Starwood European Real Estate Finance Ltd (SWEF) SWEF: Half
Yearly Report 30 June 2022 06-Sep-2022 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (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
Half Year Results for the Period Ended 30 June 2022
Income Stability, Strong Cash Generation and Inflation
Protection
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 Half Year Results for the period from 1 January
2022 to 30 June 2022.
Highlights
-- Strong cash generation - the portfolio continues to support
annual dividend payments of 5.5 pence, paidquarterly, and generates
an annual dividend yield of 6.0 per cent on the share price as at
30 June 2022
-- Regular and consistent dividend - GBP190m of dividends paid
since inception
-- Inflation protection - 78.8 per cent of the portfolio is
contracted at floating interest rates (withfloors) which will
provide an increase in revenue as expected higher inflation results
in higher interest rates
-- 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? Defensive qualities reflected in
the Group's ongoing successful track record of delivering
NAVstability ? Weighted average Loan to Value for the portfolio is
60.5 per cent as at 30 June 2022 (31 December2021: 61.9 per
cent)
-- 51.2 per cent - share price total return since inception in
December 2012
-- Strong pipeline of opportunities - the Investment Manager
continues to see a strong investment pipelinewhich represents
attractive risk adjusted returns
Portfolio Statistics
As at 30 June 2022, the portfolio was invested in line with the
Group's investment policy. The key portfolio statistics are
summarised below.
30 June 2022 30 June 2021
Number of investments 19 18
Percentage of currently invested portfolio in floating rate loans 78.8% 78.3%
Invested Loan Portfolio unlevered annualised total return* 7.1% 6.6%
Portfolio levered annualised total return* 7.2% 6.8%
Weighted average portfolio LTV - to Group first GBP* 14.9% 18.0%
Weighted average portfolio LTV - to Group last GBP* 60.5% 63.5%
Average loan term (stated maturity at inception) 5.0 years 4.7 years
Average remaining loan term 1.9 years 2.2 years
Net Asset Value GBP422.9m GBP423.7m
Amount drawn under Revolving Credit Facilities (excluding accrued interest) (GBP18.5m) (GBP11.0m)
Loans advanced GBP433.6m GBP420.8m
Cash GBP3.1m GBP1.4m
Other net assets (including hedges) GBP4.7m GBP12.5m
*Alternative performance measure
NAV Performance - as anticipated and stable demonstrating
resilience of portfolio
The table below shows the NAV per share achieved over the 6
months to 30 June 2022:
Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22
NAV per share (pence) at end of month 102.02 102.78 103.13 102.33 102.94 103.42
John Whittle, Chairman of the Group commented:
"The UK and global economies are in a state of market and
political turmoil as a result of the conflict in Ukraine and rising
inflation and interest rates. Despite this, the Group has
demonstrated its unique portfolio resilience through the strength
and consistency of its results.
"Once again, it is significant, and very gratifying, to note
that all loan interest and scheduled amortisation payments were
received on time and that underlying collateral valuations continue
to provide reassuring headroom.
"While this half year has been a turbulent period in the equity
markets and, as a direct result, for the share price of the Group,
it has not been a turbulent time for the Group's NAV which has once
again remained stable throughout. The Group's NAV stability
demonstrates 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
market volatility, the Group has not only maintained a stable net
asset value but has also met its dividend targets, delivering an
annualised 5.5 pence per share to shareholders. We have also
instituted share buybacks in response to the volatility of the
share price which we believe is primarily due to the volatility of
the equity markets in general.
"Given our stability of income, strong cash generation and
attractive pipeline of potential investments, I and the whole Board
remain confident of continuing to extend the resilient track record
of the strategy in delivering compelling risk adjusted income
returns."
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company
Secretary
+44 (0) 20 3530 5630
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) 07872 604453
Henry Wilson +44 (0) 07788 528143
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.
Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements
for the six-month period from 1 January 2022 to 30 June 2022
Overview Corporate Summary
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate
Finance Limited (the "Company"), together with its wholly owned
subsidiaries Starfin Public Holdco 1 Limited, Starfin Public Holdco
2 Limited, Starfin Lux S.à.r.l, Starfin Lux 3 S.à.r.l and Starfin
Lux 4 S.à.r.l (collectively the "Group"), is to provide its
shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments in the UK and the European Union's internal
market.
The Company seeks 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 Group aims to be appropriately diversified by geography,
real estate sector, loan type and counterparty. The Group pursues
investments across the commercial real estate debt asset class
through senior loans, subordinated loans and mezzanine loans,
bridge loans, selected loan-on-loan financings and other debt
instruments.
STRUCTURE
The Company was incorporated with limited liability in Guernsey
under the Companies (Guernsey) Law, 2008, as amended, on 9 November
2012 with registered number 55836, and has been authorised by the
Guernsey Financial Services Commission ("GFSC") as a registered
closed-ended investment company. The Company's ordinary shares were
first admitted to the premium segment of the UK's Financial Conduct
Authority's Official List and to trading on the Main Market of the
London Stock Exchange as part of its initial public offering which
completed on 17 December 2012. Further issues took place in March
2013, April 2013, July 2015, September 2015, August 2016 and May
2019. The issued capital during the period comprises the Company's
Ordinary Shares denominated in Sterling.
The Company received authority at the 2020 Annual General
Meeting ("AGM"), to purchase up to 14.99 percent of the Ordinary
Shares in issue. This authority was renewed at the 2021 and 2022
AGMs.
In August 2020 the Board announced that it had engaged Jefferies
International Limited as buy-back agent to effect share buybacks on
behalf of the Company.
During 2020 the Company bought back 3,648,125 shares at an
average cost per share of 86.9 pence per share. During 2021, the
Company bought back 660,000 Ordinary Shares at an average price of
89.54 pence per share. In the first half of 2022 the Company did
not buy back any shares but between 1 July 2022 and 2 September
2022 (having re-engaged Jefferies International Limited as buy-back
agent to effect share buybacks on behalf of the Company) the
Company has bought back a further 5,230,919 shares at an average
price per share of 93.7 pence.
Ordinary shares bought back are held in treasury. Share buybacks
are subject to sufficient cash being available.
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).
The Investment Manager is Starwood European Finance Partners
Limited (the "Investment Manager"), a company incorporated in
Guernsey with registered number 55819 and regulated by the GFSC.
The Investment Manager has appointed Starwood Capital Europe
Advisers, LLP (the "Investment Adviser"), an English limited
liability partnership authorised and regulated by the Financial
Conduct Authority, to provide investment advice, pursuant to an
Investment Advisory Agreement.
Chairman's Statement
Dear Shareholder,
I am delighted to present the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements of Starwood
European Real Estate Finance Limited (the "Group") for the period
from 1 January 2022 to 30 June 2022.
Six months ago, when I presented the Annual Report and Audited
Consolidated Financial Statements of the Group for the year ended
31 December 2021 to you, none of us foresaw the market and
political turmoil that would be experienced between then and now in
both UK and global economies as a result of the conflict in Ukraine
and rising inflation and interest rates. Despite this, and as in
2020 and 2021, the Group has demonstrated its unique portfolio
resilience through the strength and consistency of its results.
Once again, it is significant, and very gratifying, to note that
all loan interest and scheduled amortisation payments were received
on time and that underlying collateral valuations continue to
provide reassuring headroom.
While this half year has been a turbulent period in the equity
markets and, as a direct result, for the share price of the
Company, it has not been a turbulent time for the Group's NAV which
has once again remained stable throughout. The Group's NAV
stability demonstrates 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 market volatility, the Group has not only maintained a
stable net asset value but has also met its dividend targets,
delivering an annualised 5.5 pence per share to shareholders.
The Board remains keen to engage with shareholders and potential
investors with a view to stabilising and increasing the share price
to at or above par to reflect the Group's stability of net asset
value and consistency of results.
HIGHLIGHTS OVER THE SIX MONTHS TO 30 JUNE 2022
? Strong cash generation - the portfolio continues to support
annual dividend payments of 5.5 pence per Ordinary Share, paid
quarterly, and generates an annual dividend yield of 6.0 per cent
on the share price as at 30 June 2022
? Regular and Consistent Dividend - GBP190 million of dividends
paid since inception
? Inflation protection - 78.8 per cent of the portfolio is
contracted at floating interest rates (with floors) which will
provide an increase in revenue as expected higher inflation results
in higher interest rates
? Robust portfolio - the loan book is performing in line with
expectations with its defensive qualities reflected in the Group's
continued stable NAV; the weighted average Loan to Value for the
portfolio is 60.5 per cent as at 30 June 2022 compared with 61.9
per cent at the end of 2021
? 51.2 per cent - share price total return since inception in
December 2012
? Strong pipeline of opportunities - The Investment Adviser and
Manager continue to see a strong investment pipeline which
represents attractive risk adjusted returns.
INVESTMENT PERFORMANCE
INTEREST & AMORTISATION PAYMENTS
All loan interest and scheduled amortisation payments to date
have been paid in full and on time. This includes loans in sectors
that have been most impacted by the pandemic, namely, hospitality
and retail assets, where borrowers continue to remain adequately
capitalised as previously reported.
STRONG CASH GENERATION
The portfolio performance continues to support the targeted
annual dividend payments of 5.5 pence per Ordinary Share, paid
quarterly.
INFLATION PROTECTION
78.8 per cent of the portfolio is contracted at floating
interest rates (with floors) which will provide an increase in
revenue as expected higher inflation results in higher interest
rates. The majority of underlying floating rate borrowers have
hedging in place such that their exposure to rising base rates are
capped. Where no hedging is in place, there are other mitigating
factors in place which provide comfort of the headroom available to
borrowers to be able to absorb base rate increases.
