments which comprise many underlyingindividual
properties located in eight different countries across Europe. The
office portfolios have performed wellon rent collection and
occupation during the pandemic, with all loans continuing to pay
interest and any scheduledamortization throughout.
-- Just under 50 per cent of the Group's office exposure are
loans where refurbishment or constructionfacilities are in place
which will result in these assets being either brand new attractive
office buildings ornewly refurbished space upon completion of their
respective projects. An example of this was realized in Q4
2021,where the office building secured under the "Office, London"
loan, representing approximately 15 per cent of thetotal office
exposure, has been successfully pre-let to a strong tenant. The
office building is located in CentralLondon and is currently under
heavy refurbishment.
The rent agreed was in line with market and ahead of the
pre-pandemic underwritten level. This letting has substantially
de-risked the Group's exposure on this loan, even in advance of the
refurbishment project completing. The pre-letting has further
demonstrated that demand for good quality office space remains.
Post year end the sponsor of this office has agreed a sale of the
building to an institutional investor at a price that exceeds the
Company's independent valuation, we expect the loan to be repaid
during 2022.
LIQUIDITY AND HEDGING
The Group is very modestly levered with net debt of GBP8.5
million (2.0 per cent of NAV) at 31 December 2021 and has
significant liquidity available with undrawn revolving credit
facilities (see note 17(c) for further information) of GBP117.5
million to fund existing and new commitments.
The way in which the Group's borrowing facilities are structured
means that it does not need to fund mark to market margin calls.
The Group does have the obligation to post cash collateral under
its hedging facilities. However, cash would not need to be posted
until the hedges are more than GBP20 million out of the money. The
mark to market of the hedges at 31 December 2021 was GBP13.6
million (in the money) and with the robust hedging structure
employed by the Group, cash collateral has never been required to
be posted since inception. The Group has the majority of its
investments currently denominated in Sterling (although this can
change over time) and is a sterling denominated group. The Group is
therefore subject to the risk that 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 (unless it was funded using the revolving
credit facilities in which case it will have a natural hedge).
Interest payments are generally 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.
TRANSITION TO SONIA FROM LIBOR
The Investment Manager has overseen the transition from LIBOR to
SONIA for each of the loans impacted on behalf of the Group. The
Group had ensured that loan agreements for the current portfolio
are in a form which accommodates the flexibilities required to
manage the transition. In addition, the three new Sterling loans
entered into during 2021 (and referred to elsewhere) have interest
charges linked to SONIA rather than LIBOR.
EXPECTED CREDIT LOSSES (IMPAIRMENT)
All loans within the portfolio are classified and measured at
amortised cost less impairment. Under IFRS 9 a three stage approach
for recognition of impairment was introduced, based on whether
there has been a significant deterioration in the credit risk of a
financial asset since initial recognition. These three stages then
determine the amount of impairment provision recognised.
For the purposes of classifying between stages 1 to 3 after
initial recognition, the Group considers a change in credit risk
based on a combination of the following factors:
-- Underlying income performance is at a greater than 10 per
cent variance to the underwritten loan metrics;
-- Loan to Value is greater than 75-80 per cent;
-- Loan to Value or income covenant test results are at a
variance of greater than 5-10 per cent of loandefault covenant
level;
-- Late payments have occurred and not been cured;
-- Loan maturity date is within six months and the borrower has
not presented an achievable refinance orrepayment plan;
-- Covenant and performance milestones criteria under the loan
have required more than two waivers;
-- Increased credit risk has been identified on tenants
representing greater than 25 per cent of underlyingasset
income;
-- Income rollover / tenant break options exist such that a
lease up of more than 30 per cent of underlyingproperty will be
required within 12 months in order to meet loan covenants and
interest payments; and
-- Borrower management team quality has adversely changed.
At 31 December 2020, six loans with a value of 35.3 per cent of
NAV were classified as Stage 2 and the remaining loans were
classified as Stage 1. During 2021, one of the loans classified as
Stage 2 was fully repaid and, at year end, two of the five
remaining Stage 2 loans were reclassified to Stage 1 loans
following a review of their most recent performance.
Therefore, at 31 December 2021, three loans with a value of 14
per cent of NAV remain classified as Stage 2 and the remaining
loans are classified as Stage 1. The loans classified to Stage 2
are predominantly in the retail and hospitality sectors (but not
all hospitality loans are in Stage 2). The main reason for leaving
these in Stage 2 was the continued impact of Covid-19 on these
assets.
At Initial Recognise a loss allowance equal to 12 months expected credit losses resulting from default events
Recognition that are possible within 12 months.
After initial
recognition:
Stage 1 Credit risk has not increased significantly since initial recognition. Recognise 12 months expected
credit losses.
Credit risk has increased significantly since initial recognition. Recognise lifetime expected
Stage 2 losses.
Interest revenue recognised on a gross basis.
Credit impaired financial asset.
Stage 3 Recognise lifetime expected losses.
Interest revenue recognised on a net basis (i.e., losses are "above the line" and impact P&L and
NAV).
It is important to note that although these three loans have
been classified as Stage 2, no expected credit losses ("ECLs") have
been recognised. This is because the formula for calculating the
expected credit loss is:
"Present Value of loan" x "probability of default" x "value of
expected loss".
Although credit risk has increased since the original inception
of these loans, we have considered a number of scenarios and as a
result of these do not currently expect to realise a loss in the
event of a default (i.e. the last part of the formula above is
considered to be zero for all loans).
This assessment has been made, despite the continued pressure on
the hospitality and retail markets from Covid-19, on the basis of
information in our possession at the date of reporting, our
assessment of the risks of each loan and certain estimates and
judgements around future performance of the assets. The position on
any potential ECLs on the Spanish retail assets in particular
continues to be closely monitored and analysed, and we have sought
input, analysis and commentary from Spanish market advisers and an
updated external valuation (in Q1 2021) in this regard, to
supplement our own information. Although we continue to update the
information available at this point in time, we have no reason to
believe that any ECLs should be recognised against the Spanish
Retail assets determined to be Stage 2. The reasons, estimates and
judgements supporting our current assessment are as follows:
-- Significant headroom on the loans based on the last
independent valuations received with an LTV of 77.2per cent based
on the latest valuation dated March 2021;
-- Performance of the centres when local restrictions were
lifted following the different waves of Covid-19has been very
encouraging for future recovery; as a result, we consider that
income in the centers is wellpositioned to recover post
pandemic;
-- We have determined that although there is pressure in this
market, it is unlike the UK retail market aswe are currently seeing
no evidence of significant liquidations in the Spanish retail
market.
FAIR VALUE OF PORTFOLIO VS AMORTISED COST
The table below represents the fair value of the loans based on
a discounted cash flow basis using different discount rates.
The effective interest rate ("EIR") - i.e., the discount rate at
which future cash flows equal the amortised cost, is 6.9 per cent.
We have sensitised the cash flows at EIR intervals of 0.5 per cent
up to +/- 2.0 per cent. The table reflects how a change in market
interest rates or credit risk premiums may impact the fair value of
the portfolio versus the amortised cost. Further, the Group
considers the EIR of 6.9 per cent to be conservative as many of
these loans were part of a business plan which involved
transformation and many of these business plans are either
completed or well advanced in execution and therefore significantly
de-risked from the original underwriting and pricing. The
volatility of the fair value to movements in discount rates is low
due to the low remaining duration of most loans.
Discount Rate Value Calculated % of Book Value
4.9% GBP 432.7 m 104.4%
5.4% GBP 428.1 m 103.2%
5.9% GBP 423.5 m 102.1%
6.4% GBP 419.0 m 101.1%
6.9% GBP 414.6 m = book value 100.0%
7.4% GBP 410.3 m 99.0%
7.9% GBP 406.1 m 97.9%
8.4% GBP 402.0 m 96.9%
8.9% GBP 397.9 m 96.0%
LOAN TO VALUE
Given the need for the Group and most of its peers to record
loans at amortised cost, the loan to value of companies in our
sector has understandably been an area of focus for many of our
shareholders and stakeholders seeking to understand underlying risk
further.
In order to try to assist in understanding the underlying credit
risk, we have always quoted the last GBP loan to value ("last LTV")
of our portfolio and have outlined further detail below on our
approach to this calculation.
Methodology
Our methodology to calculate the last LTV for each individual
loan is:
Total loan drawn less any deductible lender controlled cash
reserves and less any amortization received to date (including any
debt provided by other lenders which rank alongside or senior to
the Group's position)
Market value determined by the last formal lender valuation
received by the reporting date
Each individual loan LTV is then weighted by the amount of the
loan currently drawn (in the Group only, ignoring the position of
other third party lenders) to give a weighted average last LTV
across the Group's portfolio.
Valuations Process
The following describes the valuation basis that is used in our
calculation. As the vast majority of our portfolio is originated
directly by the Investment Adviser, the Group has discretion over
when and how to instruct valuations. We consider this to be a
strength of our valuation process as we have control over timing
and complete access to the detail of the valuation process and the
output. Where loans are not directly originated the lender could
have a lack of control over the timing and no input to the process
which we prefer to avoid where possible.
-- On the origination of a loan, for a straight forward standing
investment asset (for example, an occupiedoffice), the independent
open market value determined by an independent valuer under RICS
guidelines will be used.When considering the relevance of these
valuations in the current market, it is important to consider how
quickly aportfolio churns. Our average loan term from origination
to repayment is approximately 2.4 years and therefore ourvaluations
have always been fresh.
-- After loan origination, the Group has the right under loan
documents to obtain valuations on an annualbasis at the expense of
the borrower (based on loan anniversary, not Group financial year
end). Where a follow onvaluation has been done we use the latest
valuation number in our calculations. However, the Group does
notinstruct independent third party valuations on a strict annual
basis, only when it is considered necessary anduseful to obtain
one. 75.4 per cent of the total income producing loan book have had
their valuation updated underour instruction in the twelve months
to 31 December 2021.
-- For development projects there are a number of potential
valuation methodologies. Our selected approachis based on giving
the clearest and most consistent presentation of the risk. For
development projects ourcalculation includes the total facility
available and is calculated against the appraised market value
oncompletion of the relevant project. There are other potential
approaches such as using current drawn loan balanceand current
value or using total cost as a proxy for value. However, each of
these approaches has limitations. Forexample, using the approach of
drawn loan balance divided by current project value will typically
understate theLTV in the earlier days of a development when less
debt is drawn before converging to a higher LTV that matches
ourmethodology at the end once all the debt is drawn. We generally
retain the same rights to valuation on developmentloans as for
investment assets. It is also worth noting that the weighting of
the loan within the portfoliocalculation is based off the latest
drawn balance and not the total loan commitment.
On the basis of the methodology previously outlined, at 31
December 2021, the Group has an average last LTV of 61.9 per
cent.
The table below shows the sensitivity of the loan to value
calculation for movements in the underlying property valuation and
demonstrates that the Group has considerable headroom within the
currently reported last LTVs:
Change in Valuation Hospitality Retail Residential Other Total
-25% 81.9% 99.5% 79.3% 78.5% 82.6%
-20% 76.8% 93.3% 74.3% 73.6% 77.4%
-15% 72.3% 87.8% 69.9% 69.2% 72.9%
-10% 68.3% 82.9% 66.1% 65.4% 68.8%
-5% 64.7% 78.6% 62.6% 62.0% 65.2%
0% 61.4% 74.6% 59.4% 58.9% 61.9%
5% 58.5% 71.1% 56.6% 56.1% 59.0%
10% 55.8% 67.9% 54.0% 53.5% 56.3%
15% 53.4% 64.9% 51.7% 51.2% 53.8%
Dividend Policy
The Company declared dividends of 5.5 pence per Ordinary Share
in respect of the year ended 31 December 2021 (2020: 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 out of reserves 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.
For the year ended December 2021, 5.5 pence was paid out in
dividends which was covered 0.98x by earnings (excluding unrealised
FX gains). The Company maintains a dividend reserve which was
partially utilised to ensure dividends were not paid out of
capital.
EVENTS AFTER THE REPORTING PERIOD
The following amounts have been drawn under existing
commitments, up to 23 March 2022:
-- GBP3,619,265
The following loan amortisation (both scheduled and unscheduled)
has been received since the year-end up to 23 March 2022:
-- GBP614,876
No loans have been repaid in full since the year-end up to 23
March 2022.
At 23 March 2022, the amounts drawn under each of the Group's
credit facilities are:
-- Morgan Stanley - GBP8.5 million
On 21 January 2022, the Directors declared a dividend in respect
of the fourth quarter of 1.375 pence per Ordinary Share payable on
25 February 2022 to shareholders on the register at 4 February
2022.
Starwood European Finance
Partners Limited | Investment Manager
23 March 2022
Governance
Board of Directors
JOHN WHITTLE | Non-executive Director - Chairman of the
Board
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 The Renewable
Infrastructure Group Ltd (FTSE 250), Sancus Lending Group Ltd
(listed on AIM), and Chenavari Toro Limited Income Fund Limited
(listed on the SFS segment of the Main Market of the London Stock
Exchange). 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 a
resident of Guernsey.
GARY YARDLEY | Non-executive Director (appointed 6 September
2021)
Gary is a Fellow of the Royal Institution of Chartered Surveyors
and holds a degree in estate management from Southbank University
and an MBA. He has been a senior deal maker in the UK and European
real estate market for over 25 years. Gary was formally Managing
Director & Chief Investment Officer of Capital & Counties
Property PLC ("Capco") and led Capco's real estate investment and
development activities. Leading Capco's team on the redevelopment
of Earls Court, Gary was responsible for acquiring and subsequently
securing planning consent for over 11m sq. ft. at this strategic
opportunity area capable of providing over 7,500 new homes for
London. Gary was also heavily involved in the curation and growth
of the Covent Garden estate for Capco, now an established premier
London landmark. Gary is a Chartered Surveyor with over 30 years'
experience in UK & European real estate. He is a former CIO of
Liberty International and former equity partner of King Sturge and
led PwC's real estate team in Prague and Central Europe in the
early 1990s. Gary is a resident of the United Kingdom.
SHELAGH MASON | Non-executive Director - Management Engagement
Committee Chairman and Senior Independent Director
Shelagh Mason is a solicitor specialising in English commercial
property who retired as a consultant with Collas Crill LLP in 2020.
She is the Non-Executive Chairman of the Channel Islands Property
Fund Limited listed on the International Stock Exchange and is also
Non-Executive Chairman of Riverside Capital PCC, sits on the board
of Skipton International Limited, a Guernsey Licensed bank, and
until 28 February 2022, she was a Non-Executive Director of the
Renewables Infrastructure Fund a FTSE 250 company, standing down
after nine years on the board. In addition to the Company, she has
a non-executive position with Ruffer Investment Company Limited.
