Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Half Yearly Report 30 June 2023
07-Sep-2023 / 07:00 GMT/BST
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Starwood European Real Estate Finance Limited
Half Year Results for the Period Ended 30 June 2023
Orderly Realisation Progressing Well
First Capital Distribution Executed with a Second Distribution Announced Post Period End
Starwood European Real Estate Finance Limited (the "Company") 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 Half Year Results for the six months ended 30 June 2023.
Following the approval of the Company's new investment objective and policy as recommended to shareholders by the Board
at the Company's EGM on 27 January 2023, the Company is pursuing a strategy of orderly realisation and the return of
capital to shareholders over time and in an orderly fashion.
Highlights for the period, six months ended 30 June 2023
-- Positive realisation progress - during the half year:
? A total of GBP43.6 million, 10.2 per cent of the Group's 31 December 2022 total funded loan portfolio,
has been repaid across 9 investments
? This included the full repayment of three loans (totalling GBP31.2 million or 7.3 per cent of the
Group's 31 December 2022 total fund loan portfolio)
? Proceeds were used to fund the repayment of the GBP19 million of debt outstanding as at 31 December
2022, the additional dividend of GBP7.9 million paid in April 2023 (which equated to 2.0 pence per share) and the
first return of capital to shareholders of GBP10.0 million paid in June 2023
? Post period end, following the full repayment of two loans totalling GBP60.8 million and further
partial repayments, a second capital distribution of GBP30.0 million was announced alongside the creation of a
reserve to fund unfunded loan commitments and the reduction of the Company's credit facilities to GBP25.0 million
-- All assets are carefully monitored for changes in their risk profile - during the half year the following
changes were made:
? Four assets moved from Stage 1 to Stage 2 indicating a change in their credit risk since origination
but no impairments anticipated; and
? One asset moved from Stage 2 to Stage 3 and a small credit loss of GBP1.7 million was recognised - this
represents 0.5% of the funded portfolio and is the result of the Group prudently applying sensitivities to net
proceeds from an agreed asset sale currently progressing through exclusivity
-- The average remaining loan term of the portfolio is 1.4 years
-- 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 6.2 per cent on the share price as at 30
June 2023
-- Regular and consistent dividend - since inception the Company has paid a regular and consistent dividend
-- Inflation protection - 76.1 per cent of the portfolio is contracted at floating interest rates (with
floors)
-- Robust portfolio - the loan book is performing broadly in line with expectations with its defensive
qualities reflecting in the Group's continued NAV stability
-- Significant equity cushion - the weighted average Loan to Value for the portfolio as at 30 June 2023 is
56.0 per cent
Portfolio Statistics
As at 30 June 2023, the portfolio was invested in line with the Group's investment policy. The key portfolio statistics
are summarised below:
30 June 2023 30 June 2022
Number of investments 17 19
Percentage of currently invested portfolio in floating rate loans 76.1% 78.8%
Invested Loan Portfolio unlevered annualised total return* 8.1% 7.1%
Invested Loan Portfolio levered annualised total return* 8.1% 7.2%
Weighted average portfolio LTV - to Group first GBP* 11.6% 14.9%
Weighted average portfolio LTV - to Group last GBP* 56.0% 60.5%
Average loan term 5.3 years 5.0 years
Average remaining loan term 1.4 years 1.9 years
Net Asset Value GBP400.4m GBP422.9m
Amount drawn under Revolving Credit Facility (excluding accrued interest) (GBP0.0m) (GBP18.5m)
Loans advanced at amortised cost (including accrued income) GBP384.1m GBP433.6m
Cash and cash equivalents GBP13.1m GBP3.1m
Other net assets (including financial assets held at fair value through the profit or loss) GBP3.2m GBP4.7m
*Alternative performance measure
John Whittle, Chairman of the Company commented:
"We are pleased to report a robust performance and we note once
again that all interest due has been paid in full.
Following approval of the Company's new investment objective and
policy at the outset of the period, SEREF is pursuing a strategy of
orderly realisation. During the period, 10.2% of the Group's total
loan portfolio was repaid which included the full repayment of
three investments. These cash resources were allocated to provide
the first distribution of GBP10.0 million to shareholders in June,
an additional dividend of GBP7.9 million to shareholders in April
and the repayment of GBP19 million of outstanding debt.
Post period end, following further repayment activity, the Board
has created a reserve to fund unfunded loan commitments, reduced
the revolving credit facilities to GBP25 million and announced a
further capital distribution of GBP30.0 million.
The focus of the Group going forward remains the continued
robust asset management of the existing loan portfolio, the orderly
realisation of the portfolio and the timely return of capital to
shareholders. We look forward to providing further updates towards
meeting these objectives and would like to thank shareholders for
their continued commitment and support."
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company
Secretary +44 203 5303 630
Duke Le Prevost
Starwood Capital +44 (0) 20 7016 3655
Duncan MacPherson
Jefferies International Limited +44 (0) 20 7029 8000
Gaudi Le Roux
Stuart Klein
Harry Randall
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Notes:
Starwood European Real Estate Finance Limited is an investment
company listed on the main market of the London Stock Exchange with
an investment objective to conduct an orderly realisation of the
assets of the Group. www.starwoodeuropeanfinance.com.
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 2023 to 30 June 2023
Overview Corporate Summary
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
Starwood European Real Estate Finance Limited (the "Company")
was established in November 2012 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 made 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) (collectively the "Group").
Following the Company's Extraordinary General Meeting ("EGM") on
27 January 2023, the Company's objective changed and is now to
conduct an orderly realisation of the assets of the Group and the
return of capital to Shareholders. In line with this objective the
Board will endeavour to realise all of the Group's investments in a
manner that achieves a balance between maximising the net value
received from those investments and making timely returns to
Shareholders. It is anticipated that it will take four to five
years to complete this objective.
The Group will not make any new investments going forward save
that investments may be made to honour commitments under existing
contractual arrangements or to preserve the value of any underlying
security.
Cash held by the Group pending distribution will be held in
either cash or cash equivalents for the purposes of cash
management.
Subject to the above restrictions, the Company retains the
ability to seek to enhance the returns of selected loan investments
through the economic transfer of the most senior portion of such
loan investments. It is anticipated that where this is undertaken
it would generate a positive net interest rate spread and enhance
returns for the Company.
Full details of the investment objectives and policy post the
EGM on 27 January 2023 are set out in the 2022 Annual Report which
can be found on the company's website
https://starwoodeuropeanfinance.com.
The Investment Objective and Policy which applied prior to the
EGM on 27 January 2023 and for the whole of 2022, are set out in
the 2021 Annual Report which can also be found on the company's
website https://starwoodeuropeanfinance.com. The Investment
Objective applied for the whole of 2022 and prior to the EGM on 27
January 2023 was 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 Investment Policy applied
for the whole of 2022 and prior to the EGM on 27 January 2023 was
to invest in a diversified portfolio of real estate debt
investments in the UK and the European Union's internal market as
the Group had done since its initial public offering ("IPO") in
December 2012.
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 registered with the Guernsey
Financial Services Commission ("GFSC") as a closed-ended collective
investment scheme. 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 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. 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, 2022 and
2023 AGMs. Between 2020 and 2022 the Company bought back 17,626,702
Ordinary Shares. Shares bought back (which had been held in
treasury) were cancelled in June 2023.
In June 2023 the Company compulsorily redeemed 9,652,350
Ordinary Shares from Shareholders at 103.63 pence per share.
In August 2023 the Company compulsorily redeemed a further
29,092,218 Ordinary Shares from Shareholders at 103.12 pence per
share.
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,
On behalf of the Board I 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 2023 to 30 June 2023.
Six months ago, when I presented the Annual Report and Audited
Consolidated Financial Statements of the Group for the year ended
31 December 2022 to you, I spoke about the growing concerns over
energy prices, the rising cost of living, higher interest rates and
the Russian invasion of Ukraine. Since then the global economic and
political themes have remained the same albeit energy prices and
inflation have started to fall while interest rates have continued
to rise. The Group's performance has also remained consistent
demonstrating its unique portfolio resilience through the strength
and consistency of its results. Once again all loan interest and
scheduled amortisation payments have been received and underlying
collateral valuations continue to provide reassuring headroom.
Notwithstanding this continued robust performance, the Group
decided to move one of the Spanish retail assets from Stage 2 to
Stage 3 and recognise a modest impairment provision against it.
This minor impairment represents 0.5% of the funded portfolio and
is the result of the Group prudently applying sensitivities to net
proceeds from an agreed asset sale which is subject to contract and
is currently progressing through exclusivity. We have also moved
four assets from Stage 1 to Stage 2 indicating a change in their
credit risk since origination but with no impairments anticipated.
The Group will continue to exercise an abundance of caution in
these challenging times.
Despite this the Group's NAV has remained stable. This stability
demonstrates the positive fundamentals of the Group's portfolio as
an exceptionally attractive risk-adjusted source of alternative
income tested, once again, in the harshest of market environments.
Against market volatility, the Group has maintained a relatively
stable market valuation, met its dividend targets (delivering an
annualised 5.5 pence per share to shareholders) and started the
orderly realisation of the Group's assets and the return of capital
to Shareholders.