The Invested Loan Portfolio unlevered annualised total return
has been increasing steadily as interest rate curves have moved
upwards. The year on year increase is 50 basis points (i.e. now 7.1
per cent, up from 6.6 per cent in June 2021). As interest rates
increase there will be additional income to cover the dividend.
RECATEGORISATION OF STAGE 2 ASSET TO STAGE 1
Of the three loans categorised at Stage 2 in the December 2021
financial statements one of those has now been recategorised as
Stage 1 reflecting the Investment Manager's and Investment
Advisor's conclusion that the risk related to the loan had
reduced.
INVESTMENT MOMENTUM
The table below summarises the new commitments made and
repayments received in the first six months of each year from 2018
to 2022.
H1 2018 H1 2019 H1 2020 H1 2021 H1 2022
New Commitments GBP147.5m GBP49.9m GBP72.7m GBP26.6m GBP19.5m
Repayments & Amortisation (GBP74.1m) (GBP45.9m) (GBP65.3m) (GBP45.8m) (GBP14.9m)
Net Increase / (Decrease) in Commitments GBP73.4m GBP4.0m GBP7.4m (GBP19.2m) GBP4.6m
The net change in commitments during the first half of 2022 is
showing a small increase. Importantly, the Group is fully invested,
with a strong pipeline of new loans, all of which supports the
Group's income generation going forward.
As at 30 June 2018 to 2022 the Group had commitments as shown in
the table below.
June 2018 June 2019 June 2020 June 2021 June 2022
Funded loans GBP429.9m GBP447.0m GBP447.5m GBP418.5m GBP429.1m
Unfunded Commitments GBP42.2m GBP31.9m GBP67.2m GBP36.8m GBP36.8m
Total Portfolio GBP472.1m GBP478.9m GBP514.7m GBP455.3m GBP465.9m
Between 1 July 2022 and 2 September 2022 the Group received
GBP13.1 million in partial repayments and funded an additional
GBP3.1 million on loans it had committed to as at 30 June 2022. NAV
PERFORMANCE
Jan - 22 Feb - 22 Mar - 22 Apr - 22 May - 22 Jun - 22
NAV per share at beginning of month 103.09 102.02 102.78 103.13 102.33 102.94
Monthly Movements
Operating Income available to distribute(i) 0.46 0.44 0.46 0.48 0.54 0.44
Realised FX gains/(losses) not distributable 0.00 0.00 0.78 0.00 0.29 0.00
Unrealised FX gains/(losses) (0.15) 0.32 (0.89) 0.10 (0.22) 0.04
Dividends declared (1.38) 0.00 0.00 (1.38) 0.00 0.00
NAV per share as end of month 102.02 102.78 103.13 102.33 102.94 103.42
(i) Operating Income available to distribute comprises loan
income recognised in the period less the cost of debt facilities
utilised by the Group and operating costs incurred. The Operating
Income available to distribute also includes any realised foreign
exchange gains or losses upon settlement of hedges not expected to
reverse. In the months to 31 May and 30 June the balance includes
circa GBP200,000 of realised FX gains and GBP150,000 of realised FX
losses respectively.
As anticipated, as shown above and as in the past, we are
pleased to report that the Group's NAV has once again remained
stable over the first half of the year demonstrating the highly
resilient credentials of the asset class that contributes to its
success as a reliable source of alternative income. We do not
expect to see significant movements in NAV as the Group's loans are
held at amortised cost and Euro exposures are hedged.
The NAV would be materially impacted if an impairment in the
value of a loan was required but despite the disruption to markets
in the last few years (caused by the Covid-19 pandemic, the
Ukraine/Russia conflict, the high inflationary and rising interest
rate environment), no such impairment has been needed and the
Group's collateral valuations remain stable and current (the
current weighted average age of valuations is 1.07 years). Please
refer to the Investment Manager's report for detailed sector
performance reporting, information on the accounting for our loans,
consideration of the changes in loan risk level in the six month
period to 30 June 2022 and the current loan to value position for
the portfolio as a whole and for each sector.
SHARE PRICE PERFORMANCE
During the first half of 2022, the Company's share price had
been volatile, primarily, it is believed, because of the volatility
of the market. In the six month period to 30 June 2022, the share
price has been trading at between 90.2 pence and 97.2 pence and
ended the half year at 91.6 pence. On 19 July 2022 the Board
announced that it had re-engaged Jefferies International Limited as
buy-back agent to effect share buy backs on behalf of the Company.
Since then and to 2 September 2022 5,230,919 shares have been
purchased at an average price of 93.7 pence per share. Any shares
bought back will be held in treasury. Share buy backs are subject
to available cash.
The Company's shares closed on 30 June 2022 at 91.6 pence,
resulting in a share price total return for the first half of 2022
of 0.3 per cent. As at 30 June 2022, the discount to NAV stood at
11.4 per cent, with an average discount to NAV of 6.7 per cent over
the half year. The Board, the Investment Manager and Adviser
continue to believe that the shares represent attractive value at
this level as demonstrated by the personal purchases of shares by
two of the directors of the Company during July 2022.
Notwithstanding this, if the Ordinary Shares trade at an average
discount to Net Asset Value per Share of five percent or more
during the six month period ending 31 December 2022, the Directors,
at their absolute discretion, may put forward a realisation offer
to Shareholders ("Realisation Offer"). The terms of such
realisation offer would provide, broadly, that Shareholders may
request for up to 75% of the Ordinary Shares in issue to be
realised for cash.
DIVIDS
The Directors declared dividends in respect of the first two
quarters of 2022 of 1.375 pence per Ordinary Share, equating to an
annualised 5.5 pence per annum. This was covered by earnings
excluding unrealised FX gains and realised FX gains expected to
reverse. With the current portfolio, and based on current
forecasts, we expect the dividend to continue to be covered by
earnings over the 12 months to 31 December 2022.
On the share price at 30 June 2022, a dividend of 5.5 pence per
annum represents a 6.0 per cent dividend yield.
BOARD COMPOSITION AND DIVERSITY
The Board believes in the value and importance of diversity in
the boardroom and it continues to consider the recommendations of
the Davies, Hampton Alexander and Parker Reports and these
recommendations will be taken into account should the appointment
of a new director be required.
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, of
which 50% is female, and I believe we have a very relevant
diversity of skills and expertise which places us well for the
future.
Based on the recent change in the listing rules regarding the
disclosure of diversity on listed company boards and executive
committees effective for accounting periods starting from April
2022, the Board are considering the impact, if any, on disclosure
requirements.
GOING CONCERN
Under the AIC Code of Corporate Governance and applicable
regulations, the Directors are required to satisfy themselves that
it is reasonable to assume that the Group is a going concern.
As set out in more detail in the 2021 Annual Report, and subject
to the discount triggered Realisation Offer 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) ("Realisation Vote") to Shareholders by no later than
28 February 2023. The Board is actively investigating and
considering the options available to them in the best interests of
Shareholders. This process is ongoing and the outcome uncertain at
the current time.
The Directors have undertaken a comprehensive review of the
Group's ability to continue as a going concern including a review
of the ongoing cash flows and the level of cash balances as of the
reporting date as well as forecasts of future cash flows. After
making enquiries of the Investment Manager, Investment Adviser and
the Administrator and having reassessed the principal risks, 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 unaudited condensed consolidated financial
statements are signed. A range of scenarios has been evaluated as
part of this analysis. In the worst case scenario evaluated, the
Group was still able to meet its liabilities as they fall due,
although the dividend would need to be reduced to reflect the
reduced cash received. Accordingly, the Directors continue to adopt
a going concern basis in preparing these Unaudited Condensed
Consolidated Financial Statements.
OUTLOOK
The Board is pleased that the diligent underwriting, loan
structuring and active asset management of the Investment Manager
and Adviser during this last turbulent two and a half years has led
to very robust performance of the loans during the period, meaning
that all interest has been paid in full and on time and no
impairments have been required. Importantly, future interest
payments continue to be expected to be paid on time and in full and
no loan defaults are anticipated.
The Investment Adviser is seeing a strong pipeline of
opportunities and will continue to apply its rigorous approach to
the selection of appropriate opportunities as it re-invests capital
into new opportunities. At 30 June 2022, the Group was very
modestly levered with net debt of GBP15.4 million (3.6 per cent of
NAV) and undrawn revolving credit facilities of GBP107.5 million to
fund existing commitments of circa GBP37 million. If the Group does
not receive any further repayments this year, it means the Group
has approximately GBP70 million of capacity for new loans.
The focus of the Group for the rest of 2022 remains:
(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 both origination capacity and
portfolio construction of the Group in order to continue to deliver
attractive risk adjusted returns to its investors.
I would like to close by thanking you for your commitment and
support.
John Whittle
Chairman
5 September 2022
Investment Manager's Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
? Inflation data is delivering month on month records and
central banks continue to fight this inflation by raising interest
rates
? Unemployment remains very low in major European economies
? Public markets remain volatile with credit markets reflecting
a new interest rate environment, with the biggest effect seen in
medium to long-term fixed rate credit markets
? Fundamentals for real estate remain healthy
? Hotel market data reports higher average daily rates in May
2022 than May 2019 with 2022 likely to be a strong year in many
major European markets
In our recent factsheets we had highlighted the well-reported
global inflationary pressures and the expected impact on interest
rates. This theme has continued with higher inflation rates and
interest rates across all markets during the quarter reflecting
expectations of more persistent inflation and resulting interest
rate policy actions from central banks. We have also commented on
the inverted interest rate curve in the UK signalling the market's
anticipation that interest rate policy might go too far resulting
in recessionary pressures. The market is now expecting higher
probabilities of technical recessions in many countries and we have
seen interest rate expectations coming off recent peaks. However,
across major European countries unemployment rates remain very low
(UK: 3.8 per cent and Euro Area: 6.6 per cent). This will remain a
key focus for central banks as they balance the fight against
inflation with other key macro-economic signals.