Previously Shelagh was a member of the board of directors of
Standard Life Investments Property Income Trust, a property fund
listed on the London Stock Exchange for 10 years until December
2014. She retired from the board of Medicx Fund Limited, a main
market listed investment company investing in primary healthcare
facilities in 2017 after 10 years on the board. She is a past
Chairman of the Guernsey Branch of the Institute of Directors and a
member of the Chamber of Commerce, the Guernsey International Legal
Association and she also holds the IOD Company Direction
Certificate and Diploma with distinction. Shelagh is a resident of
Guernsey.
CHARLOTTE DENTON | Non-executive Director - Audit Committee
Chairman
Charlotte is a Fellow of the Institute of Chartered Accountants
in England and Wales and holds a degree in politics from Durham
University. She is also a member of the Society of Trust and Estate
Practitioners, a Chartered Director and a fellow of the Institute
of Directors. During Charlotte's executive career she worked in
various locations through roles in diverse organisations, including
KPMG, Rothschild, Northern Trust, a property development startup
and a privately held financial services group. She has served on
boards for over fourteen years and is currently a Non-Executive
Director of various entities including Butterfield Bank (Guernsey)
Limited, the GP boards of Private Equity groups Cinven and Hitec
and the Investment Manager for NextEnergy. Charlotte is 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 Financial Conduct Authority's
("FCA")
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).
References to the Group refer to the Company and its
subsidiaries.
DIVID POLICY
The Company had a target dividend of 5.5 pence per Ordinary
Share per annum, based on quarterly dividend payments.
DIVIDS PAID
The Company declared dividends of 1.375 pence for each of the
calendar quarters of 2021. The Company paid a total of
GBP23,512,398 in respect of 2021 (5.5 pence per Ordinary share)
(2020: GBP26,824,860: 6.5 pence per Ordinary Share).
BUSINESS REVIEW
The Group's performance during the year to 31 December 2021, 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:
Admission Date Number of Price (pence per
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
15 May 2019 38,200,000 104.75
The Company holds 4,308,125 (2020: 3,648,125) shares in
treasury. The total number of voting rights in the Company is
408,911,273, which may be used by shareholders as the denominator
for the calculations by which they can determine if they are
required to notify their interest in, or a change to their interest
in, the Company under the Financial Conduct Authority's Disclosure
and Transparency Rules. As disclosed in the Chairman's Statement,
during the year ended 31 December 2021, the Company bought back
660,000 Ordinary Shares at an average price of 89.54 pence per
share (2020: 3,648,125 Ordinary Shares at an average price of 86.9
pence per share).
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders
pursuant to the FCA's Disclosure 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 2021 and as at the date of this report.
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown opposite:
% holding of % holding of
Ordinary Ordinary
Name Shares at Shares at
31 December 1 March 2022
2021 (the latest
available)
BlackRock 18.82 18.52
Close Brothers Asset Management 7.26 7.16
Schroder Investment Management 7.25 7.07
Waverton Investment Management 6.19 6.42
SG Private Banking 4.94 3.93
Fidelity International 4.57 4.57
Quilter Cheviot Investment Management 4.19 4.04
Premier Miton Investors 3.78 3.78
James Hambro & Partners 3.32 3.42
Transact (EO) 3.17 3.03
Ordinary Ordinary
Shares at Shares at
Name
31 December 31 December
2021 2020
John Whittle 23,866 23,866
Shelagh Mason (appointed 1 September 2020) 112,819 17,688
Charlotte Denton (appointed 1 January 2021) - -
Gary Yardley (appointed 6 September 2021) - -
Stephen Smith (resigned 31 December 2021) 78,929 78,929
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 Directors, at the recommendation of the Audit Committee,
intend to conduct a tender for the position of Independent Auditor
to the Company for the audit of the year-ending 31 December 2023.
The Audit Committee recommended that the Board progress an audit
tender as best practice considering that the current independent
auditor, PricewaterhouseCoopers CI LLP, has served as the Company's
Independent Auditor for two consecutive terms of five years.
PricewaterhouseCoopers CI LLP have indicated their willingness to
be included in the tender process.
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 FCA, to provide
investment advice pursuant to an Investment Advisory Agreement.
The administration of both the Company and Investment Manager
was delegated to Apex Fund and Corporate Services (Guernsey)
Limited (the "Administrator") during the year.
DISCOUNT CONTROL
The Company maintains 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. Tap issues enable issuers such as the
Company (subject to obtaining the requisite Shareholder
authorities) to issue up to 10 per cent of the securities already
listed by way of such issues over 12 months without any requirement
to publish a prospectus.
DISCOUNT-TRIGGERED REALISATION
The Company has in place a discount-triggered realisation
mechanism whereby if the Ordinary Shares trade at an average
discount to Net Asset Value per Share of five per cent or more
during the six month period ending 31 December 2022 (and in the six
month period ending on the successive fifth anniversary of such
date) the Directors, at their absolute discretion, may put forward
a realisation offer to Shareholders (subject to applicable law,
including the requirements of the Companies (Guernsey) Law, 2008)
(a "Realisation Offer").
The terms of such Realisation Offer would provide, broadly, that
Shareholders may request for up to 75 per cent of the Ordinary
Shares in issue to be realised for cash.
In the event that a Realisation Offer is made, the Company will
cease investment (except in limited circumstances) in respect of
Ordinary Shares the subject of valid realisation requests and will
return capital to holders of such Ordinary Shares over time, net of
costs, as investments mature or are otherwise realised.
If valid realisation requests exceed 75 per cent of the Ordinary
Shares in issue, the Directors will, in their absolute discretion,
consider whether it is appropriate to put forward alternative
proposals which may include the reorganisation or winding up of the
Company.
The Directors realise that the Ordinary Shares have been trading
at a discount to NAV since 22 February 2020, correlating with the
impact of the COVID-19 pandemic experienced by the market.
The making of a Realisation Offer to Shareholders will be
considered by 31 December 2022.
REALISATION VOTE
In the event that the conditions for a Realisation Offer (as
described under "Discount-Triggered Realisation") are not satisfied
and such offer is not activated, the Directors shall exercise the
discretion afforded to them under the Articles to put forward a
realisation vote (as an ordinary resolution) to Shareholders by no
later than 28 February 2023 (and on successive five year
anniversaries of such date) (a "Realisation Vote").
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 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.
As indicated in note 2 to these financial statements, there is a
material uncertainty as to the outcome of the Realisation Offer and
Realisation Vote that may cast substantial doubt on the Group's
ability to continue as a going concern. The financial statements
have not been modified in respect of this matter.
SHARE BUYBACKS
The Company renewed its authority at the recent AGM to purchase
in the market up to 14.99 per cent of the Ordinary Shares in issue
on 15 June 2021 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 AGM in 2022. The Directors intend to
seek annual renewal of this buyback authority from Shareholders
each year at the Company's AGM.
As disclosed in the Chairman's statement, the Company has bought
back 660,000 shares during the year ended 31 December 2021 at an
average price per share of 89.54 pence. These shares are held in
treasury.
John Whittle | Chairman
23 March 2022
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 Incorporation, 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.
Since year end, the Directors have appointed Trust Associates to
formally review the level of Directors' remuneration. Trust
Associates are considered to be independent of the Company and its
Directors. Following receipt of Trust Associates' review, the Board
will seek shareholders' approval at the June 2022 AGM to increase
the aggregate overall limit for Directors' remuneration to
GBP300,000 in order to aid with Board succession to attract and
retain high-calibre Directors.
Trust Associates considered the following items during their
review:
-- The time commitment required of each Director to
appropriately discharge their responsibilities;
-- Additional fees where a Director's duties extend beyond those
normally expected as part of the Director'sappointment (e.g.
Chairmanship of the Board or one it's Committees); and
-- Remuneration levels witnessed in the market.
The Board has reviewed the advice from its independent
consultant, Trust Associates, on appropriate fee increases to apply
and the Board's recommendations are set out in the below table.
This includes recognition of the additional responsibility borne by
the Chairman (John Whittle), the Chairman of the Audit Committee
(Charlotte Denton) and the Chairman of the Management Engagement
Committee (Shelagh Mason). The increases also reflect fees seen in
the market for Directors of similar companies.
The Director fees are proposed to be increased with effect from
1 January 2022 to the annual amounts set out in the below table.
The Directors' Remuneration Policy is subject to shareholder
approval at the June 2022 AGM.
As outlined in the Articles of Incorporation, 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.
Proposed Total Current Total Total Total
Director Role Fee for 2022 Fee for 2022 Fee 2021 Fee 2020
GBP GBP
GBP GBP
John Whittle Chairman with effect from 1 January 2022 60,000 50,000 45,000 45,000
Shelagh Mason (appointed Management Engagement Committee Chairman 45,000 42,500 42,500 13,333
1 September 2020) and Senior Independent Director
Charlotte Denton Audit Committee Chairman - with effect
(appointed 1 January from 1 January 2022 50,000 45,000 40,000 -
2021)
Gary Yardley (appointed 6 Non-Executive Director 42,000 40,000 12,712 -
September 2021)
Stephen Smith (resigned Chairman - - 50,000 50,000
31 December 2021)
Jonathan Bridel (resigned Management Engagement Committee Chairman - - - 42,500
31 December 2020)
Aggregate fees 197,000 177,500 190,212 150,833
Aggregate expenses - - 5,198 1,731
Total 197,000 177,500 195,410 152,564
None of the Directors have a service contract with the Company.
Each of the Directors has entered into a letter of appointment with
the Company. The letters of appointment were reviewed and amended
in 2019 by an external party to ensure that they were in line with
market standards prevailing at the time. Each Director is 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, willful misconduct or negligence.
By order of the Board
John Whittle | Chairman
23 March 2021
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 July 2018 ("UK Code").
As an AIC member, the Board has also considered the principles
and provisions of the AIC Code of Corporate Governance dated
February 2019 ("AIC Code"). The AIC Code addresses all the
principles set out in the UK Code, as well as setting out
additional principles and provisions 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.
Except as disclosed within the report, the Board is of the view
that throughout the year ended 31 December 2021, the Company
complied with the principles and provisions of the AIC 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. There is no
information that is required to be disclosed under Listing Rule
9.8.4.
The UK 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
AIC Code.
CHAIRMAN
Appointed to the position of Chairman of the Board on 1 January
2022, John Whittle 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. Stephen Smith was Chairman of the Board during
the year ended 31 December 2021 when he stepped down from the
Board.
The Chairman's appointment is in line with previously released
Succession Plan. Prior to the Chairman's appointment, a job
specification was prepared which included an assessment of the time
commitment anticipated for the role. Discussions were undertaken to
ensure the Chairman was sufficiently aware of the time needed for
his role and agreed to upon signature of his letter of appointment.
Other significant business commitments of the Chairman were
disclosed to the Company prior to appointment to the Board and were
publicly disclosed in the Company's Prospectus dated 28 November
2012. Any subsequent changes have been declared. Certain of these
commitments, and their subsequent changes, can be identified in his
biography.
The effectiveness and independence of the Chairman is evaluated
on an annual basis as part of the Board's performance evaluation;
the Management Engagement 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.
JOHN WHITTLE | Chairman
BOARD
Independence and Disclosure
The Chairman confirms the initial Board, consisting of Messrs.
Jonathan Bridel (resigned 31 December 2020), Stephen Smith
(resigned 31 December 2021) and John Whittle, 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. Shelagh Mason was appointed as a
non-executive Director during 2020 and during this year, Charlotte
Denton and Gary Yardley were appointed as non-executive Directors
on 1 January 2021 and 6 September 2021, respectively, in accordance
with the Boards Succession Planning Memorandum. The appointment of
Gary Yardley to the Board during the second half of 2021 was
considered sufficient by the Board to allow Gary time to get up to
speed prior to Stephen Smith's step down from the Board as of 31
December 2021 and John Whittle's retirement from the Board in
December 2023 (as detailed in the Chairman's Statement). The Board
is composed entirely of independent non-executive Directors, who
meet as required without the presence of the Investment Manager or
service providers to scrutinise the achievement of agreed goals,
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 their 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 that
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 initial
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 their appointment to the Board and were publicly disclosed
in the Company's Prospectus dated 28 November 2012. A similar
process was followed when the two new directors were appointed to
the Board this year as part of the succession planning outlined
above. Any subsequent changes have been declared. Certain of these
commitments can be identified in each Director's biography. Details
of the skills and experience provided by each Director can also be
found in their biographies, alongside identification of the role
each Director currently holds in the Company.
The terms and conditions of appointment for non-executive
Directors are outlined in their letters of appointment and are
available for inspection by any person at the Company's registered
office during normal business hours and at the AGM for fifteen
minutes prior to and during the meeting. The letters of appointment
were reviewed in the prior year by an external party and amended to
ensure that they are in line with current market standards.
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 specific
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, by phone and
through virtual meetings.
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. Appointing an additional Director as part of the
succession planning ensures stability during any transition
period.
The Board's position on diversity can be seen in the Strategic
Report. All Directors currently sit on all the Committees, with the
exception of the Chairman, who is not a member of the Audit
Committee; additionally, no single Director fills more than one
Committee chairmanship post.
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, and 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 Management
Engagement 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. The need to appoint an external facilitator
is reviewed by the Board on an annual basis.
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
counterproductive. 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. As part of the
recommendations of the AIC Code, the Directors put themselves
forward for annual re-election. In light of this, all Directors,
with the exception of Gary Yardley, are therefore submitting
themselves for re-election. Gary Yardley will have an election vote
at the AGM on 15 June 2022.
The Audit Committee Members and the Board confirm that all
Directors have proven their ability to fulfil all legal
responsibilities and to provide effective independent judgment on
issues of strategy, performance, resources and conduct. The Board
therefore has no hesitation in recommending to Shareholders that
all Directors are re-elected.
Appointment Process
The Directors appointment process involves identifying gaps and
needs in the Board's composition and then reviewing the skill set
of potential candidates with a view to making an appointment that
fills the identified gaps and needs. Following this process, the
Board formally appointed Gary Yardley in 2021 and announced his
appointment to the market in September 2021. The Board engaged OSA
Recruitment, an independent search consultancy with no connection
to the Company or its Directors, to assist in the above
appointments.
Succession Planning
The Company enters its tenth year in 2022 and the Board has been
mindful in the implementation of the previously announced
succession plan. During Q4 2019, the Directors devised a Succession
Planning Memorandum. The Memorandum states that a new Director was
to be appointed to the Board during the second half of 2021 giving
them time to get up to speed prior to Stephen Smith standing down
from the Board in December 2021. Charlotte Denton and Gary Yardley
were duly appointed on 1 January 2021 and 6 September 2021,
respectively.
Upon Stephen Smith's retirement from the Board during December
2021, John Whittle was subsequently appointed as Chairman of the
Board as of 1 January 2022, until his retirement in December 2023.
Charlotte Denton became Chairman of the Audit Committee as of 1
January 2022. Shelagh Mason became the Senior Independent Director
as of 20 January 2022.