As you are aware and as already detailed in the Annual Report
for the period to 31 December 2022, on 31 October 2022, the Board
announced the Company's Proposed Orderly Realisation and Return of
Capital to Shareholders. A Circular relating to the Proposed
Orderly Realisation, containing a Notice of Extraordinary General
Meeting (EGM) was published on 28 December 2022. The proposals were
approved by Shareholders at the EGM in January 2023 and the Company
is now seeking to return cash to Shareholders in an orderly manner
as soon as reasonably practicable following the repayment of loans,
while retaining sufficient working capital for ongoing operations
and the funding of committed but currently unfunded loan
commitments.
In June 2023, the Company announced its first capital
distribution, returning circa GBP10 million to shareholders through
the compulsory redemption of 9,652,350 shares at a price of
GBP1.0363 per share.
The second capital distribution was announced in August 2023
which returned circa GBP30 million to shareholders through the
compulsory redemption of 29,092,218 shares at a price of GBP1.0312
per share.
JOHN WHITTLE
Chairman
6 September 2023
HIGHLIGHTS OVER THE SIX MONTHS TO 30 JUNE 2023
? Positive realisation progress - during the half year:
? A total of GBP43.6 million, 10.2 per cent of the Group's 31
December 2022 total funded loan portfolio, has been repaid across 9
investments
? This included the full repayment of three loans (totalling
GBP31.2 million or 7.3 per cent of the Group's 31 December 2022
total funded loan portfolio)
? Proceeds were used to fund the repayment of the GBP19 million
of debt outstanding as at 31 December 2022, the additional dividend
of GBP7.9 million paid in April 2023 (which equated to 2.0 pence
per share) and the first return of capital to shareholders of
GBP10.0 million paid in June 2023
? All assets are carefully monitored for changes in their risk
profile - during the half year, the following changes to risk
classification were made:
? Four assets moved from Stage 1 to Stage 2 indicating a change
in their credit risk since origination but no impairments
anticipated; and
? One asset moved from Stage 2 to Stage 3 and a small credit
loss of GBP1.7 million was recognised - this minor impairment
represents 0.5% of the funded portfolio and is the result of the
Group prudently applying sensitivities to net proceeds from an
agreed asset sale which is subject to contract and is currently
progressing through exclusivity
? The average remaining loan term of the portfolio is 1.4
years
? 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 6.2 per cent
on the share price as at 30 June 2023
? Regular and consistent dividend - since inception the Company
has paid a regular and consistent dividend
? Inflation protection - 76.1 per cent of the portfolio is
contracted at floating interest rates (with floors)
? Robust portfolio - the loan book is performing broadly in line
with expectations with its defensive qualities reflected in the
Group's continued NAV stability
? Significant equity cushion - the weighted average Loan to
Value for the portfolio as at 30 June 2023 is 56.0 per cent
INVESTMENT MOMENTUM
In line with the new strategic direction of the Group (i.e. the
orderly realisation and return of capital to shareholders) there
has been no new commitments made in the six months to 30 June 2023.
Repayments received in the six months to 30 June 2023 are
summarised in the highlights section above.
As at 30 June 2019 to 2023 the Group had commitments as shown in
the table below.
June 2019 June 2020 June 2021 June 2022 June 2023
Funded loans GBP447.0m GBP447.5m GBP418.5m GBP429.1m GBP379.2m
Unfunded cash Commitments GBP31.9m GBP67.2m GBP36.8m GBP36.8m GBP47.3m
Total Portfolio GBP478.9m GBP514.7m GBP455.3m GBP465.9m GBP426.5m
Since 30 June 2023 GBP69.7 million has been repaid, including
the full repayment of two loans - Hotels & Residential, UK -
GBP49.9 million and Mixed Use, Dublin - GBP10.9 / EUR12.7
million.
NAV PERFORMANCE
The table below shows the NAV per share movements over the 6
months to 30 June 2023.
Jan - 23 Feb - 23 Mar - 23 Apr - 23 May - 23 Jun - 23
NAV per share at beginning of month 105.20 104.58 105.28 103.82 103.09 103.63
Monthly Movements
Operating Income available to distribute before impairment 0.65 0.69 0.59 0.63 0.62 0.64
provision(1)
Impairment provision on asset classified as Stage 3(2) 0.00 0.00 0.00 0.00 0.00 (0.45)
Realised FX gains/(losses) not distributable(3) 0.00 0.56 0.00 0.00 0.00 0.00
Unrealised FX gains/(losses)(4) 0.11 (0.55) (0.05) 0.01 (0.08) (0.07)
Dividends declared (1.38) 0.00 (2.00) (1.37) 0.00 0.00
NAV per share as end of month 104.58 105.28 103.82 103.09 103.63 103.75
(1) Operating Income available to distribute before impairment
provision comprises loan income recognised in the period less the
cost of debt facilities utilised by the Group and operating costs
incurred. Operating Income available to distribute before
impairment provision also includes any realised foreign exchange
gains or losses upon settlement of hedges, except those described
in note 3. Included in loan income recognised in February 2023 is
circa GBP0.5m (equivalent to 0.14p per share) of loan income
related to Office and Industrial Portfolio, UK which was fully
repaid in February 2023 and which benefited from early repayment
income protection.
(2) In June 2023 a loan which had been classified as Stage 2 was
reclassified to Stage 3 and an impairment provision recognised.
(3) 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 or
as a reduction in distributable profits when the rolled hedge
matures or is settled and the final net gain or loss on the capital
hedges can be determined.
(4) Unrealised foreign exchange gain/losses relate to the net
impact of changes in the valuation of foreign exchange hedges and
the sterling equivalent value of Euro loan investments (using the
applicable month end rate). Mismatches between the hedge valuations
and the loan investments may occur depending on the shape of the
forward FX curve and this causes some movement in the NAV. These
unrealised FX gains / losses are not considered part of
distributable reserves.
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, Euro exposures are hedged and credit risk
is proactively managed.
The NAV would be materially impacted if a significant impairment
in the value of a loan was required but, despite the disruption to
markets over the recent years, no material impairment has been
needed and the Group's underlying collateral valuations remain
stable and current (the average age of current valuations is just
over one year). Please refer to the Investment Manager's report for
detailed sector performance reporting, information on the
accounting for our loans and the current loan to value position for
the portfolio as a whole and for each sector.
The Group continues to closely monitor its loan exposures,
underlying collateral performance and repayments.
SHARE PRICE PERFORMANCE
During the first half of 2023, the Company's shares have been,
relative to a volatile market, stable. In the six month period to
30 June 2023, the share price has been trading at between 86.2
pence and 92.6 pence and ended the half year at 88.6 pence.
As at 30 June 2023, the discount to NAV stood at 14.6 per cent,
with an average discount to NAV of 15.0 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.
DIVIDS
The Directors declared dividends in respect of the first two
quarters of 2023 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). The Board also declared an additional dividend in March
2023 of 2 pence per share related to 2022. With the current
portfolio, and based on current forecasts (including forecasts of
capital redemptions), we expect the target dividend of 5.5 pence
per share to continue to be covered by earnings over the 12 months
to 31 December 2023.
Based on the share price at 30 June 2023, a dividend of 5.5
pence per annum represents a 6.2 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.
I am very pleased with the composition of the Board and I
believe we have a very relevant diversity of skills and expertise
which places us well for executing the strategy the shareholders
have tasked us with.
GOING CONCERN
Under the UK Corporate Governance Code and applicable
regulations, the Directors are required to satisfy themselves that
it is reasonable to assume that the Group is a going concern.
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 in
light of the recent change of investment objective and strategy,
the Directors considered it appropriate to adopt the going concern
basis of accounting in preparing the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements.
OUTLOOK
The Board is pleased that the diligent underwriting, loan
structuring and active asset management of the Investment Manager
and Adviser has led to very robust performance of the loans during
the period.
At 30 June 2023, the Group had no debt drawn and undrawn
revolving credit facilities of GBP101.0 million to fund existing
commitments of GBP47.3 million if needed. Since 30 June 2023 and
following the full repayment of two loans totaling GBP60.8 million
in addition to other partial repayments the Board has created a
reserve to fund the unfunded cash loan commitments and has reduced
the revolving credit facilities to GBP25 million, available to May
2024.
The focus of the Group for the rest of 2023 is:
(i) the continued robust asset management of the existing loan
portfolio;
(ii) the orderly realisation of the portfolio; and
(iii) the timely return of capital to shareholders
I would like to close by thanking you for your continued
commitment and support.
John Whittle
Chairman
6 September 2023
Investment Manager's Report
MARKET COMMENTARY
At the beginning of the year we saw inflation from energy costs
beginning to moderate as we passed the anniversary of the start of
the war in Ukraine. Some of these trends have continued over the
half year under review particularly in the United States where June
CPI was well received by the markets down to 3 per cent which is
the lowest rate since 2021 but there are concerns of a longer
period of high inflation especially in the UK.
Eurozone preliminary data for June shows the consumer price
inflation rate decreased to 5.5 per cent in June 2023, down from
6.1 per cent in the previous month and slightly below market
expectations of 5.6 per cent. The core rate, which excludes
volatile items such as food and energy, was slightly up from the
previous month at 5.4 per cent but below the March rate of 5.7 per
cent and also slightly below market forecasts of 5.5 per cent.
Energy prices were down 5.6 per cent (versus down 1.8 per cent in
May). More concerningly, services inflation picked up to 5.4 per
cent from 5.0 per cent. However, more encouraging aspects to note
are that the Eurozone consumer price inflation is now at its lowest
level since January 2022 having peaked at 10 per cent in October
2022 and recent data shows factory gate prices in the region fell
1.5 per cent in the year to May, the first outright decline since
December 2020.