Inflation data continues to deliver month on month records with
July headline inflation for the Eurozone coming in at the highest
recorded figure since the inception of the Euro currency at 9.8 per
cent expected). The UK CPI rate was 10.1 per cent and the US CPI
level was 8.5 per cent. Inflation numbers continue to be driven by
increased energy costs. Energy prices in July were estimated to be
up 39.7 per cent compared to a year earlier for the Eurozone, up
57.8 per cent for the UK and up 32.9 per cent for the US. After
stripping out energy and food, core inflation was 4.0 per cent for
the Eurozone, 6.2 per cent for the UK and 5.9 per cent for the US.
Commodity prices are expected to remain volatile while the war in
Ukraine causes disruption to energy, agricultural and other exports
from Ukraine due to blockades of the ports and from Russia due to
sanctions.
Previously we commented on seeing a step change in interest rate
expectations in reaction to the persistence of inflationary
pressures. These rate expectations were feeding into the SONIA,
Euribor and swap rates, to which most of the Group's investments
are linked. As at 19 August 2022 the 3 month SONIA
(forward-looking) and Euribor stood at 2.12 per cent and 0.43 per
cent respectively versus 0.05 percent and negative 0.55 per cent
respectively the same time last year. As at 18 August, the 5 year
sterling swap and 5 year Euro swap were at 2.84 per cent and 1.65
per cent respectively versus 0.42 per cent and negative 0.41 per
cent respectively the same time last year. Much of this change has
occurred since the beginning of 2022. In the case of the 2.42 per
cent increase in the 5 year sterling swap, the majority of the move
(1.79 per cent) was since the beginning of 2022. These movements
have provided a significant yield benefit to lenders with exposure
to floating rate loans.
In the public credit capital markets, primary issuance has
slowed across asset classes and secondary pricing has increased as
investors digest the implications of the rising rate environment
and the knock on effects. The most significant impact can be seen
in fixed rate credit markets where lenders do not have the benefit
of rising rates in the credit instrument they own. The iTraxx
Crossover index had more than doubled from 238 basis points at the
same time last year to 525 basis points at week ending 19 August.
This is a combination of changing rates being reflected in the
credit markets and an increase in the risk premium which investors
are seeking. We are seeing similar patterns for real estate in
Europe with primary markets for corporate unsecured bonds and CMBS
currently taking a pause and a reduced capacity of investment banks
to underwrite and distribute. We expect this to persist over the
typically quiet European summer period. These markets will create
good opportunities for lenders to originate loans with strong risk
adjusted returns.
In the underlying real estate markets, we are also seeing
dislocation in public equity capital markets. Most public real
estate companies are trading at a discount to private market values
as investors assess the impact of rising rates on valuations for
the asset class. While rising rates will have an impact on the cost
of financing real estate, there are many factors that will
influence value on an asset specific basis and so stock selection
and quality of business plan remain key. Countering a higher cost
of debt, inflation helps revenues for many types of real estate
where leases are linked to inflation metrics or where operational
real estate can benefit from inflation in top line revenues. We
continue to see occupiers willing to pay well for product with high
environmental accreditation and the right amenities. We are also
seeing strong top line inflation across operational asset
classes.
Another key effect of inflation in real estate is that
speculative development of new real estate is constrained when
development costs are higher, helping keep supply and demand in
check and benefitting existing stock.
Examples of this inflation in operational real estate can be
seen in hotel market data. Despite the fact that corporate travel
is still down on pre-pandemic levels, a large majority of the
gateway markets in Europe reported higher average daily rates in
June 2022 than June 2019. Examples include rates 46 per cent higher
in Paris, 24 per cent higher in Rome and 17 per cent higher in
London. On the leisure side according to the BBC the average price
of all-inclusive package holidays for British holiday makers is up
17 per cent versus 2019. Of the leading European markets, only
Prague had a lower average daily rate in June 2022 than 2019. These
rises have come without a full return of corporate business,
however leading indicators are now showing that corporate business
is likely to increase in the coming months. Corporate travel
expectations surveys for the resumption of both domestic and
business travel over the coming months are hitting new post Covid
highs which is likely to put further upward pressure on rates for
urban hotels.
The slow summer period for volumes in both credit and equity
markets for real estate is unlikely to be broken quickly as market
participants take stock on returning from vacations and we expect a
cautious resumption in the later part of the year with all eyes
remaining on how economies navigate through to a stabilisation in
inflation and interest rates expectations. These markets provide a
great canvas for company to operate in, allowing it to focus on
deal selection and generating strong returns with good downside
protections.
PORTFOLIO STATISTICS
As at 30 June 2022, the portfolio was invested in line with the
Group's investment policy. The key portfolio statistics are as
summarized below.
30 June 30 June
2022 2021
Number of investments 19 18
Percentage of currently invested portfolio in floating rate loans 78.8% 78.3%
Invested Loan Portfolio unlevered annualised total return (1) 7.1% 6.6%
Portfolio levered annualised total return (1) 7.2% 6.8%
Weighted average portfolio LTV - to Group first GBP (1) 14.9% 18.0%
Weighted average portfolio LTV - to Group last GBP (1) 60.5% 63.5%
Average loan term (stated maturity at inception) 5.0 years 4.7 years
Average remaining loan term 1.9 years 2.2 years
Net Asset Value GBP422.9m GBP423.7m
Amount drawn under Revolving Credit Facilities (excluding accrued interest) (GBP18.5m) (GBP11.0m)
Loans advanced GBP433.6m GBP420.8m
Cash GBP3.1m GBP1.4m
Other net assets (including hedges) GBP4.7m GBP12.5m
(1) Alternative performance measure - for definitions and
calculation methodology.
The maturity profile of investments as at 30 June 2022 is shown
below.
% of invested
Remaining years to contractual maturity (1) Principal value of loans GBPm
portfolio
0 to 1 years GBP145.7 34.0%
1 to 2 years GBP68.7 16.0%
2 to 3 years GBP132.0 30.8%
3 to 5 years GBP82.7 19.2%
The Board considers that the Group is engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. The analysis presented in this report
is presented to demonstrate the level of diversification achieved
within that single segment. The Board does not believe that the
Group's investments constitute separate operating segments.
SHARE PRICE PERFORMANCE
As at 30 June 2022, the NAV was 103.42 pence per Ordinary Share
(31 December 2021: 103.09 pence; 30 June 2021: 103.62 pence) and
the share prices was 91.6 pence (31 December 2021: 94 pence; 30
June 2021: 94 pence).
The Company's share price has been volatile since March 2020.
This volatility has been driven by market conditions and trading
volumes rather than a change in the Company's NAV.
INVESTMENT DEPLOYMENT
As at 30 June 2022, the Group had 19 investments and commitments
of GBP465.9 million as follows:
Sterling equivalent Sterling equivalent unfunded Sterling Total (Drawn and
balance (1) commitment (1) Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office, London GBP17.0 m GBP3.5 m GBP20.5 m
Hotel, Oxford GBP22.8 m GBP0.1 m GBP22.9 m
Hotel, Scotland GBP42.6 m GBP42.6 m
Hotel, North Berwick GBP15.0 m GBP15.0 m
Life Science, UK GBP19.5 m GBP7.1 m GBP26.6 m
Hotel and Office, Northern Ireland GBP12.5 m GBP12.5 m
Two Hotels, Manchester & Edinburgh GBP30.4 m GBP20.3 m GBP50.7 m
Office and Industrial Portfolio, UK GBP5.5 m GBP5.5 m
(2)
Total Sterling Loans GBP240.2 m GBP31.0 m GBP271.2 m
Three Shopping Centres, Spain GBP29.9 m GBP29.9 m
Shopping Centre, Spain GBP14.6 m GBP14.6 m
Hotel, Dublin GBP51.7 m GBP51.7 m
Office, Madrid, Spain GBP15.9 m GBP0.9 m GBP16.8 m
Mixed Portfolio, Europe GBP16.0 m GBP16.0 m
Mixed Use, Dublin GBP7.8 m GBP4.8 m GBP12.6 m
Office Portfolio, Spain GBP8.3 m GBP0.1 m GBP8.4 m
Office Portfolio, Dublin, Ireland GBP27.3 m GBP27.3 m
Logistics Portfolio, Germany GBP3.3 m GBP3.3 m
Office and Industrial Portfolio, The GBP14.1 m GBP14.1 m
Netherlands(2)
Total Euro Loans GBP188.9 m GBP5.8 m GBP194.7 m
Total Portfolio GBP429.1 m GBP36.8 m GBP465.9 m
(1) Euro balances translated to sterling at period-end exchange
rate.
(2) Office and Industrial Portfolio, UK and Office and
Industrial Portfolio, The Netherlands is one single loan agreement
with sterling and Euro tranches.
