Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Annual Audited Accounts 2020
26-March-2021 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014
(MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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Starwood European Real Estate Finance
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2020
The Company has today published its annual financial report for the year ended 31 December 2020 and has made it
available online at www.starwoodeuropeanfinance.com.
Starwood European Real Estate Finance Limited is an investment company listed on the main market of the London Stock
Exchange with an investment objective to provide Shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution, acquisition and servicing of a diversified portfolio
of real estate debt investments in the UK and the wider European Union's internal market.
The Group's assets are managed by Starwood European Finance Partners Limited, an indirect wholly-owned subsidiary of
the Starwood Capital Group.
Financial Highlights
Year ended Year ended
Key Highlights
31 December 2020 31 December 2019
NAV per Ordinary Share 104.18 p 103.23 p
Share Price 90.0 p 104.50 p
NAV total return (1) 6.3% 7.1%
Share Price total return (1) -7.5% 9.1%
Total Net Assets GBP426.7 m GBP426.6 m
Loans advanced at amortised cost (including accrued income) GBP442.7 m GBP390.6 m
Financial assets held at fair value through profit or loss GBP0.9 m GBP30.5 m
(including associated accrued income)
Cash and Cash Equivalents GBP2.9 m GBP36.8 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP19.5 m GBP29.7 m
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered annualised total return (1) 6.7% 7.1%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Ongoing charges percentage (1) 1.0% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 18.2% 18.4%
Weighted average portfolio LTV to Group last GBP (1) 61.8% 63.0%
(1) Further explanation and definitions of the calculation is
contained in the section "Alternative Performance Measures" at the
end of this financial report.
Full text of annual financial report for the year ended 31
December 2020
Overview
Objective and Investment Policy
INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate
Finance Limited (the "Company"), together with its subsidiaries
Starfin Public Holdco 1 Limited, Starfin Public Holdco 2 Limited,
Starfin Lux S.à.r.l, Starfin Lux 3 S.à.r.l, and Starfin Lux 4
S.à.r.l, (collectively the "Group"), is to provide its shareholders
with regular dividends and an attractive total return while
limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments in the UK and the European Union's internal
market.
INVESTMENT POLICY
The Company invests in a diversified portfolio of real estate
debt investments in the UK and the European Union's internal
market. Whilst investment opportunities in the secondary markets
will be considered from time to time, the Company's predominant
focus is to be a direct primary originator of real estate debt
investments on the basis that this approach is expected to deliver
better pricing, structure and execution control and a client facing
relationship that may lead to further investment opportunities.
The Company will attempt to limit downside risk by focusing on
secured debt with both quality collateral and contractual
protection.
The Company anticipates that the typical loan term will be
between three and seven years. Whilst the Company retains absolute
discretion to make investments for either shorter or longer
periods, at least 75 per cent of total loans by value will be for a
term of seven years or less.
The Company's portfolio is intended to be appropriately
diversified by geography, real estate sector type, loan type and
counterparty.
The Company will pursue investments across the commercial real
estate debt asset class through senior loans, subordinated loans
and mezzanine loans, bridge loans, selected loan-on-loan financings
and other debt instruments. The split between senior, subordinated
and mezzanine loans will be determined by the Investment Manager in
its absolute discretion having regard to the Company's target
return objectives. However, it is anticipated that whole loans will
comprise approximately 40-50 per cent of the portfolio,
subordinated and mezzanine loans approximately 40-50 per cent and
other loans (whether whole loans or subordinated loans) between
0-20 per cent (including bridge loans, selected loan-on-loan
financings and other debt instruments). Pure development loans will
not, in aggregate, exceed 25 per cent of the Company's Net Asset
Value ("NAV") calculated at the time of investment. The Company may
originate loans which are either floating or fixed rate.
The Company may seek to enhance the returns of selected loan
investments through the economic transfer of the most senior
portion of such loan investments which may be by way of
syndication, sale, assignment, sub-participation or other financing
(including true sale securitisation) to the same maturity as the
original loan (i.e."matched funding") while retaining a significant
proportion as a subordinate investment. It is anticipated that
where this is undertaken it would generate a positive net interest
rate spread and enhance returns for the Company. It is not
anticipated that, under current market conditions, these techniques
will be deployed with respect to any mezzanine or other already
subordinated loan investments. The proceeds released by such
strategies will be available to the Company for investment in
accordance with the investment policy.
Loan to Value ("LTV")
The Company will typically seek to originate debt where the
effective loan to real estate value ratio of any investment is
between 60 per cent and 80 per cent at the time of origination or
acquisition. In exceptional circumstances that justify it, the
ratio may be increased to an absolute maximum of 85 per cent. In
any event, the Company will typically seek to achieve a blended
portfolio LTV of no more than 75 per cent (based on the initial
valuations at the time of loan origination or participation
acquisition) once fully invested.
Geography
The Company's portfolio will be originated from the larger and
more established real estate markets in the UK and European Union's
internal market. UK exposure is expected to represent the majority
of the Company's portfolio. Investment in the European Union's
internal market will mainly be focused on Northern and Southern
Europe. Northern European markets include Germany, France,
Scandinavia, Netherlands, Belgium, Poland, Switzerland, Ireland,
Slovakia and the Czech Republic. Southern European markets include
Italy and Spain. The Company may however originate investments in
other countries in the European Union's internal market to the
extent that it identifies attractive investment opportunities on a
risk adjusted basis.
The Company will not invest more than 50 per cent of the
Company's NAV (calculated at the time of investment) in any single
country save in relation to the UK, where there shall be no such
limit.
In the event that a member state ceases to be a member of the
European Union's internal market, it will not automatically cease
to be eligible for investment.
Real Estate Sector and Property Type
The Company's portfolio will focus on lending into commercial
real estate sectors including office, retail, logistics, light
industrial, hospitality, student accommodation, residential for
sale and multi-family rented residential. Investments in student
accommodation and residential for sale are expected to be limited
primarily to the UK, while multi-family investments are expected to
be limited primarily to the UK, Germany and Scandinavia. Further,
not more than 30 per cent, in aggregate, of the Company's NAV,
calculated at the time of investment, will be invested in loans
relating to residential for sale. No more than 50 per cent of the
Company's NAV will be allocated to any single real estate sector of
the UK, except for the UK office sector which is limited to 75 per
cent of the Company's NAV.
Counterparty and Property Diversification
No more than 20 per cent of the Company's NAV, calculated at the
time of investment, will be exposed to any one borrower legal
entity.
No single investment, or aggregate investments secured on a
single property or group of properties, will exceed 20 per cent of
the Company's Net Asset Value, calculated at the time of
investment.
Corporate Borrowings
Company or investment level recourse borrowings may be used from
time-to-time on a short term basis for bridging investments,
financing repurchases of Shares or managing working capital
requirements, including foreign exchange hedging facilities and on
a longer term basis for the purpose of enhancing returns to
Shareholders and/or to facilitate the underwriting of whole loans
with a view to syndication at a later point. In this regard, the
Company is limited to aggregate short and long term borrowings at
the time of the relevant drawdown in an amount equivalent to a
maximum of 30 per cent of NAV but longer term borrowings will be
limited to 20 per cent of NAV in any event.
Hedging
The Company will not enter into derivative transactions for
purely speculative purposes. However, the Company's investments
will typically be made in the currency of the country where the
underlying real estate assets are located. This will largely be in
Sterling and Euros. However, investments may be considered in other
European currencies, and the Company may implement measures
designed to protect the investments against material movements in
the exchange rate between Sterling, being the Company's reporting
currency, and the currency in which certain investments are made.
The analysis as to whether such measures should be implemented will
take into account periodic interest, principal distributions or
dividends, as well as the expected date of realisation of the
investment. The Company may bear a level of currency risk that
could otherwise be hedged where it considers that bearing such risk
is advisable. The Company will only enter into hedging contracts,
such as currency swap agreements, futures contracts, options and
forward currency exchange and other derivative contracts when they
are available in a timely manner and on terms acceptable to it. The
Company reserves the right to terminate any hedging arrangement in
its absolute discretion.
The Company may, but shall not be obliged to, engage in a
variety of interest rate management techniques, particularly to the
extent the underlying investments are floating rate loans which are
not fully hedged at the borrower level (by way of floating to fixed
rate swap, cap or other instrument). Any instruments chosen may
seek on the one hand to mitigate the economic effect of interest
rate changes on the values of, and returns on, some of the
Company's assets, and on the other hand help the Company achieve
its risk management objectives. The Company may seek to hedge its
entitlement under any loan investment to receive floating rate
interest.
Cash Strategy
Cash held by the Company pending investment or distribution will
be held in either cash or cash equivalents, or various real estate
related instruments or collateral, including but not limited to
money market instruments or funds, bonds, commercial paper or other
debt obligations with banks or other counterparties having a A- or
higher credit rating (as determined by any reputable rating agency
selected by the Company), Agency RMBS (residential mortgage backed
securities issued by government-backed agencies) and AAA rated CMBS
(commercial mortgage-backed securities).
Transactions with Starwood Capital Group or Other Accounts
Without prejudice to the pre-existing co-investment arrangements
described below, the Company may acquire assets from, or sell
assets to, or lend to, companies within the Starwood Capital Group
or any fund, company, limited partnership or other account managed
or advised by any member of the Starwood Capital Group ("Other
Accounts"). In order to manage the potential conflicts of interest
that may arise as a result of such transactions, any such proposed
transaction may only be entered into if the independent Directors
of the Company have reviewed and approved the terms of the
transaction, complied with the conflict of interest provisions in
the Registered Collective Investment Scheme Rules 2018 issued by
the Guernsey Financial Services Commission (the "Commission") under
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as
amended, and, where required by the Listing Rules, Shareholder
approval is obtained in accordance with the listing rules issued by
the UK Listing Authority. Typically, such transactions will only be
approved if: (i) an independent valuation has been obtained in
relation to the asset in question; and (ii) the terms are at least
as favourable to the Company as would be any comparable arrangement
effected on normal commercial terms negotiated at arms' length
between the relevant person and an independent party, taking into
account, amongst other things, the timing of the transaction.
Co-investment Arrangements
Starwood Capital Group and certain Other Accounts are party to
certain pre-existing co-investment commitments and it is
anticipated that similar arrangements may be entered into in the
future. As a result, the Company may invest alongside Starwood
Capital Group and Other Accounts in various investments. Where the
Company makes any such co-investments they will be made at the same
time, and on substantially the same economic terms, as those
offered to Starwood Capital Group and the Other Accounts.
UK Listing Authority Investment Restrictions
The Company currently complies with the investment restrictions
set out below and will continue to do so for so long as they remain
requirements of the UK Listing Authority: ? neither the Company nor
any of its subsidiaries will conduct any trading activity which is
significant in the
context of its group as a whole; ? the Company will avoid
cross-financing between businesses forming part of its investment
portfolio; ? the Company will avoid the operation of common
treasury functions as between the Company and investee companies; ?
not more than 10 per cent, in aggregate, of the Company's NAV will
be invested in other listed closed-ended
investment funds; and ? the Company must, at all times, invest
and manage its assets in a way which is consistent with its object
of
spreading investment risk and in accordance with the published
investment policy. The Directors do not currently
intend to propose any material changes to the Company's
investment policy, save in the case of exceptional or
unforeseen circumstances. As required by the Listing Rules, any
material change to the investment policy of the
Company will be made only with the approval of shareholders.
Financial Highlights
Year ended Year ended
Key Highlights
31 December 2020 31 December 2019
NAV per Ordinary Share 104.18 p 103.23 p
Share Price 90.0 p 104.50 p
NAV total return (1) 6.3% 7.1%
Share Price total return (1) -7.5% 9.1%
Total Net Assets GBP426.7 m GBP426.6 m
Loans advanced at amortised cost (including accrued income) GBP442.7 m GBP390.6 m
Financial assets held at fair value through profit or loss GBP0.9 m GBP30.5 m
(including associated accrued income)
Cash and Cash Equivalents GBP2.9 m GBP36.8 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP19.5 m GBP29.7 m
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered annualised total return (1) 6.7% 7.1%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Ongoing charges percentage (1) 1.0% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 18.2% 18.4%
Weighted average portfolio LTV to Group last GBP (1) 61.8% 63.0%
(1) Further explanation and definitions of the calculation is
contained in the section "Alternative Performance Measures" at the
end of this financial report.
SHARE PRICE PERFORMANCE
As at 31 December 2020 the NAV was 104.18 pence per Ordinary
Share (2019: 103.23 pence) and the share price was 90.0 pence
(2019: 104.50 pence).
The Company's share price has been volatile since March 2020.
This volatility has been driven by market conditions and trading
flows rather than a change in the Company's NAV.
Chairman's Statement
STEPHEN SMITH | Chairman
25 March 2021
Dear Shareholder,
It is my pleasure to present the Annual Report and Audited
Consolidated Financial Statements of Starwood European Real Estate
Finance Limited for the year ended 31 December 2020. The last year
has seen a great deal of turmoil and has placed a considerable
burden on all of us, in both our professional and private lives.
Our focus throughout the pandemic has been on the health and
wellbeing of everyone associated with the Group while ensuring that
our systems have remained fully functional throughout this period
of intense disruption. My thanks to the Investment Adviser and all
of our service providers for their perseverance in extraordinarily
difficult times.
I am delighted to welcome Shelagh Mason and Charlotte Denton to
the Board (Shelagh joined the Board on 1 September 2020 and
Charlotte on 1 January 2021). Shelagh and Charlotte bring
considerable experience to the Board as well as a range of skills
that we believe will be both additive and complementary.
I would like to thank Jon Bridel, who left the Board in December
2020, for his contribution to the establishment and success of the
Group. Jon's departure is in line with the Company's succession
planning process for the phased retirement of Board members. Jon
leaves with our very best wishes.
OVERVIEW
As at 31 December 2020, the Group had investments and
commitments of GBP490.1 million (of which GBP49.2 million was
committed but unfunded at the end of the year). The average
remaining maturity of the Group's loan book was 2.4 years. The
Group had net debt of GBP16.6 million and unused debt facilities of
GBP106.5 million, available to fund the undrawn commitments of
GBP49.2 million and new lending. The gross annualised levered total
return at the year end was 7.0 per cent. The Net Asset Value
("NAV") was GBP426.7 million, being 104.18 pence per Ordinary
Share.
INVESTMENT ACTIVITY
The Group started 2020 with a strong first quarter, making new
commitments of GBP54.9 million. Loan origination is often slow in
the first quarter and this was a promising start to the year.
However, from March onwards, as the general level of economic
activity spiralled downwards due to the Covid-19 pandemic, the
focus of the Group understandably shifted to the management of the
existing portfolio. In parallel, even though the pipeline at the
time was healthy, the Group took a cautious approach to origination
closing just one loan of GBP17.9 million in the second quarter.
During the third quarter, the Group committed to fund an upsize of
GBP1.3 million to an existing loan. There was no origination in the
fourth quarter.
As activity in the investment and financing markets slowed,
there was in the market, in general, a significant reduction in the
volume of early repayments. As might be expected, borrowers who had
previously decided to refinance or sell, were unable or became
reluctant to do so.
We received repayment in full of two loans prior to the pandemic
totalling GBP14.1 million and a repayment in full of the credit
linked notes totalling GBP21.8 million in June 2020. During the
year to 31 December 2020, we received a further GBP45.5 million of
partial loan repayments.
The Group funded a further GBP23.9 million in relation to loan
commitments made in prior years so net cash invested in the year
increased by GBP16.6 million. This was primarily due to the
redevelopment of the Hotel, Spain.