UK inflation has been higher persistently with concerns focused
around the core inflation rate. Interest rate markets moved
markedly higher on the recent numbers. While the April data showed
a reasonable decrease in overall consumer price inflation which
declined from 10.1 per cent in March to 8.7 per cent, it was less
of a decline than markets expected and core consumer price
inflation continued to increase to 6.8 per cent which was the
highest rate since March 1992. May numbers continued to miss
expectations with the overall consumer price inflation rate
unchanged at 8.7 per cent versus an expectation of a fall to 8.5
per cent. However June data swung the other way with a decline to
7.9 per cent versus analyst expectations of 8.2 per cent and
markets reacted quickly to the surprise with asset prices rising
across the board. The FTSE 100 rallied by almost 2 per cent and the
10 year gilt yield fell from 4.34 per cent to 4.16 per cent on the
day.
As expected, central banks continue to be hawkish on the
persistence of inflation. During the half year under review, the
Bank of England raised the UK base rate four times including a
larger than expected 50 basis points move in June in reaction to
the high inflation data. With the subsequent August increase the
Bank of England has now raised rates from 0.1 per cent to 5.25 per
cent in this tightening cycle over a twenty month period. The
markets see more to come with the expected peak in UK interest
rates having risen from an expected peak of 5 per cent as at May,
to as high as 6.5 per cent at one point.
In Europe there have also been rate rises taking the key Euro
interest rate to 3.75 per cent and markets expecting this to rise
to a peak of around 4 per cent. Christine Lagarde has signaled that
the ECB will remain vigilant commenting on "a more persistent
inflation process" meaning that rate-setters "cannot declare
victory yet".
Higher interest rates expectations have fed directly into UK
mortgage rates with fast changing rate expectations leading to a
flurry of press reports on rising rates for residential mortgages.
Headlines have highlighted the large numbers of mortgage deals
being pulled from the market and in some cases leading UK banks
repriced their headline mortgage rates twice in one week. During
August a number of lenders have begun to cut rates however the 2
year fixed rate residential mortgages are still near their peak
level at 6.8 per cent and the average rate for a five-year fixed
mortgage stands at 6.3 per cent. These increases have begun to feed
into house prices where average UK home prices according to the
Halifax declined 2.6 per cent in the year to June which is the
largest year on year decline since 2011.
Commercial real estate markets are looking for increased levels
of certainty in inflation and interest rate expectations and until
the outlook settles there is likely to be a decreased level of
transaction volumes. This can be seen in the reduced activity in
the first quarter of 2023 where investment volumes were down 62 per
cent as a whole in Europe. Focusing on the office market where we
commented last time on the differences between the US and European
markets, observers might be surprised that volume decreases here
are largely in line with the market as a whole with a 64 per cent
decrease in office transaction volume. Looking at Central London
office in particular the number of transactions is similar to the
same period last year but the average lot size is down by 59 per
cent which is in line with the reduction in overall transaction
volumes. As is typical in slower markets the activity has been
focused on high quality assets and as such London office
transactions in the first quarter of 2023 have set the highest ever
recorded average capital value per square foot.
Operating asset classes showed lower declines in investment
volumes with hotel investment activity in the quarter ended 30 June
2023 versus the previous year being the strongest of the sectors.
Hotels recorded a flat level of transactions reflecting strong
underlying operating performance in the sector. All of the top 25
European hotel markets have recorded higher average room rates in
the 12 months to end of May 2023 than they did in 2019.
One of the underperformers in transaction volumes for the
quarter ended 30 June 2023 was logistics where volumes were down 76
per cent, however this may be a sector that picks up volume
following a rapid repricing. Valuation adjustment in the UK during
2022 has been very swift with the move having been compounded by a
high starting point due to strong performance in recent years. As a
result of the rapid correction we had seen some evidence that
yields were nudging off the recent highs. The fundamentals of high
demand combined with supply being unable to keep up are still
leading to a positive outlook for growing rental levels in this
area which will attract investor interest to the positive income
dynamics.
The wait for stability in the inflation and interest rate
markets has been longer than many expected. This will continue to
be a key driver for real estate markets and until the outlook
settles further market volumes are likely to remain lower.
PORTFOLIO STATISTICS
As at 30 June 2023, the portfolio was invested in line with the
Group's investment policy.
The key portfolio statistics are as summarized below.
30 June 30 June
2023 2022
Number of investments 17 19
Percentage of currently invested portfolio in floating rate loans 76.1% 78.8%
Invested Loan Portfolio unlevered annualised total return(1) 8.1% 7.1%
Invested Loan Portfolio levered annualised total return(1) 8.1% 7.2%
Weighted average portfolio LTV - to Group first GBP(1) 11.6% 14.9%
Weighted average portfolio LTV - to Group last GBP(1) 56.0% 60.5%
Average loan term 5.3 years 5.0 years
Average remaining loan term 1.4 years 1.9 years
Net Asset Value GBP400.4m GBP422.9m
Amount drawn under Revolving Credit Facilities (excluding accrued interest) GBP0.0m (GBP18.5m)
Loans advanced at amortised cost (including accrued income) GBP384.1m GBP433.6m
Cash and cash equivalents GBP13.1m GBP3.1m
Other net assets (including financial assets held at fair value through the profit or loss) GBP3.2m GBP4.7m
(1) Alternative performance measure - refer to definitions and
calculation methodology.
The maturity profile of investments as at 30 June 2023 is shown
below.
Remaining years to contractual maturity* Principal value of loans GBPm % of invested portfolio
0 to 1 years GBP186.4 49.2%
1 to 2 years GBP87.6 23.1%
2 to 3 years GBP46.0 12.1%
3 to 5 years GBP59.2 15.6%
* Excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
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 2023 the NAV was 103.75 pence per Ordinary Share
(31 December 2022: 105.20 pence; 30 June 2022: 103.42 pence) and
the share price was 88.6 pence (31 December 2022: 89.0 pence; 30
June 2022: 91.6 pence).
Source: Morningstar
The Company's share price volatility has been driven by market
conditions and trading cash flows rather than a change in the
Company's NAV.
INVESTMENT DEPLOYMENT
As at 30 June 2023, the Group had 17 investments and commitments
of GBP426.5 million as follows:
Sterling equivalent balance Sterling equivalent unfunded cash Sterling Total
(1), (2) commitment(1) (3) (Drawn and
Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office, London GBP20.5 m GBP20.5 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 GBP10.5 m GBP10.5 m
Ireland
Hotels, United Kingdom GBP32.0 m GBP18.6 m GBP50.6 m
Industrial Estate, UK GBP27.2 m GBP19.0 m GBP46.2 m
Total Sterling Loans GBP242.2 m GBP44.7 m GBP286.9 m
Three Shopping Centres, GBP28.7 m GBP28.7 m
Spain
Shopping Centre, Spain GBP14.6 m GBP14.6 m
Hotel, Dublin GBP32.6 m GBP32.6 m
Office, Madrid, Spain GBP15.9 m GBP0.9 m GBP16.8 m
Mixed Portfolio, Europe GBP5.7 m GBP5.7 m
Mixed Use, Dublin GBP10.9 m GBP1.7 m GBP12.6 m
Office Portfolio, Spain GBP7.6 m GBP7.6 m
Office Portfolio, Ireland GBP21.0 m GBP21.0 m
Total Euro Loans GBP137.0 m GBP2.6 m GBP139.6 m
Total Portfolio GBP379.2 m GBP47.3 m GBP426.5 m
(1) Euro balances translated to sterling at period end exchange
rate.
(2) Balances shown are funded balances before impairment.
(3) Excludes Interest of circa GBP4.4 million to be capitalised
in respect of Office Portfolio, Ireland which is repayable on
maturity.
Between 1 January 2023 and 30 June 2023, the following
significant investment activity occurred (reflected in the table
overleaf):
REPAYMENTS:
During the half year, despite lower transaction volumes across
the markets because of the cautionary approach being adopted by
investors, borrowers repaid the following loan obligations:
- GBP23.0 million, Hotel, Oxford (repayment of loan in full)
- EUR9.4 million, Hotel, Dublin (partial repayment of loan)
- GBP5.5 million, Office and Industrial Portfolio, UK (repayment
of loan in full)
- EUR3.0 million, Logistics Portfolio, Germany (repayment of
loan in full)
- EUR2.1 million, Mixed Portfolio, Europe (partial repayment of
loan)
- GBP1.0 million, Hotel and Office, Northern Ireland (partial
repayment of loan)
- EUR0.8 million, Office Portfolio, Spain (partial repayment of
loan)
- EUR0.7 million, Three Shopping Centres, Spain (scheduled
amortisation)
- EUR0.08 million, Mixed Use, Dublin (partial repayment of
loan)
These repayments were used in the six months to 30 June 2023
to:
- Fund the repayment of the GBP19 million of debt outstanding in
the Group as at 31 December 2022;
- Pay the additional dividend of GBP7.9 million paid in March
2023 (which equated to 2.0 pence per share); and
- Make the first return of capital to shareholders of GBP10.0
million paid in June 2023
ADDITIONAL FUNDING:
During the half year, the Group funded GBP1.6 million in
relation to loan commitments made in prior years which were
unfunded. No new loans were funded during the half year in line
with new objective and investment policy of the group as outlined
in the Chairman's Statement.