Between 1 January 2022 and 30 June 2022, the following
significant investment activity occurred (included in the table
above):
NEW LOAN: OFFICE AND INDUSTRIAL PORTFOLIO, THE NETHERLANDS AND
UK:
On 26 May 2022, the Group announced its EUR16.4 million and
GBP5.5 million investment in a three-year multi-currency loan
secured on a portfolio of five offices and one industrial property
located in the Netherlands and the UK. The Dutch portfolio consists
of four office properties in the highly sought-after Randstad
region that contains two of the largest Dutch cities - The Hague
and Utrecht. The portfolio also includes an industrial property of
7,586 square metres located near the Port of Rotterdam, Europe's
largest and busiest industrial zone. The UK office asset is located
in Southwark, London, adjacent to Borough tube station and very
close to London Bridge station, one of the city's major terminals
for commuter and regional services. It provides 16,000 square feet
of space which was let to four tenants across six floors.
REPAYMENTS:
OFFICE, SCOTLAND:
The GBP5 million loan repaid in full upon the sale of the
underlying property in line with the sponsors business plan.
PARTIAL REPAYMENTS:
Despite lower transaction volumes across the markets as a result
of the cautionary approach being adopted by investors, borrowers in
the portfolio successfully executed a number of disposals ahead of
business plan, for example:
? EUR6.6 million, equivalent to approximately 36 per cent of the
remaining loan balance was repaid on the Mixed Portfolio, Europe
during May 2022. This was due to the sale of the Finnish
sub-portfolio which has resulted in the Group's exposure to Finland
reducing to zero.
? EUR2.1 million, equivalent to approximately 35 per cent of the
remaining loan balance was repaid on the Logistics, Germany and UK
loan upon the sale of a major UK logistics property which had been
leased up and sold at a price exceeding underwritten
expectations.
Subsequent to 30 June 2022, the following significant
investments activity occurred: PARTIAL REPAYMENTS
HOTEL, DUBLIN:
EUR4.3 million, equivalent to 7 per cent of the remaining loan
balance was repaid on Hotel, Dublin in July. This cash was
generated from surplus trading cash at the election of the sponsor
and in line with the parameters of the underlying facility
agreement.
MIXED PORTFOLIO, EUROPE:
EUR4.8 million, equivalent to 26 per cent of the remaining loan
balance was repaid on Mixed Portfolio, Europe in July 2022, upon
the sponsor selling a portfolio of seven industrial assets in well
located areas across Germany. The portfolio was sold at a
significant premium to underwritten values.
OFFICE AND INDUSTRIAL PORTFOLIO, THE NETHERLANDS
EUR5.8 million, equivalent to 35 per cent of the remaining loan
balance was repaid on Office and Industrial Portfolio, The
Netherlands in August 2022 following the sale of one of the assets
in the portfolio.
Amounts received were used primarily to fund amounts drawndown
on existing loan commitments, share buybacks and to repay debt.
PORTFOLIO OVERVIEW
The existing portfolio continues to perform robustly. As
indicated above, we are also seeing loan repayments in line with
sponsors executing underwritten business plans, with a total of
GBP14.9 million repaid in the six months to 30 June 2022 from a
combination of underlying property sub- portfolio sales, one loan
repaying in full upon sale of the underlying property and scheduled
amortisation. The portfolio remains fully invested.
We continue to closely monitor any actual or potential impact of
market headwinds such as energy, food, labour and construction cost
inflation through review of underlying asset performance and
discussions with sponsors and asset managers. As previously noted,
the majority of loan structures have interest rate hedging
requirements which assist in limiting the cash flow impact for
borrowers of increased loan interest payments as interest rates
continue to rise. Other structural features which provide
additional headroom on many of the investments include interest
reserves and the trapping of surplus trading cash until
underwritten business plans are achieved. All interest and
scheduled amortisation have been paid in line with contractual
obligations and no shortfall in interest due to the Group is
projected as a result of forecast interest rate rises.
The Group's key sector exposures of hospitality (40 per cent of
total invested portfolio), office (25 per cent) and retail (11 per
cent) all continue to perform in line with expectations. Hotels
that are open and trading are performing very well, with average
daily rates exceeding the Group's underwritten expectations,
underpinning the demand for these hotels, driven by robust demand
for business and leisure travel. Occupancy across the office
portfolio continues to be robust, with valuations holding up well.
Typically, valuations of collateral for income producing loans are
updated annually and such valuations that contain office collateral
and which are not under construction or heavy refurbishment have an
average age of under 1 year. The Group's retail exposure has
decreased by just under 1 per cent to 11 per cent of the total
invested portfolio as a result of scheduled amortisation and a sub
portfolio sale within the Mixed Portfolio, Europe loan. Occupancy
of the Spanish Shopping Centres, which comprise over 90 per cent of
the Group's retail exposure, continues to be robust and remains
ahead of the pre- pandemic level occupancy. Additionally, the
Group's independent valuations of the Spanish Shopping Centres have
been very recently updated and confirm that valuations are holding
up with a marginal increase in overall value.
Loan to Value
All assets securing the loans undergo third party valuations
before each investment closes and periodically thereafter at a time
considered appropriate by the lenders. The current weighted average
age of the dates of these third party valuations for the whole
portfolio is 1.07 years while the current weighted average age of
the valuations for the income-producing portfolio (i.e. excluding
loans for development or heavy refurbishment) is 0.71 years.
On the basis of the methodology and valuation processes
previously disclosed and including new valuations received, at 30
June 2022, the Group has an average last GBP LTV of 60.5 per cent
(31 December 2021: 61.9 per cent; 30 June 2021: 63.5 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% 80.4% 94.3% 79.0% 77.4% 80.7%
-20% 75.4% 88.4% 74.1% 72.5% 75.6%
-15% 70.9% 83.2% 69.7% 68.3% 71.2%
-10% 67.0% 78.6% 65.8% 64.5% 67.2%
-5% 63.5% 74.5% 62.4% 61.1% 63.7%
0% 60.3% 70.7% 59.3% 58.0% 60.5%
5% 57.4% 67.4% 56.4% 55.3% 57.6%
10% 54.8% 64.3% 53.9% 52.7% 55.0%
15% 52.4% 61.5% 51.5% 50.5% 52.6% LIQUIDITY AND HEDGING
The Group is very modestly levered with net debt of GBP15.4
million (3.6 per cent of NAV) at 30 June 2022 and has significant
liquidity available with undrawn revolving credit facilities (see
note 3g of the 2021 Annual Report for further information) of
GBP107.5 million to fund existing commitments as summarised
below.
As at 30 June 2022 GBP million
Drawn on Group debt facilities (18.5)
Cash at hand 3.1
Net Debt (15.4)
Undrawn Debt Facilities available to Group 107.5
Undrawn Commitments to Borrowers (36.8)
Available Capacity 70.7
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 were more than GBP20 million out of the money. The
mark to market of the hedges at 30 June 2022 was GBP4.6 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 a large proportion (44%) of its investments
denominated in Euros (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.
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 is used, 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.
At initial
recognition Recognise a loss allowance equal to 12 months expected credit losses resulting from default
(if asset is not events that are possible within 12 months
credit impaired)
After initial recognition:
Credit risk has not increased significantly since initial recognition. Recognise 12 months
expected credit losses.
Stage 1
Interest income is recognised by applying the effective interest rate to the gross carrying
amount of financial assets.
Credit risk has increased significantly since initial recognition. Recognise lifetime expected
losses.
Stage 2
Interest income is recognised by applying the effective interest rate to the gross carrying
amount of financial assets.
Credit impaired financial asset. Recognise lifetime expected losses.
Stage 3
Interest income is recognised by applying the effective interest rate to the amortised cost (that
is net of the expected loss provision) of financial assets.
The Group has not recognised any impairment at initial
recognition on any of its loans due to the detailed and
conservative underwriting undertaken, robust loan structures in
place and a strong equity cushion with an average LTV of 60.5 per
cent (based on the latest available valuation for each asset).
A detailed description of how the Group determines on what basis
loans are classified as stage 1, stage 2 and stage 3 post initial
recognition is provided in the full year accounts.
As at 30 June 2022 two loans held in the balance sheet at
GBP45,650,969 (31 December 2021: three loans of GBP59,031,888) have
been classified as Stage 2. One investment was upgraded to Stage 1
from Stage 2 during the period as the underlying hotel asset has
completed its refurbishment project, demonstrated strong trading in
Q2 2022 since re-opening and has significant headroom to the loan's
basis, with no heightened credit risk vs recognition
continuing.
FAIR VALUE OF THE PORTFOLIO COMPARED TO AMORTISED COST
The table below represents the fair value of the loans based on
a discounted cash flow basis using a range of potential discount
rates.
% of book
Discount Rate Value Calculated
value
5.30% GBP 451.6m = fair value 104.10%
5.5% GBP 450.0m 103.8%
6.0% GBP 445.8m 102.8%
6.5% GBP441.7m 101.9%
7.0% GBP 437.6m 100.9%
7.5% GBP 433.6m = book value 100.0%
8.0% GBP 429.7m 99.1%
8.5% GBP 425.9m 98.2%
9.0% GBP 422.1m 97.3%
9.5% GBP 418.3m 96.5%
The effective interest rate ("EIR") - i.e. the discount rate at
which future cash flows equal the amortised cost, is 7.5 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 7.5 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 advanced in the
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.
RELATED PARTY TRANSACTIONS
Related party disclosures are given in note 15 to the Unaudited
Condensed Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Certain statements in this interim report are forward-looking.
Although the Group believes that the expectations reflected in
these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct.
Because these statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by
these forward-looking statements.
The Group undertakes no obligation to update any forward-looking
statements whether as a result of new information, future events or
otherwise.