As disclosed in previous reports, it is the Boards' intention
that John Whittle would remain on the Board until December 2023 in
light of (i) John Whittle's extensive familiarity with the Company;
(ii) the previously challenging market circumstances facing the
Company; and (iii) the extensive rotation of the Board in recent
years. The Board are of the view that it is in shareholders' best
interests that John Whittle remains on the Board until December
2023, a year longer than originally envisaged under the Succession
Planning Memorandum. This will ensure that there is orderly
succession of the Board which allows the new Directors the
opportunity to benefit from the significant experience the John
Whittle has developed since the Company's IPO.
In terms of the new appointments, the Directors believe that the
current composition of three Guernsey Directors and one Director
from the United Kingdom works well in terms of satisfying the
Company's requirements. The Board also intends to consider
diversity when making the new appointments to the Board. The Board
will consider the need to appoint a formal search contractor to
assist with the appointments of new directors.
At present, the Directors wish to leave the succession and the
tenure policy of the Chairman open until Mr Whittle's departure
from the Board in 2023.
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 which was composed
of all the independent members of the Board other than Chairman of
the Board. The Chairman of the Board, although not a member of the
Committee, may still attend the meetings upon invitation by the
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.
John Whittle was the Audit Committee Chairman until 31 December
2021. Charlotte Denton was appointed on 24 March 2021 to the Audit
Committee and has become chairman of the Audit Committee with
effect from 1 January 2022.
The Audit Committee met three times during 2021 (2020: four
times). 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 Group
and its service providers, for example as evidenced by the Report
on Controls at a Service Organisation ("SOC 1 Type 2 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 Group's assets.
The Audit Committee is intended to assist the Board in
discharging its responsibilities for the integrity of the Group's
consolidated financial statements, as well as aiding the assessment
of the Group'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 Shelagh Mason 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 2021 (2020:
once) 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.
Management
Scheduled Ad hoc Audit
Engagement
Board Board(1) Committee
Committee
Stephen Smith2 (resigned 31 December 2021) 3 2 3 1
John Whittle 4 8 3 1
Shelagh Mason (appointed 1 September 2020) 4 7 3 1
Charlotte Denton (appointed 1 January 2021) 4 8 3 1
Gary Yardley (appointed 6 September 2021) 2 1 1 1
Total Meetings for year 4 8 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.
(2) Meetings attended telephonically.
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 Attendance
Individual attendance at Board and committee meetings is set out
above.
In addition to the scheduled quarterly and additional ad hoc
meetings, the Directors and the Investment Manager have been
provided with a number of telephone 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 2018, a committee of one
Director was appointed to approve dividends should a quorum of two
Directors not be available.
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 2021 is provided in the
Statement of Directors' Responsibilities.
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, Apex Fund and Corporate Services (Guernsey) Limited
produces an annual SOC 1 Type 2 Report on the internal control
procedures in place within Apex Fund and Corporate Services
(Guernsey) Limited 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 EGMs held on 2 May2014, 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 2021.
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. Following the UK's cessation
of EU membership on 31 January 2020, the FCA has implemented an
equivalent regulation ("UK AIFMD") for the marketing of AIFs in the
UK and to UK 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/UK AIF, with Starwood European
Finance Partners Limited appointed to act as the Non-EU/UK
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 notes 3 and 22, as a result of acting as the AIFM.
The Board of the Investment Manager received an aggregate fee of
GBP60,000 for the year ended 31 December 2021.
The marketing of shares in AIFs that are established outside the
EU/UK (such as the Company) to investors in an EU member state/ UK
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/UK 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.
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 Marketing 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.
The Board has considered requirements of Articles 6 and 7 of
Regulation 2019/2088 on sustainability-related disclosures in the
financial services sector dated 27 November 2019 and have made the
necessary disclosures on the Company's website.
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.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the
intention of the AIC Code is that the below matters set out in
section 172 of the UK Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business
objectives, the Company actively identifies, evaluates, manages and
mitigates risk as well as continually evolving the approach to risk
management. For further details in connection with Risk Management
of the Company, please refer to the Strategic Report and the
Corporate Governance Statement.
Our People
The Company has no employees, however, to succeed we need to
manage Company's performance by bringing through talent to the
Board while ensuring we operate as efficiently as possible, as
demonstrated with the succession plan. For further details in
connection with the succession plan, please refer to the Corporate
Governance Statement.
Business Relationships
In order for the Company to succeed, it requires to develop and
maintain long-term relationships with service providers and
borrowers. The Company values all of its service providers and
borrowers.
Community and Environment
As an investment company, the Group's activities have minimal
direct impact on the environment. Please refer to the Strategic
Report for more details in connection with the impact of the
Group's operations on the community and environment.
Business Conduct
The Company is committed to act responsibly and ensure that the
business operates in a responsible and effective manner and with
high standards in order to meet its objectives.
Shareholders
The Board place a great deal of importance on communication with
all shareholders and envisage to continuing effective dialogue with
all shareholders. Please refer to section below for more details on
how the Company engages with the shareholders.
Throughout 2022, the Board of the Company, both individually and
together, will continue to review and challenge how the Company can
continue to act in good faith to promote the success of the Company
for the benefit of its stakeholders in the decisions taken.
DIALOGUE WITH SHAREHOLDERS
The Directors place a great deal of importance on communication
with shareholders. The Company's Chairman, Investment Manager and
the Broker, 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 Broker on shareholder issues. Publications such as
the Annual Report and Consolidated Financial Statements and
quarterly factsheets - which in light of the considerable
disruption from Covid-19 the Board has sought to provide more
detailed updates and disclosures - 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 (John Whittle), Senior
Independent Director (Shelagh Mason) and the Audit Committee
Chairman (Charlotte Denton), as and when required.
Should a situation arise where shareholders cast a vote of 20
per cent or more against a board recommendation the directors will
consult with shareholders to understand their reasons behind this
vote. The Board will publish the views received from the
shareholders within six months of the shareholder meeting.
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 | Chairman
23 March 2022
Report of the Audit Committee
The Board is supported by the Audit Committee, which during the
year comprised of John Whittle, as chairman until 31 December 2021,
Shelagh Mason, Charlotte Denton (appointed on 24 March 2021 to the
Audit Committee) and Gary Yardley (appointed on 11 November 2021 to
the Audit Committee). Subsequently following Stephen Smith's step
down as Chairman of the Board, Charlotte Denton has become chairman
of the Audit Committee with effect from 1 January 2022. John
Whittle, as Chairman of the Board, from 1 January 2022, no longer
sits on the Audit Committee. 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 AIC 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 formalannouncements relating to the
Group's financial performance, and reviewing significant financial
reportingjudgements contained within said statements and
announcements;
-- Reviewing the Group's internal financial controls, and the
Group's internal control and risk managementsystems;
-- Monitoring the need for an internal audit function
annually;
-- Monitoring and reviewing the scope, independence, objectivity
and effectiveness of the external Auditor,taking into consideration
relevant regulatory and professional requirements;
-- Making recommendations to the Board in relation to the
appointment, re-appointment and removal of theexternal Auditor and
approving their remuneration and terms of engagement, which in turn
can be placed before theshareholders for their approval at the
AGM;
-- Development and implementation of the Group's policy on the
provision of non-audit services by theexternal Auditor, 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 mayaffect the Group;
-- Providing advice to the Board on whether the consolidated
financial statements, taken as a whole, arefair, balanced and
understandable and provide the information necessary for
shareholders to assess the Group'sperformance, business model and
strategy; and
-- Reporting to the Board on how the Committee discharged all
relevant responsibilities at each Boardmeeting.
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 Auditor 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 financialand governance reporting
requirements;
-- Material areas in which significant judgements have been
applied or there has been discussion with theAuditor;
-- 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'sperformance, 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
Auditor on the outcomes of their half-year review and annual audit.
The Audit Committee supports PricewaterhouseCoopers CI LLP ("PwC")
in displaying the necessary professional skepticism their role
requires.
The Audit Committee met three times during the year under
review; individual attendance of Directors is outlined in the
Corporate Governance Statement. The main matters discussed at those
meetings were:
-- Review and approval of the external Auditor and when tabled,
consideration of the final audit findingsreport;
-- Discussion and approval of the fee for the external
audit;
-- Detailed review of the Annual Report and Audited Consolidated
Financial Statements and recommendation forapproval by the
Board;
-- Review and approval of the interim review findings report of
the external Auditor;
-- Detailed review of the Interim Condensed Consolidated
Financial Statements and recommendation forapproval by the
Board;
-- Discussion of reports from the external Auditor following
their interim review and annual audit;
-- Assessment of the effectiveness of the external Auditor as
described below;
-- Assessment of the independence of the external Auditor;
-- Review of the Group's key risks and internal controls;
and
-- Consideration of the AIC Code, FRC Guidance on Audit
Committees and other regulatory guidelines.
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 SOC 1 Type 2 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 risks 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 Actions to Address Issue
Issues
The Audit Committee reviews the investment process of 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.
Carrying The Audit Committee receives regular updates and reports on the performance of each loan and discusses
amount with the Investment Manager and Investment Adviser whether there are any indicators of significant
increase in credit risk or impaired or defaulted loans. The Audit Committee also assesses the ECL
and methodology focusing on the estimation of probability of default, exposure at default and loss given
impairment/ default.
expected
credit
Formal loan performance reviews and credit risk assessments are also prepared by the Investment Adviser
losses of and Investment Manager which are reviewed at each Audit Committee meeting and the Audit Committee
loans considers whether there are any indicators that would warrant a change to the expected credit loss
assessed for each loan advanced. For all new loans advanced, the Investment Manager presents, as part of
advanced the investment recommendation process, their assessment of any expected credit loss required at inception
of the loan arrangement.
All existing loans advanced as at 31 December 2021 were assessed so as to ensure compliance with IFRS 9.
As disclosed in note 2 and in the Investment Manager's report, while three loans amounting to GBP59,031,888
(2020: 6 loans amounting to GBP150,331,450 (one loan was repaid during 2021)) remain classified as Stage 2,
during the year ended 31 December 2021, no expected credit losses were considered necessary based on the
loan to value ratios headroom as at 31 December 2021 and strong security packages in place.
Income from loans advanced is measured in accordance with the effective interest rate method. The
requirement to estimate the expected cash flows when forming an effective interest rate model is subject
to significant management judgements and estimates.
Risk of fraud The Audit Committee discusses with the Investment Manager and Investment Adviser the reasons for the
and 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.
error in The Audit Committee ensures that any changes made to the models are justifiable based on the latest
income available information.
from loans
advanced 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 Auditor 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
Auditor's performance, considering a wide variety of factors
including:
-- The quality of service, the Auditor's specialist expertise,
the level of audit fee, identification andresolution of any areas
of accounting judgement, and quality and timeliness of papers
analysing these judgements;
-- Review of the audit plan presented by the Auditor, and when
tabled, the final audit findings report;
-- Meeting with the Auditor regularly to discuss the various
papers and reports in detail;
-- Furthermore, interviews of appropriate staff in the
Investment Manager, Investment Adviser andAdministrator 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 Auditor's performance.
The Audit Committee, whilst satisfied with the Auditor's
effectiveness, has recommended to the Board of Directors that a
tender for the position of Independent Auditor to the Company be
conducted for the year-ending 31 December 2023. The Audit Committee
recommended that the Board progress an audit tender as best
practice considering that the current independent auditor,
PricewaterhouseCoopers CI LLP, has served the Company for two
consecutive terms of five years. PricewaterhouseCoopers CI LLP have
indicated their willingness to be included in the tender
process.
AUDITOR'S TENURE AND OBJECTIVITY
The Group's current Auditor, PwC, have acted in this capacity
since the Company's inaugural meeting on 22 November 2012. The
Committee reviews the Auditor's performance on a regular basis to
ensure the Group receives an optimal service and make regular
enquiries to confirm the quality findings of audit work undertaken
by both the firm and lead engagement partner on the audit. 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 follows the FRC Ethical Standards
and their rotation rules require the lead audit partner to rotate
every 5 years, key partners involved in an audit every 7 years and
PwC's own internal policy would generally expect senior staff to
have consideration given to the threats to their independence after
7 years and to be rotated 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. Roland Mills is
currently serving his fourth year of five as engagement
partner.
PwC regularly updates the Audit Committee on the rotation of
audit partners, staff, level of fees, details of any relationships
between the Auditor 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
Auditor. Any non-audit work would be reviewed by the Audit
Committee to confirm it appropriate under the FRC Ethical Standard
and approved by the Audit Committee Chairman prior to the Auditor
undertaking any work.
Following a review of PwC's tenure, the Audit Committee has
recommended that the Board of Directors conducts a tender process
for the role of the Company's independent auditor for the audit of
the year-ended 31 December 2023. PwC have indicated their
willingness to be included in the tender process.
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 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 ofthe Annual Report and
Audited Consolidated Financial Statements, including the
verification processes in place toconfirm the factual content;
-- The detailed reviews undertaken at various stages of the
production process by the Investment Manager,Investment Adviser,
Administrator, Auditor and the Audit Committee that are intended to
ensure consistency andoverall balance;
-- Controls enforced by the Investment Manager, Investment
Adviser, Administrator and other third-partyservice providers to
ensure complete and accurate financial records and security of the
Group's assets; and
-- The existence and content of a satisfactory controls report
that has been reviewed and reported upon bythe Administrator's
service Auditor to verify the effectiveness of the internal
controls of the Administrator, suchas the SOC 1 Type 2 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 Auditor. It has reported to the Board that the Annual
Report for the year ended 31 December 2021, 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 a tender
process is conducted for role of the Company's independent auditor
for the 2023 year end annual report.
Charlotte Denton | Audit Committee
Chairman
23 March 2022
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 departuresdisclosed and explained
in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going
concern basis unless it is inappropriate topresume 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 Auditor
does not involve consideration of the maintenance and integrity of
the website and, accordingly, the Auditor accepts 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
Auditor is unaware;
-- All Directors have taken the necessary steps that they ought
to have taken to make themselves aware ofany relevant audit
information and to establish that the Auditor is aware of said
information;
-- The consolidated financial statements, prepared in accordance
with the applicable set of accountingstandards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of theCompany and Group; and
-- The Chairman's Statement, Strategic Report, Investment
Manager's Report, Report of the Directors andCorporate Governance
Statement include a fair review of the development and the position
of the Company and theGroup, 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 fulfil 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 Overview section of the Annual Report
provide the information necessary for shareholders to assess the
Company's performance, business model and strategy.
Having taken into account all the matters considered by the
Board and brought to the attention of the Board during the year
ended 31 December 2021, as outlined in the Chairman Statement,
Investment Manager's Report, 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 2021, 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
John Whittle | Chairman
23 March 2022
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 consolidated financial position of
Starwood European Real Estate Finance Limited (the "company") and
its subsidiaries (together "the group") as at 31 December 2021, 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 2021;
-- 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 significant accounting policies andother explanatory
information.