Subsequent to 30 June 2023, the following significant loan
repayments occurred:
- GBP49.9 million, Hotel & Residential, UK (repayment of
loan in full)
- EUR12.7 million, Mixed Use, Dublin (repayment of loan in
full)
- EUR5.5 million, Hotel, Dublin (partial repayment of loan)
- EUR2.4 million, Mixed Portfolio, Europe (partial repayment of
loan)
- GBP1.2 million, Hotel & Office, Northern Ireland (partial
repayment of loan)
- EUR0.8 million, Shopping Centre, Spain (partial repayment of
loan)
These repayments were used to build up sufficient cash reserves
for the Group to be able to self-fund the unfunded cash loan
commitments (which were GBP47.3 million as at 30 June 2023) and to
make the second return of capital to shareholders of circa GBP30
million paid in August 2023.
Subsequent to 30 June 2023, the Group funded GBP0.7 million in
relation to loan commitments made in prior years which were
unfunded.
PORTFOLIO OVERVIEW
The Group continues to closely monitor its loan exposures,
underlying collateral performance and repayments. The Group has
prudently assessed key risk indicators impacting all investments
and has increased the number of loans classified as Stage 2 and
moved one loan from a Stage 2 classification to a Stage 3
classification. This is outlined in detail under the Credit Risk
Analysis. Despite increased risk around higher interest rates and
lower transaction volumes, the portfolio has continued to perform
well.
During H1 2023, a total of GBP43.6 million, equivalent to 10.2
per cent of the 31 December 2022 total funded loan portfolio, has
been repaid across nine investments. Repayments are originating
from strategic underlying property sales, regular loan amortisation
or borrowers electing to voluntarily pay down loan balances with
surplus cash. Since 30 June 2023 a further GBP69.7 million has been
repaid, including the full repayment of two loans - Hotels &
Residential, UK - GBP49.9 million and Mixed
Use, Dublin - GBP10.9/EUR12.7 million. These repayments were
used to provide a reserve of cash to fund committed to but as yet
unfunded loan commitments (which amounted to GBP47.3 million as at
30 June 2023) and to fund the second return of capital to
Shareholders (which amounted to circa GBP30.0 million) and was paid
in August 2023.
Post 30 June 2023 the Group's exposure to development and heavy
refurbishment projects has reduced to zero following the final
repayment of the Hotel & Residential, UK loan. The sponsor
successfully completed on a combination of pre-sold residential
units and a refinance of the hotel and repaid the Group's loan in
full.
At 30 June 2023 four asset classes represented 80 per cent of
the total funded loan portfolio these are Hospitality (38 per
cent), Office (21 per cent), Retail (12 per cent) and Residential
(9 per cent).
The Hospitality exposure is diversified across six different
loan investments. Two (25 per cent of hospitality exposure) benefit
from State/ Government licences in place at accretive rents with
structural amortisation continuing to decrease loan exposures on
these assets. The other trading hotel exposures either have been
recently refurbished or will be on a rolling basis from mid-2023.
All trading assets continue to have strong revenue performance
driven by higher rates being achieved. Sponsors are keenly focused
on costs to ensure that dilution of strong top line perform due to
higher costs is minimised. The weighted average Loan to Value of
the Hospitality exposure is 49 per cent.
The Office exposure (21 per cent) is spread across seven loan
investments. Occupancy across the leased office portfolio has held
up well, with the vast majority of the underlying tenants renewing
leases and staying in occupation. The Group's office exposure is
predominantly weighted (over 65 per cent) toward strong city centre
locations which is widely documented as being the most defensive,
alongside buildings which have high quality, ESG credentials. 66
per cent of the Group's current office exposure is against
underlying office collateral that is either newly constructed or
has undergone recent refurbishment projects. The weighted average
Loan to Value of loans with office exposure is 62 per cent. The
average age of these independently instructed valuation reports is
under one year and hence there continues to be significant headroom
to the Group's basis on these loans. As a precaution however, two
of the office loans have as at 30 June 2023 been classified in the
higher risk Stage 2 category due to slower lease up of newly
refurbished space than expected or a materially lower valuation
level upon receipt of a revised appraisal.
The Retail exposure (12 per cent) has continued to perform
strongly from an operational perspective, with occupancies across
the shopping centre exposures fully recovered to pre-pandemic
levels and in the high eighties or nineties per cent. The sponsor
of the shopping centre loans has launched a comprehensive sale
process and bids have been received on the assets. The Group has
prudently reclassified one of the retail loan exposures to a Stage
3 loan given a tight bid level versus the Groups loan level. This
is further detailed in the Credit Risk Analysis section below. The
weighted average Loan to Value of the Retail exposure is 75 per
cent.
Residential exposure (9 per cent) is predominantly related to
the successfully pre-sold residential for sale development project
(Hotel & Residential, UK) that was fully repaid during Q3 2023.
The weighted average Loan to Value of the Residential exposure was
38 per cent.
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 LTVs shown below are
based on independent third party appraisals with the exception of
two loans that have been marked against a lower sale process bid
level. The current weighted average age of the dates of these third
party valuations for the whole portfolio is just over one year
while the current weighted average age of the valuations for the
income producing portfolio (i.e. excluding loans for development or
heavy refurbishment) is just over six months.
On the basis of the methodology and valuation processes
previously disclosed (the exception as noted above) at 30 June 2023
the Group has an average last GBP LTV of 56.0 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 Office Retail Residential Other Total
-15% 58.1% 73.4% 88.4% 44.3% 68.8% 65.9%
-10% 54.9% 69.3% 83.5% 41.8% 65.0% 62.2%
-5% 52.0% 65.7% 79.1% 39.6% 61.6% 59.0%
0% 49.4% 62.4% 75.1% 37.7% 58.5% 56.0%
5% 47.0% 59.4% 71.5% 35.9% 55.7% 53.3%
10% 44.9% 56.7% 68.3% 34.2% 53.2% 50.9%
15% 42.9% 54.3% 65.3% 32.8% 50.9% 48.7%
LIQUIDITY AND HEDGING
The Group had no funds drawn on its available credit facilities
as at 30 June 2023 and thus had significant liquidity available
with undrawn revolving credit facilities (see note 3.g of the 2022
Annual Report for further information) of GBP101.0 million to fund
outstanding commitments as at that date.
Since 30 June 2023 and following the full repayment of two loans
totaling GBP60.8 million in addition to other partial repayments
the Board has created a reserve to fund the unfunded cash loan
commitments and has reduced the debt facilities available to the
Group to GBP25.0 million.
In August 2023, the Company redeemed circa GBP30 million of
shares from Shareholders. The table below summarises the available
liquidity as at 30 June 2023 and 31 August 2023.
30 June 2023 31 August 2023
GBP million GBP million
Drawn on Group debt facilities - -
Cash and cash equivalents 13.1 54.2
Net Cash and cash equivalents held 13.1 54.2
Undrawn Debt Facilities available to Group 101.0 25.0
Undrawn Commitments to Borrowers (47.3) (44.9)
Available Capacity 66.8 34.3
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, while the net assets of the Group
exceed GBP400.0 million cash would not need to be posted until the
hedges were more than GBP20.0 million out of the money. As the net
assets of the Group decreases so will these thresholds. This
situation is closely monitored as a result. The mark to market of
the hedges at 30 June 2023 was GBP2.9 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 (36%) 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.
CREDIT RISK ANALYSIS
All loans within the portfolio are classified and measured at
amortised cost less impairment.
The Group follows a three-stage model for impairment based on
changes in credit quality since initial recognition as summarised
below:
? A financial instrument that is not credit-impaired on initial
recognition is classified as Stage 1 and has its credit risk
continuously monitored by the Group. The expected credit loss
("ECL") is measured over a 12-month period of time.
? If a significant increase in credit risk since initial
recognition is identified, the financial instrument is moved to
Stage 2 but is not yet deemed to be credit-impaired. The ECL is
measured on a lifetime basis.
? If the financial instrument is credit-impaired it is then
moved to Stage 3. The ECL is measured on a lifetime basis.
The Group closely monitors all loans in the portfolio for any
deterioration in credit risk. As at the 31 December 2022, all but
two of the Group's loan investments were categorised as Stage 1,
with two loans (GBP44.6 million / 11 per cent of total funded loan
portfolio) categorised as Stage 2 loans. As at 30 June 2023, the
Group has prudently reassessed assigned classifications and has
made the following reclassifications:
? Stage 2 loans - four loans investments have moved from a Stage
1 classification to Stage 2. In total five loans amounting to
GBP100.1 million / 26 per cent of total funded loan portfolio are
now classified as Stage 2. The average Loan to Value of these
exposures is 69 per cent. The average age of valuation report dates
used in the Loan to Value calculation for these assets is just
under six months old. While these loans are considered to be higher
risk since initial recognition, no loss has been recognised on a
12-month and lifetime expected credit losses basis. Therefore, no
impairment in the value of these loans has been recognised. The
reclassification of these loans has been driven by various key risk
assessment factors including the following;
? Lower underlying property values following receipt of updated
formal appraisals by independent valuers or agreed and in
exclusivity sale values,
? Sponsor business plans progressing slower than originally
underwritten meaning that trading performance has lagged
expectation and operating financial covenants under the facility
agreements have breached, and
? Additional equity support is required to cover interest or
operating shortfalls as a result of slower lease up or operations
taking longer to ramp up.