Starwood European Finance Partners Limited
Investment Manager
5 September 2022
Principal Risks
PRINCIPAL RISKS FOR THE REMAINING SIX MONTHS OF THE YEAR TO 31
DECEMBER 2022
The principal risks assessed by the Board relating to the Group
were disclosed in the Annual Report and Audited consolidated
Financial Statements for the year to 31 December 2021. The Board
and Investment Manager have reassessed the principal risks and do
not consider these risks to have changed. Therefore, the following
are the principal risks assessed by the Board and the Investment
Manager as relating to the Group for the remaining six months of
the year to 31 December 2022:
FINANCIAL MARKET VOLATILITY (RISK THAT DIVIDS 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
Adviser, 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 resumption of a share
buyback programme in July 2022 in order to support the share price.
While the Directors may seek to mitigate any discount to NAV per
share through this share buyback and/or other 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.
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
Adviser, 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 had a material impact on global economies
and on the operations of the Group's borrowers during 2022 (as it
had in 2021/2020). There is continued uncertainty as large parts of
the world open up and learn to live with the long terms impacts of
the pandemic 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 60.5 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.
Three loans, in the retail and hospitality sectors, were in
Stage 2 (increased risk of default) at the beginning of the year as
disclosed in the Annual Report and Audited consolidated Financial
Statements for the year to 31 December 2021 largely as a result of
the uncertainty and operational disruption caused by the impact of
the COVID-19 pandemic. One of these loans has now stabilised to the
extent that it has now been moved back to Stage 1 (which indicates
that it is judged to be at the same risk of default as it was when
it was originally underwritten). The two loans currently classified
as Stage 2 account for 11 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.
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 Directors receive regular 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 loans in place at 30 June 2022 have been structured so that
21 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 79 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 56 per cent as at 30 June 2022) 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 GBP286.1 million of hedged gross
notional exposure with Lloyds Bank plc at 30 June 2022 (converted
at 30 June 2022 FX rates).
As at 30 June 2022, 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 30 June 2022, 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 Adviser, 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 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.
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
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,
recently admitted to the FTSE 250. 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 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 fifteen 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.
Statement of Directors' Responsibilities
To the best of their knowledge, the Directors of Starwood
European Real Estate Finance Limited confirm that:
1. The Unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with IAS 34, "Interim Financial
Reporting" as adopted by the European Union as required by DTR
4.2.4 R; and
2. The Interim Financial Report, comprising of the Chairman's
Statement, the Investment Manager's Report and the Principal Risks,
meets the requirements of an interim management report and includes
a fair review of information required by:
(i) DTR 4.2.7R of the UK Disclosure and Transparency Rules,
being an indication of important events that have occurred during
the first six months and their impact on the Unaudited Condensed
Consolidated Financial Statements, and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(ii) DTR 4.2.8R of the UK Disclosure and Transparency Rules,
being related party transactions that have taken place in the first
six months and that have materially affected the financial position
or performance of the Company during that period, and any material
changes in the related party transactions disclosed in the last
Annual Report.
By order of the Board
For Starwood European Real Estate Finance Limited
John Whittle Charlotte Denton
Chairman Director
5 September 2022 5 September 2022
Interim Financial Statements
Independent Review Report to Starwood European Real Estate
Finance Limited
Report on the unaudited condensed consolidated financial
statements
OUR CONCLUSION
We have reviewed Starwood European Real Estate Finance Limited's
unaudited condensed consolidated financial statements (the "interim
financial statements") in the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements (the "Interim
Report") of Starwood European Real Estate Finance Limited for the
6-month period ended 30 June 2022. Based on our review, nothing has
come to our attention that causes us to believe that the interim
financial statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
WHAT WE HAVE REVIEWED
The interim financial statements comprise:
? the unaudited condensed consolidated statement of financial
position as at 30 June 2022;
? the unaudited condensed consolidated statement of
comprehensive income for the period then ended;
? the unaudited condensed consolidated statement of cash flows
for the period then ended;
? the unaudited condensed consolidated statement of changes in
equity for the period then ended; and
? the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Report
have been prepared in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
The Companies (Guernsey) Law, 2008 and International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
MATERIAL UNCERTAINTY RELATED TO GOING CONCERN
In forming our conclusion on the interim financial statements,
which is not modified, we have considered the adequacy of the
disclosure made in note 2 to the interim financial statements
concerning the Group's ability to continue as a going concern.
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. These conditions,
along with the other matters explained in note 2 to the interim
financial statements, indicate the existence of a material
uncertainty which may cast significant doubt about the Group's
ability to continue as a going concern. The interim financial
statements do not include the adjustments that would result if the
Group were unable to continue as a going concern. RESPONSIBILITIES
FOR THE INTERIM FINANCIAL STATEMENTS AND THE REVIEW
OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS
The Interim Report, including the interim financial statements,
is the responsibility of, and has been approved by, the directors.
The directors are responsible for preparing the Interim Report in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the Interim Report based on our review.
This report, including the conclusion, has been prepared for and
only for the Company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, 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.
WHAT A REVIEW OF INTERIM FINANCIAL STATEMENTS INVOLVES
We conducted our review in accordance with International
Standard on Review Engagements 2410, 'Review of Interim Financial
Information Performed by the Independent Auditor of the Entity'
issued by the International Auditing and Assurance Standards Board.
A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim
Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
5 September 2022
(a) The maintenance and integrity of the Starwood European Real
Estate Finance Limited website is the responsibility of the
directors; the work carried out by the auditors does not involve
consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to
the interim financial statements since they were initially
presented on the website.
(b) Legislation in Guernsey governing the preparation and
dissemination of interim financial statements may differ from
legislation in other jurisdictions. Unaudited Condensed
Consolidated Statement of Comprehensive Income for the period ended
30 June 2022
1 January 2022 to 1 January 2021 to 1 January 2021 to
Notes 30 June 2022 30 June 2021 31 December 2021
GBP (unaudited) GBP (unaudited) GBP (audited)
Income
Income from loans advanced 7 14,795,630 14,472,491 28,382,742
Net foreign exchange gains/ (losses) 3 1,045,763 (1,279,202) (3,043,374)
Total income 15,841,393 13,193,289 25,339,368
Expenses
Investment management fees 15 1,559,609 1,561,503 3,147,075
Credit facility commitment fees 434,591 414,060 844,694
Credit facility interest 170,528 239,892 336,071
Credit facility amortisation of fees 206,438 140,715 349,744
Legal and professional fees 242,080 174,184 266,154
Administration fees 176,070 172,485 344,950
Other expenses 268,139 119,543 179,262
Audit and non-audit fees 118,463 117,763 229,387
Directors' fees and expenses 15 103,105 89,500 195,410
Broker's fees and expenses 25,000 25,000 53,250
Total operating expenses 3,304,023 3,054,645 5,945,997
Operating profit for the period / year before tax 12,537,370 10,138,644 19,393,371
Taxation 14 44,710 58,388 100,452
Operating profit for the period / year 12,492,660 10,080,256 19,292,919
Other comprehensive income
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 82,285 (190,056) (329,895)
Other comprehensive income /(loss) for the 82,285 (190,056) (329,895)
period / year
Total comprehensive income for the period / year 12,574,945 9,890,200 18,963,024
Weighted average number of shares in issue 4 408,911,273 408,968,207 408,939,505
Basic and diluted earnings per Ordinary Share (pence) 4 3.06 2.46 4.72
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements. Unaudited Condensed
Consolidated Statement of Financial Position as at 30 June 2022
As at 30 June 2022 As at 30 June 2021 As at 31 December 2021
Notes
GBP (unaudited) GBP (unaudited) GBP (audited)
Assets
Cash and cash equivalents 5 3,078,669 1,359,957 2,994,357
Other receivables and prepayments 6 969,360 1,129,774 37,652
Financial assets at fair value through profit or 8 4,624,887 11,975,731 13,291,598
loss
Loans advanced 7 433,639,486 420,807,466 414,632,512
Total assets 442,312,402 435,272,928 430,956,119
Liabilities
Credit facilities 10 18,021,799 10,215,635 7,914,993
Trade and other payables 9 1,404,119 1,328,457 1,484,526
Total liabilities 19,425,918 11,544,092 9,399,519
Net assets 422,886,484 423,728,836 421,556,600
Capital and reserves
Share capital 407,440,011 407,440,011 407,440,011
Retained earnings 15,397,991 16,182,789 14,150,392
Translation reserve 48,482 106,036 (33,803)