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 ethical
requirements that are relevant to our audit of the consolidated
financial statements of the group, as required by the Crown
Dependencies' Audit Rules and Guidance, and we have fulfilled our
other ethical responsibilities in accordance with these
requirements. We are also independent in accordance with SEC
Independence Rules.
MATERIAL UNCERTAINTY RELATED TO GOING CONCERN
We draw attention to the going concern disclosures in the basis
of preparation disclosures in note 2 to the consolidated financial
statements. These disclosures note that there is a possibility of a
realisation offer being made or, failing that, a realisation vote
being put to the shareholders no later than 28 February 2023.
Depending on the level of realisation requests from shareholders,
the directors may put forward alternative proposals which may
include the reorganisation or winding up of the company. There is a
material uncertainty as to the outcome of this realisation offer
and realisation vote that may cast substantial doubt on the group's
ability to continue as a going concern. Our opinion is not modified
in respect of this matter.
OUR AUDIT APPROACH
OVERVIEW
AUDIT SCOPE
-- The company is based in Guernsey, has subsidiaries located in
Guernsey and Luxembourg and engagesStarwood European Finance
Partners Limited (the "Investment Manager") to manage its assets.
The consolidatedfinancial statements are a consolidation of the
company and all the subsidiaries.
-- We conducted our audit of the consolidated financial
statements from information provided by Apex Fundand Corporate
Services (Guernsey) Limited (the "Administrator") and its related
group entities to whom the board ofdirectors has delegated the
provision of certain functions. We also had significant interaction
with StarwoodCapital 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 thetypes of investments
within the group, the involvement of the third parties referred to
above, and the industry inwhich the group operates.
-- We performed an audit of the financial information of the
company and its Guernsey and Luxembourgsubsidiaries and we consider
them all as one component.
-- Scoping was performed at the group level, irrespective of
whether the underlying transactions took placewithin the company or
within any of the subsidiaries. Our testing was performed on a
consolidated basis usingthresholds which are determined with
reference to the overall group performance materiality and the
risks ofmaterial misstatement identified.
KEY AUDIT MATTERS
-- Carrying amount and impairment/expected credit losses of
loans advanced.
-- Risk of fraud in income from loans advanced.
-- Material uncertainty related to going concern.
MATERIALITY
-- Overall group materiality: GBP8.4 million (2020: GBP8.5
million) based on 2% consolidated net assets.
-- Performance materiality: GBP6.3 million.
THE SCOPE OF OUR AUDIT
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 and we
considered the risk of climate change and the potential impact
thereof on our audit approach. 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.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we make on
the results of our procedures thereon, 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. In addition to the matter
described in the Material uncertainty related to going concern
section, we have determined the matters described below to be the
key audit matters to be communicated in our report.
This is not a complete list of all risks identified by our
audit.
Key audit matter How our audit addressed the Key audit matter
We understood and evaluated the internal control
environment in place at the Administrator and the
Investment Adviser over the carrying amount of the loans
advanced, in particular management's processes and
assumptions used to measure the loans at amortised cost and
used to determine the level of impairment (if any) required
on the loans advanced, either at inception, or on an
ongoing basis, using the amortised cost model and ECL
calculation.
We assessed the accounting policy for loans advanced for
compliance with International Financial Reporting Standards
as adopted by the European Union and planned and executed
our audit procedures to ensure that the loans advanced were
accounted for in accordance with the stated accounting
policy.
Our procedures included:
Carrying amount and impairment/expected credit losses of -- Detailed testing over the amortised cost
loans advanced models used by management to value the loans at
amortised cost using the effective interest rate
Loans advanced at the year-end of GBP414.6 million (note 10) method;
are measured at amortised cost and comprise of both fixed -- Testing the assumptions and inputs into the
and floating rate loans. amortised cost models and inspecting the associated
agreements and other legal documentation;
-- Back-testing procedures were also performed
to assist in our conclusions as to the cash flow
Loans advanced make up a significant part of the forecasting reliability applied by the Investment
consolidated statement of financial position and due to the Adviser;
nature of this balance, their amortised cost carrying -- Understanding of and evaluating the
amount, ongoing recoverability and impairment is subject to assumptions and judgements made by the Investment
judgement and estimation, including the calculation of Adviser in respect of the ECL for each loan advanced
expected credit losses ("ECL") as disclosed within note 2c including:
of the consolidated financial statements.
? obtaining the Investment Adviser's impairment
papers and assessing the ECL methodology, focussing on
the estimation of probability of default, exposure at
The judgements exercised in determining the potential for default and loss given default, and how forward-looking
ECL could significantly impact the net asset value of the information was considered in this regard;
group and this is considered to be a key source of ? evaluating the consistency and
estimation uncertainty as described in note 2c of the appropriateness of the Investment Adviser's assumptions
consolidated financial statements. applied in determining whether any loan advanced was
performing, underperforming or non-performing,
including consideration as to whether a significant
increase in credit risk of each borrower had occurred
The specific areas of judgement include: during the year;
? obtaining evidence to support any significant
-- The impact of changes in the expected cash assumptions presented in the assessment of the ECL,
flows for each loan on the carrying amount of the loans including consideration of the financial information on
measured at amortised cost; and the borrower and the collateral in place to assess
-- How management determine the underlying their ability to meet future payment commitments, and
assumptions when preparing impairment/ECL review progress against business plans, including any ongoing
analyses such as significant changes in the credit risk impact caused by COVID-19 or other global crises,
of a borrower, changes in the probability of default of including management's assessment of the Loan-To-Value
a borrower, changes in valuation of underlying ratios headroom;
collateral and the Loan-To-Value ratios headroom, the ? inspecting the Investment Adviser's
ability of the borrowers to deliver in accordance with application of its impairment/expected credit loss
their business plans and their projected financial criteria to evaluate the appropriateness and
performance figures. completeness of the loans moved between ECL stages;
? recalculating a targeted sample of the
Investment Adviser's sensitivity analysis of the
Loan-To-Values ratios headroom;
? engaging our Real Estate valuation experts to
work with our audit team through a sample of
third-party real estate valuation reports on the
underlying properties against which collateral is held
by the group for the loans advanced, and which underpin
the Loan-To-Value considerations applied in the ECL
modelling; and
? inspecting a sample of compliance
certificates signed by each respective underlying
borrower in respect of compliance with covenants as at
the year-end.
Based on the audit procedures performed, we have nothing to
report to
those charged with corporate governance.
We assessed the accounting policy for the recognition of
interest income for compliance with International Financial
Reporting Standards as adopted by the European Union; and
we planned and executed our audit procedures to ensure that
interest income had been accounted for in accordance with
the stated accounting policy.
Risk of fraud in income from loans advanced We held discussions with the Investment Adviser and the
Administrator to understand and evaluate the processes in
Income from loans advanced for the year was GBP28.4 million place for recognising interest income and to understand the
(Note 10) and was measured in accordance with the estimates made.
accounting policies as described in note 2l of the
consolidated financial statements. The group has a key
investment objective to provide shareholders with regular
dividends through investment in debt instruments and Our procedures included:
therefore we focussed on this risk.
-- Detailed testing over the amortised cost
models used by management to measure the loans at
amortised cost and calculate the effective interest
The requirement to estimate the expected cash flows when income in the consolidated financial statements,
calculating an effective interest rate model is subject to including how the arrangement, origination and
significant management judgements and estimates, and as commitment fees, which are integral to the loan
such could be open to manipulation by management of factors arrangements, have been considered in the models;
including:
-- Assessing the judgements made in respect of
-- Expected timing of repayments; the estimated cash flows timing (versus the contractual
-- Expectations of partial or full prepayments; repayment date) and amount including arrangement,
and origination and commitment fees, through testing of the
-- Associated exit fees and make-whole payments. amortised cost models for each loan;
-- Recalculating interest income using the
original effective interest rate, paying due
consideration to any early, partial or full prepayments
or management's re-estimate thereof;
Changes to the estimated timings of cash flows can have a -- Inspecting supporting documents, such as
significant impact on the recognition of income from loans correspondence with the underlying borrower and timing
advanced and is considered to be a key source of estimation of cash receipts, as part of our assessment of
uncertainty as described in note 2c of the consolidated management's estimates and assumptions; and
financial statements. -- For those loans advanced also held at 31
December 2020, comparing the estimated future cash
flows in the amortised cost models as at 31 December
2021 and evaluating the rationale behind any
significant changes to those cash flows from the 31
December 2020 models.
Based on the audit procedures performed, we have nothing to
report to those charged with corporate governance.
HOW WE TAILORED THE AUDIT SCOPE
We tailored the scope of our audit to ensure that we performed
enough work to be able to give 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 two subsidiaries located
in Guernsey and three underlying subsidiaries located in
Luxembourg. The consolidated financial statements are a
consolidation of the company and all the subsidiaries.
MATERIALITY
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality
for the consolidated financial statements as a whole as
follows:
Overall group GBP8.4 million (2020: GBP8.5 million)
materiality
How we 2% of consolidated net assets
determined it
Rationale for We believe consolidated net assets to be the appropriate basis for determining materiality since this is
benchmark a key consideration for members of the company when assessing financial performance. It is also a
generally accepted measure used for companies in this industry.
applied
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 its related group entities
and therefore we were not required to engage with component
auditors from another PwC global network firm operating under our
instruction. 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.
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% of overall
materiality, amounting to GBP6.3 million (2020: GBP6.4 million) for
the group financial statements.
In determining the performance materiality, we considered a
number of factors - the history of misstatements, risk assessment
and aggregation risk and the effectiveness of controls - and
concluded that an amount at the upper end of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.4 million
(2020: GBP0.4 million) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.
REPORTING ON OTHER INFORMATION
The other information comprises all the information included in
the Annual Report and Audited Consolidated Financial Statements
(the "Annual Report") but does not include the consolidated
financial statements and our auditor's report thereon. The
directors are responsible for the other information.
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
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 based on these responsibilities.
RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE AUDIT
Responsibilities of the directors for the consolidated financial
statements
As explained more fully in the Statement of Directors'
Responsibilities, 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 consolidated 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
related 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.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whetherdue to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidencethat is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a
materialmisstatement 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 proceduresthat are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness ofthe group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimatesand related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, basedon the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may castsignificant doubt on the group's ability
to continue as a going concern over a period of at least twelve
monthsfrom the date of approval of the consolidated financial
statements. If we conclude that a material uncertaintyexists, we
are required to draw attention in our auditor's report to the
related disclosures in the consolidatedfinancial statements or, if
such disclosures are inadequate, to modify our opinion. Our
conclusions are based onthe audit evidence obtained up to the date
of our auditor's report. However, future events or conditions may
causethe 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 transactionsand events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities orbusiness activities within
the group to express an opinion on the consolidated financial
statements. We areresponsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
ouraudit 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.
Use of this report
This report, including the opinions, 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 these opinions, 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.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Company Law exception reporting
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.
CORPORATE GOVERNANCE STATEMENT
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement, included within the Strategic Report is
materially consistent with the consolidated financial statements
and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
-- The directors' confirmation that they have carried out a
robust assessment of the emerging and principalrisks;
-- The disclosures in the Annual Report that describe those
principal risks, what procedures are in place toidentify emerging
risks and an explanation of how these are being managed or
mitigated;
-- The directors' statement in the consolidated financial
statements about whether they considered itappropriate to adopt the
going concern basis of accounting in preparing them, and their
identification of anymaterial uncertainties to the group's ability
to continue to do so over a period of at least twelve months from
thedate of approval of the consolidated financial statements;
-- The directors' explanation as to their assessment of the
group's prospects, the period this assessmentcovers and why the
period is appropriate; and
-- The directors' statement as to whether they have a reasonable
expectation that the company will be ableto continue in operation
and meet its liabilities as they fall due over the period of its
assessment, including anyrelated disclosures drawing attention to
any necessary qualifications or assumptions.
Our review of the directors' statement regarding the longer-term
viability of the group 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
Code; and considering whether the statement is consistent with the
consolidated financial statements and our knowledge and
understanding of the group and its environment obtained in the
course of the audit.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
consolidated financial statements and our knowledge obtained during
the audit:
-- The directors' statement that they consider the Annual
Report, taken as a whole, is fair, balanced andunderstandable, and
provides the information necessary for the members to assess the
group's position, performance,business model and strategy;
-- The section of the Annual Report that describes the review of
effectiveness of risk management andinternal control systems;
and
-- The section describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
OTHER MATTERS
As required by the Financial Conduct Authority Disclosure
Guidance and Transparency Rule 4.1.14R, these consolidated
financial statements will form part of the ESEF-prepared annual
financial report filed on the National Storage Mechanism of the
Financial Conduct Authority in accordance with the ESEF Regulatory
Technical Standard ("ESEF RTS"). This auditor's report provides no
assurance over whether the annual financial report will be prepared
using the single electronic format specified in the ESEF RTS.
As explained in note 21 to the consolidated financial
statements, in addition to our responsibility to audit and express
an opinion on the consolidated financial statements in accordance
with ISAs and Guernsey law, we have been requested by the directors
to express an opinion on the consolidated financial statements in
accordance with auditing standards generally accepted in the United
States of America as issued by the AICPA, in order to meet the
requirements of Rule 206(4)-2 under the Investment Advisers Act
(the "Custody Rule").
Roland Mills
For and on behalf of PricewaterhouseCoopers CI LLP Chartered
Accountants and Recognised Auditor
Guernsey, Channel Islands
23 March 2022
Independent Auditor's Report to the Directors of Starwood
European Real Estate Finance Limited (US GAAS)
OPINION
We have audited the accompanying consolidated financial
statements of Starwood European Real Estate Finance Limited (the
"company") and its subsidiaries (together "the group"), which
comprise the consolidated statements of financial position as of 31
December 2021 and 31 December 2020, and the related consolidated
statements of comprehensive income, changes in equity and cash
flows for the years then ended, including the related notes
(collectively referred to as the "consolidated financial
statements").
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects, the financial
position of the group as of 31 December 2021 and 31 December 2020,
and the results of its operations and its cash flows for the years
then ended in accordance with International Financial Reporting
Standards as adopted by the European Union.
BASIS FOR OPINION
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America (US GAAS). Our
responsibilities under those standards are further described in the
Auditors' responsibilities for the audit of the consolidated
financial statements section of our report. We are required to be
independent of the group and to meet our other ethical
responsibilities, in accordance with the relevant ethical
requirements relating to our audit. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.
SUBSTANTIAL DOUBT ABOUT THE GROUP'S ABILITY TO CONTINUE AS A
GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming that the group will continue as a going concern.