The Stage 2 loans continue to benefit from headroom to the
Group's investment basis. In all cases sponsors have defined
business plans to achieve stabilisation or optimise disposal
processes. In most cases sponsors are supporting the continued
execution of business plans and contractual loan payments by
injecting additional equity. Additionally, the Group has in some
cases negotiated for borrowers to inject equity to partially repay
loans in exchange for selected temporary financial covenant waivers
to allow headroom for strong sponsors to progress business plans.
This will provide de-risking against the loan basis once documented
and cash injected.
? Stage 3 loan - one loan has been reclassified from Stage 2 to
Stage 3. This investment totals GBP14.6 million / 4 per cent of
total funded loan portfolio and its Loan to Value has been
increased to 92 per cent. This value is based on the projected net
proceeds which are expected to be available for loan repayment upon
sale of the underlying loan collateral. The sponsor has run a
comprehensive competitive sale process through a global advisory
firm with oversight by the lenders and the bidder has proven
execution track record in the same asset class and deal size and
intends to close with all equity with no reliance on debt. Given
continued capital markets volatility, materially lower transaction
volumes and uncertainty regarding interest rates, the Group has
approved the sale and the buyer is in exclusivity while undertaking
standard purchaser due diligence.
While the current projected net sale proceeds on the stage 3
loan would fully pay down the Group's loan balance, the Group has
applied sensitivities to the expected net proceeds and, on that
basis, has accounted for a credit impairment of GBP1.7m / 0.5 per
cent of total funded loan portfolio. We note that despite the
impairment, this loan investment is projected to achieve local
currency returns of over 1.4 times the Group's capital
invested.
This assessment has been made based on information in our
possession at the date of reporting, our assessment of the risks of
each loan and certain estimates and judgements around future
performance of the assets.
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.
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.
Discount Rate Value Calculated % of book value
6.3% GBP 398.4 m 103.7%
7.0% GBP 394.6 m 102.7%
7.5% GBP 391.9 m 102.0%
8.0% GBP 389.3 m 101.3%
8.5% GBP 386.7 m 100.7%
9.0% GBP 384.1 m = BOOK VALUE 100.0%
9.5% GBP 381.6 m 99.3%
10.0% GBP 379.2 m 98.7%
10.5% GBP 376.7 m 98.1%
11.0% GBP 374.3 m 97.4%
The effective interest rate ("EIR") - i.e. the discount rate at
which future cash flows equal the amortised cost is 9.0 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 9.0 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 16 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
6 September 2023
Principal Risks
PRINCIPAL RISKS FOR THE REMAINING SIX MONTHS OF THE YEAR TO 31
DECEMBER 2023
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 2022. 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 2023:
FINANCIAL MARKET VOLATILITY (RISK THAT DIVIDS DO NOT MEET THE
TARGETED LEVELS AND THAT THE SHARE PRICE DISCOUNT PERSISTS AND
WIDENS)
Subsequent to the EGM held on 27 January 2023 the Group's
strategy is for an orderly realisation of its assets and the return
of capital to shareholders. During the realisation period the
Company intends to target a similar per share level of dividends as
previously for as long as this is feasible and to return capital to
shareholders subject to maintaining sufficient cash to fund as yet
unfunded cash commitments on loans and ongoing operating costs.
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.
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 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 returns of the business and, where
necessary, communicate any changes in those estimates and
assumptions to the market.
The Board deployed a share buyback programme during 2020, 2021
and 2022 in order to support the share price. No shares were bought
back in the first six months of 2023 but 9,652,350 shares were
redeemed in June 2023 at 103.63 pence per share (the NAV per share
at the end of May 2023). The current strategy of the orderly
realization of assets and the return of capital to shareholders
over time should mean that, subject to no unforeseen negative
impacts on the value of investments, shareholders will receive a
return of capital invested over time.
LONG-TERM STRATEGIC RISK (RISK THAT THE BUSINESS MODEL IS NO
LONGER ATTRACTIVE)
Subsequent to the EGM held on 27 January 2023, the Group's
strategy is for an orderly realisation and return of capital to
shareholders. It is anticipated that the return of capital to
shareholders will be completed in the next four to five years.
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.
The Directors 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, or the need for any loan amendments.
The Board continues to monitor the revised investment strategy
and performance on an ongoing basis.
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 United Kingdom ('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 loan defaults or
impairments.
The Covid-19 pandemic has had a material long term impact on
global economies and on the operations of the Group's borrowers
since 2020.
The situation in Ukraine, following the February 2022 incursion
into Ukraine by Russia, also presents a significant risk to
European and global economies. While the Group has no direct or
known indirect involvement with Ukraine, Russia or Belarus it may
be impacted by the consequences of the instability caused by the
ongoing conflict.
The impact of the UK'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.
In addition there is the impact of the ongoing high inflationary
environment to consider (driven by increasing interest rates,
energy costs and costs of living). This environment could make it
harder for borrowers to meet their interest obligations to the
Group and to ultimately repay the loans advanced to them.
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 has mitigated against this with an average
weighted loan to value of the portfolio of 56.0 per cent.
Therefore, the portfolio should be able to withstand a significant
level of deterioration before credit losses are incurred.
The Investment Adviser and Manager has also mitigated the risk
of credit losses by undertaking detailed due diligence prior to the
signing of each loan. Whilst the precise scope of due diligence
will have depended on the proposed investment, such diligence will
typically have included 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 have also
managed these risks in the past by ensuring a diversification of
investments in terms of geography, market and type of loan. Such
diversification will be harder to achieve as the company pursues a
strategy of orderly realisation and does not enter into any new
investments. The Investment Manager and Investment Adviser operate
in accordance with the guidelines, investment limits and
restrictions as determined by the Board. The Directors review the
portfolio against these guidelines on a regular basis.
The Investment Adviser obtains regular performance reporting
from all borrowers and 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.
The Group has prudently assessed key risk indicators impacting
all investments and has increased the number of loans classified as
Stage 2 and moved one loan from a Stage 2 classification to a Stage
3 classification. This is outlined in detail under the Credit Risk
Analysis section of the Investment Manager report. Despite
increased risk around higher interest rates and lower transaction
volumes, the portfolio has continued to perform well. The reasons,
estimates and judgements supporting this assessment are described
in the Investment Manager's report.
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 2023 are structured so that 76.1
per cent are floating rate and all of these floating rate 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.
The remaining 23.9 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).
FOREIGN EXCHANGE RISK
The majority of the Group's investments are Sterling denominated
(63.9 per cent as at 30 June 2023) 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 GBP237.0 million (EUR276.1
million) of hedged notional exposure with Lloyds Bank plc at 30
June 2023 (converted at 30 June 2023 FX rates).
As at 30 June 2023, the hedges were in the money. If the hedges
move out of the money and this mark to market exceeds GBP20.0
million and the total net assets of the Groups are above GBP400.0
million, the Company is required to post collateral, subject to a
minimum transfer amount of GBP1 million. As the Company returns
capital to shareholders and the net assets value of the Group
decreases these thresholds also decrease. This situation is
monitored closely, however, and as at 30 June 2023, 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 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 are completed by the Group's
service providers and are 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
Group.
The Board maintains close contact with all service providers to
ensure that the operational risks are minimised.
EMERGING RISKS
Emerging risks to the Group are considered by the Board to be
trends, innovations and potential rule changes relevant to the real
estate mortgage and financial sector. The challenge to the Group is
that emerging risks are known to some extent but are not likely to
materialise or have an impact in the near term. The Board regularly
reviews and discusses the risk matrix and has identified climate
change as an emerging risk.
CLIMATE CHANGE
The consequences that climate change could have are potentially
severe but highly uncertain. The potential high impact of possible
losses has done a lot to raise the awareness of this risk in
investment circles. The Board, in conjunction with the Investment
Manager and Investment Adviser, considers the possible physical and
transitional impact of climate change on properties secured on
loans provided by the Group and includes the consideration of such
factors in valuation instructions of the collateral properties and
in considering any potential expected credit losses on loans. The
Investment Adviser considers the possible physical and transitional
impact of climate change as part of the origination process. In
addition, the Board, in conjunction with the Investment Adviser, is
monitoring closely the regulation and any developments in this area
(see 'Environmental, Social and Corporate' section for further
information). 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 and Audit
Committee Chairman 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 has recently returned to Prague and became
Managing Director of West Bohemia Developments a.s, in August 2023,
leading a major development opportunity on the D5 Highway adjacent
to the German border. Gary currently remains 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,
also a FTSE 250 company. 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 the GP boards of Private
Equity groups Cinven and Hitec, the voting company for Pershing
Square Holdings and the Investment Manager for NextEnergy. She is
also the Audit Chair for the listed Investment Company River and
Mercantile UK Micro Cap. 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
6 September 2023 6 September 2023
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 of Starwood
European Real Estate Finance Limited for the 6-month period ended
30 June 2023 (the "period").
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.
The interim financial statements comprise:
? the unaudited condensed consolidated statement of financial
position as at 30 June 2023;
? 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
Financial Report and Unaudited Condensed Consolidated Financial
Statements 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.
BASIS FOR CONCLUSION
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
Financial Report and Unaudited Condensed Consolidated Financial
Statements and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
RESPONSIBILITIES FOR THE INTERIM FINANCIAL STATEMENTS AND THE
REVIEW
OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS
The Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Interim
Financial Report and Unaudited Condensed Consolidated Financial
Statements 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 Financial Report and Unaudited
Condensed Consolidated Financial Statements 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.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
6 September 2023
(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 financial statements since they were initially presented on the
website.