2017 2018 2019 2020
New loans to borrowers (commitment) GBP245.8m GBP208.0m GBP224.7m GBP74.1m
Loan repayments and amortisation -GBP213.1m -GBP137.2m -GBP198.3m -GBP81.4m
Net Commitment GBP32.7m GBP70.8m GBP26.4m -GBP7.3m
PORTFOLIO PERFORMANCE
All loan interest and scheduled amortisation payments up to 31
December 2020 have been paid in full and on time, in accordance
with their respective initial or amended terms, as applicable.
In the Board's opinion the Investment Manager and Investment
Adviser have performed well during this period of disruption.
Robust underwriting, detailed due diligence and considered loan
structuring and restructuring have been combined to produce a
resilient portfolio which continues to perform in spite of very
considerable and obviously stressed market conditions.
In some instances, the Investment Manager and Investment Adviser
have worked closely with borrowers to agree loan amendments and
changes to business plans, where appropriate, to ensure loan
compliance and to maintain adequate capitalisation (if needed).
49.1 per cent of loans were subject to no modification, as a result
of Covid-19, in 2020, a testament to the quality of underwriting
standards and loan structuring. All economic modifications to date
have been neutral to returns with no interest deferrals. In asset
classes subject to greater Covid-19 impact we have sought
additional sponsor equity, amortisation and / or deleveraging. The
loan performance has been resilient. In the sectors that are most
affected by the Covid-19 pandemic, hospitality and retail,
borrowers continue to meet their obligations including regular
interest and capital repayments in line with the agreed revised
business plans. At 31 December 2020 six loans with exposure
predominantly to hospitality and retail with a value of 35.3 per
cent of NAV are classified as Stage 2 and the remaining loans are
still classified as Stage 1 in accordance with the Group's credit
risk assessment in determining expected credit losses.
In light of the considerable disruption from Covid-19 the Board
has sought to provide more detailed updates and disclosure to our
shareholders during the year through its quarterly factsheets,
which are available on the Company's website. Please refer to the
Investment Manager's report on page 27 for detailed updates on
portfolio performance.
STABILITY OF NET ASSET VALUE ("NAV")
Loans made by the Group are measured at amortised cost in line
with the requirements of IFRS 9 with which we are obliged to
comply. As our business model is to invest for interest and hold
loans to maturity we do not follow fair value accounting for the
vast majority of our loans. In our eight year history only one
position has been recognised at fair value (the credit linked notes
which repaid in the second quarter of this year). Therefore our NAV
does not show significant fluctuations during periods of market
volatility.
Had the underwriting, including loan to value ("LTV") headroom,
on the Group's loans not been as strong as it is, the Group may
well have faced more volatility in its NAV as the Group might have
had to recognise expected credit losses ("ECLs"). However, after
taking into consideration the current market conditions,
independent valuations of the underlying assets secured against the
Group's loans, the receipt of expected cash flows and the credit
worthiness of the counter parties to the loans, the Group sees no
need to recognise any ECLs in any of the Group's loans. The
reasons, estimates and judgements supporting our current assessment
are described on page 19 of the Investment Manager's report.
BOARD COMPOSITION AND DIVERSITY
As the Company approaches its ninth year of existence, as
articulated in previous reports, the Board has been mindful of the
need to plan for succession accordingly. The Company is using this
moment as an opportunity to promote new talent and diversity,
whilst being mindful of passing on the experience that the Board
has gained since IPO. The succession plan began late last year with
the retirement of the first Director, as well as the excellent
replacement found in Shelagh Mason. Additionally, we are delighted
that Charlotte Denton has joined the Board recently to further help
with the Company's development. Further details of the Board's
succession planning can be found in the Corporate Governance
Statement on page 37.
SUCCESSION PLANNING
The Company enters its ninth year in 2021 and the Board has been
mindful that a succession plan needs to be implemented for a
lengthy period of time. During Q4 2019, the Directors devised a
Succession Planning Memorandum. The Memo states that a new Director
will be appointed to the Board during the second half of 2020
giving them time to embed themselves in the role prior to Jonathan
Bridel standing down from the Board in December 2020. Shelagh Mason
was duly appointed on 1 September 2020. In addition, the Company
has decided that it is appropriate to appoint an additional
Director to the Board to further improve the Company's skills,
experience and diversity as well as to assist in the succession
process. To that end, Charlotte Denton was duly appointed on 1
January 2021.
The Boards intention remains that Stephen Smith will retire from
the Board in December 2021. At the point of Stephen Smith's
retirement, only John Whittle would have served as a Director of
the Company since its IPO. In context of John Whittle's familiarity
with the Company, he will probably be appointed as Chairman until
his own departure from the Board. In light of (i) John Whittle's
extensive familiarity with the Company; (ii) the current
challenging market circumstances facing the Company and; (iii) the
extensive rotation of the Board in recent years, the Board are of
the view that it is in shareholders best interests that John
Whittle remains on the Board until December 2023, a year longer
than originally envisaged under the Succession Planning Memorandum.
This will ensure that there is a phased and orderly succession of
the Board which allows new Directors the opportunity to benefit
from the significant experience John Whittle has developed since
the Company's IPO.
In terms of the new appointments, the Directors believe that the
current composition of three Guernsey Directors and one Director
from the United Kingdom works well in terms of satisfying the
Company's requirements. The Board also intend to consider diversity
when making the new appointments to the Board.
SHARE BUYBACKS AND SHARE PRICE PERFORMANCE
The year end share price was 90 pence reflecting a 13.6 per cent
discount to NAV. Despite continued market dislocation and
fluctuation, the share price was starting to look less volatile in
the second half of 2020 (compared to the first half of 2020),
trading in a range between 83.6 pence and 94.0 pence and ending the
period at 90.0 pence, although there is still certainly inherent
value which is not being recognised in the market at this time.
This price stability has been supported by the share buy-back
programme which commenced at the end of the second quarter. The
Board continue to believe that the shares represent very attractive
value at this level and certain members of the Board and
individuals at the Investment Adviser have made personal purchases
during the year, as previously disclosed, and as referenced in note
22. We believe this reflects not only strong corporate governance
demonstrating our alignment with our shareholders, but it also
demonstrates the strong belief in the valuation of the
portfolio.
The Company received authority at the most recent Annual General
Meeting ("AGM"), to purchase up to 14.99 per cent of the Ordinary
Shares in issue on 8 June 2020 and since then, in August 2020, the
Board engaged Jefferies International Limited as buy-back agent to
effect share buy backs on behalf of the Company. During the third
and fourth quarters the Company bought back 3,648,125 shares at an
average cost per share of 86.9 pence per share and these shares are
held in treasury. Share buy backs are subject to sufficient cash
being available.
FUTURE SHARE ISSUANCE
At the last AGM, the Company sought and received authority to
disapply Pre-Emption Rights on the allotment of equity securities
for up to 10 per cent of the Ordinary Shares in issue. As at the
date of this report, this authority has not been utilised.
The Covid-19 pandemic has caused dislocation in the real estate
sector and we are partly through this now and potentially working
to come out the other side. The market is still trying to ascertain
what the longer term impact on real estate values will be. The
Investment Adviser feels that the market reaction has been too
cautious and that has led to considerable investment market
opportunity which we feel will remain the case throughout 2021.
Whilst the discount to NAV persists, we do not intend to raise
additional equity. Nevertheless, we do expect the market to
recognise the value in the shares during the year and the Board
believes that the Group should maintain its capacity to access
capital within a short time frame in expectation of improved
markets. The Directors believe that as the market improves and the
discount to NAV narrows, immediate access to capital could have the
following additional benefits for the Company and shareholders: ?
to enable the Company to pursue larger investment opportunities and
broaden its lending range and capacity; ? to enable the Company to
increase diversification and the depth of its portfolio; ?
increased scale is attractive to a wider investor base; ? a greater
volume of shares, creating increased secondary market activity; and
? fixed running costs spread across a larger equity capital base
reducing the Company's ongoing expenses per share.
To take advantage of opportunities as and when they present
themselves, the Directors believe it is appropriate for the Company
to renew the existing authorities at the forthcoming AGM, in
respect of issuance of up to 10 per cent of the Ordinary Shares in
issue.
DIVIDS
Total dividends of 6.5 pence per Ordinary Share were declared in
relation to the year ended 31 December 2020.
Dividend Payment Amount
Period
declared date per share
1 January 2020 to 31 March 2020 23 April 2020 20 May 2020 1.625p
1 April 2020 to 30 June 2020 23 July 2020 28 August 2020 1.625p
1 July 2020 to 30 September 2020 22 October 2020 20 November 2020 1.625p
1 October 2020 to 31 December 2020 22 January 2021 05 March 2021 1.625p
Total 6.5p
The 2020 dividends were covered 0.9x by earnings (excluding
unrealised FX gains and losses). We have held a dividend reserve
(within retained earnings) built up over several years which we
have been using to maintain the annual dividend at 6.5 pence per
share over the last two years even though the dividend has not been
covered by earnings more recently. As a result, dividends have not,
to date, been paid out of capital reserves.
As announced on 24 July 2020, from 1 January 2021 the Board
intends to target a dividend of 5.5 pence per annum (payable
quarterly) which reflects the broader lower interest rate
environment. This will provide a level of dividend which should be
fully covered by earnings whilst ensuring the Company maintains
strong credit discipline without having to increase the risk of the
portfolio.
OUTLOOK
The focus of the Group for 2021 remains the continued robust
asset management of the existing loan portfolio. We also expect
that we will see good origination opportunities during the year.
Disruption due to the Covid-19 pandemic may reduce as the year
progresses and the vaccine roll out across the United Kingdom is
particularly heartening. More stable conditions could herald
greater market volumes to come.
Of particular note is the significant reduction in lending by
balance sheet bank lenders, particularly to development,
refurbishment and non-core property asset classes. This trend will
inevitably produce interesting opportunities for alternative
lenders and we fully expect to benefit.
Finally, the Board note that one positive outcome of the
pandemic could be the recognition by the global business community
of the need for affirmative action in relation to climate change
and other related environmental, social and governance
considerations.
The Board continues to work with the Investment Manager and
Investment Adviser to enhance both origination capacity and
portfolio construction in order to deliver attractive risk adjusted
returns to its investors. The Board will continue to inform you of
progress by way of the quarterly fact sheets.
On behalf of the Board, I would like to close by thanking
shareholders for your commitment. I sincerely hope that we all have
a more stable time in 2021 and I look forward to briefing you on
the Group's progress later this year.
Stephen Smith | Chairman
25 March 2021
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and
details the uncertainties, principal and emerging risks associated
with its activities.
CORPORATE PURPOSE
As an investment company, the general corporate purpose is to
provide long-term prosperity to our shareholders through providing
regular dividends and preserving capital by limiting downside risk.
In addition to this, the Board and Investment Manager also
recognise that by furthering their understanding of the needs of
other relevant stakeholders, the Company can provide better returns
to its shareholders.
OBJECTIVE, INVESTMENT POLICY AND BUSINESS MODEL
The Objective and Investment Policy set out on pages 2 to 4
describes the Group's strategy and business model.
The Investment Manager is Starwood European Finance Partners
Limited, a Company incorporated in Guernsey with registered number
55819 and regulated by the Guernsey Financial Services Commission
(the "Commission"). The Investment Manager has appointed Starwood
Capital Europe Advisers, LLP (the "Investment Adviser"), an English
limited liability partnership authorised and regulated by the
Financial Conduct Authority, to provide investment advice, pursuant
to an Investment Advisory Agreement.
CURRENT AND FUTURE DEVELOPMENT
A review of the year and outlook is contained in the Investment
Highlights and Portfolio Review sections of the Investment
Manager's Report and within the Chairman's Statement.
PERFORMANCE
A review of performance is contained in the Investment
Highlights and Portfolio Review sections of the Investment
Manager's Report.
A number of performance measures are considered by the Board,
the Investment Manager and Investment Adviser in assessing the
Company's success in achieving its objectives. The Key Performance
Indicators ("KPIs") used are established industry measures to show
the progress and performance of the Group and are as follows: ? The
movement in NAV per Ordinary Share; ? The movement in share price
and the discount / premium to NAV; ? The payment of targeted
dividends; ? The portfolio yield, both levered and unlevered; ?
Ongoing charges as a percentage of undiluted NAV; and ? Weighted
average loan to value for the portfolio.
Details of the KPIs achieved are shown in the Financial
Highlights section on page 6.
RISK MANAGEMENT
It is the role of the Board to review and manage all risks
associated with the Group, both those impacting the performance and
the prospects of the Group and those which threaten the ongoing
viability. It is the role of the Board to mitigate these either
directly or through the delegation of certain responsibilities to
the Audit Committee and Investment Manager. The Board performs a
review of a risk matrix at each Board meeting.
The Board considers the following principal risks could impact
the performance and prospects of the Group but do not threaten its
ability to continue in operation and meet its liabilities. In
deciding which risks are principal risks the Board considers the
potential impact and probability of the related events or
circumstances, and the timescale over which they may occur.
Consequently, it has put in place mitigation plans to manage those
identified risks. Details of the principal and emerging risks
considered as part of the review of the risk matrix are highlighted
below.
Principal Risks
Cybercrime
The Group is subject to the risk of unauthorised access into
systems, identification of passwords or deleting data, which could
result in loss of sensitive data, breach of data physical and
electronic, amongst other potential consequences. This risk is
managed and mitigated by regular reviews of the Group's operational
and financial control environment. The matter is also contained
within service providers surveys which is completed by Group's
service providers and is regularly reviewed by the Board. No
adverse findings in connection with the service provider surveys
have been found. The Company and its service providers have
policies and procedures in place to mitigate this risk, the
cybercrime risk continues to be closely monitored.
Long Term Strategic Risk
The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies and, consequently, the
actual rate of return may be materially lower than the targeted
returns. In addition, the pace of investment has in the past and
may in the future be slower than expected or the principal on loans
may be repaid earlier than anticipated, causing the return on
affected investments to be less than expected. Furthermore, if
repayments are not promptly re-invested this may result in cash
drag, which may lower portfolio returns. As a result, the level of
dividends to be paid by the Company may fluctuate and there is no
guarantee that any such dividends will be paid. Since the Covid-19
pandemic the shares have traded at a discount to NAV per share and
shareholders may be unable to realise their investments through the
secondary market at NAV per share.
The Board monitors the level of premium or discount of share
price to NAV per share and announced a share buyback programme
during the year in order to support the share price. While the
Directors may seek to mitigate any discount to NAV per share
through the discount management mechanisms set out in this Annual
Report, there can be no guarantee that they will do so or that such
mechanisms will be successful. Please see page 33 for further
information on the discount management mechanisms.
The Investment Adviser provides the Investment Manager and the
Board with a regular report on pipeline opportunities, which
includes an analysis of the strength of the pipeline and the
returns available. The Directors also regularly receive information
on the performance of the existing loans, including the performance
of underlying assets versus underwritten business plan and the
likelihood of any early repayments, the need for any loan
amendments to allow the loans continue to perform in different
economic circumstances which may impact returns.
The Board monitors investment strategy and performance on an
ongoing basis and regularly reviews the Investment Objective and
Investment Policy in light of prevailing investor sentiment to
ensure the Company remains attractive to its shareholders.