As discussed in the going concern disclosures in the basis of
preparation disclosures in note 2 to the consolidated financial
statements, there is a possibility of a realisation offer being
made or, failing that, a realisation vote being put to the
shareholders no later than 28 February 2023. Depending on the level
of realisation requests from shareholders, the directors may put
forward alternative proposals which may include the reorganisation
or winding up of the company. Note 2 has stated that substantial
doubt exists about the group's ability to continue as a going
concern. Management's evaluation of the events and conditions and
management's plans regarding these matters are also described in
note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our opinion is not modified with respect to this matter.
RESPONSIBILITIES OF MANAGEMENT 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, and for 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.
In preparing the consolidated financial statements, management
is responsible for assessing the group's ability to continue as a
going concern for at least, but not limited to, twelve months from
the end of the reporting period, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the group
or to cease operations, or has no realistic alternative but to do
so.
AUDITORS' RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance but is not absolute assurance and
therefore is not a guarantee that an audit conducted in accordance
with US GAAS will always detect a material misstatement when it
exists. 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.
Misstatements are considered material if there is a substantial
likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the
financial statements.
In performing an audit in accordance with US GAAS, we:
-- Exercise professional judgment and maintain professional
skepticism throughout the audit.
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whetherdue to fraud or error,
and design and perform audit procedures responsive to those risks.
Such procedures includeexamining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated
financialstatements.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit proceduresthat are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness ofthe group's internal control. Accordingly,
no such opinion is expressed.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of significant accountingestimates made by
management, as well as evaluate the overall presentation of the
consolidated financialstatements.
-- Conclude whether, in our judgment, there are conditions or
events, considered in the aggregate, thatraise substantial doubt
about the group's ability to continue as a going concern for a
reasonable period of time.
We are required to communicate with those charged with
governance regarding, among other matters, the planned scope and
timing of the audit, significant audit findings, and certain
internal control-related matters that we identified during the
audit.
OTHER INFORMATION
Management is responsible for the other information included in
the Annual Report and Audited Consolidated Financial Statements
(the "Annual Report"). The other information comprises the
information included in the Annual Report, but does not include the
consolidated financial statements and our auditor's reports
thereon. Our opinion on the consolidated financial statements does
not cover the other information, and we do not express an opinion
or any form of assurance thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information and
consider whether a material inconsistency exists between the other
information and the consolidated financial statements or the other
information otherwise appears to be materially misstated. If, based
on the work performed, we conclude that an uncorrected material
misstatement of the other information exists, we are required to
describe it in our report.
RESTRICTION OF USE
This report, including the opinion, has been prepared for and
only for the directors in relation to the requirements of Rule
206(4)-2 of the Investment Advisers Act of 1940 (the "Custody
Rule") as it applies to the company 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.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
23 March 2022
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2021
1 January 2021 1 January 2020
to to
Notes 31 December 2021 31 December 2020
GBP GBP
Income
Income from loans advanced 10 28,382,742 29,052,521
Net foreign exchange (losses)/gains 6 (3,043,374) 5,993,767
Net changes in fair value of financial assets at fair value through profit or 18 - 1,097,722
loss
Total income 25,339,368 36,144,010
Expenses
Investment management fees 3, 22 3,147,075 3,186,943
Credit facility commitment fees 844,694 762,074
Credit facility interest 685,815 945,771
Administration fees 3(b) 344,950 331,591
Legal and professional fees 266,154 288,111
Audit and non-audit fees 5 229,387 227,386
Directors' fees and expenses 4, 22 195,410 152,564
Other expenses 179,262 198,350
Broker's fees and expenses 3(d) 53,250 50,000
Facility agent fees - 10,781
Total operating expenses 5,945,997 6,153,571
Operating profit for the year before tax 19,393,371 29,990,439
Taxation 20 100,452 81,953
Operating profit for the year 19,292,919 29,908,486
Other comprehensive (loss)/income
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 2(k) (329,895) 232,417
Other comprehensive (loss)/income for the year (329,895) 232,417
Total comprehensive income for the year 18,963,024 30,140,903
Weighted average number of shares in issue 7 408,939,505 412,469,890
Basic and diluted earnings per Ordinary Share (pence) 7 4.72 7.25
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Financial Position
as at 31 December 2021
As at As at
Notes 31 December 2021 31 December 2020
GBP GBP
Assets
Cash and cash equivalents 8 2,994,357 2,939,408
Other receivables and prepayments 9 37,652 17,094
Financial assets at fair value through profit or loss 11 13,291,598 918,259
Loans advanced 10 414,632,512 442,659,649
Total assets 430,956,119 446,534,410
Liabilities
Credit facility 12 7,914,993 18,626,837
Trade and other payables 13 1,484,526 1,210,066
Total liabilities 9,399,519 19,836,903
Net assets 421,556,600 426,697,507
Capital and reserves
Share capital 15 407,440,011 408,031,544
Retained earnings 14,150,392 18,369,871
Translation reserve (33,803) 296,092
Total equity 421,556,600 426,697,507
Number of Ordinary Shares in issue 15 408,911,273 409,571,273
Net asset value per Ordinary Share (pence) 103.09 104.18
These consolidated financial statements were approved and
authorised for issue by the Board of Directors on 23 March 2022,
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 2021
Year ended 31 December 2021
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2021 408,031,544 18,369,871 296,092 426,697,507
Share buy backs (591,533) - - (591,533)
Dividends paid - (23,512,398) - (23,512,398)
Operating profit for the year - 19,292,919 - 19,292,919
Other comprehensive income:
Other comprehensive income for the year - - (329,895) (329,895)
Balance at 31 December 2021 407,440,011 14,150,392 (33,803) 421,556,600
Year ended 31 December 2020
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2020 411,205,161 15,286,245 63,675 426,555,081
Share buy backs (3,173,617) - - (3,173,617)
Dividends paid - (26,824,860) - (26,824,860)
Operating profit for the year - 29,908,486 - 29,908,486
Other comprehensive income:
Other comprehensive income for the year - - 232,417 232,417
Balance at 31 December 2020 408,031,544 18,369,871 296,092 426,697,507
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2021
1 January 2021 to 1 January 2020 to
31 December 2021 31 December 2020
GBP GBP
Operating activities:
Operating profit for the year before tax 19,393,371 29,990,439
Adjustments:
Net interest income (28,382,742) (29,052,521)
Net changes in fair value of financial assets at fair value through profit or loss - (1,097,722)
(Increase) / decrease in prepayments and receivables (20,558) 11,841
Increase / (decrease) in trade and other payables 132,570 (159,467)
Net unrealised (gains) / losses on foreign exchange derivatives (12,373,339) 7,676,819
Net foreign exchange losses / (gains) 15,488,570 (12,848,644)
Credit facility interest 236,071 558,323
Credit facility amortisation of fees 449,744 387,448
Credit facility commitment fees 844,694 762,074
Currency translation difference 2,722,148 (463,709)
Corporate taxes paid (87,724) (151,052)
(1,597,195) (4,386,171)
Loans advanced(1) (90,597,307) (98,731,281)
Loan repayments 103,474,780 59,619,767
Credit linked note repayments - 21,773,000
Origination fees paid (300,456) (577,233)
Interest, commitment and exit fee income from loans advanced 26,682,663 28,256,205
Interest received on Credit Linked Notes - 1,210,333
Net cash inflow from operating activities 37,662,485 7,164,620
Cash flows from financing activities
Shares buy backs (677,120) (3,088,030)
Dividends paid (23,512,398) (26,824,860)
Proceeds under credit facility 63,800,000 41,985,860
Repayments under credit facility (75,128,132) (52,067,717)
Credit facility interest paid (262,221) (492,331)
Credit facility commitment fees paid (647,799) (616,146)
Net cash outflow from financing activities (36,427,670) (41,103,224)
Net increase / (decrease) in cash and cash equivalents 1,234,815 (33,938,604)
Cash and cash equivalents at the start of the year 2,939,408 36,793,674
Net foreign exchange (losses) / gains on cash and cash equivalents (1,179,866) 84,338
Cash and cash equivalents at the end of the year 2,994,357 2,939,408
(1) Net of arrangement fees of GBP1,125,342 (2020: GBP780,584)
withheld.
The accompanying notes form an integral part of these
consolidated financial statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2021
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 (the "GFSC") as registered
closed-ended investment scheme. 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. Further issues took place in March 2013, April
2013, July 2015, September 2015, August 2016 and May 2019. On 10
August 2020, the Company announced the appointment of Jefferies
International Limited as buy-back agent to effect share buy backs
on behalf of the Company. During the year ended 31 December 2021,
the Company repurchased 660,000 (2020: 3,648,125) Ordinary Shares
at an average price of 89.54 pence (2020: 86.9 pence) per share. As
at 31 December 2021, the Company had repurchased 4,308,125 (2020:
3,648,125). These Ordinary Shares are held in treasury.
The consolidated financial statements comprise the financial
statements of the Company, Starfin Public Holdco 1 Limited ("Holdco
1"), Starfin Public Holdco 2 Limited ("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
2021.
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 wide
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 UK 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 (the "FCA"), to provide investment advice pursuant to an
Investment Advisory Agreement. The administration of the Company is
delegated to Apex Fund and Corporate Services (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
assessing the possible impact of the Covid-19 pandemic on the
Group's portfolio, reviewing the ongoing cash flows and the level
of cash balances and available liquidity facilities. The Board have
also taken into consideration forecasts of future cash flows and
the possibility of a Realisation Offer being made or, failing that,
the Realisation Vote being put to the shareholders (the details of
which are set out in the Report of the Directors and below).
After making enquiries of the Investment Manager and the
Administrator and reviewing the viability model prepared by the
Investment Adviser, 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.
In addition to a going concern statement, the Directors have
undertaken a longer term viability assessment of the Group,
including the impact of Covid-19, the results of which can be found
in the Strategic Report. A range of scenarios have been evaluated
as part of this analysis. The worst case scenario evaluated was an
interest payment default on all Stage 2 loans, and simultaneously
the repayment of the loan principal is not received until 12 months
after their maturity dates. In this scenario the Group is still
able to meet its liabilities as the fall due although the dividend
would need to be reduced to reflect the reduced cash received.
As noted in the Report of the Directors, if the Ordinary Shares
trade at an average discount to Net Asset Value per Share of five
per cent or more during the six month period ending 31 December
2022, the Directors, at their discretion, may put forward a
Realisation Offer to Shareholders. If valid realisation requests
exceed 75 per cent of the Ordinary Shares in issue, the Directors
will, in their absolute discretion, consider whether it is
appropriate to put forward alternative proposals which may include
the reorganisation or winding up of the Company. Subject to the
discount triggered realisation mechanism not being activated, the
Directors will exercise their discretion to put forward a
Realisation Vote to shareholders by no later than 28 February 2023.
Should the Realisation Vote be passed by the requisite majority, a
Realisation Offer will then be made to the shareholders. 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; or (iii) the
number of Ordinary Shares of any class in public hands falls below
25 per cent, the Directors, at their discretion, have the right to
propose a resolution to wind up or reconstruct the Company.
There is a material uncertainty as to the outcome of the
Realisation Offer and the Realisation Vote, and subsequently the
Realisation Offer if the Realisation Vote is passed, that may cast
substantial doubt on the Group's ability to continue as a going
concern. As a result of the strong fundamentals supporting the
Company's investment strategy, robust operating metrics displayed
by the Company which include a consistent dividend yield and stable
NAV, combined with the strong financial position of the Company,
the Directors believe there is a compelling rationale for
shareholders to vote against a Realisation Offer and Realisation
Vote and that the Company will continuing as constituted. 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 ("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 and were adopted by the European
Union. 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 2021
Certain new accounting standards and interpretations have been
published that are effective 1 January 2021 and have not been
applied in preparing these consolidated financial statements. These
standards are not expected to have a material impact on the Group
in the current or future reporting periods and on foreseeable
future transactions. ii. New standards, amendments and
interpretations effective after 1 January 2021 and have not been
earlyadopted
A number of new standards, amendments to standards and
interpretations are effective for annual periods beginning after 1
January 2021 and have not been early adopted in preparing the
Group's consolidated financial statements. None of these are
expected to have a material effect on the consolidated 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 the Board of Directors 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 regarding the receipt andtiming of
scheduled and unscheduled payments of loans advanced. Changes in
these assumptions and estimates couldimpact liquidity risk and the
interest income (see note 17).
-- The measurement of both the initial and ongoing expected
credit loss ("ECL") allowance for financialassets measured at
amortised cost is an area that requires the use of significant
assumptions about credit behaviorsuch as likelihood of borrowers
defaulting and the resulting losses (see note 2(h)). ii. Critical
accounting judgements
-- The functional currency of each the Company and its
subsidiary undertakings, which is considered by theDirectors to be
Euro for Luxco 3 and Sterling for the Company and all other
subsidiaries (see notes 2(e) and 2(k)).
Subsidiary undertakings Date of Ownership Country of Establishment Principal place of business
Control %
Starfin Lux S.à.r.l 30/11/12 100 Luxembourg Luxembourg
Starfin Public Holdco 1 Limited 11/09/17 100 Guernsey Guernsey
Starfin Public Holdco 2 Limited 11/09/17 100 Guernsey Guernsey
Starfin Lux 3 S.à.r.l 19/09/17 100 Luxembourg Luxembourg
Starfin Lux 4 S.à.r.l 11/12/17 100 Luxembourg Luxembourg ? The operating segments, of which the Directors are currently of the opinion that the Company and itssubsidiaries are engaged in a single segment of business, being the provision of a diversified portfolio of realestate backed loans (see note 2(f)). ? A number of significant judgements are also required in applying the accounting requirements formeasuring ECL, such as determining the criteria for significant increase in credit risk, choosing the appropriatemodel and assumptions for the measurement of ECL, determining the probabilities of default and loss given default(see note 2(h)). 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 percent 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. 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. 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 Luxco 3 share capitalwhich is denominated in
Euro; ? the dividends are paid in Sterling; ? Euro non-investment
transactions represent only a small proportion of transactions in
the Luxembourgentities; and ? proportion of non-Sterling
investments in each portfolio of Luxembourg entities.
The functional and presentation currency of each Group entity is
Sterling, apart from Luxco 3 for which the functional currency is
Euro. Luxco 3 holds loans and investments in Euro currencies. The
Directors have also adopted Sterling as the
Group's presentation currency (as the Group holds a significant
proportion of its assets in the UK, although this may vary from
time to time, capital was raised in Sterling, Group expenses are
primarily incurred in Sterling and performance is measured in
Sterling) and, therefore, the consolidated financial statements for
the Group 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 and subsequent measurement
The Group classifies its financial assets into the following
measurement categories: at amortised cost, at fair value through
profit or loss and at fair value through other comprehensive
income. 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 measured at amortised cost
A financial asset is measured at amortised cost if both of the
following conditions are met: (a) the financial asset is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and (b) the contractual
terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding. The carrying amount of these assets
is adjusted by any ECL allowance recognised and measured as
described in note 2(h). Interest income from these financial assets
is included in "Income from loans advanced" using the effective
interest rate method.