(b) Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Unaudited Condensed Consolidated Statement of Comprehensive
Income
for the period ended 30 June 2023
1 January 2023 to 1 January 2022 to 1 January 2022 to
30 June 2023 30 June 2022 31 December 2022
Notes GBP (unaudited) GBP (unaudited) GBP (audited)
Income
Income from loans advanced 7 18,204,923 14,795,630 33,356,702
Short term deposits interest income 11,435 - -
Net foreign exchange (losses) / gains 3 (33,802) 1,045,763 3,046,164
Total income 18,182,556 15,841,393 36,402,866
Expenses
Impairment loss on loans advanced 7 1,726,000 - -
Investment management fees 16 1,520,900 1,559,609 3,122,755
Credit facility commitment fees 424,219 434,591 828,876
Credit facility interest and amortisation of fees 255,505 376,966 1,080,499
Other expenses 214,759 268,139 432,649
Audit and non-audit fees 182,957 118,463 233,773
Administration fees 158,769 176,070 354,426
Legal and professional fees 144,932 242,080 437,622
Directors' fees and expenses 16 103,112 103,105 203,373
Broker's fees and expenses 25,000 25,000 50,000
Professional fees for the orderly realisation proposals - - 210,000
Total operating expenses 4,756,153 3,304,023 6,953,973
Operating profit for the period / year before tax 13,426,403 12,537,370 29,448,893
Taxation 15 367,217 44,710 90,287
Operating profit for the period / year 13,059,186 12,492,660 29,358,606
Other comprehensive income
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 18,174 82,284 (112,256)
Other comprehensive income /(loss) for the period / year 18,174 82,284 (112,256)
Total comprehensive income for the period / year 13,077,360 12,574,944 29,246,350
Weighted average number of shares in issue 4 395,326,056 408,911,273 404,881,933
Basic and diluted earnings per Ordinary Share (pence) 4 3.30 3.06 7.25
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 2023
As at As at As at
30 June 2023 30 June 2022 31 December 2022
Notes GBP (unaudited) GBP (unaudited) GBP (audited)
Assets
Cash and cash equivalents 5 13,137,269 3,078,669 3,576,155
Other receivables and prepayments 6 1,537,753 969,360 26,792
Revolving credit facility capitalised cost 262,287 - -
Financial assets at fair value through profit or loss 8 2,891,365 4,624,887 706,661
Loans advanced 7 384,146,488 433,639,486 432,459,966
Total assets 401,975,162 442,312,402 436,769,574
Liabilities
Credit facilities 10 - 18,021,799 18,863,204
Trade and other payables 9 1,543,420 1,404,119 1,758,606
Total liabilities 1,543,420 19,425,918 20,621,810
Net assets 400,431,742 422,886,484 416,147,764
Capital and reserves
Share capital 11 385,435,824 407,440,011 395,075,556
Retained earnings 15,123,803 15,397,992 21,218,267
Translation reserve (127,885) 48,481 (146,059)
Total equity 400,431,742 422,886,484 416,147,764
Number of Ordinary Shares in issue 385,940,346 408,911,273 395,592,696
Net asset value per Ordinary Share (pence) 103.75 103.42 105.20
These Unaudited Condensed Consolidated Financial Statements were
approved and authorised for issue by the Board of Directors on 6
September 2023, 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 2023
Share Retained Translation Total
Period ended 30 June 2023 capital earnings reserve equity
GBP GBP GBP GBP
(unaudited) (unaudited) (unaudited) (unaudited)
Balance at 1 January 2023 395,075,556 21,218,267 (146,059) 416,147,764
Shares redeemed (9,639,732) (362,997) - (10,002,729)
Dividends paid - (18,790,653) - (18,790,653)
Operating profit for the period - 13,059,186 - 13,059,186
Other comprehensive income:
Other comprehensive income for the period - - 18,174 18,174
Balance at 30 June 2023 385,435,824 15,123,803 (127,885) 400,431,742
Share Retained Translation Total
Period ended 30 June 2022 capital earnings reserve equity
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
Share Retained Translation Total
Year ended 31 December 2022 capital earnings reserve equity
GBP GBP GBP GBP
(audited) (audited) (audited) (audited)
Balance at 1 January 2022 407,440,011 14,150,392 (33,803) 421,556,600
Share buy backs (12,364,455) - - (12,364,455)
Dividends paid - (22,290,731) - (22,290,731)
Operating profit for the year - 29,358,606 - 29,358,606
Other comprehensive income:
Other comprehensive income for the year - - (112,256) (112,256)
Balance at 31 December 2022 395,075,556 21,218,267 (146,059) 416,147,764
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 2023
1 January 2023 1 January 2022 1 January 2022
to to to
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
(unaudited) (unaudited) (audited)
Operating activities:
Operating profit for the period / year before tax 13,426,403 12,537,370 29,448,893
Adjustments before tax
Net interest income (18,204,923) (14,795,630) (33,356,702)
(Increase) / decrease in prepayments, receivables and capitalised (5,875) 16,164 10,860
costs
(Decrease) / increase in trade and other payables (259,704) 165,901 458,661
Net unrealised (gains) / losses on foreign exchange derivatives (2,184,704) 8,669,146 12,584,938
Net foreign exchange losses / (gains) 5,036,923 (4,774,059) (15,292,556)
Net foreign exchange gains on hedges (2,553,840) - 5,618,298
Impairment loss on loans advanced 1,726,000 - -
Credit facility interest 148,118 170,528 707,171
Credit facility amortisation of fees 107,386 206,438 373,328
Credit facility commitment fees 424,219 434,591 828,876
Currency translation difference 2,199,941 (3,374,358) (5,663,501)
Corporate taxes paid (290,396) (84,274) (84,274)
(430,452) (828,183) (4,366,008)
Loans advanced1 (1,661,978) (27,365,276) (60,788,846)
Loan repayments and amortisation 43,551,178 14,934,266 56,894,392
Origination fees paid - (525,888) (872,020)
Interest, commitment and exit fee income from loans advanced 16,604,438 12,402,875 29,585,823
Net cash (outflow)/inflow from operating activities 58,063,186 (1,382,206) 20,453,341
Cash flows from investing activities
Share buy backs - - (12,364,455)
Share redemptions (10,002,729) - -
Dividends paid (18,790,653) (11,245,060) (22,290,731)
Proceeds under credit facility - 30,623,470 94,223,490
Repayments under credit facility (19,000,000) (20,985,311) (84,158,141)
Credit facility interest paid (535,358) (235,601) (533,577)
Credit facility commitment fees paid (443,877) (434,931) (834,495)
Net cash outflow from financing activities (48,772,617) (2,277,433) (25,957,909)
Net decrease in cash and cash equivalents 9,290,569 (3,659,639) (5,504,568)
Cash and cash equivalents at the start of the period / year 3,576,155 2,994,357 2,994,357
Net foreign exchange gains / (losses) on cash and cash equivalents 270,545 3,743,951 6,086,366
Cash and cash equivalents at the end of the period / year 13,137,269 3,078,669 3,576,155
1 Net of arrangement fees of GBPnil (period ended 30 June 2022:
GBP243,148, year ended 31 December 2022: GBP820,118) 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 2023
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
FCA'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 buybacks on behalf of the
Company. During year end 31 December 2022, the Company had
repurchased 13,318,577 Ordinary Shares at an average cost of 92.84
pence per share. These Ordinary Shares are held in treasury.
However, in June 2023 the total number of Ordinary Shares held in
treasury were cancelled. On 26 June 2023, 9,652,350 Ordinary Shares
were redeemed. On 25 August 2023, a further 29,092,218 Ordinary
Shares were redeemed.
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 2023.
Following the Company's Extraordinary General Meeting ("EGM") on
27 January 2023, the Company's objective changed and is now to
conduct an orderly realisation of the assets of the Group and the
return of capital to Shareholders. In line with this objective the
Board will endeavour to realise all of the Group's investments in a
manner that achieves a balance between maximising the net value
received from those investments and making timely returns to
Shareholders. This has resulted in having the first partial
redemption in the period of 9,652,350 Ordinary Shares from
Shareholder at 103.63 pence per share. Further details and
background is covered in the Corporate Summary section of this
report.
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 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 2022, 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 2022 were approved by the Board of Directors on 23 March
2023. 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 2023
has been reviewed by the Auditor but not audited.
In line with the considerations noted in Note 1 above, 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 2023.
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 2022.
3. NET FOREIGN EXCHANGE GAINS / (LOSSES)
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Loans advanced - realised 113,162 5,699 511,596
Loans advanced - realised (166,935) (517,378) (996,010)
Forward contracts gains - realised 2,755,096 7,424,908 6,507,544
Forward contracts losses - realised (209,237) (2,352,429) (428,644)
Other gains - realised 4,904 (82,130) 110,951
Other losses - realised - (89,876) (38,684)
Total realised gains 2,496,990 4,388,794 5,666,753
Loans advanced gains - unrealised 32,929 5,323,680 9,987,926
Loans advanced losses - unrealised (4,748,425) - (23,578)
Forward contracts gains - unrealised 7,716,816 959,471 2,337,351
Forward contracts losses - unrealised (5,532,112) (9,626,182) (14,922,288)
Total unrealised losses (2,530,792) (3,343,031) (2,620,589)
Net gains/(losses) (33,802) 1,045,763 3,046,164
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 GBP13,059,186 (30 June 2022: GBP12,492,660
and 31 December 2022: GBP29,358,606) and on the weighted average
number of Ordinary Shares in issue at 30 June 2023 of 395,326,056
(30 June 2022: 408,911,273 and 31 December 2022: 404,881,933).