Interest Rate Risk
The Group is subject to the risk that the loan income and income
from the cash and cash equivalents will fluctuate due to movements
in interbank rates. The Investment Adviser is monitoring the
transition from LIBOR to SONIA and will manage any transition
required on behalf of the Group. The Group has ensured that loan
agreements for the current portfolio are in a form which
accommodates the flexibilities required to manage the
transition.
The loans in place at 31 December 2020 have been structured so
that 20.8 per cent by value of the loans are fixed rate, which
provides protection from downward interest rate movements to the
overall portfolio (but also prevents the Group from benefiting from
any interbank rate rises on these positions). In addition, whilst
the remaining 79.2 per cent is classified as floating, 100 per cent
of these loans are subject to interbank rate floors such that the
interest cannot drop below a certain level, which offers some
protection against downward interest rate risk. When reviewing
future investments, the Investment Manager will continue to review
such opportunities to protect against downward interest rate
risk.
The Board considers that the following principal and emerging
risks could impact both the performance and prospects of the Group
and could also threaten its ability to continue its operations and
meet its liabilities but has identified the mitigating actions in
place to manage them.
Foreign Exchange Risk
The majority of the Group's investments are Euro denominated
(circa 58.3 per cent as at 31 December 2020). The Group is subject
to the risk that the exchange rates move unfavourably and that a)
foreign exchange losses on the loan principal are incurred and b)
that interest payments received are lower than anticipated when
converted back to Sterling and therefore returns are lower than the
underwritten returns.
The Group manages this risk by entering into forward contracts
to hedge the currency risk. Most 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 GBP273.4 million of hedged
notional exposure with Lloyds Bank plc at 31 December 2020
(converted at 31 December 2020 FX rates).
As at 31 December 2020 the hedges were in the money. If the
hedges move out of the money and at any time this mark to market
exceeds GBP15 million, the Company is required to post collateral,
subject to a minimum transfer amount of GBP1 million. This
situation is monitored closely, however, and as at 31 December
2020, the Company had sufficient liquidity and credit available on
the revolving credit facility to meet any cash collateral
requirements.
Market Deterioration Risk
The Group's investments are comprised principally of debt
investments in the UK, and the European Union's internal market and
it is therefore exposed to economic movements and changes in these
markets. Any deterioration in the global, UK or European economy
could have a significant adverse effect on the activities of the
Group and may result in significant loan defaults or
impairments.
The Covid-19 pandemic has had a material impact on global
economies and on the operations of the Group's borrowers during
2020 and this will continue in 2021. The Covid-19 pandemic presents
a major risk to growth and the full impact of the consequences for
the world economy is unclear. The Board have considered the impact
of Covid-19 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.
The United Kingdom's departure from the European Union
represents a potential threat to the UK economy as well as wider
Europe. On a cyclical view, national economies across Europe appear
to be heading at best towards lower growth and alongside the
economic impact of Covid-19, towards recession. The potential
impact of Brexit could have a further destabilising effect as a
result of Covid-19. To some extent the potential impact of an
unsatisfactory UK exit from the EU has already been priced into
markets and forecasts, but significant headwinds could still
arise.
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.
However, the Group is mitigated against this with an average
weighted loan to value of the portfolio of 61.8 per cent (see page
21 of the Investment Manager's report). Therefore, the portfolio
should be able to withstand a significant level of deterioration
before credit losses are incurred.
The Investment Adviser also mitigates the risk of credit losses
by undertaking detailed due diligence on each loan. Whilst the
precise scope of due diligence will depend on the proposed
investment, such diligence will typically include independent
valuations, building, measurement and environmental surveys, legal
reviews of property title, assessment of the strength of the
borrower's management team and key leases and, where necessary,
mechanical and engineering surveys, accounting and tax reviews and
know your customer checks.
The Investment Adviser, Investment Manager and Board also manage
these risks by ensuring a diversification of investments in terms
of geography, market and type of loan. The Investment Manager and
Investment Adviser operate in accordance with the guidelines,
investment limits and restrictions policy determined by the Board.
The Directors review the portfolio against these guidelines, limits
and restrictions on a regular basis.
The Investment Adviser meets with all borrowers on a regular
basis to monitor developments in respect of each loan and reports
to the Investment Manager and the Board periodically and on an ad
hoc basis where considered necessary.
The Group's loans are held at amortised cost. The performance of
each loan is reviewed quarterly by the Investment Adviser for any
indicators of significant increase in credit risk, impaired or
defaulted loans. The Investment Adviser also provides their
assessment of any expected credit loss for each loan advanced. The
results of the performance review and allowance for expected credit
losses are discussed with the Investment Manager and the Board.
Six loans, predominantly in the retail and hospitality sectors
with a value of 35.3 per cent of NAV were moved to Stage 2 during
the year but no loan has been moved to Stage 3. However, at this
point in time we have no reason to believe that any expected credit
losses should be recognised against any of the loans, because of
the strong LTVs across the loan portfolio, including these 6 loans.
The reasons, estimates and judgements supporting our current
assessment are described on pages 19-20 of the Investment Manager's
report.
Risk of Default under the Revolving Credit Facilities
The Group is subject to the risk that a borrower could be unable
or unwilling to meet a commitment that it has entered into with the
Group as outlined above under market deterioration risk. As a
consequence of this, the Group could breach the covenants of its
revolving credit facilities and fall into default itself.
A number of the measures the Group takes to mitigate market
deterioration risk as outlined above, such as portfolio
diversification and rigorous due diligence on investments and
monitoring of borrowers, will also help to protect the Group from
the risk of default under the revolving credit facility as this is
only likely to occur as a consequence of borrower defaults or loan
impairments.
The Board regularly reviews the balances drawn under the credit
facility against commitments and pipeline and reviews the
performance under the agreed covenants. The loan covenants are also
stress tested to test how robust they are to withstand default of
the Group's investments.
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 the risk matrix and identified climate change as an
emerging risk. Cybercrime which was an emerging risk in the prior
year, has been moved to Principal Risks.
Climate change
Extreme weather events and natural catastrophes and the
consequences that climate change could have both on infrastructures
and on nature are potentially severe but highly uncertain. The
potential high impact of possible losses has done a lot to raise
the awareness of this risk in investment circles. The Board, in
conjunction with the Investment Adviser, is monitoring closely the
regulation and any developments in this area (see 'Environmental,
Social and Corporate' section on page 17 for further
information).
ASSESSMENT OF PROSPECTS
The Group's strategy is central to an understanding of its
prospects. The Group's focus is twofold: i) to manage expected
repayments, including proactively managing the investments already
made to ensure that during times of economic instability on either
a macro (as experienced during the year as a result of the Covid-19
pandemic) or micro level, the loans continue to perform and provide
positive returns to the Group, and ii) continuing to grow the
Group, by sourcing investments with good risk adjusted returns in
order to minimise any potential for cash drag and improve the
Group's returns. The Group's prospects are assessed primarily
through its strategic review process, which the Board participates
fully in. The Directors' have assessed the prospects of the Group
over a period of three years which has been selected because the
strategic review covers a three-year period. The Group updates its
plan and financial forecasts on a monthly basis and detailed
financial forecasts are maintained and reviewed by the Board
regularly.
In addition the Directors have considered the realisation vote
which will, under the Articles, take place no later than 28
February 2023. The Directors have concluded that the shareholders
will most likely vote against this realisation vote and the Company
will continue as consituted.
ASSESSMENT OF VIABILITY
Although the strategic review reflects the Directors' best
estimate of the future prospects of the business, they have also
tested the potential impact on the Group of a number of scenarios
over and above those included in the review, by quantifying their
financial impact. These scenarios are based on aspects of the
following selected principal risks, which are detailed in this
Strategic Report, and as described below: ? Foreign exchange risk;
? Market deterioration risk; specifically the risk that the all the
Stage 2 loans held default, resulting in a loss
of interest income and delay in the repayment of capital; and ?
Risk of default under the revolving credit facilities.
These scenarios represent 'severe but plausible' circumstances
that the Group could experience. The scenarios tested included: ? A
high level of loan default meaning that the Group stopped receiving
interest on the Stage 2 loans in the
portfolio and that the outstanding capital on these loans was
not received until 12 months after the loan maturity
date; and ? An analysis of the robustness of the covenants under
the revolving credit facility to withstand default of the
underlying investments.
The results of this stress testing showed that the Group would
be able to withstand a high level of underlying loan default or
impairment resulting from either of the risks identified over the
period of the financial forecasts.
VIABILITY STATEMENT
In addition to the assessment of prospects and viability above,
the Directors also have a reasonable expectation, based on the
scenarios testing, that the Group will continue to meet its
liabilities as they fall due over the three-year period ending 31
December 2023, and therefore the Group is expected to remain viable
from both a business model, strategic opportunity and financial
perspective.
In connection with the viability statement, the Board confirm
that they have carried out a robust assessment of the principal and
emerging risks facing the company, including those that would
threaten its business model, future performance, solvency or
liquidity.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ("ESG")
As an investment company, the Board and the Investment Adviser
consider the Group's activities to have a minimal direct impact on
the environment.
The Investment Manager and Investment Adviser are part of the
Starwood Capital Group (SCG), which is a signatory to the UN
Principles for Responsible Investments (UNPRI). In assessing new
loans SCG evaluates environmental risks associated with any
investments as part of the underwriting process. A formal scope of
work is followed by the Investment Adviser, which requires an
environmental site assessment to be performed which identifies
environmental conditions that may have a material adverse impact on
the property being assessed or its immediate surrounding area and
an assessment of a property's sustainability and marketability
through the review of its environmentally friendly
characteristics.
The Board recognises that it has no direct control over a
borrower's company policy towards environment and social
responsibility and whilst it is an important part of the due
diligence process in understanding the impact of such issues,
decisions are not weighted towards those investments with stronger
environmental and social characteristics. It should be noted that a
number of the loans made by the Group involve refurbishment
projects and these will often improve the environmental impact of
the real estate concerned. Additionally, whilst it is not an
investment criteria, the Group's loan portfolio is significantly
funded in sectors with positive social impact such as hospitality,
healthcare and residential.
In carrying out its activities and in its relationship with the
community, the Group aims to conduct itself responsibly, ethically
and fairly; including in relation to social and human rights
issues. Our risk management framework is intended to facilitate an
enterprise wide view of risk that supports a strong and
collaborative risk management culture within the Board and with its
relationship with SCG.
The Board (through its relationships with SCG, its brokers and
other advisers) is focused on maintaining a productive dialogue
with shareholders and gathering feedback to inform the decision
making at Board level.
SCG, with in excess of 4,000 employees worldwide, takes its
social responsibilities to its employees very seriously offering a
challenging, fast-paced and collegial environment to its employees.
SCG strives to create diverse and inclusive workplaces where all
employees can perform to their full potential and to be a good
corporate citizen for their communities by supporting charitable
organisations that promote education and social wellbeing.
The Group has no Greenhouse Gas Emissions, other than as noted
below, to report from its operations for the current or prior year,
nor does it have responsibility for any other emissions producing
sources (including those within the underlying investment
portfolio).
While there is some travel involved for the Directors and
representatives from the Investment Adviser, the Company's service
providers are Guernsey office-based companies, and the majority of
the Directors are based in Guernsey, thus having a relatively low
impact on the environment and negating the need for long commutes
or flights to and from Board meetings. As a result of Covid-19
there has been an acceleration in the use of interactive and
virtual technology for meetings, further reducing the need for
travel.
The Group has no employees and the Board is composed entirely of
non-executive Directors. Therefore, the Group is not within scope
of the Modern Slavery Act 2015 and is therefore not obliged to make
a human trafficking statement.
BOARD DIVERSITY
The Board considers that its members have a balance of skills,
qualifications and experience which are relevant to the Company.
The Board supports the recommendations of the Davies Report, the
Hampton Alexander Review and the Parker Review and believes in the
value and importance of diversity in the boardroom and it continues
to consider the recommendations of these reports and reviews as
part of its succession planning.
The Company has no employees and therefore has no disclosures to
make in this regard.
Stephen Smith | Chairman
25 March 2021
Investment Manager's Report - Investment Highlights
The Investment Manager and Investment Adviser are both part of
the Starwood Capital Group (SCG), a leading global real estate
investment group.
PORTFOLIO STATISTICS
The Investment Manager and the Board of the Company considers
that the Group is engaged in a single segment of business, being
the provision of a diversified portfolio of real estate backed
loans. The analysis presented in this report is presented to
demonstrate the level of diversification achieved within that
single segment. The Board does not believe that the Group's
investments constitute separate operating segments.
As at 31 December 2020, the portfolio was invested in line with
the Group's investment policy and is summarised below.
31 31
December December
2020 2019
Number of investments 18 18
Percentage of invested portfolio in floating rate loans (1) 79.2% 79.1%
Invested Loan Portfolio unlevered annualised total return (1) 6.7% 7.1%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Weighted average portfolio LTV - to Group first GBP (1) 18.2% 18.4%
Weighted average portfolio LTV - to Group last GBP (1) 61.8% 63.0%
Average loan term (stated maturity at inception) 4.5 years 4.1 years
Average remaining loan term 2.4 years 2.8 years
Net Asset Value GBP426.7 m GBP426.6 m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP19.6 m) (GBP29.7 m)
Loans advanced at amortised cost (including accrued income) GBP442.7 m GBP390.6 m
Financial assets held at fair value through profit or loss (including associated accrued income and - GBP21.9 m
excluding the value of FX hedges)
Cash GBP2.9 m GBP36.8 m
Other net assets / (liabilities) (including the value of FX hedges) GBP0.7 m GBP7.0 m
(1) Further explanation and definitions of the calculation is
contained in the section "Alternative Performance Measures" at the
end of this financial report.
PORTFOLIO DIVERSIFICATION
% of invested
Country
assets
UK 41.7
Spain 30.0
Republic of Ireland 20.2
Netherlands 3.8
Germany 3.2
Finland 1.1
% of invested
Sector
assets
Hospitality 35.7
Office 23.2
Residential for sale 15.7
Retail 12.9
Healthcare 5.7
Logistics 4.1
Light Industrial 1.6
Residential for rent 0.9
Other 0.2
% of invested
Loan type
assets
Whole loans 61.2
Mezzanine 38.8
% of invested
Loan currency
assets*
Sterling 41.7
Euro 58.3 ? The currency split refers to the underlying loan currency; however, the capital and interest during protected
periods on all non-sterling exposure is hedged back to
sterling.
EXPECTED CREDIT LOSSES
All loans within the portfolio are classified and measured at
amortised cost less impairment.
Under IFRS 9 a three stage approach for recognition of
impairment is applicable, based on whether there has been a
significant deterioration in the credit risk of a financial asset
since initial recognition. These three stages then determine the
amount of impairment provision recognised.
At Initial
Recognition Recognise a loss allowance equal to 12 months expected credit losses resulting from default
(if asset is not events that are possible within 12 months.
credit impaired)
After initial
recognition:
Credit risk has not increased significantly since initial recognition. Recognise 12 months
expected credit losses.
Stage 1
Interest income is recognised by applying the effective interest rate to the gross carrying
amount of financial assets.
Credit risk has increased significantly since initial recognition. Recognise lifetime expected
losses.
Stage 2
Interest income is recognised by applying the effective interest rate to the gross carrying
amount of financial assets.
Credit impaired financial asset. Recognise lifetime expected losses.
Stage 3
Interest income is recognised by applying the effective interest rate to the amortised cost (that
is net of the expected loss provision) of financial assets.
The Group has not recognised expected credit losses at initial
recognition on any of its loans due to the detailed and
conservative underwriting undertaken, robust loan structures in
place and a strong equity cushion with an average LTV of 61.8 per
cent (based on the latest available valuation for each asset).