Financial assets at fair value through other comprehensive
income
A financial asset is measured at fair value through other
comprehensive income if both of the following conditions are met:
(a) the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and
selling financial assets and (b) the contractual terms of the
financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount
outstanding. Movements in the carrying amount are taken through
other comprehensive income, except for the recognition of
impairment gains and losses, interest revenue and foreign exchange
gains and losses on the instrument's amortised cost which are
recognised in profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are
financial instruments that (a) either designated in this category
upon initial recognition or subsequently or (b) not classified in
any of the other categories. Financial assets at fair value through
profit or loss are carried in the statement of financial position
at fair value with net changes in fair value recognised in the
Consolidated Statement of Comprehensive Income. This category
includes currency forward contracts. Gains or losses on currency
forward contracts are recognised within "net foreign exchange
(losses) / gains".
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are
carried in the statement of financial position at fair value with
net changes in fair value recognised in profit or loss. These
comprise currency forward contracts which represent contractual
obligations to purchase domestic currency and sell foreign currency
on a future date.
Financial liabilities measured at amortised cost
Financial liabilities that are not classified through profit or
loss, including bank loans, are measured at amortised cost.
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 financial assets at fair value through other
comprehensive income are subsequently carried at fair value.
Financial assets at amortised cost are subsequently measured using
the effective interest method and are subject to impairment using
the ECL model. Gains and losses are recognised in profit or loss
when the asset is derecognised, modified or impaired.
Derecognition
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.
Amortised cost and effective interest rate
The amortised cost is the amount at which the financial asset or
financial liability is measured at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation
using the effective interest method of any difference between that
initial amount and the maturity amount and, for financial assets,
adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected
life of financial assets or financial liability to the gross
carrying amount of a financial asset (i.e., its amortised cost
before any loss allowance) or to the amortised cost of a financial
liability. The calculation does not consider expected credit losses
and includes transaction costs and all fees paid or received that
are integral to the effective interest rate.
Fair value estimation
The fair value of financial assets, 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. h. Expected credit loss measurement
The Group follows a three-stage model for impairment based on
changes in credit quality since initial recognition as summarised
below: ? A financial instrument that is not credit-impaired on
initial recognition is classified as Stage 1 andhas its credit risk
continuously monitored by the Group. The ECL is measured over a 12
month period of time. ? If a significant increase in credit risk
since initial recognition or the previous reporting period
isidentified, the financial instrument is moved to Stage 2 but is
not yet deemed to be credit-impaired. The ECL ismeasured on a
lifetime basis. ? If the financial instrument is credit-impaired,
it is then moved to Stage 3. The ECL is measured on alifetime
basis.
The Group's financial assets at amortised cost were all
classified within Stage 1 at inception for the following reasons: ?
All loans are the subject of very detailed underwriting, including
the testing of resilience toaggressive downside scenarios with
respect to the loan specifics, the market and general
macro-economic changes,and therefore the Group considers that value
of losses given default ("LGD") currently have a nil value for
allloans; ? Loans have very robust covenants in place which trigger
as an early warning (long before there would beany indicators of
significant increase in credit risk) and this enables the
Investment Adviser to become highlyinvolved in the execution of
business plans to avoid ECL; ? Loans have strong security packages
and many are amortising with relatively short terms which
furtherreduces the risk; and ? All loans have significant
loan-to-value headroom which further mitigates the risk of ECL.
During the year ended 31 December 2021, three loans with a value
of GBP59,031,888 (2020: six loans with a value of GBP150,331,450
(one of which was fully repaid in 2021)) remain classified as Stage
2 and the remaining loans are classified as Stage 1. The loans
classified as Stage 2 are predominantly in the retail and
hospitality sectors (but not all hospitality loans are in Stage 2).
The main reason for moving the loans to Stage 2 in the second
quarter of 2020 was expected income covenant breaches due to the
disruption from Covid-19. Following loan amendments agreed with
borrowers, no income breaches have occurred. Although these loans
have been classified as Stage 2 loans, no expected credit loss has
been recognised at 31 December 2021 (2020: GBPnil) as although the
credit risk has increased for these loans, the Group does not
anticipate realising a loss in the event of a default. For further
information, see the Investment Manager's report. The paragraph
below describes how the Group determines when a significant
increase in credit risk has occurred, such that a loan would move
from Stage 1 to Stage 2. No loans have been moved to Stage 2 or to
Stage 3 during 2021.
The Group considers that for prepayments and capitalised cost,
the ECL is by default nil as these are non-monetary items with no
credit risks. For trade and other receivables, the Group applies
the simplified approach which requires expected lifetime losses to
be recognised from initial recognition of the receivables.
Significant increase in credit risk - Stage 2
The Group uses both quantitative and qualitative criteria which
is monitored no less than quarterly in order to assess whether an
increase in credit risk has occurred. Increased credit risk would
be considered if, for example, all or a combination of the
following has occurred: ? underlying income performance is at a
greater than 10 per cent variance to the underwritten loan metrics;
? Loan to Value is greater than 75-80 per cent; ? Loan to Value or
income covenant test results are at a variance of greater than
5-10% of loan defaultcovenant level (note that loan default
covenant levels are set tightly to ensure that an early cure is
required bythe borrower should they breach which usually involves
decreasing the loan amount until covenant tests are passed); ? late
payments have occurred and not been cured within 3 days; ? loan
maturity date is within six months and the borrower has not
presented an achievable refinance orrepayment plan; ? covenant and
performance milestones criteria under the loan have required more
than two waivers; ? increased credit risk has been identified on
tenants representing greater than 25 per cent of underlyingasset
income; ? income rollover / tenant break options exist such that a
lease up of more than 30 per cent of underlyingproperty will be
required within 12 months in order to meet loan covenants and
interest payments; and ? borrower management team quality has
adversely changed.
Default and credit-impaired assets - Stage 3
Non-performing financial assets would be classified with Stage
3, which is fully aligned with the definition of credit- impaired,
when one or more of the following has occurred: ? the borrower is
in breach of all financial covenants; ? the borrower is in
significant financial difficulty; and ? it is becoming probable
that the borrower will enter bankruptcy.
An instrument is considered to have been cured, that is no
longer in default, when it no longer meets any of the default
criteria for a sufficient period of time (which is determined by
reference to the default).
Write-off policy
The Group writes off financial assets, in whole or in part, when
it has exhausted all practically recovery efforts and has concluded
there is no reasonable expectation of recovery. Indicators that
there is no reasonable expectation of recovery include: ? ceasing
enforcement activity; and ? where the Group's recovery method is
foreclosing on collateral and the value of the collateral is
suchthat there is no reasonable expectation of recovering in
full.
Sensitivity analysis
The most significant period-end assumptions used for the ECL
estimates are the LGD and probability of default ("PD") as
described above.
The default probabilities are based on initial loan-to-value
("LTV") headroom which the Investment Adviser believes to be a good
predictor of the PD, in accordance with recent market studies of
European commercial real estate loans.
In measuring the LGD for this sensitivity analysis, the loans
advanced have been assessed on a collective basis as they possess
similar covenants and security package characteristics.
The selected LGD of 0.30% is based on the aggregate losses of
all AAA rated notes issued in Europe from 1995 to 2020 (totalling
EUR174 billions), according to recent market studies of European
commercial real estate loans. AAA rated notes are considered the
most representative of the Group's loan portfolio due to the nature
of the loans. The Investment Adviser considers this to be a
reasonable estimate for loss given default.
As explained on Note 2 (b)(i), the year-end ECL are nil. Set out
in the table below is the sensitivity to the ECL as at 31 December
2021 and 31 December 2020 that could result from reasonable
possible changes in the LTV and LGD actual assumptions used for
calculation of ECL as at the respective year-end. On an individual
loan basis, the LTV was increased by 25%, and a new PD determined,
which was multiplied by a constant LGD of 0.30% for all loans and
the loan exposure as at each year-end. All other variables are held
constant.
31 December 31 December
Reasonable possible shift (absolute value) 2021 ECL 2020 ECL
GBP GBP
LTV +25% (2020: +25%)
264,231 304,219
LGD +0.3% (2020: +0.3%)
Change in ECL allowance (+) 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 loans
advanced, 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
closingrate 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
thetransaction dates, in which case income and expenses are
translated at the rate on the dates of the transactions); iii.
share capital is translated at historical cost (translated using
the exchange rates at the transactiondate); and iv. 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. Luxco 3 has Euro as its functional currency. l. Interest
income
Interest income on financial assets within Stage 1 and 2 is
recognised by applying the effective interest rate to the gross
carrying amount of financial assets. For financial assets that are
classified within Stage 3, interest revenue is calculated by
applying the effective interest rate to their amortised cost (that
is net of ECL provision). Interest income on non-performing
financial assets at amortised cost is recognised to the extent the
Group expects to recover the interest receivable.
Interest on cash and cash equivalents is recognised at amortised
cost 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 allowance for ECL. 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 at amortised cost
Financial liabilities at amortised cost, including bank loans
are initially recognised at fair value and subsequently measured at
amortised cost using the effective interest method. 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 interest". 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 NAV 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.
Pursuant to the Investment Management Agreement's provisions, a
performance fee would apply from 1 January 2018. 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). The measurement period over which the
Performance Fee is calculated is two years, with the payment of any
performance fee earned being made at the end of each such two year
period.
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).
To the extent that the Company makes further issues of Ordinary
Shares and/or repurchases or redeems Ordinary Shares, the Hurdle
Total Return will be adjusted accordingly, by reference to the
issue proceeds of such further issues and dividends declared
subsequent to such issues. Other corporate actions will also be
reflected as appropriate in the calculation of the Hurdle Total
Return.
The Investment Manager has appointed Starwood Capital Europe
Advisers, LLP (the "Investment Adviser"), an English limited
liability partnership authorised and regulated by the FCA, to
provide investment advice pursuant to an Investment Advisory
Agreement. b. Administration agreement
The Company has engaged the services of Apex Fund and Corporate
Services (Guernsey) Limited (the "Administrator") to act as
Administrator and Company Secretary. Under the terms of the service
agreement dated 25 September 2018, the Administrator is entitled to
a fee of no less than GBP225,000 per annum for Guernsey registered
companies of the Group, EUR96,000 for Luxembourg registered
subsidiaries 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 19 June 2020, Jefferies Group LLC ("Jefferies") was appointed
to act as Broker. Jefferies is entitled to receive a fee of
GBP50,000 per annum plus expenses. The previous brokerage agreement
with Stifel Nicolaus Europe Limited was terminated on the same
date. 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 Lloyds Bank plc (the "Lloyds
Facility") which is intended for short-term liquidity. This
facility was amended and extended on 7 January 2022. The current
maturity date is 5 May 2023. The facility is secured by a pledge
over the bank accounts of the Company, its interests in Holdco 1
and the intercompany funding provided by the Company to Holdco 1.
Holdco 1 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 separate GBP64
million secured borrowing facility with Morgan Stanley (the "MS
Facility"). This facility was amended and extended on 14 November
2019. The current maturity date is 14 November 2024 and the
borrowing facility was increased to GBP76 million. 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
(Luxco 3 and Luxco 4) 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
2021 2020
GBP GBP
Directors' emoluments 190,212 150,833
Other expenses 5,198 1,731
195,410 152,564 5. AUDIT AND NON-AUDIT FEES
The following table discloses the audit and non-audit fees paid
to the auditors for audit and non-audit services and their
associated network firms for non-audit services, where and as
applicable.
31 December 2021 31 December 2020
GBP GBP
Audit and non-audit fees expensed in the Consolidated Statement
of Comprehensive Income
Audit of company 120,800 119,300
Audit of subsidiaries 84,756 70,342
Total audit 205,556 189,642
Audit related assurance services (Interim review) 23,831 23,083
Total assurance services 23,831 23,083
Non-audit services not covered above - 14,661
Total non-audit services 23,831 37,744
Total fees expensed 229,387 227,386
Other non-audit services of GBP14,661 expensed in the
Consolidated Statement of Comprehensive Income for the year ended
31 December 2020 relate to tax services and other disbursements.
From 15 March 2020, these services are now impermissible in
accordance with the latest FRC Ethical Standard and the Board had
appointed an alternative service provider as a result. 6. NET
FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2021 31 December 2020
GBP GBP
Loans advanced gains - realised 153,504 647,000
Loans advanced losses - realised (1,929,067) (1,134,619)
Forward contracts gains - realised 1,998,286 1,131,404
Forward contracts losses - realised (330,105) (328,698)
Other gains - realised 328,245 1,229
Other losses - realised (49,430) (422,347)
171,433 (106,031)
Loans advanced gains - unrealised - 13,776,618
Loans advanced losses - unrealised (15,588,146) -
Forward contracts gains - unrealised 13,707,768 397,778
Forward contracts losses - unrealised (1,334,429) (8,074,598)
(3,214,807) 6,099,798
(3,043,374) 5,993,767 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 GBP19,292,919 (2020: GBP29,908,486) and on
the weighted average number of Ordinary Shares in issue during the
year of 408,939,505 (2020: 412,469,890) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of
GBP421,556,600 (2020: GBP426,697,507) and the actual number of
Ordinary Shares in issue at 31 December 2021 of 408,911,273 (2020:
409,571,273). 8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2021 31 December 2020
GBP GBP
Cash at bank 2,994,357 2,939,408
2,994,357 2,939,408
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 2021 31 December 2020
GBP GBP
Prepayments 37,439 17,094
Investment proceeds receivable 213 -
37,652 17,094 10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial
assets is discussed in note 2(g).