The calculation of NAV per Ordinary Share is based on a NAV of
GBP400,431,742 (30 June 2022: GBP422,886,484 and 31 December 2022:
GBP416,147,764) and the actual number of Ordinary Shares in issue
at 30 June 2023 of 385,940,346 (30 June 2022: 408,911,273 and 31
December 2022: 395,592,696).
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprises bank balances and short term
bank deposits held by the Company. The carrying amount of these
represents their fair value.
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Cash at bank 3,125,834 3,078,669 3,576,155
Short term deposit 10,011,435 - -
13,137,269 3,078,669 3,576,155
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 2023 30 June 2022 31 December 2022
GBP GBP GBP
Prepayments 32,667 21,275 26,792
Investment interest receivable1 1,505,086 948,085 -
1,537,753 969,360 26,792
1 Investment interest receivable as at 30 June 2023 and 30 June
2022 relate to loan related payments which were received after
period end.
7. LOANS ADVANCED
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
UK
Hotel & Residential, UK 50,110,830 49,942,753 49,876,920
Hotel, Scotland 43,249,198 42,729,177 43,109,284
Hotels, United Kingdom 32,061,420 30,381,133 32,134,282
Industrial Estate, UK 27,414,987 - 27,435,196
Hospitals, UK 25,363,038 25,360,264 25,367,475
Office, London 20,975,997 17,404,582 19,336,450
Life Science, UK 20,055,999 19,764,594 19,955,081
Hotel, North Berwick 15,253,555 15,095,014 15,211,739
Hotel and Office, Northern Ireland 10,919,618 12,852,101 11,947,821
Hotel, Oxford - 23,042,786 23,181,461
Office and Industrial Portfolio, UK - 5,499,677 5,594,291
Spain
Three Shopping Centres 29,590,487 30,410,440 31,023,568
Office, Madrid, Spain 15,988,322 16,032,248 16,510,039
Shopping Centre, Spain 13,466,064 15,240,528 15,886,055
Office Portfolio, Spain 8,138,179 8,653,598 9,027,980
Ireland
Hotel, Dublin 33,267,881 52,266,251 42,752,233
Office Portfolio, Ireland 21,264,090 27,382,693 21,950,119
Mixed use, Dublin 11,127,912 7,944,861 11,469,547
Rest of Europe
Mixed Portfolio, Europe 5,898,911 16,181,824 7,946,143
Logistics Portfolio, Germany - 3,305,528 2,744,282
Office and Industrial Portfolio, The Netherlands - 14,149,434 -
384,146,488 433,639,486 432,459,966
The amortised carrying cost of the Shopping Centre, Spain
includes an impairment provision of GBP1.7 million for 2023 and
none for 2022. For further information and the associated risks see
the Investment Manager's Report and also covered in Note 13.
The table below reconciles the movement of the carrying value of
loans advanced in the period / year:
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Loans advanced at the start of the period / year 432,459,966 414,632,512 414,632,512
Loans advanced 1,637,570 27,401,675 61,420,419
Income from loans advanced 18,204,923 14,795,630 33,356,702
Impairment loss on loans advanced (1,726,000) - -
Foreign exchange gains / (losses) (4,769,269) 4,811,942 9,478,646
Origination fees received for the year - 525,888 872,020
Exit fees paid (238,207) (86,896) (501,062)
Arrangement fees paid - (243,148) (820,118)
Commitment fees paid (433,719) (368,823) (710,782)
Interest payments receivable (17,437,598) (12,895,028) (28,373,979)
Loan repayments (43,551,178) (14,934,266) (56,894,392)
Loans advanced at the end of the period / year 384,146,488 433,639,486 432,459,966
Loans advanced at fair value 398,443,765 451,583,669 453,301,433
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 2023 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 238,265,359 4,865,135 (1,973,770) 2,891,365
Total 238,265,359 4,865,135 (1,973,770) 2,891,365
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
31 December 2022 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 309,280,796 4,697,637 (3,990,976) 706,661
Total 309,280,796 4,697,637 (3,990,976) 706,661
1 Euro amounts are translated at the period / year end exchange
rate
9. TRADE AND OTHER PAYABLES
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Investment management fees payable 757,750 785,084 777,556
Audit fees payable 223,094 195,268 289,457
Accrued expenses 172,764 121,571 273,183
Administration fees payable 132,971 142,667 203,420
Commitment fees payable 154,195 154,045 164,855
Tax provision 102,646 (2,721) 25,727
Loan amounts payable - 6,204 24,408
Directors' fees payable - 2,001 -
1,543,420 1,404,119 1,758,606
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 2023, an amount of GBPnil (30 June 2022:
GBP18,470,386 and 31 December 2022: GBP19,000,000) was drawn and
interest of GBPnil (30 June 2022: GBP38,213 and 31 December 2022:
GBP181,907) was payable.
As at 30 June 2023, commitment fees of GBP154,195 (30 June 2022:
GBP154,045 and 31 December 2022: GBP164,855) were 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 2023 and an amount at 30 June
2022: GBP486,566 and 31 December 2022: GBP319,675 was netted off
against the loan facilities outstanding. In June 2023, an amount of
GBP262,289 was separately shown in revolving credit facility
capitalised cost in assets.
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 2023 30 June 2022 31 December 2022
GBP GBP GBP
Borrowings at the start of the period / year 18,863,204 7,914,993 7,914,993
Proceeds during the period / year - 30,623,470 94,223,490
Repayments during the period / year (19,000,000) (20,985,311) (84,158,141)
Interest expense recognised for the period / year 148,118 170,528 707,171
Interest paid during the period / year (330,455) (235,601) (533,577)
Credit facility fees incurred (50,000) - -
Credit facility amortisation of fees 107,386 206,438 373,328
Foreign exchange and translation difference 261,747 327,282 335,940
Borrowings at the end of the period/year - 18,021,799 18,863,204
11. SHARE CAPITAL
The share capital of the Company consists of an unlimited number
of redeemable Ordinary Shares of no par value which upon issue the
Directors may classify into such classes as they may determine. The
Ordinary Shares are redeemable at the discretion of the Board.
At the period end, the Company had issued and fully paid up
share capital as follows:
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Period to:
Ordinary Shares of no par value - - -
Issued and fully paid 395,592,696 413,219,398 413,219,398
Shares redeemed (9,652,350) - -
Shares held in treasury - (4,308,125) (17,626,702)
Total Ordinary Shares, excluding those in treasury 385,940,346 408,911,273 395,592,696
On 13 June 2023, the Board of the Company announced the
cancellation of 17,626,702 shares that were held in treasury.
The Company's share capital is denominated in Sterling. At any
general meeting of the Company each ordinary share carries one
vote. The Ordinary Shares also carry the right to receive all
income of the Company attributable to the Ordinary Shares, and to
participate in any distribution of such income made by the Company,
such income shall be divided pari passu among the holders of
Ordinary Shares in proportion to the number of Ordinary Shares held
by them.
Significant share movements
1 January 2023 to 30 June 2023:
Number GBP
Balance at the start of the period 395,592,696 403,365,545
Shares redeemed in June 2023 (9,652,350) (9,639,732)
Balance at the end of the period 385,940,346 393,725,813
Issue costs since inception (8,289,989)
Net proceeds 385,435,824
1 January 2022 to 30 June 2022:
Number GBP
Balance at the start of the period 408,911,273 415,730,000
Shares bought back in the period - -
Balance at the end of the period 408,911,273 415,730,000
Issue costs since inception (8,289,989)
Net proceeds 407,440,011
1 January 2022 to 31 December 2022:
Number GBP
Balance at the start of the period 408,911,273 415,730,000
Shares bought back in 2022 (13,318,577) (12,364,455)
Balance at the end of the period 395,592,696 403,365,545
Issue costs since inception (8,289,989)
Net proceeds 395,075,556
12. 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).
The Company paid the following dividends in respect of the
period to 30 June 2023:
Dividend rate per Share (pence) Net dividend Payment date
paid (GBP)
Period to:
31 March 2023 1.375 5,439,400 23 May 2023
After the end of the period, the Directors declared a dividend
in respect of the financial period ended 30 June 2023 of 1.375
pence per share which was paid in August 2023 to shareholders on
the register on 31 July 2023.
The Company paid the following dividends in respect of the year
to 31 December 2022:
Dividend rate per Share (pence) Net dividend Payment date
paid (GBP)
Period to:
31 March 2022 1.375 5,622,530 27 May 2022
30 June 2022 1.375 5,606,271 26 August 2022
30 September 2022 1.375 5,439,400 25 November 2022
31 December 2022 1.375 5,439,400 24 February 2023
31 December 2022 - Additional 2022 dividend 1 2.000 7,911,854 18 April 2023
1 Additional dividend relating to 2022 declared after year end
due to excess funds available.
13. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated
loans, mezzanine loans, bridge loans, loan-on-loan financings and
other debt instruments is exposed to a variety of financial risks,
including market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group's overall risk
management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the
Group's financial performance.
It is the role of the Board to review and manage all risks
associated with the Group, mitigating these either directly or
through the delegation of certain responsibilities to the Audit
Committee, Investment Manager and Investment Adviser.