Total equity 422,886,484 423,728,836 421,556,600
Number of Ordinary Shares in issue 408,911,273 408,911,273 408,911,273
Net asset value per Ordinary Share (pence) 103.42 103.62 103.09
These Unaudited Condensed Consolidated Financial Statements were
approved and authorised for issue by the Board of Directors on 5
September 2022, and signed on its behalf by:
John Whittle Charlotte Denton
Chairman Director
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements. Unaudited Condensed
Consolidated Statement of Changes in Equity for the period ended 30
June 2022
Translation
Share capital Retained earnings Total equity
reserve
Period ended 30 June 2022 GBP GBP GBP
GBP
(unaudited) (unaudited) (unaudited)
(unaudited)
Balance at 1 January 2022 407,440,011 14,150,392 (33,803) 421,556,600
Dividends paid - (11,245,060) - (11,245,060)
Operating profit for the period - 12,492,660 - 12,492,660
Other comprehensive income:
Other comprehensive income for the period - - 82,284 82,284
Balance at 30 June 2022 407,440,011 15,397,992 48,481 422,886,484
Translation
Share capital Retained earnings Total equity
reserve
Period ended 30 June 2021 GBP GBP GBP
GBP
(unaudited) (unaudited) (unaudited)
(unaudited)
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 - (12,267,338) - (12,267,338)
Operating profit for the period - 10,080,256 - 10,080,256
Other comprehensive income:
Other comprehensive loss for the period - - (190,056) (190,056)
Balance at 30 June 2021 407,440,011 16,182,789 106,036 423,728,836
Translation
Share capital Retained earnings Total equity
reserve
Year ended 31 December 2021 GBP GBP GBP
GBP
(audited) (audited) (audited)
(audited)
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 loss for the year - - (329,895) (329,895)
Balance at 31 December 2021 407,440,011 14,150,392 (33,803) 421,556,600
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements. Unaudited Condensed
Consolidated Statement of Cash Flows for the period ended 30 June
2022
1 January 2022 1 January 2021 1 January 2021
to to to
30 June 2022 30 June 2021 31 December 2021
GBP GBP GBP
(unaudited) (unaudited) (audited)
Operating activities:
Operating profit for the period / year 12,537,370 10,138,644 19,393,371
Adjustments
Net interest income (14,795,630) (14,472,491) (28,382,742)
Decrease / (increase) in prepayments, receivables and capitalised 16,164 5,535 (20,558)
costs
Increase / (decrease) in trade and other payables 165,901 221,199 132,570
Net unrealised (gains) / losses on foreign exchange derivatives 8,669,146 (11,057,472) (12,373,339)
Net foreign exchange losses / (gains) (4,774,059) 12,187,021 15,488,570
Credit facility interest 170,528 239,892 236,071
Credit facility amortisation of fees 206,438 140,715 449,744
Credit facility commitment fees 434,591 414,060 844,694
Currency translation difference (3,374,358) 180,885 2,722,148
Corporate taxes paid (84,274) (87,724) (87,724)
(828,183) (2,089,736) (1,597,195)
Loans advanced1 (27,365,276) (35,607,633) (90,597,307)
Loan repayments and amortisation 14,934,266 45,824,727 103,474,780
Origination fees paid (525,888) (199,206) (300,456)
Interest, commitment and exit fee income from loans advanced 12,402,875 12,885,675 26,682,663
Net cash (outflow)/inflow from operating activities (1,382,206) 20,813,827 37,662,485
Cash flows from investing activities
Shares buy backs - (677,120) (677,120)
Dividends paid (11,245,060) (12,267,338) (23,512,398)
Proceeds under credit facility 30,623,470 29,400,000 63,800,000
Repayments under credit facility (20,985,311) (37,900,000) (75,128,132)
Credit facility interest paid (235,601) (291,809) (262,221)
Credit facility commitment fees paid (434,931) (417,751) (647,799)
Net cash outflow from financing activities (2,277,433) (22,154,018) (36,427,670)
Net decrease in cash and cash equivalents (3,659,639) (1,340,191) 1,234,815
Cash and cash equivalents at the start of the period / year 2,994,357 2,939,408 2,939,408
Net foreign exchange gains/(losses) on cash and cash equivalents 3,743,951 (239,260) (1,179,866)
Cash and cash equivalents at the end of the period / year 3,078,669 1,359,957 2,994,357
1 Net of arrangement fees of GBP243,148 (period ended 30 June
2021: GBP357,009, year ended 31 December 2021: GBP1,125,342)
withheld.
The accompanying notes form an integral part of these Unaudited
Condensed Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial
Statements
for the period ended 30 June 2022 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 a 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 year end 31 December 2021, the
Company had repurchased 660,000 Ordinary Shares at an average price
of 89.54 pence per share. As at 31 December 2021, the Company had
repurchased 4,308,125 Ordinary shares. These Ordinary Shares are
held in treasury.
The Unaudited Condensed 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 30 June 2022.
The Company did not buy-back any shares in the six month period
to 30 June 2022 but in the period from 20 July 2022 (when the
Company announced it had re-engaged Jefferies International Limited
as buy-back agent) to 2 September 2022, the Company bought back a
further 5,230,919 Ordinary Shares at an average price of 93.7 pence
per share.
The Company's investment objective is to provide its
shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments (including debt instruments) in the UK and wider
European Union's internal market. To pursue its investment
objective, the Company, through the Holdco 1 and Holdco 2 (the
"Holdcos"), invests in the Luxco, Luxco 3 and Luxco 4 (the
"Luxcos") through both equity and profit participation instruments
or other funding instruments. The Luxcos then grant or acquire
loans (or other debt instruments) to borrowers in accordance with
the Group's investment policy.
The Group expects all of its investments to be debt obligations
of corporate entities domiciled or with significant operations in
the UK and the 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 Company has prepared these Unaudited Condensed Consolidated
Financial Statements on a going concern basis in accordance with
International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. This Interim Financial Report does not
comprise statutory Financial Statements within the meaning of the
Companies (Guernsey) Law, 2008, and should be read in conjunction
with the Consolidated Financial Statements of the Group as at and
for the year ended 31 December 2021, which have been prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union and the Companies (Guernsey) Law,
2008. The statutory Financial Statements for the year ended 31
December 2021 were approved by the Board of Directors on 23 March
2022. The opinion of the Auditor on those Financial Statements was
unqualified. This Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements for the period ended 30 June 2022
has been reviewed by the Auditor but not audited.
As set out in more detail in the 2021 Annual Report, 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 is actively investigating and considering the
options available to them in the best interests of Shareholders.
This process is ongoing and the outcome uncertain at the current
time.
The Directors have undertaken a comprehensive review and
considered it appropriate to adopt the going concern basis of
accounting in preparing the Interim Financial Report and Unaudited
Condensed Consolidated Financial Statements.
There are a number of new and amended accounting standards and
interpretations that became applicable for annual reporting periods
commencing on or after 1 January 2022.
These amendments have not had a significant impact on these
Unaudited Condensed Consolidated Financial Statements and therefore
the additional disclosures associated with first time adoption have
not been made.
The preparation of the Unaudited Condensed Consolidated
Financial Statements requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income
and expenses. Actual results may differ from these estimates.
In preparing these Unaudited Condensed Consolidated Financial
Statements, the significant judgements made by management in
applying the Group's accounting policies and the key sources of
estimation uncertainty were the same as those that applied to the
Annual Consolidated Financial Statements for the year ended 31
December 2021. 3. NET FOREIGN EXCHANGE GAINS / (LOSSES)
30 June 30 June 31 December 2021
2022 2021
GBP
GBP GBP
Loans advanced - realised gains 5,699 124,994 153,504
Loans advanced - realised losses (517,378) (65,004) (1,929,067)
Forward contracts held at fair value through profit or loss - realised gains 7,424,908 147,710 1,998,286
Forward contracts held at fair value through profit or loss - realised losses (2,352,429) (296,355) (330,105)
Other - realised gains (82,130) 189,031 328,245
Other - realised losses (89,876) (51,454) (49,430)
Total realised gains 4,388,794 48,922 171,433
Loans advanced - unrealised gains 5,323,680 - -
Loans advanced - unrealised losses - (12,385,596) (15,588,146)
Forward contracts held at fair value through profit or loss - unrealised 959,471 11,817,856 13,707,768
gains
Forward contracts held at fair value through profit or loss - unrealised (9,626,182) (760,384) (1,334,429)
losses
Total unrealised losses (3,343,031) (1,328,124) (3,214,807)
Net realised and unrealised gains/(losses) 1,045,763 (1,279,202) (3,043,374)
On occasion, the Group may realise a gain or loss on the roll
forward of a hedge if it becomes necessary to extend a capital
hedge beyond the initial anticipated loan term. If this situation
arises the Group will separate the realised FX gain or loss from
other realised FX gains or losses and not consider it available to
distribute (or as a reduction in distributable profits). The FX
gain or loss will only be considered part of distributable reserves
when the rolled hedge matures or is settled and the final net gain
or loss on the capital hedges can be determined. 4. EARNINGS PER
SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on
the operating profit of GBP12,492,660 (30 June 2021: GBP10,080,256
and 31 December 2021: GBP19,292,919) and on the weighted average
number of Ordinary Shares in issue at 30 June 2022 of 408,911,273
(30 June 2021: 408,968,207 and 31 December 2021: 408,939,505).
The calculation of NAV per Ordinary Share is based on a NAV of
GBP422,886,484 (30 June 2021: GBP423,728,836 and 31 December 2021:
GBP421,556,600) and the actual number of Ordinary Shares in issue
at 30 June 2022 of 408,911,273 (30 June 2021: 408,911,273 and 31
December 2021: 408,911,273). 5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
30 June 30 June 31 December
2022 2021 2021
GBP
GBP GBP
Cash at bank 3,078,669 1,359,957 2,994,357
Cash and cash equivalents comprises cash and short-term deposits
held with various banking institutions with original maturities of
three months or less.