31 December 2021 31 December 2020
GBP GBP
Europe
Mixed Portfolio, Europe 21,789,309 30,007,911
Germany
Logistics Portfolio 4,958,050 5,909,892
Ireland
Hotel, Dublin 50,842,327 54,730,169
Office Portfolio 26,570,048 31,753,439
Mixed Use, Dublin 5,108,054 3,112,893
Spain
Three Shopping Centres 30,171,573 33,367,582
Office, Madrid 15,595,042 16,792,398
Shopping Centre 14,736,977 15,653,661
Office Portfolio 9,845,168 19,375,687
Hotel - 47,379,721
UK
Hotel & Residential 49,922,112 49,914,595
Hotel, Scotland 42,390,350 10,497,593
Hotels, United Kingdom 30,016,910 -
Hospitals 25,364,814 25,362,367
Hotel, Oxford 21,579,756 16,705,485
Life Science, UK 19,620,908 -
Office, London 14,156,850 13,368,457
Hotel, North Berwick 14,123,338 26,727,408
Hotel & Office, Northern Ireland 12,719,727 -
Office, Scotland 5,121,199 4,894,738
Residential, London - 25,124,499
Logistics Portfolio - 11,981,154
414,632,512 442,659,649
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 2021 31 December 2020
GBP GBP
Loans advanced at the start of the year 442,659,649 390,647,516
Loans advanced 91,935,602 97,794,862
Loan repayments (103,474,780) (59,619,767)
Arrangement fees earned (1,125,342) (780,584)
Commitment fees earned (586,841) (1,215,996)
Exit fees earned (527,953) (250,772)
Origination fees for the year 300,456 546,194
Income from loans advanced 28,382,742 29,052,521
Interest payments received / accrued (25,567,309) (26,789,437)
Foreign exchange (losses) / gains (17,363,712) 13,275,112
Loans advanced at the end of the year 414,632,512 442,659,649
Loans advanced at fair value 431,658,356 459,549,015
IFRS 7 requires the disclosure of the fair value of financial
instruments not measured at fair value for comparison to their
carrying amounts. The fair value of loans advanced has been
determined by discounting the expected cash flows at a market rate
of interest using the discounted cash flow model. For the avoidance
of doubt, the Group carries its loans advanced at amortised cost in
the consolidated financial statements, consistent with the
requirement of IFRS 9 as the Group's intention and business model
is to collect both interest and the capital repayments thereof.
The following table sets out the sensitivity to the above
reported fair value to a change in the discount rate used in the
discounted cash flow model (see the Investment Manager's report for
more information):
Discount Rate 31 December 2021 31 December 2021
Value Value increase /
calculated (decrease)
GBP GBP
4.9% 432,710,809 18,078,297
5.1% (Fair value) 431,658,356 17,025,843
5.4% 428,059,002 13,426,490
5.9% 423,496,872 8,864,360
6.4% 419,022,118 4,389,606
6.9% (Carrying value) 414,632,512 -
7.4% 410,325,896 (4,306,616)
7.9% 406,100,176 (8,532,336)
8.4% 401,953,326 (12,679,186)
8.9% 397,883,380 (16,749,132)
Discount Rate 31 December 2020 31 December 2020
Value Value increase /
calculated (decrease)
GBP GBP
4.8% 464,563,596 21,903,947
5.2% (Fair value) 459,549,015 16,889,366
5.3% 458,928,617 16,268,968
5.8% 453,401,431 10,741,782
6.3% 447,979,319 5,319,670
6.8% (Carrying value) 442,659,649 -
7.3% 437,439,862 (5,219,787)
7.8% 432,317,488 (10,342,161)
8.3% 427,290,124 (15,369,525)
8.8% 422,355,444 (20,304,205) 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.
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 foreign exchange derivatives are subject to
offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value
through profit or loss are set out below.
Fair values
Notional contract
Assets Liabilities Total
31 December 2021 amount(1) GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 305,663,797 14,394,963 (1,103,365) 13,291,598
Total 305,663,797 14,394,963 (1,103,365) 13,291,598
(1) Euro amounts are translated at the year end exchange
rate
Fair values
Notional contract amount(1) Assets Liabilities Total
31 December 2020
GBP GBP GBP GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 273,442,149 3,897,550 (2,979,291) 918,259
Total 273,442,149 3,897,550 (2,979,291) 918,259
(1) Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group 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 Group's borrowings for this
purpose, any liabilities incurred under the Group'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 2021, an amount of GBP8,500,000 (2020:
GBP19,500,000) was drawn and interest of GBP7,997 (2020: GBP69,585)
was payable.
The revolving credit facility capitalised costs are directly
attributable costs incurred in relation to the establishment of the
credit loan facilities and an amount of GBP593,004 (2020:
GBP942,748) was netted off against the loan facilities
outstanding.
The Group has maintained sufficient headroom against the
measures under, and is full compliance with, all loan
covenants.
The changes in liabilities arising from financing activities are
shown in the table below.
31 December 2021 31 December 2020
GBP GBP
Borrowings at the start of the year 18,626,837 28,359,047
Proceeds during the year 63,800,000 41,985,860
Repayments during the year (75,128,132) (52,067,717)
Interest expenses recognised for the year 236,071 558,323
Interest paid during the year (262,221) (492,331)
Credit facility fees incurred - -
Credit facility amortisation of fees 563,496 387,448
Foreign exchange and translation difference 78,942 (103,793)
Borrowings at the end of the year 7,914,993 18,626,837
13. TRADE AND OTHER PAYABLES
31 December 2021 31 December 2020
GBP GBP
Loan amounts payable 212,953 -
Investment management fees payable 791,344 799,584
Commitment fees payable 169,746 161,430
Audit fees payable 98,896 98,902
Share buyback payable - 85,587
Tax provision 19,742 9,713
Administration fees payable 87,815 7,771
Accrued expenses 103,470 17,079
Broker fees payable - 25,000
Directors' fees payable 560 -
Legal and professional fees payable - 5,000
1,484,526 1,210,066
14. COMMITMENTS
As at 31 December 2021, the Group had outstanding commitments in
respect of loans not fully drawn of GBP44,543,155 (2020:
GBP49,104,643).
As at 31 December 2021, the Group has entered into forward
contracts under the Hedging Master Agreement with Lloyds Bank plc
to sell EUR219,050,014 (2020: EUR302,627,550) to receive Sterling.
At the end of the reporting period, these forward contracts have a
fair value of GBP13,291,598 asset (2020: GBP918,259 asset).
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 2021 31 December 2020
Number of shares Number of shares
Ordinary Shares of no par value
413,219,398 413,219,398
Issued and fully paid
Shares held in treasury (4,308,125) (3,648,125)
Total Ordinary Shares, excluding
408,911,273 409,571,273
those in treasury
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 2021 to 31 December 2021:
Ordinary Shares Number GBP
Balance at the start of the year 409,571,273 416,321,533
Shares bought back in 2021 (660,000) (591,533)
Balance at the end of the year 408,911,273 415,730,000
Issue costs since inception (8,289,989)
Net proceeds 407,440,011
1 January 2020 to 31 December 2020:
Ordinary Shares Number GBP
Balance at the start of the year 413,219,398 419,495,150
Shares bought back in 2020 (3,648,125) (3,173,617)
Balance at the end of the year 409,571,273 416,321,533
Issue costs since inception (8,289,989)
Net proceeds 408,031,544
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 Group passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the
Group and the investment outlook, it is the Directors' intention to
pay quarterly dividends to shareholders (for more information see
Chairman's Statement).
The Group paid the following dividends in respect of the year to
31 December 2021:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2021 1.375 5,622,530 4 June 2021
30 June 2021 1.375 5,622,530 3 September 2021
30 September 2021 1.375 5,622,530 3 December 2021
31 December 2021(1) 1.375 5,622,530 25 February 2022
(1) Declared after year end and were paid on 25 February 2022 to
shareholders on the register as at 4 February 2022.
The Group paid the following dividends in respect of the year to
31 December 2020:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2020 1.625 6,714,815 20 May 2020
30 June 2020 1.625 6,714,815 28 August 2020
30 September 2020 1.625 6,680,414 20 November 2020
31 December 2020 1.625 6,644,808 5 March 2021
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:
a) Market risk
Market risk includes market price risk, currency risk and
interest rate risk.
i) Market price 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 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.
ii) 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 ongoing basis and is reported to the Board
accordingly.
The Group and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and, on 7
February 2014, the Group 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 Group 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 reporting date and movements in the fair value
are included in the Consolidated Statement of Comprehensive Income
under net foreign exchange (losses) / gains. The Group does not
adopt hedge accounting in the financial statements. At the end of
the reporting period, the Group had 134 (2020: 138) open forward
contracts.
As at 31 December 2021 the Group had the following currency
exposure:
Danish Krone Sterling Euro Total
31 December 2021
GBP GBP GBP GBP
Assets
Loans advanced - 192,279,327 222,353,185 414,632,512
Financial assets at fair value through profit or loss - 13,291,598 - 13,291,598
Other receivables and prepayments - 17,094 20,558 37,652
Cash and cash equivalents 101 2,858,545 135,711 2,994,357
Liabilities
Revolving credit facility - (7,914,993) - (7,914,993)
Trade and other payables - (1,375,329) (109,197) (1,484,526)
Net currency exposure 101 199,156,242 222,400,257 421,556,600
Danish Krone Sterling Euro Total
31 December 2020
GBP GBP GBP GBP
Assets
Loans advanced - 184,576,296 258,083,353 442,659,649
Financial assets at fair value through profit or loss - 918,259 - 918,259
Other receivables and prepayments - 17,094 - 17,094
Cash and cash equivalents 422 2,409,377 529,609 2,939,408
Liabilities
Revolving credit facility - (18,626,837) - (18,626,837)
Trade and other payables - (1,123,070) (86,996) (1,210,066)
Net currency exposure 422 168,171,119 258,525,966 426,697,507
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 2021 would increase or
decrease by GBP22,240,026 (2020: GBP25,852,597). 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 2021 would increase or
decrease by GBP10 (2020: GBP42). 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 Group's policy, the Investment Manager
monitors the Group's currency position, and the Board of Directors
reviews this risk on a regular basis.
iii) 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, 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 76.8% (2020: 79.2%) of investments
designed as loans advanced at 31 December 2021 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 2021:
31 December 2021 31 December 2020
GBP GBP
Floating rate
Loans advanced(1) 318,642,491 347,477,400
Cash and cash equivalents 2,994,357 2,939,408
Fixed rate
Loans advanced 95,990,021 95,182,249
Total financial assets subject to interest rate risk 417,626,869 445,599,057
(1) Loans advanced at floating rates include loans with
interbank rate floors.
At 31 December 2021, if interest rates had changed by 50 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 2021 31 December 2020
GBP GBP
Floating rate
Increase of 50 basis points (1) 1,608,184 1,752,084
Decrease of 50 basis points (1,608,184) (1,752,084)
(1) Loans advanced at floating rates include loans with
interbank rate floors.
These percentages have been determined based on potential
volatility and deemed reasonable by the Directors. b. 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, 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 2021 due to several loans
being advanced since inception. There is also credit risk in
respect of other financial assets as a portion of the Group's
assets are cash and cash equivalents or accrued interest. The banks
used to hold cash and cash equivalents have been diversified to
spread the credit risk to which the Group is exposed. The Group
also has credit risk exposure in its financial assets classified as
financial assets through profit or loss which is diversified
between hedge providers in order to spread credit risk to which the
Group is exposed. At year-end, the derivative exposures were with
one counterparty.
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 2021, the maximum credit risk exposure was
GBP430,918,680 (2020: GBP446,517,316).
The Investment Manager has adopted procedures to reduce credit
risk exposure by conducting credit analysis of the counterparties,
their business and reputation which is monitored on an ongoing
basis. After the advancing of a loan, a dedicated debt asset
manager employed by the Investment Adviser monitors ongoing 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 measures credit risk and ECL using probability of
default, exposure at default and loss given default. The Directors
consider both historical analysis and forward looking information
in determining any ECL. The Directors consider the loss given
default to be close to zero as all loans are the subject of very
detailed underwriting, including the testing of resilience to
aggressive downside scenarios with respect to the loan specifics,
the market and general macro changes. In addition to this, all
loans have very robust covenants in place, strong security packages
and significant loan-to-value headroom.
During the year ended 31 December 2021, three loans with a value
of GBP59,031,888 (2020: six loans with a value of GBP150,331,450
(one fully repaid in 2021)) remain classified as Stage 2 and the
remaining loans are classified as Stage 1. The loans classified as
Stage 2 are predominantly in the retail and hospitality sectors
(but not all hospitality loans are in Stage 2). The main reason for
moving the loans to Stage 2 in the second quarter of 2020 was
expected income covenant breaches due to the disruption from
Covid-19. Following loan amendments agreed with borrowers, no
income breaches have occurred. Although these loans have been
classified as Stage 2 loans, no expected credit loss has been
recognised at 31 December 2021 (2020: GBPnil) as although the
credit risk has increased for these loans, the Group does not
anticipate realising a loss in the event of a default.
The Group uses both quantitative and qualitative criteria for
monitoring the loan portfolio as described in note 2 (h). The gross
carrying amount of loan portfolio is presented in the table below
and also represents the Group's maximum exposure to credit risks on
these assets.
Total as at
Stage 1 Stage 2 Stage 3 Total as at
31 December 2021
GBP GBP GBP 31 December 2020 GBP
GBP
Loans advanced 355,600,624 59,031,888 - 414,632,512 442,659,649
Gross carrying amount 355,600,624 59,031,888 - 414,632,512 442,659,649
Less ECL allowance - - - - -
Carrying amount 355,600,624 59,031,888 - 414,632,512 442,659,649
A reconciliation of changes in the loss allowance was not
presented as the allowance recognised at the end of the reporting
period was GBPnil (2020: GBPnil).
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 Total as at
31 December 2021 31 December 2020
GBP GBP
Barclays Bank plc 2,980,544 1,275,464
ING Luxembourg, SA 12,743 1,662,925
Lloyds Bank plc 778 778
HSBC Bank plc 227 241
Royal Bank of Scotland International 65 -
Total cash and cash equivalents 2,994,357 2,939,408
The carrying amount of cash and cash equivalents approximates
their fair value. c. 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
of total of GBP126,000,000 (2020: GBP126,000,000) of which
GBP8,500,000 (2020: GBP19,500,000) 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 months Over 12 months Total
31 December 2021 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 14,736,977 90,989,466 308,906,069 414,632,512
Liabilities and commitments
Loan commitments(1) (8,324,454) (15,850,277) (19,186,697) (43,361,428)
Credit facilities (7,997) (8,500,000) - (8,507,997)
Trade and other payables (1,484,526) - - (1,484,526)
4,920,000 66,639,189 289,719,372 361,278,561
(1) Loan commitments are estimated forecasted drawdowns at year
end.
Between 3 and
Up to 3 months Over 12 months Total
31 December 2020 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 15,653,661 79,933,826 347,072,162 442,659,649
Liabilities and commitments
Loan commitments(1) (16,310,931) (25,822,395) (6,598,132) (48,731,458)
Credit facilities (69,585) (19,500,000) - (19,569,585)
Trade and other payables (1,210,066) - - (1,210,066)
(1,936,921) 34,611,431 340,474,030 373,148,540
(1) Loan commitments are estimated forecasted drawdowns at year
end.
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 2021
Between 3 and Over Total as at
Up to 3 months
Derivatives 12 months 12 months 31 December 2021
GBP
GBP GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (3,104,840) (51,449,438) (129,195,826) (183,750,104)
Inflow 3,115,540 52,103,985 132,586,030 187,805,555
(1) Euro amounts translated at year end exchange rate.
31 December 2020
Between 3 and Over Total as at
Up to 3 months
Derivatives 12 months 12 months 31 December 2020
GBP
GBP GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (3,619,250) (14,976,399) (254,846,500) (273,442,149)
Inflow 3,584,355 14,874,088 256,024,869 274,483,312
(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 equitycapital and
long-term debt.