The Board of Directors has established procedures for monitoring
and controlling risk. The Group has investment guidelines that set
out its overall business strategies, its tolerance for risk and its
general risk management philosophy.
In addition, the Investment Manager monitors and measures the
overall risk bearing capacity in relation to the aggregate risk
exposure across all risk types and activities. Further details
regarding these policies are set out below:
(i) Market risk
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.
The Group and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Group entered into a Professional Client
Agreement with Goldman Sachs, pursuant to which the parties can
enter into foreign exchange transactions with the intention of
hedging against fluctuations in the exchange rate between Sterling
and other currencies. The Group does not trade in derivatives but
holds them to hedge specific exposures and have maturities designed
to match the exposures they are hedging. The derivatives are held
at fair value which represents the replacement cost of the
instruments at the reporting date and movements in the fair value
are included in the Consolidated Statement of Comprehensive Income
under net foreign exchange losses/ (gains). The Group does not
adopt hedge accounting in the financial statements. At the end of
the reporting period the Group had 113 (June 2022: 105 and December
2022: 109) open forward contracts.
b) 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 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.
The loans in place at 30 June 2023 are structured so that 76.1
per cent (December 2022: 78.6 per cent) are floating rate and all
of these floating rate 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. The
remaining 23.9 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).
(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 2023 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 can be 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 2023, the maximum credit risk
exposure was GBP401,942,495 (30 June 2022: GBP442,291,127 and 31
December 2022: GBP436,742,782).
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.
During the period, four assets moved from Stage 1 to Stage 2
indicating a change in their credit risk since origination but no
impairments in value anticipated. One asset moved from Stage 2 to
Stage 3 and a small credit loss of GBP1.7 million was recognised.
This minor impairment represents 0.5% of the funded portfolio and
is the result of the Group prudently applying sensitivities to net
proceeds from an agreed asset sale which is subject to contract and
is currently progressing through exclusivity (Please refer note
7).
(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 GBP101,000,000 (30 June 2022: GBP126,000,000 and 31
December 2022: GBP126,000,000) of which GBPnil was drawn on 30 June
2023 (30 June 2022: GBP18,470,386 and 31 December 2022:
GBP19,000,000).
Subsequent to 30 June 2023 GBP76.0 million of the 30 June 2023
revolving credit facilities were cancelled, leaving GBP25.0 million
still available. This was due to repayments received after 30 June
2023 (see note 17) which allowed the Company to build a cash
reserve to cover the outstanding unfunded cash loan commitments
(which were GBP47.3 million as at 30 June 2023 and are detailed in
the Investment Managers Report).
As at 30 June 2023, the Group had GBP13,137,269 (30 June 2022:
GBP3,078,669 and 31 December 2022: GBP3,576,155) available in cash
and GBP1,792,663 (30 June 2022: GBP1,404,119 and 31 December 2022:
GBP1,758,606) 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. These are set out in the Investment Managers
report.
(iv) 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 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.
14. 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:
30 June 2023
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair value through profit or loss - 4,865,135 - 4,865,135
Short term deposit 1 10,011,435 - - 10,011,435
Total 10,011,435 4,865,135 - 14,876,570
Liabilities
Investments at fair value through profit or loss - (1,973,770) - (1,973,770)
Total - (1,973,770) - (1,973,770)
1 Presented under cash and cash equivalents in Statement of
Financial Position.
30 June 2022
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair value through profit or loss - 7,749,022 - 7,749,022
Total - 7,749,022 - 7,749,022
Liabilities
Investments at fair value through profit or loss - (3,124,135) - (3,124,135)
Total - (3,124,135) - (3,124,135)
31 December 2022
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair value through profit or loss - 4,697,637 - 4,697,637
Total - 4,697,637 - 4,697,637
Liabilities
Investments at fair value through profit or loss - (3,990,976) - (3,990,976)
Total - (3,990,976) - (3,990,976)
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:
30 June 2023
Level 1 Level 2 Level 3 Total fair values Total carrying amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 384,146,488 398,443,765 384,146,488
Total - - 384,146,488 398,443,765 384,146,488
30 June 2022
Level 1 Level 2 Level 3 Total fair values Total carrying amount
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
30 December 2022
Level 1 Level 2 Level 3 Total fair values Total carrying amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 453,301,433 453,301,433 432,459,966
Total - - 453,301,433 453,301,433 432,459,966
Liabilities
Credit facilities - 18,863,204 - 18,863,204 18,863,204
Total - 18,863,204 - 18,863,204 18,863,204
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.
15. 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 2022:
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 Dec 2022
:24.94%).
16. 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.
Outstanding at Outstanding at Outstanding at
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Investment Manager
Investment management fees payable 757,750 785,084 777,556
For the period ended For the period ended For the year ended
30 June 2023 30 June 2022 31 December 2022
GBP GBP GBP
Directors' fees and expenses paid
John Whittle 30,000 30,000 60,000
Shelagh Mason 22,500 22,500 45,000
Charlotte Denton 25,000 25,000 50,000
Gary Yardley 21,000 21,000 42,000
Expenses paid 4,612 4,605 6,373
Investment Manager
Investment management fees earned 1,520,900 1,559,609 3,122,755
Origination fees - 525,888 501,936
Expenses 42,781 97,618 120,099
The tables below summarise the dividends paid to and number of
Company's shares held by related parties.
Dividends paid during Dividends paid during Dividends paid during
the period ended 30 the period ended 30 the year ended 31
June 2023 June 2022 December 2022
GBP GBP GBP
Starwood Property Trust Inc. 434,150 251,350 502,700
SCG Starfin Investor LP 108,538 62,838 125,675
John Whittle 1,609 656 1,725
Charlotte Denton 2,111 - 1,833
Shelagh Mason 5,359 3,103 6,205
Duncan MacPherson* 11,875 6,875 8,333
Lorcain Egan* 3,975 2,301 3,818
As at As at As at
30 June 2023 30 June 2022 31 December 2022
Number of shares Number of shares Number of shares
Starwood Property Trust Inc. 8,916,984 9,140,000 9,140,000
SCG Starfin Investor LP 2,229,246 2,285,000 2,285,000
John Whittle 33,040 23,866 33,866
Charlotte Denton 43,360 - 44,444
Shelagh Mason 110,066 112,819 112,819
Duncan MacPherson* 243,891 250,000 250,000
Lorcain Egan* 81,638 83,678 83,678
* Employees at the Investment Adviser
Other
The Group continues to participate in a number of loans in which
Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The
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
Hotels, United Kingdom STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD
2 Hotels, UK SEREDF I
17. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 30 June 2023, the following loan amortisation
(both scheduled and unscheduled) has been received up to the date
of publication of this report:
Local Currency
Three Shopping Centres EUR317,344
Shopping Centre, Spain EUR775,652
Hotel, Dublin EUR5,500,000
Mixed Portfolio, Europe EUR2,371,718
Hotel and Office, Northern Ireland GBP1,200,000
Subsequent to 30 June 2023, the following loans have been repaid
in full up to the date of publication of this report:
Local Currency
Hotel & Residential, UK GBP49,930,000
Mixed Use, Dublin EUR12,715,112
Subsequent to 30 June 2023, the Group funded GBP0.7 million in
relation to loan commitments made in prior years which were
unfunded.
In August 2023 the Group's GBP76.0 million debt facility with
Morgan Stanley was canceled.
In August 2023 a second capital distribution was announced which
returned circa GBP30 million to shareholders through the compulsory
redemption of 29,092,218 shares at a price of GBP1.0312 per
share.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") the Board has considered what APMs are included
in the Interim Financial Report and Unaudited Condensed
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 Unaudited Condensed
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
John Whittle (non-executive Chairman) Registered Office
Shelagh Mason (non-executive Director)
Charlotte Denton (non-executive Director) 1 Royal Plaza
Gary Yardley (non-executive Director)
Royal Avenue
(all care of the registered office)
St Peter Port
Investment Manager
Guernsey
Starwood European Finance
GY1 2HL
Partners Limited
Investment Adviser
1 Royal Plaza
Starwood Capital Europe Advisers, LLP
Royal Avenue 2nd Floor
St Peter Port 1 Berkeley
Street London
Guernsey
W1J 8DJ
GY1 2HL United Kingdom
Solicitors to the Company Advocates to the Company
(as to English law and U.S. securities law) (as to Guernsey law)
Norton Rose Fullbright LLP Carey Olsen
3 More London Riverside
London PO Box 98
SE1 2AQ Carey House, Les Banques
United Kingdom St Peter Port
Registrar Guernsey
Computershare Investor Services GY1 4HP
(Guernsey) Limited
Independent Auditor
3rd Floor
Natwest House PricewaterhouseCoopers CI LLP
Le Truchot
Royal Bank Place
St Peter Port
Guernsey 1 Glategny Esplanade
GY1 1WD
St Peter Port
Sole Broker
Guernsey
Jefferies Group LLC
GY1 4ND
100 Bishopsgate
Principal Bankers
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
Apex Fund and Corporate Services
Guernsey
(Guernsey) Limited
GY1 3BE
1 Royal Plaza
Website:
Royal Avenue
www.starwoodeuropeanfinance.com
St Peter Port
Guernsey
GY1 2HL
-----------------------------------------------------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------------------------------------------------
ISIN: GG00BPGJYV48
Category Code: IR
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.2. Half yearly financial reports and audit reports/limited reviews
3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 269736
EQS News ID: 1720585
End of Announcement EQS News Service
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