6. OTHER RECEIVABLES AND REPAYMENTS
30 June 30 June 31 December
2022 2021 2021
GBP GBP GBP
Prepayments 21,275 11,559 37,439
Taxation prepayments - 22,712 -
Investment interest receivable1 948,085 1,095,503 213
969,360 1,129,774 37,652
1 Investment proceeds receivable as at 30 June 2021 and 30 June
2022 relate principally to Hotel & Residential, UK. 7. LOANS
ADVANCED
30 June 30 June 31 December
2022 2021 2021
GBP GBP GBP
UK
Hotel & Residential 49,942,753 49,918,080 49,922,112
Hospitals 25,360,264 25,357,713 25,364,814
Hotel, Scotland 42,729,177 37,910,554 42,390,350
Hotel, North Berwick 15,095,014 13,127,256 14,123,338
Hotel, Oxford 23,042,786 16,744,853 21,579,756
Life Science, UK 19,764,594 19,594,589 19,620,908
Office, London 17,404,582 13,764,463 14,156,850
Office, Scotland - 5,017,965 5,121,199
Hotel and Office, Northern Ireland 12,852,101 - 12,719,727
Two Hotels, Manchester & Edinburgh 30,381,133 - 30,016,910
Logistics Portfolio - 552,699 -
Office and Industrial Portfolio, UK 5,499,677 - -
Ireland
Hotel, Dublin 52,266,251 52,119,113 50,842,327
Office Portfolio, Dublin 27,382,693 30,233,451 26,570,048
Mixed use, Dublin 7,944,861 3,843,782 5,108,054
Spain
Three Shopping Centres 30,410,440 31,273,245 30,171,573
Hotel - 46,564,064 -
Office, Madrid 16,032,248 15,991,232 15,595,042
Shopping Centre 15,240,528 15,000,520 14,736,977
Office Portfolio 8,653,598 13,474,355 9,845,168
Germany
Logistics Portfolio 3,305,528 5,078,596 4,958,050
The Netherlands
Office and Industrial Portfolio, The Netherlands 14,149,434 - -
Europe
Mixed Portfolio 16,181,824 25,240,936 21,789,309
433,639,486 420,807,466 414,632,512
No element of loans advanced are past due or impaired. For
further information and the associated risks see the Investment
Manager's Report.
The table below reconciles the movement of the carrying value of
loans advanced in the period / year:
30 June 30 June 31 December
2022 2021 2021
GBP GBP GBP
Loans advanced at the start of the period / year 414,632,512 442,659,649 442,659,649
Loans advanced 27,401,675 35,964,642 91,935,602
Loan repayments and amortisation (14,934,266) (45,824,727) (103,474,780)
Arrangement fees earned (243,148) (357,009) (1,125,342)
Commitment fees earned (368,823) (365,634) (586,841)
Exit fees earned (86,896) (485,435) (527,953)
Origination fees paid 525,888 199,206 300,456
Effective interest earned 14,795,630 14,472,491 28,382,742
Interest payments due (12,895,028) (13,130,109) (25,567,309)
Foreign exchange gains / (losses) 4,811,942 (12,325,608) (17,363,712)
Loans advanced at the end of the period / year 433,639,486 420,807,466 414,632,512
Loans advanced at fair value 451,583,669 436,334,012 431,658,356
For further information on the fair value of loans advanced,
refer to note 13.8. FINANCIAL ASSETS AND FINANCIAL 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 gains and losses relating to the currency forwards are
included within "Net foreign exchange gains / (losses)" in the
Unaudited Condensed Consolidated Statement of Comprehensive
Income".
The fair value of financial assets and liabilities at fair value
through profit or loss are set out below:
Notional contract Fair values
30 June 2022 amount1 Assets Liabilities Total
GBP
GBP GBP GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 286,121,467 7,749,022 (3,124,135) 4,624,887
Total 286,121,467 7,749,022 (3,124,135) 4,624,887
Notional contract Fair values
30 June 2021 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 312,269,694 12,724,121 (748,391) 11,975,730
Total 312,269,694 12,724,121 (748,391) 11,975,730
Notional contract Fair values
31 December 2021 amount1 Assets Liabilities Total
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 period / year end exchange
rate 9. TRADE AND OTHER PAYABLES
30 June 30 June 31 December
2022 2021 2021
GBP GBP GBP
Investment management fees payable 785,084 785,134 791,344
Audit fees payable 195,268 188,315 98,896
Commitment fees payable 154,045 156,340 169,746
Accrued expenses 35,244 89,444 39,888
Administration fees payable 142,667 24,137 87,815
Legal and professional fees payable 61,327 58,087 38,582
Directors' expenses payable 2,000 2,000 560
Broker fees payable 25,000 25,000 25,000
Loan amounts payable 6,204 - 212,953
Tax provision (2,721) - 19,742
1,404,118 1,328,457 1,484,526
10. 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.
As at 30 June 2022, an amount of GBP18,470,386 (30 June 2021:
GBP11,000,000 and 31 December 2021: GBP8,500,000) was drawn and
interest of GBP38,213 (30 June 2021: GBP17,667 and 31 December
2021: GBP7,997) was payable.
The revolving credit facility capitalised costs are directly
attributable costs incurred in relation to the establishment of the
credit loan facilities as at June 2022 an amount of GBP486,566 (30
June 2021: GBP802,032 and 31 December 2021: GBP593,004) 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.
30 June 2022 30 June 2021 31 December 2021
GBP GBP GBP
Borrowings at the start of the period /year 7,914,993 18,626,837 18,626,837
Proceeds during the period / year 30,623,470 29,400,000 63,800,000
Repayments during the period / year (20,985,311) (37,900,000) (75,128,132)
Interest expense recognised for the period / year 170,528 139,892 236,071
Interest paid during the period / year (235,601) (291,809) (262,221)
Credit facility amortisation of fees 206,438 240,715 563,496
Foreign exchange and translation difference 327,282 - 78,942
Borrowings at the end of the period/year 18,021,799 10,215,635 7,914,993
11. DIVIDS
Dividends will be declared by the Directors and paid in
compliance with the solvency test prescribed by Guernsey law. Under
Guernsey law, companies can pay dividends in excess of accounting
profit provided they satisfy the solvency test prescribed by the
Companies (Guernsey) Law, 2008. The solvency test considers whether
a company is able to pay its debts when they fall due, and whether
the value of a company's assets is greater than its liabilities.
The Company passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the
Company and the investment outlook, it is the Directors' intention
to continue to pay quarterly dividends to shareholders (for more
information see Chairman's Statement).
Net dividend
Dividend rate per Share (pence) Payment date
paid (GBP)
Period to:
31 March 2022 1.375 5,622,530 27 May 2022
After the end of the period, the Directors declared a dividend
in respect of the financial period ended 30 June 2022 of 1.375
pence per share which was paid on 26 August 2022 to shareholders on
the register on 5 August 2022.
The Company paid the following dividends in respect of the year
to 31 December 2021:
Net dividend
Dividend rate per Share (pence) Payment date
paid (GBP)
Period to:
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 1.375 5,622,530 25 February 2022 12. RISK MANAGEMENT POLICIES AND PROCEDURES
The COVID-19 outbreak is an ongoing situation that is evolving
and changing. There has been a negative impact on global economies.
While the outbreak has had a significant negative impact on a lot
of businesses worldwide, it has also created opportunities in other
sectors. The Directors continue to monitor the impact on the Group
and its investments.
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 Group through its investment in whole loans, subordinated
loans, mezzanine loans, bridge loans, loan-on- loan financings and
other debt instruments is exposed to a variety of financial risks,
including market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group's overall risk
management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the
Group's financial performance.
The Directors monitor and measure the overall risk bearing
capacity in relation to the aggregate risk exposure across all risk
types and activities. Even though the risks detailed in the Annual
Report and Financial Statements for the year ended 31 December 2021
still remain appropriate, further information regarding these risk
policies are outlined below:
(i) Market 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.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and
invests in loans that are denominated in currencies other than the
functional currency of the Company. Consequently, the Group is
exposed to risks arising from foreign exchange rate fluctuations in
respect of these loans and other assets and liabilities which
relate to currency flows from revenues and expenses. Exposure to
foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board
accordingly.
b) Interest rate risk
Interest rate risk is the risk that the value of financial
instruments and related income from loans advanced and cash and
cash equivalents will fluctuate due to changes in market interest
rates.
The majority of the Group's financial assets are loans advanced
at amortised cost, receivables and cash and cash equivalents. The
Group's investments have some exposure to interest rate risk which
is limited to interest earned on cash deposits and floating
interbank rate exposure for investments designated as loans
advanced. Loans advanced have been structured to include a
combination of fixed and floating interest rates to reduce the
overall impact of interest rate movements. Further protection is
provided by including interbank rate floors and preventing interest
rates from falling below certain levels.
(ii) Credit risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. The Group's main credit risk exposure
is in the 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 30 June 2022 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 period end our 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 end of the
reporting period. As at 30 June 2022, the maximum credit risk
exposure was GBP442,291,127 (30 June 2021: GBP435,238,657 and 31
December 2021: GBP430,918,680).
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 expected credit losses using
probability of default, exposure at default and loss given default.
The Directors consider both historical analysis and forward looking
information in determining any expected credit loss. 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. As
at 30 June 2022 two loans held in the balance sheet at
GBP45,650,969 (31 December 2021:three loans of GBP59,031,888) have
been classified as Stage 2. Despite this, no loss allowance has
been recognised based on 12-month and lifetime expected credit
losses for Stage 1 and Stage 2 loans advanced, respectively, as
based on the information available there is no reason to believe
that there has been any impairment in the value of the loans held
by the Group. The remaining loans are classified as Stage 1. One
investment was upgraded to Stage 1 from Stage 2 during the period
as the underlying hotel asset has completed its refurbishment
project, demonstrated strong trading in Q2 2022 since re-opening
and has significant headroom to the loan's basis, with no
heightened credit risk vs recognition continuing.
The balance of interest rate increases being positive for the
Company and this increasing rate can put pressure on borrowers but
due to the underwriting and monitoring processes of the Investment
Manager, the Directors and Investment Manager consider the risk of
a change significant change in credit risk because of the
inflationary and interest rate environment to be low.
(iii) Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient resources available to meet its liabilities as they fall
due. The Group's loans advanced are illiquid and may be difficult
or impossible to realise for cash at short notice.