The capital of the Company is represented by the net assets
attributable to the holders of the Company's shares.
In accordance with the Group's investment policy, the Group's
principal use of cash (including the proceeds of the IPO 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, ongoing operational expenses and payment of dividends and
other distributions to shareholders in accordance with the
Company's dividend policy.
The Board, with the assistance of the Investment Manager,
monitors and reviews the broad structure of the Company's capital
on an ongoing basis. The Company has no imposed capital
requirements.
The Company's capital at the end of the reporting period
comprises:
31 December 2021 31 December 2020
GBP GBP
Equity
Equity share capital 407,440,011 408,031,544
Retained earnings and translation reserve 14,116,589 18,665,963
Total capital 421,556,600 426,697,507
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: a. Quoted prices (unadjusted) in active
markets for identical assets or liabilities (level 1). b. 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, yieldcurves, volatilities, prepayment rates, credit
risks and default rates) or other market corroborated inputs
(level2). c. Inputs for the asset or liability that are not based
on observable market data (that is, unobservableinputs) (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 2021
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 13,291,598 - 13,291,598
Total - 13,291,598 - 13,291,598
31 December 2020
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 918,259 - 918,259
Total - 918,259 - 918,259
There have been no transfers between levels for the year ended
31 December 2021 (2020: nil).
The Directors were 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 table below presents the movement in level 3 investments,
which were the Credit Linked Notes that were repaid in full during
2020.
31 December 2021 31 December 2020
GBP GBP
Balance at the start of the year - 21,885,611
Cash interest received - (1,210,333)
Net gains recognised in profit or loss (1) - 1,097,722
Redemptions during the year - (21,773,000)
Balance at the end of the year - -
Changes in unrealised gains or losses for Level 3 assets held at year end and included
in - -
net changes in fair value of financial assets at fair value through profit or loss
(1) The net gains for the year ended 31 December 2020 comprise
of GBP1,097,722 interest income on CLNs.
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2021 but for which fair value is
disclosed:
31 December 2021
Total fair Total carrying
Level 1 Level 2 Level 3
values amount
GBP GBP GBP
GBP GBP
Assets
Loans advanced - - 431,658,356 431,658,356 414,632,512
Liabilities
Credit facility - 7,914,993 - 7,914,993 7,914,993
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2020 but for which fair value is
disclosed:
31 December 2020
Total fair Total carrying
Level 1 Level 2 Level 3
values amount
GBP GBP GBP
GBP GBP
Assets
Loans advanced - - 459,549,015 459,549,015 442,659,649
Liabilities
Credit facility - 18,626,837 - 18,626,837 18,626,837
For cash and cash equivalents, other receivables and
prepayments, trade and other payables and credit facilities the
carrying amount is a reasonable approximation of the fair value.
The Group carries its loans advanced at amortised cost in the
consolidated financial statements. Refer to note 10 for further
information.
The carrying amounts of the revolving credit facilities included
in the above tables are considered to approximate its fair values.
The fair value of loans advanced have been determined by
discounting the expected cash flows using a discounted cash flow
model. For avoidance of doubt the Group carries its loans advanced
at amortised cost in the financial statements. Refer to note 10 for
further information.
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
facilities 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 2021 31 December 2020
GBP GBP
Current tax
Tax expenses on profit of the reporting period 100,452 81,953
Tax adjustments on profit of previous periods - -
Tax refund for previous periods - -
Total current tax 100,452 81,953
The Luxco had no operating gains on ordinary activities before
taxation and was therefore for the year ended 31 December 2021
subject to the Luxembourg minimum corporate income taxation at
EUR4,815 (2020: EUR4,815). The Luxco 3 and Luxco 4 are subject to
Corporate Income Tax and Municipal Business Tax based on a margin
calculated on an arm's-length principle. The effective tax rate in
Luxembourg during the reporting period was 24.94% (2020:
24.94%).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment
Advisors Act 1940 (the "Custody Rule") the consolidated financial
statements of the Group have also been audited in accordance with
Generally Accepted Auditing Standards applicable in the United
States ("US GAAS"). As such two independent Auditor's reports are
included, 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,
however, under the IFRS basis, the effective interest rate
calculation is based on the estimated cash flows over the expected
life of the asset.
The Directors have assessed the operating profit and NAV of the
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 consolidated 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 2021 and 31 December 2020.
2021
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2021 31 December 2021
GBP GBP
Directors' fees and expenses paid
Stephen Smith (resigned 31 December 2021) - 50,000
John Whittle - 45,000
Shelagh Mason - 42,500
Charlotte Denton (appointed 1 January 2021) - 40,000
Gary Yardley (appointed 6 September 2021) - 12,712
Expenses paid 560 5,198
Investment Manager
Investment management fees 791,344 3,147,075
Origination fees - 300,456
Expenses - 68,107
2020
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2020 31 December 2020
GBP GBP
Directors' fees and expenses paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel (resigned 31 December 2020) - 42,500
Shelagh Mason (appointed 1 September 2020) - 13,333
Expenses paid - 1,731
Investment Manager
Investment management fees 799,584 3,186,943
Origination fees - 546,194
Expenses - 68,279
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 2021 and 31 December
2020.
2021
Dividends paid during
As at
Shareholdings and the year ended
31 December 2021
dividends paid 31 December 2021
Number of shares
GBP
Starwood Property Trust Inc. 502,700 9,140,000
SCG Starfin Investor LP 125,675 2,285,000
Stephen Smith 4,341 78,929
John Whittle 1,313 23,866
Shelagh Mason 973 112,819
Charlotte Denton (appointed 1 January 2021) - -
Gary Yardley (appointed 6 September 2021) - -
Duncan MacPherson* 8,333 133,333
Lorcain Egan* 3,818 61,093
* Employees at the Investment Adviser
2020
Dividends paid during
As at
Shareholdings and the year ended
31 December 2020
dividends paid 31 December 2020
Number of shares
GBP
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Shelagh Mason (appointed 1 September 2020) 287 17,688
Stephen Smith 5,130 78,929
John Whittle 1,356 23,866
Jonathan Bridel (resigned 31 December 2020) 771 11,866
Duncan MacPherson* 8,333 133,333
Lorcain Egan* 3,818 61,093
* Employees at the Investment Adviser
Other
The Group continues to participate in a number of loans in which
Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The
details of these loans are shown in the table below. The Group also
acted as co-lender with Starwood European Real Estate Debt Finance
I LP ("SEREDF I") an affiliate entity.
Loan Related party co-lenders
Hotel & Residential, UK STWD
Hotel, Spain STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD
2 Hotels, UK SEREDF I
23. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 31 December 2021, the following amounts have been
drawn under existing commitments, up to 23 March 2022:
* GBP3,619,265
Subsequent to 31 December 2021, the following loan amortisation
(both scheduled and unscheduled) has been received since the
year-end up to 23 March 2022:
* GBP614,876
No loans have been repaid in full since the year-end up to 23
March 2022.
At 23 March 2022, the amounts drawn under each of the Group's
credit facilities are:
* Morgan Stanley - GBP8.5 million
On 21 January 2022, the Directors declared a dividend in respect
of the fourth quarter of 1.375 pence per Ordinary Share payable on
25 February 2022 to shareholders on the register at 4 February
2022.
Since year end, we have noted the conflict between Ukraine and
Russia. We have no direct investment exposure to the Ukraine or
Russia. We will continue to closely monitor any potential adverse
impacts on European economies, potential for various levels of
operational disruption, liquidity flows, amongst others. We note
that the portfolio has performed very robustly throughout the
global coronavirus pandemic and has shown its resiliency in
relation to that unprecedented event.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") the Board has considered what APMs are included
in the Annual Financial Report and Audited Consolidated Financial
Statements which require further clarification. An APM is defined
as a financial measure of historical or future financial
performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial
reporting framework. APMs included in the financial statements,
which are unaudited and outside the scope of IFRS, are deemed to be
as follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets
attributable to equity shareholders divided by the number of
Ordinary Shares in issue, excluding any shares held in treasury.
The NAV per Ordinary Share is published monthly. This APM relates
to past performance and is used as a comparison to the share price
per Ordinary Share to assess performance. There are no reconciling
items between this calculation and the Net Asset Value shown on the
balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any
dividends paid, together with the rise or fall in the NAV per
Ordinary Share. This APM relates to past performance and takes into
account both capital returns and dividends paid to shareholders.
Any dividends received by a shareholder are assumed to have been
reinvested in the assets of the Company at its NAV per Ordinary
Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of
any dividends paid, together with the rise or fall in the share
price. This APM relates to past performance and assesses the impact
of movements in the share price on total returns to investors. Any
dividends received by a shareholder are assumed to have been
reinvested in additional shares of the Company at the time the
shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of
the Company is lower (discount) or higher (premium) than the NAV
per Ordinary Share at the date of reporting and relates to past
performance. The discount or premium is normally expressed as a
percentage of the NAV per Ordinary Share.
INVESTED LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the
quarterly reporting date of the estimated annual return on the
portfolio at that point in time. It is calculated individually for
each loan by summing the one-off fees earned (such as up-front
arrangement or exit fees charged on repayment) and dividing these
over the full contractual term of the loan, and adding this to the
annual returns. Where a loan is floating rate (partially or in
whole or with floors), the returns are based on an assumed profile
for future interbank rates, but the actual rate received may be
higher or lower. The return is calculated only on amounts funded at
the quarterly reporting date and excludes committed but undrawn
loans and excludes cash uninvested. The calculation also excludes
origination fees paid to the Investment Manager, which are
accounted for within the interest line in the financial
statements.
An average, weighted by loan amount, is then calculated for the
portfolio.
This APM gives an indication of the future performance of the
portfolio (as constituted at the reporting date). The calculation,
if the portfolio remained unchanged, could be used to estimate
"income from loans advanced" in the Consolidated Statement of
Comprehensive Income if adjusted for the origination fee of 0.75
basis points amortised over the average life of the loan. As
discussed earlier in this report the figure actually realised may
be different due to the following reasons:
-- In the quoted return, we amortise all one-off fees (such as
arrangement and exit fees) over thecontractual life of the loan,
which is currently four years for the portfolio. However, it has
been our experiencethat loans tend to repay after approximately 2.5
years and as such, these fees are actually amortised over ashorter
period.
-- Many loans benefit from prepayment provisions, which means
that if they are repaid before the end of theprotected period,
additional interest or fees become due. As we quote the return
based on the contractual life ofthe loan these returns cannot be
forecast in the return.
-- The quoted return excludes the benefit of any foreign
exchange gains on Euro loans. We do not forecastthis as the loans
are often repaid early and the gain may be lower than this once
hedge positions are settled.
Generally speaking, the actual annualised total return is likely
to be higher than the reported return for these reasons, but this
is not incorporated in the reported figure, as the benefit of these
items cannot be assumed.
PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same
basis as the unlevered annual return but takes into account the
amount of leverage in the Group and the cost of that leverage at
current SONIA rates.
ONGOING CHARGES PERCENTAGE
Ongoing charges represents the management fee and all other
operating expenses excluding finance costs and transactions costs,
expressed as a percentage of the average monthly net asset values
during the year and allows users to assess the running costs of the
Group. This is calculated in accordance with AIC guidance and
relates to past performance. The charges include the following
lines items within the Consolidated Statement of Comprehensive
Income:
-- Investment management fees
-- Administration fees
-- Audit and non-audit fees
-- Other expenses
-- Legal and professional fees
-- Directors' fees and expenses
-- Broker's fees and expenses
-- Agency fees
The calculation adds back any expenses unlikely to occur absent
any loan originations or repayments and as such, the costs
associated with hedging Euro loans back to sterling have been added
back. The calculation does not include origination fees paid to the
Investment Manager; these are recognised through "Income from loans
advanced".
WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST GBP
These are calculations made as at the quarterly reporting date
of the loan to value ("LTV") on each loan at the lowest and highest
point in the capital stack in which the Group participates. 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 quarterly 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 development projects, the calculation
includes the total facility available and is calculated against the
assumed market value on completion of the project.
An average, weighted by the loan amount, is then calculated for
the portfolio.
This APM provides an assessment of future credit risk within the
portfolio and does not directly relate to any financial statement
line items.
PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS
This is a calculation made as at the quarterly reporting date,
which calculates the value of loans, which have an element of
floating rate in part, in whole and including loans with floors, as
a percentage of the total value of loans. This APM provides an
assessment of potential future volatility of the income on loans,
as a large percentage of floating rate loans would mean that income
would move up or down with changes in SONIA.
AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM
The average loan term is calculated at the quarterly reporting
date by calculating the average length of each loan from initial
advance to the contractual termination date. An average, weighted
by the loan amount, is then calculated for the portfolio.
The average remaining loan term is calculated at the quarterly
reporting date by calculating the average length of each loan from
the quarterly reporting date to the contractual termination date.
An average, weighted by the loan amount, is then calculated for the
portfolio.
This APM provides an assessment of the likely level of
repayments occurring in future years (absent any early repayments)
which will need to be reinvested. In the past, the actual term of
loans has been shorter than the average contractual loan term due
to early repayments and so the level of repayments is likely to be
higher than this APM would suggest. However, this shorter actual
loan term cannot be assumed as it may not occur and therefore it is
not reported as part of this APM.
NET CASH
Net cash is the result of the Group's total cash and cash
equivalents minus total credit facility utilised as reported on its
consolidated financial statements.
UNUSED LIQUID FACILITIES
Unused liquid facilities is the result of the Group's total cash
and cash equivalents plus the available balance to withdraw under
existing credit facilities at the reporting date.
PORTFOLIO DIVERSIFICATION
The portfolio diversification statistics are calculated by
allocating each loan to the relevant sectors and countries based on
the value of the underlying assets. This is then summed for the
entire portfolio and a percentage calculated for each sector /
country.
This APM provides an assessment of future risk within the
portfolio due to exposure to specific sectors or countries and does
not directly relate to any financial statement line items.
Corporate Information
Directors
Stephen Smith (Non-executive Chairman, resigned 31 December
2021)
John Whittle (Non-executive Director)
Shelagh Mason (Non-executive Director)
Charlotte Denton (Non-executive Director, appointed 1 January
2021)
Gary Yardley (Non-executive Director, appointed 6 September
2021)
(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 Fullbright LLP
3 More London Riverside London
SE1 2AQ United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
1st Floor
Tudor House
Le Bordage
St Peter Port
Guernsey
GY1 1DB
Broker
Jefferies Group LLC
100 Bishopsgate
London, EC2N 4JL
United Kingdom
Administrator, Designated Manager
and Company Secretary
Apex Fund and Corporate Services
(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
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ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 151099
EQS News ID: 1310255
End of Announcement EQS News Service
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