Stage 2: significant increase in credit risk
The Group uses both quantitative and qualitative criteria which
is monitored no less than quarterly in order to assess whether an
increase in credit risk has occurred. Increased credit risk would
be considered if, for example, all or a combination of the
following has occurred: ? underlying income performance is at a
greater than 10 per cent variance to the underwritten loan metrics;
? LTV is greater than 75-80 per cent; ? LTV or income covenant test
results are at a variance of greater than 5-10% of loan default
covenant level (note
that loan default covenant levels are set tightly to ensure that
an early cure is required by the borrower should
they breach which usually involves decreasing the loan amount
until covenant tests are passed); ? late payments have occurred and
not been cured within 3 days; ? loan maturity date is within six
months and the borrower has not presented an achievable refinance
or repayment
plan; ? covenant and performance milestones criteria under the
loan have required more than two waivers; ? increased credit risk
has been identified on tenants representing greater than 25 per
cent of underlying asset
income; ? income rollover / tenant break options exist such that
a lease up of more than 30 per cent of underlying property
will be required within 12 months in order to meet loan
covenants and interest payments; and ? borrower management team
quality has adversely changed.
Stage 3: Default and credit-impaired assets
Non-performing financial assets would be classified with Stage
3, which is fully aligned with the definition of credit- impaired,
when one or more of the following has occurred: ? the borrower is
in breach of all financial covenants; ? the borrower is in
significant financial difficulty; and ? it is becoming probable
that the borrower will enter bankruptcy.
An instrument is considered to have been cured, that is no
longer in default, when it no longer meets any of the default
criteria for a sufficient period of time.
At 31 December 2019 all loans were classified as Stage 1. At 31
December 2020 six loans with a value of 35.3 per cent of NAV are
classified as Stage 2 and the remaining loans are still classified
as Stage 1. The loans classified to Stage 2 are predominantly in
the retail and hospitality sectors (but not all hospitality loans
are in Stage 2). The main reason for moving the loans to Stage 2 in
the second quarter of 2020 was expected income covenant breaches
due to the disruption from Covid-19. Following loan amendments
agreed with borrowers, no income breaches have occurred. The loan
portfolio performance has been resilient. In 2020 the company
collected all interest that was contractually due and all
amortisation that was contractually due.
It is important to note that although these six loans have been
classified as Stage 2 no ECLs have been recognised. This is because
the formula for calculating the expected credit loss is:
"Present Value of loan" x "probability of default" x "value of
expected loss".
Although credit risk (and hence probability of default) has
increased for these loans, we have considered a number of scenarios
and as a result do not currently expect to realise a loss in the
event of a default (i.e. the last part of the formula above is
considered to be zero for these six loans given the present value
of these loans in all scenarios considered).
This assessment has been made, despite the continued pressure on
the hospitality and retail markets from Covid-19, on the basis of
information in our possession at the date of reporting, our
assessment of the risks of each loan and certain estimates and
judgements around future performance of the assets. The position on
any potential ECLs on the Three Shopping Centres and Shopping
Centre, Spain (the "Spain retail assets") in particular continues
to be closely monitored and analysed, and we have sought input,
analysis and commentary from Spanish market advisers and an updated
external valuation in this regard, to supplement our own
information. Although we continue to update the information
available, at this point in time we have no reason to believe that
any ECLs should be recognised against any of the loans determined
to be Stage 2. The reasons, estimates and judgements supporting our
current assessment are as follows: ? Sufficient headroom on the six
loans with an average LTV of 67.9 per cent between them based on
the latest
independent valuations received. ? Performance of the retail
centres where local restrictions were lifted following the first
wave of Covid-19 was
very encouraging for future recovery with the sites on average
in September 2020 reaching 92 per cent of comparable
month prior year footfall and we expect this will re-occur; ? We
have determined that although there is pressure in this market, it
is unlike the UK retail market as we are
currently seeing no evidence of significant liquidations in the
Spanish retail market; ? We believe that following the rollout of
the vaccine and the loosening of lockdown restrictions, income in
the
retail centres is well positioned to recover as a result of the
above; and ? We have reviewed valuations of listed peers of the
borrower and valuations have not moved materially and therefore
currently judge that the revised valuation on these assets,
which is being appraised by the same markets experts,
is unlikely to result in an ECL being recognised.
FAIR VALUES
The amortised cost loan recognition is required by IFRS 9 and we
do not have a choice of methodology to follow - we are not eligible
to follow fair value accounting for the vast majority of our loans,
and in our eight year history only one position has ever been
eligible to be recognised at fair value (the credit linked notes
which repaid in the second quarter of this year). Therefore our NAV
does not necessarily show significant fluctuations during periods
of market volatility.
The table below represents the fair value of the loans based on
a discounted cash flow basis using a range of potential discount
rates.
The effective interest rate ("EIR") - i.e. the discount rate at
which future cash flows equal the amortised cost, is 6.8 per cent.
We have sensitised the cash flows at EIR intervals of 0.5 per cent
up to +/- 2.0 per cent. The table reflects how a change in market
interest rates or credit risk premiums may impact the fair value of
the portfolio versus the amortised cost. Further, the Group
considers the EIR of 6.8 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 (for example the Hotel, Spain). The
volatility of the fair value to movements in discount rates is low
due to the low remaining duration of most loans.
Discount Rate Value Calculated % of Book Value
4.8% GBP 464.6 m 104.9%
5.2% GBP 459.5 = fair value 103.8%
5.8% GBP 453.4 m 102.4%
6.3% GBP 448.0 m 101.2%
6.8% GBP 442.7 m = book value 100.0%
7.3% GBP 437.4 m 98.8%
7.8% GBP 432.3 m 97.7%
8.3% GBP 427.3 m 96.5%
8.8% GBP 422.4 m 95.4%
LOAN TO VALUE
Given the need for the Group and most of its peers to record
loans at amortised cost, the loan to value of companies in our
sector has understandably been an area of focus for many of our
shareholders and stakeholders seeking to understand underlying risk
further.
In order to try to assist in understanding the underlying credit
risk, we have always quoted the last GBP loan to value ("last LTV")
of our portfolio and have outlined further detail below on our
approach to this calculation.
Methodology
Our methodology to calculate the last LTV for each individual
loan is:-
Total loan drawn less any deductible lender controlled cash
reserves and less any amortization received to date (including any
debt provided by other lenders which rank alongside or senior to
the Group's position)
Market value determined by the last formal lender valuation
received by the reporting date
Each individual loan LTV is then weighted by the amount of the
loan currently drawn (in the Group only, ignoring the position of
other third party lenders) to give a weighted average last LTV
across the Group's portfolio.
Valuations Process
The following describes the valuation basis that is used in our
calculation. As the vast majority of our portfolio is originated
directly by the Investment Adviser, the Group has discretion over
when and how to instruct valuations. We consider this to be a
strength of our valuation process as we have control over timing
and complete access to the detail of the valuation process and the
output. Where loans are not directly originated the lender could
have a lack of control over the timing and no input to the process
which we prefer to avoid where possible. ? On the origination of a
loan, for a straight forward standing investment asset (for
example, an occupied office),
the independent open market value determined by an independent
valuer under RICS guidelines will be used. When
considering the relevance of these valuations in the current
market, it is important to consider how quickly a
portfolio churns. Our average loan term from origination to
repayment is approximately 2.5 years and therefore our
valuations have always been fresh. At 31 December 2020, 15.7 per
cent of our total portfolio was originated in the
last 12 months and 40.6 per cent in the last 18 months
(including the 15.7 per cent in the last 12 months). ? After loan
origination the Group has the right under loan documents to obtain
valuations on an annual basis at the
expense of the borrower (based on loan anniversary, not Group
financial year end). Where a follow on valuation has
been done we use the latest valuation number in our
calculations. However, the Group does not instruct independent
third party valuations on a strict annual basis, only when it is
considered necessary and useful to obtain one. Of
the 84.3 per cent of loans on our books which are older than 12
months, 44.5 per cent have had the valuation
updated since the loan was originated (comprising 37.5% of the
total loan book). ? A revised, independent valuation of the Spanish
retail loan assets has been instructed by the Group post
year-end.
Initial indicative output confirms that the Group's loan
exposure continues to have adequate headroom against the
valuation basis but values have declined in line with
expectation and the wider market trend given the current lack
of certainty and liquidity for retail assets. Once these
valuation reports are finalised, the Group will reflect
the formal updated valuation basis in post year-end reporting.
We expect the impact on the overall portfolio's last
Sterling LTV to be low. ? The Group has not sought independent
valuations on every position given consideration of the individual
risk
factors considered of each loan position. Instead, the
Investment Adviser has undertaken desktop reviews of the
last valuations for each of the assets and evaluated the key
inputs based on the latest information they have, to
update any valuations in the assessment of the LTV for each loan
below, preferring to maintain the option of an
independent valuation at a time when the valuation will provide
better information to both the Group and borrower -
as was decided for the Spain retail assets. ? For development
projects there are a number of potential valuation methodologies.
Our selected approach is based on
giving the clearest and most consistent presentation of the
risk. For development projects our calculation includes
the total facility available and is calculated against the
appraised market value on completion of the relevant
project. There are other potential approaches such as using
current drawn loan balance and current value or using
total cost as a proxy for value. However each of these
approaches has limitations. For example, using the approach
of drawn loan balance divided by current project value will
typically understate the LTV in the earlier days of a
development when less debt is drawn before converging to a
higher LTV that matches our methodology at the end once
all the debt is drawn. We generally retain the same rights to
valuation on development loans as for investment
assets. It is also worth noting that the weighting of the loan
within the portfolio calculation is based off the
latest drawn balance and not the total loan commitment.
On the basis of the methodology previously outlined, at 31
December 2020 the Group has an average last LTV of 61.8 per
cent.
Change in Valuation Hospitality Retail Residential Other Total
-25% 80.9% 89.2% 76.9% 83.9% 82.3%
-20% 75.8% 83.6% 72.1% 78.6% 77.2%
-15% 71.4% 78.7% 67.8% 74.0% 72.6%
-10% 67.4% 74.3% 64.1% 69.9% 68.6%
-5% 63.9% 70.4% 60.7% 66.2% 65.0%
0% 60.7% 66.9% 57.7% 62.9% 61.8%
5% 57.8% 63.7% 54.9% 59.9% 58.8%
10% 55.1% 60.8% 52.4% 57.2% 56.1%
15% 52.7% 58.2% 50.1% 54.7% 53.7%
The table above shows the sensitivity of the LTVs for movements
in the underlying property valuations, disclosed by sector, and
demonstrates that the Group has considerable headroom within the
currently reported last LTVs. The valuations used in the
calculations for the table above are the most recent final
valuations available for the assets against which loans are held.
As previously disclosed the Group has instructed updated,
independent valuations of the Spanish retail loan assets. These
valuations are not yet final but the indicative results of these
valuations indicate that the LTV of the Group as a whole will
change from 61.8% (as set out in the table above) to 63.2%, a
deterioration of 1.4%. We will update shareholders as to the final
findings of the valuations in the quarterly factsheet following the
finalisation of the valuations. We do not anticipate that the
position on Expected Credit Losses (i.e. that currently no ECL is
recognised) with regard to these assets will change as a result of
these valuations.
FOREIGN EXCHANGE
The Group continues to recognise unrealised foreign exchange
gains or losses relating to investment activity. The Group has
fully hedged the principal of each individual non-Sterling
denominated loan with forward contracts, together with interest
receipts during the period of prepayment protection. If the loans
repay at their scheduled repayment date, the Group would expect
that this policy would be effective in protecting against realising
FX losses on capital invested.
However, the accounting treatment for the non-Sterling
denominated loans is to value the loan at the foreign exchange rate
at the relevant valuation date, and to value the hedge based on the
market forward rates at the valuation date to the maturity date of
the relevant hedge (discounted back to present value). As a result
of this accounting treatment, whilst the loan principal is
economically fully hedged (if held to loan maturity), unrealised
foreign exchange gains or losses are recognised in the accounts
during the life of the loan due to changes in the shape of the
relevant forward curves. For this reason, the Group disregards
unrealised foreign exchange gains and losses when declaring
dividends.
It is important to note that should any of the non-Sterling
denominated loans repay early, and the Group has no alternative use
for the funds repaid and therefore breaks the hedges early, foreign
exchange gains or losses could be realised at that point. The size
of this will depend on the shape of the relevant forward curve at
the point at which the relevant hedge is broken. In general, a
steeper curve would result in greater gains/losses.
DIVID POLICY
The Company declared dividends of 6.5 pence per Ordinary Share
in respect of the year ended 31 December 2020 (2019: 6.5 pence per
Ordinary Share). These dividends are recognised in the Consolidated
Statement of Changes in Equity when declared, which is usually
within one month after the end of the financial period to which
they relate. Dividends are usually paid within one month of the
declaration date.
The Company may pay dividends out of reserves provided that the
Board of Directors is satisfied on reasonable grounds that the
Company will, immediately after payment, satisfy the solvency test
(as defined in the Companies (Guernsey) Law, 2008, as amended), and
satisfy any other requirement in its memorandum and articles.
As announced on 24 July 2020, from 1 January 2021 the Board
intends to target a dividend of 5.5 pence per annum (payable
quarterly) which reflects the broader lower interest rate
environment. This will provide a more sustainable level of dividend
which should be fully covered by earnings whilst ensuring the
Company maintains strong credit discipline. For the year ended
December 2020 6.5 pence was paid out in dividends which was covered
0.9x by earnings (excluding unrealised FX gains and losses). The
Company maintains a dividend reserve (within retained earnings)
built up over several years which was partially utilised to ensure
dividends were not paid out of capital.
INVESTMENT OUTLOOK AND MARKET SUMMARY
Many people were happy to wave good-bye to 2020's troubles as we
entered 2021. While there is still some way to go dealing with
COVID-19, the balance of news flow and sentiment since the
beginning of 2021 has continued to be positive with better than
expected vaccine timing and efficacy, an ultimately orderly
handover of the US Presidency and significant continued stimulus.
The vaccine roll-out in the UK has been a particular success. There
are residual uncertainties including the impacts of Covid-19
mutations, the slower roll out of vaccines in Europe and the timing
of easing of continuing lockdowns both in the UK and Europe.
Markets are signalling that taken altogether the outlook is better
than at the end of 2020 with the Dow Jones Industrial Average, the
S&P 500 and Dax all hitting new all-time highs in early
March.
The agreement of the trade deal with Europe was a landmark in
the Brexit process which has delivered some elements of certainty,
but it will take longer to understand the full impacts of the UK
leaving the EU. In particular details around financial services
have been delayed. While equivalence arrangements are likely to
simplify matters significantly, the devil is often in the detail.
Tariff free trade appears to be a success in principle but it also
remains to be seen whether the red-tape introduced for trade
between Europe and the UK creates its own barriers.
In the real estate markets, big box and last mile logistics and
residential were the clear winners of 2020. Office and student
accommodation have been subject to more nuanced case by case
effects and hospitality and retail have faced the biggest
challenges.
Over recent months, the outlook has become significantly clearer
for hotels. As lockdowns ease we expect a rapid rebound in domestic
tourism. The population is keen to go on holidays, concerts and
events and with high savings rates during lockdowns people have the
cash and are ready to spend. This demand will focus first
domestically and then to short haul international resorts as
practicalities allow. Long haul tourism, corporate and conference
business are likely to take longer to resume.