The Group manages its liquidity risk through short-term and
long-term cash flow forecasts to ensure it is able to meet its
obligations. In addition, the Company is permitted to borrow up to
30 per cent of NAV and has entered into revolving credit facilities
totalling GBP126,000,000 (30 June 2021: GBP126,000,000 and 31
December 2021: GBP126,000,000) of which GBP18,470,386 was drawn on
30 June 2022 (30 June 2021: GBP11,000,000 and 31 December 2021:
GBP8,500,000).
As at 30 June 2022, the Group had GBP3,078,669 (30 June 2021:
GBP1,359,957 and 31 December 2021: GBP2,994,357) available in cash
and GBP1,404,119 (30 June 2021: GBP1,328,457 and 31 December 2021:
GBP1,484,526) trade payables. The Directors considered this to be
sufficient cash available, together with the undrawn facilities on
the credit facilities, to meet the Group's liabilities, and undrawn
loan commitments. 13. FAIR VALUE MEASUREMENT
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical
assets or liabilities (level 1);
(ii) Inputs other than quoted prices included within level 1
that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices
including interest rates, yield curves, volatilities, prepayment
rates, credit risks and default rates) or other market corroborated
inputs (level 2); and
(iii) Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The following table analyses within the fair value hierarchy the
Group's financial assets and liabilities (by class) measured at
fair value:
Level 1 Level 2 Level 3 Total
30 June 2022
GBP GBP GBP GBP
Assets
Derivative assets - 4,624,887 - 4,624,887
Total - 4,624,887 - 4,624,887
Level 1 Level 2 Level 3 Total
30 June 2021
GBP GBP GBP GBP
Liabilities
Derivative assets - 11,975,731 - 11,975,731
Total - 11,975,731 - 11,975,731
Level 1 Level 2 Level 3 Total
31 December 2021
GBP GBP GBP GBP
Assets
Derivative assets - 13,291,598 - 13,291,598
Total - 13,291,598 - 13,291,598
There have been no transfers between levels for the period ended
30 June 2022 (30 June 2021: nil and 31 December 2021: nil).
The Directors are responsible for considering the methodology
and assumptions used by the Investment Adviser and for approving
the fair values reported at the financial period end.
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value but for which fair value is disclosed:
Total fair Total carrying
30 June 2022 Level 1 Level 2 Level 3 amount
values
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 451,583,669 451,583,669 433,639,486
Total - - 451,583,669 451,583,669 433,639,486
Liabilities
Credit facilities - 18,021,799 - 18,021,799 18,021,799
Total - 18,021,799 - 18,021,799 18,021,799
Total fair Total carrying
30 June 2021 Level 1 Level 2 Level 3 amount
values
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 436,334,012 436,334,012 420,807,466
Total - - 436,334,012 436,334,012 420,807,466
Liabilities
Credit facilities - 10,215,635 - 10,215,635 10,215,635
Total - 10,215,635 - 10,215,635 10,215,635
Total fair Total carrying
Level 1 Level 2 Level 3 amount
31 December 2021 values
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 431,658,356 431,658,356 414,632,512
Total - - 431,658,356 431,658,356 414,632,512
Liabilities
Credit facilities - 7,914,993 - 7,914,993 7,914,993
Total - 7,914,993 - 7,914,993 7,914,993
For cash and cash equivalents, other receivables and trade and
other payables the carrying amount is a reasonable approximation of
the fair value.
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.
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.
14. 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 Luxco had no operating gains on ordinary activities before
taxation and was therefore subject to the Luxembourg minimum
corporate income taxation at EUR4,815 (year ended 31 December 2021:
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% (year ended 31 December 2021:
24.94%). 15. 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.
The tables below summarise the outstanding balances and
transactions which occurred with related parties.
Outstanding at Outstanding at Outstanding at
30 June 2022 30 June 2021 31 December 2021
GBP GBP GBP
Investment Manager
Investment management fees payable 785,084 785,134 791,344
For the period ended For the period ended For the year ended
31 December 2021
30 June 2022 30 June 2021
GBP
GBP GBP
Directors' fees and expenses paid
John Whittle 30,000 22,500 45,000
Shelagh Mason 22,500 20,000 42,500
Charlotte Denton 25,000 20,000 40,000
Gary Yardley (appointed 6 September 2021) 21,000 - 12,712
Stephen Smith (resigned 31 December 2021) - 25,000 50,000
Expenses paid 4,605 4,605 5,198
Investment Manager
Investment management fees earned 1,559,609 1,561,503 3,147,075
Origination fees 525,888 199,206 300,456
Expenses 97,618 59,984 68,107
The tables below summarise the dividends paid to and number of
Company's shares held by related parties.
Dividends paid during the Dividends paid during the Dividends paid during the
period ended period ended period ended
30 June 2022 30 June 2021 31 December 2021
GBP GBP GBP
Starwood Property Trust 251,350 274,200 525,550
Inc.
SCG Starfin Investor LP 62,838 68,550 131,388
Stephen Smith 2,171 2,368 4,538
John Whittle 656 716 1,372
Shelagh Mason 3,103 3,385 6,487
Charlotte Denton - - -
Gary Yardley - - -
Duncan MacPherson* 6,875 7,500 14,375
Lorcain Egan* 2,301 2,510 4,811
As at As at As at
30 June 2022 30 June 2021 31 December 2021 Number of shares
Number of shares Number of shares
Starwood Property Trust Inc. 9,140,000 9,140,000 9,140,000
SCG Starfin Investor LP 2,285,000 2,285,000 2,285,000
Stephen Smith 78,929 78,929 78,929
John Whittle1 23,866 23,866 23,866
Shelagh Mason 112,819 112,819 112,819
Charlotte Denton2 - - -
Gary Yardley - - -
Duncan MacPherson* 250,000 250,000 250,000
Lorcain Egan* 83,678 83,678 83,678
* Employees at the Investment Adviser
1 John Whittle purchased 10,000 shares on 20 July 2022. His
total holding as of 20 July 2022 is 33,866.
2 Charlotte Denton purchased 44,444 shares on 20 July 2022. Her
total shareholding as of 20 July 2022 is 44,444.
Other
The Group continues to participate in a number of loans in which
Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The
Group also acted as co-lender with Starwood European Real Estate
Debt Finance I LP ("SEREDF I") an affiliate entity. The details of
these loans are shown in the table below.
Loan Related party co-lenders
Hotel and Residential, UK STWD
Two Hotels, Manchester & Edinburgh SEREDF I
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD 16. EVENTS AFTER THE REPORTING PERIOD
The following cash amounts have been funded since the period
end, up to the date of publication of this report:
Local Currency
5-Star Hotel, Oxford GBP128,043
Office Building, London GBP1,180,465
Mixed Use, Dublin EUR1,525,110
Two Hotels, Manchester & Edinburgh GBP494,416
The following loan amortisation (both scheduled and unscheduled)
has been received since the period end, up to the date of
publication of this report:
Local Currency
Mixed Portfolio, Central and Northern Europe EUR5,085,641
Office and Industrial Portfolio, The Netherlands EUR4,998,013
Three Shopping Centres, Spain EUR317,344
Hotel, Dublin EUR4,300,000
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 un- invested. 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 the contractual life of the loan,
which is currently four years for the portfolio. However, it has
been our experience that loans tend to repay after approximately
2.5 years and as such, these fees are actually amortised over a
shorter period
? Many loans benefit from prepayment provisions, which means
that if they are repaid before the end of the protected period,
additional interest or fees become due. As we quote the return
based on the contractual life of the 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 forecast this 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 / DEBT
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.
Further Information
Corporate Information
Directors Registered Office
John Whittle (non-executive Chairman) 1 Royal Plaza
Shelagh Mason (non-executive Director) Royal Avenue
Charlotte Denton (non-executive Director) St Peter Port
Gary Yardley (non-executive Director) Guernsey
(all care of the registered office) GY1 2HL
Investment Manager Investment Adviser
Starwood European Finance Starwood Capital Europe Advisers, LLP
Partners Limited 2nd Floor
1 Royal Plaza
Royal Avenue One Eagle Place
St Peter Port St. James's
Guernsey London
GY1 2HL
SW1Y 6AF
Solicitors to the Company United Kingdom
(as to English law and U.S. securities law)
Advocates to the Company
Norton Rose Fullbright LLP (as to Guernsey law)
3 More London Riverside Carey Olsen
London
PO Box 98
SE1 2AQ
Carey House, Les Banques
United Kingdom St Peter Port
Registrar Guernsey
GY1 4HP
Computershare Investor Services
(Guernsey) Limited Independent Auditor
3rd Floor PricewaterhouseCoopers CI LLP
Natwest House
Le Truchot Royal Bank Place
St Peter Port 1 Glategny Esplanade
Guernsey St Peter Port
GY1 1WD
Guernsey
Sole Broker
GY1 4ND
Jefferies Group LLC
Principal Bankers
100 Bishopsgate
London, EC2N 4JL Barclays Private Clients International Limited
United Kingdom PO Box 41
Administrator, Designated Manager Le Marchant House
and Company Secretary St Peter Port
Guernsey
Apex Fund and Corporate Services
(Guernsey) Limited GY1 3BE
1 Royal Plaza Website:
Royal Avenue
St Peter Port www.starwoodeuropeanfinance.com
Guernsey
GY1 2HL
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ISIN: GG00B79WC100
Category Code: IR
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.2. Half yearly financial reports and audit reports/limited reviews
Sequence No.: 186108
EQS News ID: 1435951
End of Announcement EQS News Service
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