While hotel investment volumes were down sharply in 2020, we are
also now seeing a marked increase in investor sentiment in both
hotel equity and debt. We have already tracked over 50 hotels
transacting in Europe in the first two months of 2021.
While the 2020 sector themes are likely to continue in 2021,
taking the longer view there are likely to be opportunities for the
right assets with well thought out and well capitalised business
plans in all sectors.
Interest rates remain stable with Sterling Libor at 0.08% per
cent and the curve remaining extremely flat with the Sterling
5-year swap rate at only 0.52% per cent. With rates so low
investors are keen to find yield which has supported record
European issuance in both investment grade and non-investment grade
credit in 2020. Yields in the high yield market have been near or
around all-time lows.
In real estate lending, 2020 volumes were down significantly. As
we move in to 2021 we expect market conditions to become more
liquid as the market adjusts to the COVID-19 and post COVID-19
environments. While we expect dislocations to remain in the market
during 2021, we are seeing willingness from the market to engage on
all asset classes also including hotels and retail. The lending
appetite is coming from diverse sources reflecting an increasingly
fragmented market. There continues to be a significantly lower
participation from balance sheet bank lenders particularly for
development financing and for financing other non-vanilla business
plans and asset classes. We see this pattern persisting as a
long-term theme that will support the Group's strategy of sourcing
attractive new investment opportunities in 2021 and beyond.
INVESTMENT DEPLOYMENT
As at 31 December 2020, the Group had investments (excluding
accrued interest) and commitments of GBP490.1 million (Sterling
equivalent at year-end exchange rates) as follows:
Sterling Sterling
Sterling Total (Drawn
Transaction equivalent equivalent unfunded
and Unfunded)
balance (1) commitment (1)
Hospitals, UK GBP25.0 m - GBP25.0 m
Hotel & Residential, UK GBP49.9 m - GBP49.9 m
Office Scotland GBP4.8 m GBP0.2 m GBP5.0 m
Office, London GBP13.3 m GBP7.3 m GBP20.6 m
Residential, London GBP24.5 m GBP1.1 m GBP25.6 m
Hotel, Oxford GBP16.7 m GBP6.3 m GBP23.0 m
Hotel, Scotland GBP27.2 m GBP15.5 m GBP42.7 m
Hotel, North Berwick GBP10.5 m GBP4.5 m GBP15.0 m
Logistics Portfolio, UK (2) GBP12.0 m - GBP12.0 m
Total Sterling Loans GBP183.9 m GBP34.9 m GBP218.8 m
Three Shopping Centres, Spain GBP33.3 m - GBP33.3 m
Shopping Centre, Spain GBP15.4 m - GBP15.4 m
Hotel, Dublin GBP54.2 m - GBP54.2 m
Hotel, Spain GBP47.7 m GBP1.3 m GBP49.0 m
Office & Hotel, Madrid, Spain GBP16.7 m GBP0.9 m GBP17.6 m
Mixed Portfolio, Europe GBP29.5 m - GBP29.5 m
Mixed Use, Dublin GBP3.2 m GBP10.1 m GBP13.3 m
Office Portfolio, Spain GBP19.3 m GBP2.0 m GBP21.3 m
Office Portfolio, Ireland GBP31.8 m - GBP31.8 m
Logistics Portfolio, Germany (2) GBP5.9 m - GBP5.9 m
Total Euro Loans GBP257.0 m GBP14.3 m GBP271.3 m
Total Portfolio GBP440.9 m GBP49.2 m GBP490.1 m
(1) Euro balances translated to sterling at period end exchange
rates.
(2) Logistics Portfolio, UK and Logistics Portfolio, Germany is
one single loan agreement with Sterling and Euro tranches.
During the financial year, the following significant investment
activity occurred (included in the table above):
New Loans
The table below shows new commitments made in 2020 together with
amounts funded under both the new commitments and under the
existing commitments.
Period of New Funded
Commitment
Commitments (1) in 2020 (2)
Office Portfolio, Ireland January 2020 GBP29.9 m GBP29.9 m
Hotel, Berwick February 2020 GBP15.0 m GBP10.5 m
Residental, London (extension) February 2020 GBP10.0 m GBP10.0 m
Logistics Portfolio, UK June 2020 GBP12.0 m GBP12.0 m
Logistics Portfolio, Germany June 2020 GBP5.9 m GBP5.9 m
Hotel, Scotland Pre 2020 (extended in 2020) GBP1.3 m GBP1.3 m
Hotel, Spain Pre 2020 - GBP19.9 m
Office, Scotland Pre 2020 - GBP0.3 m
Office, London Pre 2020 - GBP0.7 m
Residential, London Pre 2020 - GBP4.6 m
Mixed use, Dublin Pre 2020 - GBP2.4 m
Office Portfolio, Spain Pre 2020 - GBP0.4 m
Total GBP74.1 m GBP97.8 m
(1) Euro amounts converted at rate on date of first loan
drawdown.
(2) Euro amounts converted at rate of each drawdown.
Loan Upsize: Hotel & Residential, UK:
On 27th February 2020 the Group also committed to fund a GBP20.0
million upsize to an existing fixed rate mezzanine loan to support
the development of a mixed-use scheme in London. Starwood Property
Trust, Inc (through a wholly owned subsidiary) is participating in
50 per cent of the loan amount, providing the Group with a net
commitment of GBP10.0 million. The remaining loan term at the date
of the extension was 1.75 years with a 1 year extension option.
New Loan: Logistics, UK and Germany:
On 17 June 2020, the Group closed an investment in the funding
of a EUR71.9 million, 36 month floating rate senior loan secured by
a portfolio of industrial/logistics assets in the UK and Germany.
The investment has been made alongside Starwood Property Trust, Inc
(through a wholly owned subsidiary) with the Group participating in
EUR20 million (27.8 per cent) of the senior loan amount. The Group
expects the transaction to generate attractive risk-adjusted
returns, in line with its stated investment strategy.
Extension: Hotel, Scotland: In August 2020, the Group increased
(and funded) the total commitment to this loan by an additional
GBP1.3 million to allow the borrowers to acquire three additional
assets in the same perimeter as the hotel which will add 9 keys
when refurbished.
New Loan, Office Portfolio, Ireland: on 2 January 2020, the
Group committed to an investment in a c. 6 year floating rate loan
secured by a portfolio of assets in Ireland, together with Starwood
Property Trust, Inc (through a wholly owned subsidiary)
participating in 50 per cent of the mezzanine loan amount,
providing the Group with a net commitment of EUR35.15 million. The
portfolio consists of 12 properties in Central Dublin with
primarily office and some small amounts of retail and residential
space totalling over 600,000 sqf in total.
New Loan: Hotel, North Berwick, Scotland: On 12th February 2020,
the Group committed to fund a hotel acquisition financing for a
total commitment of GBP15.0 million. The sponsor is a repeat
borrower for the Group. The financing, which has been provided in
the form of a significant initial advance to finance an asset
acquisition together with a smaller capex facility, will support
the sponsor's capital expenditure for improvement and rebranding of
the hotel. The day one advance amount is GBP10.5 million whilst the
total commitment is GBP15.0 million. The loan is for a term of 5
years.
Repayments
The following loans were repaid in full during the year:
Month Amount (1) Reason
Office, Paris February GBP13.4 m Repayment from borrower equity
Mixed use Development, South East UK March GBP0.7 m Completion of sales
Credit Linked Notes June GBP21.8 m Repayment by issuers
Total GBP35.9 m
(1) Sterling equivalent for Euro loans using the spot rate on
date of repayment.
The repayment of the Credit Linked Notes in the above table was
earlier than the contractual settlement date but was anticipated
given the relatively high yield that was being earned on the credit
linked notes compared to the current market conditions.
In addition to the above full repayments, the Group continued to
receive scheduled (i.e. contractual) and unscheduled amortisation
on other loans as borrowers continue to execute their business
plans in the amounts shown in the table below.
Amount(1) Reason
Residential, London GBP29.1 m Sale of selected assets in line with business plan
Mixed Portfolio, Europe GBP15.4 m Sale of selected assets in line with business plan
Office Portfolio, Spain GBP0.4 m Sale of small asset
Three Shopping Centres, Spain GBP0.6 m Scheduled amortisation
Total GBP45.5 m
(1) Sterling equivalent for Euro loans using the spot rate on
date of repayment.
The average remaining term of the loans is 2.4 years, which is
split as shown in the table below.
Remaining years to contractual maturity (1) Funded loans % of invested
(GBPm)(2) portfolio
0 to 1 years 79.2 18.0%
1 to 2 years 94.7 21.5%
2 to 3 years 155.8 35.3%
3 to 5 years 111.2 25.2%
Total 440.9 100.0%
(1) excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
(2) excluding accrued interest.
PORTFOLIO PERFORMANCE UPDATE
All loan interest and scheduled amortisation payments up to 31
December 2020 have been paid in full and on time, either in
accordance with the original or the revised contractual terms of
the loans.
Notwithstanding the Covid 19 pandemic-related disruption
continuing to be experienced, the portfolio continues to be robust
and portfolio performance is in line with current expectations. In
the sectors that are most impacted, hospitality and retail,
borrowers continue to pay loan interest and capital repayments
despite the latest lockdown measures.
Key updates up to 31 December 2020 are outlined below. Further
updates throughout the year will be provided via the quarterly
factsheets in order to keep shareholders informed.
Hospitality (35.7 per cent of Investment Portfolio) ? The
largest hotel exposure (Hotel, Dublin), at 27 per cent of
hospitality exposure has benefitted from a licence in
place to the Irish Government's Health Service Executive since
early in the pandemic and continues to benefit. This
has de-risked the impact of the pandemic in the medium term. In
addition, the sponsor has continued to work on
their wider business plan in relation to the extensive land
adjacent to the hotel that also forms part of the
loan's collateral. In the last quarter, the sponsor has been
successful in achieving planning permission for a
residential scheme of over 220 apartments on a small site that
forms part of the wider land collateral. This has
enhanced the value and future liquidity of this site. ? The UK
hotel exposures (Hotel Oxford, Scotland and North Berwick,
accounting for 35 per cent of hotels in the
portfolio) all successfully re-opened during the summer
following the lifting of domestic travel restrictions.
Trading was generally positive despite the backdrop of the wider
market uncertainty. This reflected the domestic
demand for staycation breaks in the UK, particularly for leisure
destinations with nearby outdoor facilities such
as golf which is offered by the Hotel Scotland and North
Berwick. This trend is expected to continue into 2021 with
market commentators such as VisitBritain.org forecasting that
the recovery of domestic tourism in 2021 will be
significantly stronger than inbound tourism. While 2021 is not
expected to recover to pre-Covid-19 levels and
international visitor numbers will be down materially,
VisitBritain.org (as of mid December 2020) forecast that the
value of domestic tourism spending could reach up to 84 per cent
of 2019 levels by December 2021. All three of
these UK hotels have comprehensive re-positioning capex plans in
place, which sees each sponsor injecting material
additional equity into the properties. In line with the
underwritten capex plan, each hotel has now closed and
refurbishment projects are underway as planned. The hotels will
re-open during spring/summer 2021 upon the later
completion of the refurbishment projects and lifting of UK
pandemic restrictions. Each hotel will have an
attractive new brand and a fully refurbished offering which is
expected to be well placed to benefit from pent up
UK domestic leisure travel demand. ? Hotel, Spain (accounting
for 30 per cent of hospitality exposure) completed a heavy
refurbishment project in late
summer 2020 and opened for a very successful short marketing
period before closing for winter 2020/21. The
underwritten business plan and hotel operating model sees this
hotel closing annually during the winter months in
any event. Ordinarily the hotel would open in April 2021,
however contingency plans are in place to delay this
should substantial travel restrictions remain in place by that
time. The sponsor remains well capitalised to fund
any operational cash shortfalls in the event of further delays
to opening. Forward customer bookings for summer
2021 are strong and the hotel is expected to trade well once the
pandemic restrictions are lifted.
Retail (12.9 per cent of Investment Portfolio) ? Retail
re-opened across Europe during summer 2020 following the lifting of
local restrictions, before new measures
to reduce the autumn / winter virus infection rates were
re-introduced. By September 2020 we saw encouraging signs
of footfall and sales recovery, whereby on the Group's largest
retail loan exposure (a portfolio of three shopping
centres), footfall had recovered on a weighted average basis to
approximately 92 per cent of the prior year
comparable month. ? While new restrictions introduced in late Q4
2020 and early 2021 have meant that footfalls and sales have
again
materially reduced, the sponsors have worked intensively to
support tenants by signing specific pandemic related
discounts in line with wider industry practice. As part of these
pandemic related tenant measures, the sponsors
have also extended the term under certain leases, which is
advantageous and provides greater certainty of future
income. ? A revised, independent valuation of the Spain retail
loan assets has been instructed by the Group post year-end.
Initial indicative output confirms that the Group's loan
exposure continues to have adequate headroom against the
valuation basis but values have declined in line with
expectation and the wider market trend given the current lack
of certainty and liquidity for retail assets. Once these
valuation reports are finalised, the Group will reflect
the formal updated valuation basis in post year-end reporting.
We expect the impact on the overall portfolio's last
Sterling LTV to be low. ? Loans with retail exposure continue to
have adequate cash reserves to pay interest, with detailed business
plans in
place to deal with any underlying income displacement related to
granting tenants concessions during shutdown and
recovery periods.
Construction & Heavy Refurbishment (21.2 per cent of
Investment Portfolio) ? The Group's construction and heavy
refurbishment exposure has decreased by 28 per cent since mid- 2020
with the
successful completion of the Hotel, Spain project in late summer
and completion of the Residential, London project. ? While some
construction programme disruption has been experienced by mandated
site shutdowns and the adjustment of
work practices to new Covid-19 related industry regulations, all
sites re-opened in summer 2020. Despite the latest
restrictive measures introduced in December 2020, construction
sites in the UK remain open. Construction sites in
the Republic of Ireland were mandated by the government to close
on 8th January 2021, however we note that the
Group's exposure to Irish construction loans is limited to under
1 per cent of loans invested as of 31 December
2020. In any event all construction loans remain adequately
capitalised with funding in place to complete projects. ? Please
note that the construction & heavy refurbishment exposure noted
above will include assets also included in
Hospitality and in Office, Industrial, Logistics &
Residential.
Office, Industrial, Logistics & Residential (45.5 per cent
of Investment Portfolio) ? These sectors continue to display
resilient characteristics in terms of rent collection. ? All of the
Group's material exposure to residential is either under
construction or newly completed, held for-sale
product. Residential sales of both completed and under
construction units have continued throughout the pandemic.
Factors such as stamp duty reductions , weak Sterling and
continued foreign investor interest in the capital have
assisted in incentivising purchasers to transact. Average
selling prices continue to track ahead of underwritten
values on the residential portfolio. ? The Logistics and
Industrial portfolios are proving to be very robust with property
sales continuing to transact
during the second half of 2020 at prices ahead of underwritten
levels.
EVENTS AFTER THE REPORTING PERIOD
No new investments have been made since the year end.
The following amounts have been drawn under existing
commitments, up to 25 March 2021:
Local Currency
Hotel, Scotland GBP3,867,454
Hotel, Spain EUR1,442,051
Mixed Use, Dublin EUR279,309
Office Portfolio, Spain EUR214,854
Office, London GBP154,634
The following loan amortisation (both scheduled and unscheduled)
has been received since the year-end up to 25 March 2021:
Local Currency
Residential, London GBP20,959,870
Logistics Portfolio, UK GBP7,808,392
Mixed Portfolio, Europe EUR1,765,799
Logistics Portfolio, Germany EUR644,207
Shopping Centre, Spain EUR317,344
The Company has repaid GBP14.0 million of funding on its credit
facilities following the amortisation of the loans above. In
addition, the Company has drawn GBP3.0 million of funding on its
credit facilities to fund the amounts drawn under existing
commitments. At 25 March 2021 the amounts drawn under each facility
are: ? Morgan Stanley - GBP8.5 million ? Lloyds - GBP0.0
million
No loans have been repaid in full since the year-end up to 25
March 2021. The term of the loan provided to Hotel &
Residential, UK (GBP49.9m) has been extended by one year to
December 2022.
On 22 January 2021 the Directors declared a dividend in respect
of the fourth quarter of 1.625 pence per Ordinary Share payable on
05 March 2021 to shareholders on the register at 04 February
2021.
Starwood European Finance
Partners Limited | Investment Manager
25 March 2021
Governance
Board of Directors
STEPHEN SMITH | Non-executive Chairman - Chairman of the
Board
Stephen is Chairman of The PRS REIT which currently trades on
the SFS of the London Stock Exchange. He is also Chairman of AEW UK
Long Lease REIT plc which trades on the Main Market of the London
Stock Exchange. Previously, he was the Chief Investment Officer of
British Land Company PLC, the FTSE 100 real estate investment trust
from January 2010 to March 2013 with responsibility for the group's
property and investment strategy. He was formerly Global Head of
Asset Management and Transactions at AXA Real Estate Investment
Managers, where he was responsible for the asset management of a
portfolio of more than EUR40 billion on behalf of life funds,
listed property vehicles, unit linked and closed end funds. Prior
to joining AXA in 1999 he was Managing Director at Sun Life
Properties for five years. Stephen is a UK resident.
JOHN WHITTLE | Non-executive Director - Audit Committee Chairman
and Senior Independent Director
John is a Fellow of the Institute of Chartered Accountants in
England and Wales and holds the Institute of Directors Diploma in
Company Direction. He is a Non-Executive Director of Globalworth
Real Estate Investments Limited, GLI Finance Ltd (both 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.
SHELAGH MASON | NON-EXECUTIVE DIRECTOR (appointed 1 September
2020)
Shelagh Mason is a solicitor specialising in English commercial
property who retired as a consultant with Collas Crill LLP on 31st
October 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 is a Non-Executive Director of the Renewables
Infrastructure Fund a FTSE 250 company. In addition to the Company
she has this year taken up a non-executive position with Ruffer
Investment Company Limited. Previously Shelagh was a member of the
board of directors of Standard Life Investments Property Income
Trust, a property fund listed on the London Stock Exchange for 10
years until December 2014. She retired from the board of Medicx
Fund Limited, a main market listed investment company investing in
primary healthcare facilities in 2017 after 10 years on the board.
She is a past Chairman of the Guernsey Branch of the Institute of
Directors and a member of the Chamber of Commerce, the Guernsey
International Legal Association and she also holds the IOD Company
Direction Certificate and Diploma with distinction. Shelagh is a
resident of Guernsey.
CHARLOTTE DENTON | NON-EXECUTIVE DIRECTOR (appointed 1 January
2021)
During Charlotte's executive career she worked in various
locations through roles in diverse organisations, including KPMG,
Rothschild, Northern Trust, a property development start up and a
privately held financial services group. She has served on boards
for over fourteen years and is currently a Non-Executive Director
of various entities including Butterfield Bank (Guernsey) Limited,
the GP boards of Private Equity groups Cinven and Hitec and the
Investment Manager for Next Energy. 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. Charlotte is a resident
of Guernsey.
Report of the Directors
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The Principal Activities and Investment Objective are fully
detailed in the Objective and Investment Policy section on pages 2
to 5.
STRUCTURE
The Company was incorporated with limited liability in Guernsey
under the Companies (Guernsey) Law, 2008, as amended, on 9 November
2012 with registered number 55836, and has been authorised by the
Guernsey Financial Services Commission as a registered closed-ended
investment company. The Company's Ordinary Shares were admitted to
the premium segment of the Financial Conduct Authority's ("FCA")
Official List and to trading on the Main Market of the London Stock
Exchange as part of its IPO which completed on 17 December 2012.
Further issues have taken place since IPO and are listed under
"Capital" below. The issued capital during the year comprises the
Company's Ordinary Shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l
(indirectly wholly-owned via a 100% shareholding in Starfin Public
Holdco 1 Limited), Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l.
(both indirectly wholly-owned via a 100% shareholding in Starfin
Public Holdco 2 Limited).
References to the Group refer to the Company and its
subsidiaries.
DIVID POLICY
The Company had a target dividend of 6.5 pence per Ordinary
Share per annum, based on quarterly dividend payments. From 1
January 2021 the Board intends to target a dividend of 5.5 pence
per annum (payable quarterly), which reflects the broader lower
interest rate environment.
DIVIDS PAID
The Company declared dividends of 1.625 pence for each of the
calendar quarters of 2020. The Company paid a total of
GBP26,824,860 in respect of 2020 (6.5 pence per Ordinary share)
(2019: GBP25,617,761: 6.5 pence per Ordinary Share).
BUSINESS REVIEW
The Group's performance during the year to 31 December 2020, its
position at that date and the Group's future developments are
detailed in the Chairman's Statement, the Strategic Report and the
Investment Manager's Report on pages 8 to 29.
CAPITAL
As part of the Company's IPO completed on 17 December 2012,
228,500,000 Ordinary Shares of the Company, with an issue price of
100 pence per share, were admitted to the premium segment of the UK
Listing Authority's Official List and to trading on the Main Market
of the London Stock Exchange.
The following issues have been made since IPO:
Number of Price (pence per
Admission Date
Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
15 May 2019 38,200,000 104.75
As disclosed in the Chairman's Statement on page 10, during the
year ended 31 December 2020 the Company bought back 3,648,125
Ordinary Shares at an average price of 86.9 pence per share.
Following these issues and buybacks, the Company had an issued
share capital consisting of 409,571,273 Ordinary Shares as at 31
December 2020. Since the year end the Company has bought back
660,000 Ordinary Shares at an average price of 89.54 pence per
share. Ordinary shares bought back are held in treasury.
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders
pursuant to the FCA's Disclosure and Transparency Rules ("DTR") is
published via a Regulatory Information Service and is available on
the Company's website. The Company has been notified under Rule 5
of the DTR of the following holdings of voting rights in its shares
as at 31 December 2020 and as at the date of this report.
% holding of Ordinary % holding of Ordinary
Name Shares at Shares at
31 December 5 March 2021
2020 (the latest available)
BlackRock 19.59 19.63
Close Brothers Asset Management 7.42 7.58
Schroder Investment Management 7.23 7.29
SG Private Banking 6.40 6.22
Quilter Cheviot Investment Management 5.05 4.83
Fidelity International 4.90 4.86
Premier Miton Investors 4.63 4.64
Waverton Investment Management 4.47 4.42
Transact (EO) 3.48 3.54
Liontrust Asset Management 3.36 3.30
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown opposite:
Ordinary Ordinary
Name Shares at Shares at
31 December 2020 31 December 2019
Stephen Smith 78,929 78,929
John Whittle 23,866 11,866
Jonathan Bridel (resigned 31 December 2020) and Spouse 11,866 11,866
Shelagh Mason (appointed 1 September 2020) 17,688 -
The Directors have adopted a code of Directors' dealings in
Ordinary Shares, which is based on EU Market Abuse Regulation
("MAR"). MAR came into effect across the EU (including the UK) on 3
July 2016. The Board is responsible for taking all proper and
reasonable steps to ensure compliance with MAR by the Directors and
reviews such compliance on a regular basis.
EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting period are contained in
note 23 to the consolidated financial statements.
INDEPENT AUDITOR
The Board of Directors elected to appoint PricewaterhouseCoopers
CI LLP as Auditor to the Company at the inaugural meeting of the
Company on 22 November 2012 and they have been re-appointed at each
AGM held since. PricewaterhouseCoopers CI LLP has indicated their
willingness to continue as Auditor. The Directors, at the
recommendation of the Audit Committee, will place a resolution
before the AGM to re-appoint them as independent Auditor for the
ensuing year, and to authorise the Directors to determine their
remuneration.
INVESTMENT MANAGER AND SERVICE PROVIDERS
The Investment Manager during the year was Starwood European
Finance Partners Limited (the "Investment Manager"), incorporated
in Guernsey with registered number 55819 and regulated by the GFSC
and Alternative Investment Fund Management Directive. The
Investment Manager has appointed Starwood Capital Europe Advisers,
LLP ("the Investment Adviser"), an English limited liability
partnership authorised and regulated by the FCA, to provide
investment advice pursuant to an Investment Advisory Agreement.
The administration of both the Company and Investment Manager
was delegated to Apex Fund and Corporate Services (Guernsey)
Limited (the "Administrator") during the year.
DISCOUNT CONTROL
The Company maintains share repurchase powers that allow the
Company to repurchase Ordinary Shares in the Market up to 14.99 per
cent of the share capital, subject to annual renewal of the
Shareholder authority. In addition, the Company may raise fresh
capital including through a placing programme (subject to the
publication of a prospectus of the Company) and through
opportunistic tap issues. Tap issues enable issuers such as the
Company (subject to obtaining the requisite Shareholder
authorities) to issue up to 20 per cent of the securities already
listed by way of such issues over 12 months without any requirement
to publish a prospectus.
DISCOUNT-TRIGGERED REALISATION
If the Ordinary Shares trade at an average discount to Net Asset
Value per Share of five per cent or more during the six-month
period to the end of a calendar year, the Directors at their
absolute discretion may put a realisation offer to Shareholders,
subject to applicable law including the requirements of the
Companies (Guernsey) Law, 2008 (a "Realisation Offer").
The provisions relating to the Realisation Offer will first
apply by reference to the last six months of the financial year
ending 31 December 2022 and the Realisation Vote mechanism would
apply (where the discount-triggered realisation mechanism has not
been activated) by no later than 28 February 2023 and in each case
on successive five year anniversaries of such dates.
REALISATION VOTE
In the event that the discount-triggered realisation mechanism
is not activated, the Directors shall exercise their discretion
under the Articles to put forward a realisation vote (as an
ordinary resolution) to Shareholders by no later than 28 February
2023. If Shareholders vote in favour of this resolution, then the
Company will procure that a Realisation Offer on substantially the
same terms as that described above is offered to Shareholders.
Following the receipt of all elections, if either: (i) more than 75
per cent of the Ordinary Shares then in issue were elected for
realisation; or (ii) the NAV of the Company following the
realisation would be less than GBP100 million, the Directors may
exercise their discretion not to proceed with the Realisation Offer
and instead put forward alternative proposals which are no less
favourable to electing Shareholders and which may include the
reorganisation or winding up of the Company.
If Shareholders vote against the realisation vote, then the
Company will continue in existence as it is then constituted
without any liquidity event for Shareholders.
SHARE BUYBACKS
The Company renewed its authority at the recent AGM to purchase
in the market up to 14.99 per cent of the Ordinary Shares in issue
on 8 June 2020 at a price not exceeding: (i) five per cent above
the average of the mid-market values of the Ordinary Shares for the
five Business Days before the purchase is made; or (ii) the higher
of the last independent trade or the highest current independent
bid for the Ordinary Shares.
The Directors will give consideration to repurchasing Shares
under this authority, but are not bound to do so, where the market
price of an Ordinary Share trades at more than 7.5 per cent below
the Net Asset Value per Share for more than 3 months, subject to
available cash not otherwise required for working capital purposes
or the payment of dividends in accordance with the Company's
dividend policy.
If not previously used, this authority shall expire at the
conclusion of the Company's AGM in 2021. The Directors intend to
seek annual renewal of this buyback authority from Shareholders
each year at the Company's AGM.
As included on page 31 and in the Chairman's statement on page
10 the Company has bought back 3,648,125 shares during the year
ended 31 December 2020 at an average price per share of 86.9 pence.
These shares are held in treasury.
John Whittle | Director
25 March 2021
Directors' Remuneration Report
REMUNERATION POLICY & COMPONENTS
The Board endeavours to ensure the remuneration policy reflects
and supports the Company's strategic aims and objectives throughout
the year under review. It has been agreed that, due to the small
size and structure of the Company, a separate Remuneration
Committee would be inefficient; therefore, the Board as a whole is
responsible for discussions regarding remuneration.
As per the Company's Articles of Incorporation, all Directors
are entitled to such remuneration as is stated in the Company's
Prospectus or as the Company may determine by ordinary resolution;
to not exceed the aggregate overall limit of GBP200,000. Subject to
this limit, it is the Company's policy to determine the level of
Directors' fees, having regard for the level of fees payable to
non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of responsibilities related
to the Board, Management Engagement Committee and Audit Committee
and the time dedicated by each Director to the Company's affairs.
Base fees are set out on the opposite table.
Total Fee 2020 Total Fee 2019
Director
GBP GBP
Stephen Smith 50,000 50,000
John Whittle 45,000 45,000
Jonathan Bridel (resigned 31 December 2020) 42,500 42,500
Shelagh Mason (appointed 1 September 2020) 13,333 -
Aggregate fees 150.833 137,500
Aggregate expenses 1,731 2,828
Total 152,564 140,328
As outlined in the Articles of Incorporation, the Directors may
also be paid for all reasonable travelling, accommodation and other
out-of-pocket expenses properly incurred in the attendance of Board
or Committee meetings, general meetings, or meetings with
shareholders or debentures of the Company or otherwise in discharge
of their duties; and all reasonable expenses properly incurred by
them seeking independent professional advice on any matter that
concerns them in the furtherance of their duties as Directors of
the Company.
No Director has any entitlement to pensions, paid bonuses or
performance fees, has been granted share options or been invited to
participate in long-term incentive plans. No loans have been
originated by the Company for the benefit of any Director.
None of the Directors have a service contract with the Company.
Each of the Directors has entered into a letter of appointment with
the Company. The letters of appointment were reviewed and amended
in the prior year by an external party to ensure that they were in
line with market standards prevailing at the time. Each Director is
subject to annual re-election.
The Directors do not have any interests in contractual
arrangements with the Company or its investments during the year
under review, or subsequently. Each appointment can be terminated
in accordance with the Company's Articles and without compensation.
As outlined in the letters of appointment, each appointment can be
terminated at the will of both parties with one month's notice
either by (i) written resignation; (ii) unauthorised absences from
Board meetings for 12 months or more; (iii) written request of the
other Directors; or (iv) a resolution of the shareholders.
Directors' and Officers' liability insurance cover is maintained
by the Company but is not considered a benefit in kind nor
constitutes a part of the Directors' remuneration. The Company's
Articles indemnify each Director, Secretary, agent and officer of
the Company, former or present, out of assets of the Company in
relation to charges, losses, liabilities, damages and expenses
incurred during the course of their duties, in so far as the law
allows and provided that such indemnity is not available in
circumstances of fraud, wilful misconduct or negligence.
By order of the Board
John Whittle | Director
25 March 2021
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium
Listing on the Official List and admission to trading on the Main
Market for Listed Securities of the London Stock Exchange, the
Company is required to comply with the principles of the UK
Corporate Governance Code dated July 2018 ("UK Code").
As an AIC member, the Board has also considered the principles
and provisions of the AIC Code of Corporate Governance dated
February 2019 ("AIC Code"). The AIC Code addresses all the
principles set out in the UK Code, as well as setting out
additional principles and provisions on issues of specific
relevance to the Company. The AIC Code has been endorsed by the
Financial Reporting Council as ensuring investment company boards
fully meet their obligations to the UK Code and LR 9.8.6 of the
Listing Rules.
Except as disclosed within the report, the Board is of the view
that throughout the year ended 31 December 2020, the Company
complied with the principles and provisions of the AIC Code. Key
issues affecting the Company's corporate governance
responsibilities, how they are addressed by the Board and
application of the AIC Code are presented below. There is no
information that is required to be disclosed under Listing Rule
9.8.4.
The UK Code includes provisions relating to: the role of the
chief executive; executive Directors' remuneration; and the need
for an internal audit function which are not considered by the
Board to be relevant to the Company, being an externally managed
investment company. The Company has therefore not reported further
in respect of these provisions.
The Guernsey Financial Services Commission Finance Sector Code
of Corporate Governance ("GFSC Code") came into force in Guernsey
on 1 January 2012 and was amended in February 2016. The Company is
deemed to satisfy the GFSC Code provided that it continues to
conduct its governance in accordance with the requirements of the
AIC Code.
CHAIRMAN
Appointed to the permanent position of Chairman of the Board on
22 November 2012, Stephen Smith is responsible for leading the
Board in all areas, including determination of strategy, organising
the Board's business and ensuring the effectiveness of the Board
and individual Directors. He also endeavours to produce an open
culture of debate within the Board.
Prior to the Chairman's appointment, a job specification was
prepared which included an assessment of the time commitment
anticipated for the role. Discussions were undertaken to ensure the
Chairman was sufficiently aware of the time needed for his role and
agreed to upon signature of his letter of appointment. Other
significant business commitments of the Chairman were disclosed to
the Company prior to appointment to the Board and were publicly
disclosed in the Company's Prospectus dated 28 November 2012. Any
subsequent changes have been declared. Certain of these
commitments, and their subsequent changes, can be identified in his
biography on page 30.
The effectiveness and independence of the Chairman is evaluated
on an annual basis as part of the Board's performance evaluation;
the Management Engagement Committee Chairman is tasked with
collating feedback and discussing with the Chairman on behalf of
the rest of the Board.
As per the Company's Articles, all Directors, including the
Chairman, must disclose any interest in a transaction that the
Board and Committees will consider. To ensure all Board decisions
are independent, the said conflicted Director is not entitled to
vote in respect of any arrangement connected to the interested
party but may be counted in the quorum.
STEPHEN SMITH | Chairman
BOARD
Independence and Disclosure
The Chairman confirms the initial Board were selected prior to
the Company's launch and were able to assume all responsibilities
at an early stage, independent of the Investment Manager and
Investment Adviser. During the year, Shelagh Mason was appointed as
non-executive Director on 1 September 2020 in accordance with the
Boards Succession Planning Memorandum. The Memorandum states that a
new Director will be appointed to the Board during the second half
of 2020 giving them time to get up to speed prior to Jonathan
Bridel standing down from the Board in December 2020. In addition,
the Company decided that it is appropriate to appoint an additional
Director to the Board to further improve the Company's skills,
experience and diversity as well as to assist in the succession
process when Stephen Smith retires from the Board in December 2021
and when John Whittle retires from the Board in December 2023 (as
proposed in the Chairman's Statement on page 10). Charlotte Denton
was duly appointed on 1 January 2021. The Board is composed
entirely of non-executive Directors, who meet as required without
the presence of the Investment Manager or service providers to
scrutinise the achievement of agreed goals, objectives and monitor
performance. Through the Audit Committee and the Management
Engagement Committee they are able to ascertain the integrity of
financial information and confirm that all financial controls and
risk management systems are robust, and analyse the performance of
the Investment Manager and other service providers on a regular
basis.
Following the annual performance evaluation, it was deemed that
the Directors had been proven to challenge the Investment Manager
throughout the year under review, as minuted and recorded,
therefore for the purposes of assessing compliance with the AIC
Code, the Board as a whole considers that each Director is
independent of the Investment Manager and free from any business or
other relationship that could materially interfere with the
exercise of their independent judgment. If required, the Board is
able to access independent professional advice. The Investment
Manager is also requested to declare any potential conflicts
surrounding votes, share dealing and soft commissions on an annual
basis to the Board to help with the assessment of investments.
Open communication between the Investment Manager and the Board
is facilitated by regular Board meetings, to which the Investment
Manager is invited to attend and update the Board on the current
status of the Company's investments, along with ad hoc meetings as
required.
Coming to mutual agreement on all decisions, it was agreed that
the Board had acted in the best interests of the Company to the
extent that, if deemed appropriate, a Director would abstain or
have his objection noted, which would be reflected within the
minutes.
Similar to the process outlined above for the appointment of the
Chairman, a job specification was prepared for each initial
directorship which included an assessment of the time commitment
anticipated for the role to ensure each Director was aware of the
time commitment needed for the role. The Directors' other
significant business commitments were disclosed to the Company
prior to their appointment to the Board and were publicly disclosed
in the Company's Prospectus dated 28 November 2012. A similar
process was followed when the two new directors were appointed to
the Board this year as part of the succession planning outlined
above. Any subsequent changes have been declared. Certain of these
commitments can be identified in each Director's biography on page
30. Details of the skills and experience provided by each Director
can also be found in their biographies, alongside identification of
the role each Director currently holds in the Company.
The terms and conditions of appointment for non-executive
Directors are outlined in their letters of appointment and are
available for inspection by any person at the Company's registered
office during normal business hours and at the AGM for fifteen
minutes prior to and during the meeting. The letters of appointment
were reviewed in the prior year by an external party and amended to
ensure that they are in line with current market standards.
There is no executive Director function in the Company; all
day-to-day functions are outsourced to external service
providers.
Development
The Board believes that the Company's Directors should develop
their skills and knowledge through participation at relevant
courses. The Chairman is responsible for reviewing and discussing
the training and development of each Director according to specific
needs. Upon appointment, all Directors participate in discussions
with the Chairman and other Directors to understand the
responsibilities of the Directors, in addition to the Company's
business and procedures. The Company also provides regular
opportunities for the Directors to obtain a thorough understanding
of the Company's business by regularly meeting members of the
senior management team from the Investment Manager, Investment
Adviser and other service providers, both in person, by phone and
through virtual meetings.
Balance of the Board and Diversity Policy
It is perceived that the Board is well-balanced, with a wide
array of skills, experience and knowledge that ensures it functions
correctly and that no single Director may dominate the Board's
decisions. Appointing an additional Director as part of the
succession planning ensures stability during any transition
period.
The Board's position on diversity can be seen in the Strategic
Report on page 17. All Directors currently sit on all the
Committees, with the exception of the Chairman, who is not a member
of the Audit Committee; additionally, no single Director fills more
than one Committee chairmanship post.
Annual Performance Evaluation
The Board's balance is reviewed on a regular basis as part of a
performance evaluation review. Using a pre- determined template
based on the AIC Code's provisions as a basis for review, the Board
undertook an evaluation of its performance, and in addition, an
evaluation focusing on individual commitment, performance and
contribution of each Director was conducted. The Chairman then met
with each Director to fully understand their views of the Company's
strengths and to identify potential weaknesses. If appropriate, new
members are proposed to resolve any perceived issues, or a
resignation is sought. Following discussions and review of the
Chairman's evaluation by the other Directors, the Management
Engagement Committee Chairman reviewed the Chairman's performance.
Training and development needs are identified as part of this
process, thereby ensuring that all Directors are able to discharge
their duties effectively.
Given the Company's size and the structure of the Board, no
external facilitator or independent third party was used in the
performance evaluation. The need to appoint an external facilitator
is reviewed by the Board on an annual basis.
Re-election and Board Tenure
There is currently no Nominations Committee for the Company as
it is deemed that the size, composition and structure of the
Company would mean the process would be inefficient and
counterproductive. The Board therefore undertakes a thorough
process of reviewing the skill set of the individual Directors, and
proposes new, or renewal of current appointments to the Board.
Each Director is required to be elected by shareholders at the
AGM following his appointment by the Board. As part of the
recommendations of the AIC Code, the Directors put themselves
forward for annual re-election. In light of this, John Whittle and
Stephen Smith are therefore submitting themselves for re-election,
whilst Shelagh Mason and Charlotte Denton will have an election
vote at the AGM on 15 June 2021.
The Audit Committee Members and the Board confirm that all
Directors have proven their ability to fulfil all legal
responsibilities and to provide effective independent judgment on
issues of strategy, performance, resources and conduct. The Board
therefore has no hesitation in recommending to Shareholders that
all Directors are re-elected.
Appointment Process
The Directors appointment process involves identifying gaps and
needs in the Board's composition and then reviewing the skill set
of potential candidates with a view to making an appointment that
fills the identified gaps and needs. Following this process, the
Board formally appointed Shelagh Mason and Charlotte Denton in 2020
and announced the two appointments to the market in August 2020.
The Board engaged OSA Recruitment, an independent search
consultancy with no connection to the Company or its Directors, to
assist in the above appointments.
Succession Planning
The Company enters its ninth year in 2021 and the Board has been
mindful that a succession plan needs to be implemented. During Q4
2019, the Directors devised a Succession Planning Memorandum. The
Memo states that a new Director will be appointed to the Board
during the second half of 2020 giving them time to get up to speed
prior to Jonathan Bridel standing down from the Board in December
2020. Shelagh Mason was duly appointed on 1 September 2020.
In addition, the Company have decided that it is appropriate to
appoint an additional Director to the Board to further improve the
Company's skills, experience and diversity as well as to assist in
the succession process when Stephen Smith retires from the Board in
December 2021 and when John Whittle retires from the Board in
December 2023 (as proposed in the Chairman's Statement on page 10).
Charlotte Denton was duly appointed on 1 January 2021.
Upon the retirement of Stephen Smith from the Board, John
Whittle will probably be appointed as Chairman until his retirement
in December 2023.
In terms of the new appointments, the Directors believe that the
current composition of three Guernsey Directors and one Director
from the United Kingdom works well in terms of satisfying the
Company's requirements. The Board also intend to consider diversity
when making the new appointments to the Board. The Board will
consider the need to appoint a formal search contractor to assist
with the appointments of new directors.
At present the Directors wish to leave the succession and the
tenure policy of the Chairman open until Mr Whittle's departure
from the Board in 2023.
BOARD AND COMMITTEES
Board
Matters reserved for the Board include review of the Company's
overall strategy and business plans; approval of the Company's
half-yearly and annual report; review and approval of any
alteration to the Group's accounting policies or practices and
valuation of investments; approval of any alteration to the
Company's capital structure; approval of dividend policy;
appointments to the Board and constitution of Board Committees;
observation of relevant legislation and regulatory requirements;
and performance review of key service providers. The Board also
retains ultimate responsibility for Committee decisions; every
Committee is required to refer to the Board, who will make the
final decision.
Terms of reference that contain a formal schedule of matters
reserved for the Board of Directors and its duly authorised
Committee for decision has been approved and can be reviewed at the
Company's registered office.
The meeting attendance record is displayed on page 38 of the
Corporate Governance statement. The Company Secretary acts as the
Secretary to the Board.
Audit Committee
The Board has established an Audit Committee which was composed
of all the independent members of the Board other than Chairman of
the Board. The Chairman of the Board, although not a member of the
Committee, may still attend the meetings upon invitation by the
Audit Committee Chairman. The Audit Committee, its membership and
its terms of reference are kept under regular review by the Board,
and it is confident all members have sufficient financial skills
and experience, and competence relevant to the Company's sector.
John Whittle is the Audit Committee Chairman.
The Audit Committee met four times during 2020 (2019: three
times); the meeting attendance record is displayed on page 38. The
Company Secretary acts as the Secretary to the Audit Committee.
Owing to the size and structure of the Company, there is no
internal audit function. The Audit Committee has reviewed the need
for an internal audit function, and perceived that the internal
financial and operating control systems in place within the Company
and its service providers, for example as evidenced by the Report
on Controls at a Service Organisation ("SOC 1 Type 2 Report") on
the internal procedures of the Administrator, give sufficient
assurance that a sound system of internal control is maintained
that safeguards shareholders' investment and Company assets.
The Audit Committee is intended to assist the Board in
discharging its responsibilities for the integrity of the Company's
consolidated financial statements, as well as aiding the assessment
of the Company's internal control effectiveness and objectivity of
the external Auditors. Further information on the Audit Committee's
responsibilities is given in the Report of the Audit Committee on
page 42.
Formal terms of reference for the Audit Committee are available
at the registered office and on the Company's website and are
reviewed on a regular basis.
Management Engagement Committee
The Company has established a Management Engagement Committee
which comprises all the Directors, with Jonathan Bridel as the
Chairman of the Committee. Following Jonathan Bridel's resignation
on 31 December 2020, the Board will look to appoint a new Chairman
in 2021. The Management Engagement Committee's main function is to
review and make recommendations on any proposed amendment to the
Investment Management Agreement and keep under review the
performance of the Investment Manager; and undertake an assessment
of the Investment Manager's scope and responsibilities as outlined
in the service agreement and prospectus on a formal basis every
year. Discussions on the Investment Manager's performance are also
conducted regularly throughout the year by the Board. Reviews of
engagements with other service providers, such as the
Administrator, to ensure all parties are operating satisfactorily
are also undertaken by the Management Engagement Committee so as to
ensure the safe and accurate management and administration of the
Company's affairs and business and that they are competitive and
reasonable for Shareholders.
The Management Engagement Committee met once during 2020 (2019:
once) and undertook a review of the key service providers to the
Group and the Company, utilising a service provider questionnaire.
No material weaknesses were identified and the recommendation to
the Board was that the current arrangements were appropriate and
provided good quality services and advice to the Company and the
Group.
Formal terms of reference for the Management Engagement
Committee are available at the registered office and the Company's
website and are reviewed on a regular basis.
The Company Secretary acts as the secretary to the Management
Engagement Committee.
Board and Committee Meeting Attendance
Individual attendance at Board and committee meetings is set out
below:
Management
Scheduled Ad hoc Audit
Engagement
Board Board(1) Committee
Committee
Stephen Smith2 4 4 3 0
John Whittle 4 6 4 1
Jonathan Bridel (resigned 31 December 2020) 4 7 4 1
Shelagh Mason (appointed 1 September 2020) 1 2 1 1
Total Meetings for year 4 7 4 1
(1) The ad hoc Board meetings are convened at short notice to
deal with administrative matters. It is not therefore always
logistically feasible, or a necessity, for the Chairman of the
Board to attend such meetings.
(2) Meetings attended telephonically.
In addition to the scheduled quarterly and additional ad hoc
meetings, the Directors and the Investment Manager have been
provided with a number of telephone investment briefings by the
Investment Adviser in order to keep the Directors and the
Investment Manager fully apprised and up to date with the current
investment status and progress. During 2018, a committee of one
Director was appointed to approve dividends should a quorum of two
Directors not be available.
BOARD REMUNERATION
As outlined in the Prospectus, Directors are paid in accordance
with agreed principles aimed at focusing on long-term performance
of the Company. Further information can be found in the Directors'
Remuneration Report on page 34.
COMPANY SECRETARY
Reports and papers, containing relevant, concise and clear
information, are provided to the Board and Committees in a timely
manner to enable review and consideration prior to both scheduled
and ad-hoc specific meetings. This ensures that Directors are
capable of contributing to, and validating, the development of
Company strategy and management. The regular reports also provide
information that enables scrutiny of the Company's Investment
Manager and other service providers' performance. When required,
the Board has sought further clarification of matters with the
Investment Manager and other service providers, both by means of
further reports and in-depth discussions, in order to make more
informed decisions for the Company.
Under the direction of the Chairman, the Company Secretary
facilitates the flow of information between the Board, Committees,
Investment Manager and other service providers through the
development of comprehensive, detailed meeting packs, agendas and
other media. These are circulated to the Board and other attendees
in sufficient time to review the data.
Full access to the advice and services of the Company Secretary
is available to the Board; in turn, the Company Secretary is
responsible for advising on all governance matters through the
Chairman. The Articles and schedule of matters reserved for the
Board indicate the appointment and resignation of the Company
Secretary is an item reserved for the full Board. A review of the
performance of the Company Secretary is undertaken by the Board on
a regular basis.
FINANCIAL AND BUSINESS INFORMATION
An explanation of the Directors' roles and responsibilities in
preparing the Annual Report and Audited Consolidated Financial
Statements for the year ended 31 December 2020 is provided in the
Statement of Directors' Responsibilities on page 47.
For the purposes solely of the audit of the consolidated
financial statements, the Auditors have reviewed the Company's
compliance with certain of the AIC Code's provisions, the FCA's
Listing Rules and other applicable rules as reported on pages 49 to
55.
Further information enabling shareholders to assess the
Company's performance, business model and strategy can be sourced
in the Chairman's Statement on pages 8 to 11, the Strategic Report
on pages 12 to 17 and the Report of the Directors on pages 31 to
33.
GOING CONCERN
The Directors also considered it appropriate to prepare the
financial statements on the going concern basis, as explained in
the 'Basis of preparation' paragraph in Note 2 of the financial
statements.
RISK CONTROL
In addition to the earlier assessment of principal risks and
uncertainties contained within the Strategic Report, the Board is
required annually to review the effectiveness of the Group's key
internal controls such as financial, operational and compliance
controls and risk management. The controls are designed to ensure
that the risk of failure to achieve business objectives is
minimised, and are intended to provide reasonable assurance against
material misstatement or loss. This is not absolute assurance that
all risks are eliminated.
Through regular meetings of the Audit Committee, the Board seeks
to maintain full and effective control over all strategic,
financial, regulatory and operational issues. The Board maintains
an organisational and committee structure with clearly defined
lines of responsibility and delegation of authorities.
RISK MANAGEMENT
As part of the compilation of the risk register for the Company,
appropriate consideration has been given to the relevant control
processes and that risk is considered, assessed and managed as an
integral part of the business. The Company's system of internal
control includes inter alia the overall control exercise,
procedures for the identification and evaluation of business risk,
the control procedures themselves and the review of these internal
controls by the Audit Committee on behalf of the Board. Each of
these elements that make up the Company's system of internal
financial and operating control is explained in further detail as
below.
(i) Control Environment
The Company is ultimately dependent upon the quality and
integrity of the staff and management of the Investment Manager,
the Investment Adviser and its Fund Administration & Company
Secretarial service provider. In each case, qualified and able
individuals have been selected at all levels. The staff of both the
Investment Manager and Administrator are aware of the internal
controls relevant to their activities and are also collectively
accountable for the operation of those controls. Appropriate
segregation and delegation of duties is in place.
The Audit Committee undertakes a review of the Company's
internal financial and operating controls on a regular basis. The
Auditors of the Company consider internal controls relevant to the
Company's preparation and fair presentation of the consolidated
financial statements in order to design their audit procedures, but
not for the purpose of expressing an audit opinion on the
effectiveness of the Company's internal controls.
In its role as a third-party fund administration services
provider, Apex Fund and Corporate Services (Guernsey) Limited
produces an annual SOC 1 Type 2 Report on the internal control
procedures in place within Apex Fund and Corporate Services
(Guernsey) Limited and this is subject to review by the Audit
Committee and the Board.
(ii) Identification and Evaluation of Business Risks
Another key business risk is the performance of the Company's
investments. This is managed by the Investment Manager, which
undertakes regular analysis and reporting of business risks in
relation to the loan portfolio, and then proposes appropriate
courses of action to the Board for their review.
(iii) Key Procedures
In addition to the above, the Audit Committee's key procedures
include a comprehensive system for reporting financial results to
the Board regularly, as well as quarterly impairment reviews of
loans conducted by the Board as a whole (including reports on the
underlying investment performance).
Although no system of internal control can provide absolute
assurance against material misstatement or loss, the Company's
system is designed to assist the Directors in obtaining reasonable
assurance that problems are identified on a timely basis and dealt
with appropriately. The Company, given its size, does not have an
internal audit function. It is the view of the Board that the
controls in relation to the Company's operating, accounting,
compliance and IT risks performed robustly throughout the year. In
addition, all have been in full compliance with the Company's
policies and external regulations, including: ? Investment policy,
as outlined in the IPO documentation, and subsequently amended by
EGMs held on 2 May 2014, 9
March 2015 and 6 May 2016; ? Personal Account Dealing, as
outlined in the Model Code; ? Whistleblowing Policy; ? Anti-Bribery
Policy; ? Applicable Financial Conduct Authority Regulations; ?
Listing Rules, and Disclosure and Transparency Rules; ? Treatment
and handling of confidential information; ? Conflicts of interest;
? Compliance policies; and ? Anti-Money Laundering Regulations.
There were no protected disclosures made pursuant to the
Company's whistleblowing policy, or that of service providers in
relation to the Company, during the year to 31 December 2020.
In summary, the Board considers that the Company's existing
internal financial and operating controls, coupled with the
analysis of risks inherent in the business models of the Company
and its subsidiaries, continue to provide appropriate tools for the
Company to monitor, evaluate and mitigate its risks.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE ("AIFMD")
The AIFMD, which was implemented across the EU on 22 July 2013
with the transition period ending 22 July 2014, aims to harmonise
the regulation of Alternative Investment Fund Managers ("AIFMs")
and imposes obligations on managers who manage or distribute
Alternative Investment Funds ("AIFs") in the EU or who market
shares in such funds to EU investors.
After seeking professional regulatory and legal advice, the
Company was established in Guernsey such that, upon implementation
of AIFMD it would be a Non-EU AIF, with Starwood European Finance
Partners Limited appointed to act as the Non-EU AIFM.
In accordance with AIFMD disclosure obligations, note 6 provides
a summary of realised and unrealised gains and losses.
The Investment Manager does not receive an additional fee, to
that stated in note 22, as a result of acting as the AIFM. The
Board of the Investment Manager received an aggregate fee of
GBP60,000 for the year ended 31 December 2020.
The marketing of shares in AIFs that are established outside the
EU (such as the Company) to investors in an EU member state is
prohibited unless certain conditions are met. Certain of these
conditions are outside the Company's control as they are dependent
on the regulators of the relevant third country (in this case
Guernsey) and the relevant EU member state entering into regulatory
co-operation agreements with one another.
The AIFM has given written notification to the United Kingdom
Financial Conduct Authority ("FCA"), pursuant to Regulation 59 of
the Alternative Investment Fund Managers Regulations 2013 (SI
1773/2013) (the "AIFM Regulations") of its intention to market the
shares to investors in the United Kingdom in accordance with the
AIFM Regulations and the rules and guidance of the FCA.
The AIFM has given written notification to the Netherlands
Authority for the Financial Markets ("AFM") pursuant to Article
1:13b section 1 and 2 of the Act on the Financial Supervision (Wet
op het financieel toezicht) (the "AFS") of its intention to market
the shares to investors in the Netherlands in accordance with the
AFS, any rules and regulations promulgated pursuant thereto and the
rules and guidance of the AFM.
On 12 February 2016, the AIFM obtained a marketing licence in
Sweden in accordance with Chapter 5, Section 10 of the Swedish
Alternative Investment Fund Managers Act (Sw. lag (2013:561) om
förvaltare av alternativa investeringsfonder). This enables shares
in the Company to be marketed to professional investors in
Sweden.
Currently, the National Private Placement Regime ("NPPR")
provides a mechanism to market Non-EU AIFs that are not allowed to
be marketed under the AIFMD domestic marketing regimes. The Board
is utilising NPPR in order to market the Company, specifically in
the UK, Sweden and the Netherlands. The Board works with the
Company's advisers to ensure the necessary conditions are met, and
all required notices and disclosures are made under NPPR.
Any regulatory changes arising from implementation of the AIFMD
(or otherwise) that limit the Company's ability to market future
issues of its shares may adversely affect the Company's ability to
carry out its investment policy successfully and to achieve its
investment objective, which in turn may adversely affect the
Company's business, financial condition, results of operations, NAV
and/or the market price of the Ordinary Shares.
The Board, in conjunction with the Company's advisers, will
continue to monitor the development of the AIFMD and its impact on
the Company. The Company will continue to use NPPR pending further
consultation from the European Securities and Marketing Authority
("ESMA").
The Board has considered the disclosure obligations under
Articles 22 and 23 and can confirm that the Company complies with
the various organisational, operational and transparency
obligations.
The Board has considered requirements of Articles 6 and 7 of
Regulation 2019/2088 on sustainability-related disclosures in the
financial services sector dated 27 November 2019 and have made the
necessary disclosures on the Company's website.
FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA") AND THE OECD COMMON
REPORTING STANDARDS ("CRS")
FATCA became effective on 1 January 2013 and is being gradually
implemented internationally. The legislation is aimed at
determining the ownership of US assets in foreign accounts and
improving US Tax compliance with respect to those assets.
More than 90 jurisdictions, including all 34 member countries of
the Organisation for Economic Co-operation and Development ("OECD")
and the G20 members, have committed to implement the Common
Reporting Standard for automatic exchange of tax information
("CRS"). Building on the model created by FATCA, the CRS creates a
global standard for the annual automatic exchange of financial
account information between the relevant tax authorities.
The Board in conjunction with the Company's service providers
and advisers have ensured that the Company complies with FATCA and
CRS's requirements to the extent relevant to the Company.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the
intention of the AIC Code is that the below matters set out in
section 172 of the UK Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business
objectives, the Company actively identifies, evaluates, manages and
mitigates risk as well as continually evolving the approach to risk
management. For further details in connection with Risk Management
of the Company, please refer to pages 12-16 of the Strategic Report
and pages 39-40 of the Corporate Governance Statement.
Our People
The Company has no employees, however, to succeed we need to
manage Company's performance by bringing through talent to the
Board while ensuring we operate as efficiently as possible, as
demonstrated with the succession plan. For further details in
connection with the succession plan, please refer to page 37 of the
Corporate Governance Statement.
Business Relationships
In order for the Company to succeed, it requires to develop and
maintain long term relationships with service providers and
borrowers. The Company values all of its service providers and
borrowers.
Community and Environment
As an investment company, the Group's activities have minimal
direct impact on the environment. Please refer to page 17 for more
details in connection with the impact of the Company's operations
on the community and environment.
Business Conduct
The Company is committed to act responsibly and ensure that the
business operates in a responsible and effective manner and with
high standards in order to meet its objectives.
Shareholders
The Board place a great deal of importance on communication with
all shareholders and envisage to continuing effective dialogue with
all shareholders. Please refer to section below for more details on
how the Company engages with the shareholders.
Throughout 2021, the Board of the Company, both individually and
together, will continue to review and challenge how the Company can
continue to act in good faith to promote the success of the Company
for the benefit of its stakeholders in the decisions taken.
DIALOGUE WITH SHAREHOLDERS
The Directors place a great deal of importance on communication
with shareholders. The Company's Chairman, Investment Manager and
the Broker, aim to meet with large shareholders at least annually,
together with the Investment Adviser, and calls are undertaken on a
regular basis with shareholders. The Board also receives regular
reports from the Broker on shareholder issues. Publications such as
the Annual Report and Consolidated Financial Statements and
quarterly factsheets - which in light of the considerable
disruption from Covid-19 the Board has sought to provide more
detailed updates and disclosures - are reviewed and approved by the
Board prior to circulation and are widely distributed to other
parties who have an interest in the Company's performance and are
available on the Company's website.
All Directors are available for discussions with the
shareholders, in particular the Chairman and the Audit Committee
Chairman, as and when required.
Should a situation arise where shareholders cast a vote of 20
per cent or more against a board recommendation the directors will
consult with shareholders to understand their reasons behind this
vote. The Board will publish the views received from the
shareholders within six months of the shareholder meeting.
On 8 June 2020 at the Company's AGM, 27 per cent of total votes
cast were cast against resolution 3 (to re-elect as a Director of
the Company, Stephen Smith). The Company noted that it would seek
to engage with the relevant shareholders who voted against
resolution 3 in order to understand further the reasons for their
votes and address their concerns. Following such consultation with
shareholders, who expressed concerns over the diversity of the
Board at that time, the Board announced on 3 August 2020 that the
Company had appointed Shelagh Mason with effect from 1 September
2020 and Charlotte Denton with effect from 1 January 2021 as
Non-Executive Directors of the Company. The appointments were in
line with the Company's succession planning for the phased
retirement of Directors over the period to December 2022 and its
intention to consider diversity when making any new appointments to
the Board. The appointments bring significant talent as well as new
skills and experience to the Board and the Company was pleased to
be able to make the appointments early in the rotation, ensuring a
smooth transition. Any perceived imbalances in Board composition
(including those leading to votes against resolution 3 at the prior
AGM) have thus been addressed.
CONSTRUCTIVE USE OF AGM
The Notice of AGM is sent out at least 20 working days in
advance of the meeting. All shareholders have the opportunity to
put questions to the Board or Investment Manager, either formally
at the Company's AGM, informally following the meeting, or in
writing at any time during the year via the Company Secretary. The
Company Secretary is also available to answer general shareholder
queries at any time throughout the year.
By order of the Board
John Whittle | Director
25 March 2021
Report of the Audit Committee
The Board is supported by the Audit Committee, which comprises
of John Whittle, as chairman, Jonathan Bridel (until his
resignation on 31 December 2020) and Shelagh Mason (appointed on 8
September 2020 to the Audit Committee). The Board has considered
the composition of the Audit Committee and is satisfied it has
sufficient recent and relevant skills and experience, in particular
the Board has considered the requirements of the AIC Code that the
Audit Committee should have at least one Member who has recent and
relevant financial experience and that the Audit Committee as a
whole has competence relevant to the sector in which the Company
invests. The Board considers all of the relevant requirements to
have been met.
ROLE AND RESPONSIBILITIES
The primary role and responsibilities of the Audit Committee are
outlined in the Audit Committee's terms of reference, available at
the registered office, including: ? Monitoring the integrity of the
consolidated financial statements of the Group and any formal
announcements
relating to the Group's financial performance, and reviewing
significant financial reporting judgements contained
within said statements and announcements; ? Reviewing the
Group's internal financial controls, and the Group's internal
control and risk management systems; ? Monitoring the need for an
internal audit function annually; ? Monitoring and reviewing the
scope, independence, objectivity and effectiveness of the external
Auditor, taking
into consideration relevant regulatory and professional
requirements; ? Making recommendations to the Board in relation to
the appointment, re-appointment and removal of the external
Auditor and approving their remuneration and terms of
engagement, which in turn can be placed before the
shareholders for their approval at the AGM; ? Development and
implementation of the Group's policy on the provision of non-audit
services by the external
Auditor, as appropriate; ? Reviewing the arrangements in place
to enable Directors and staff of service providers to, in
confidence, raise
concerns about possible improprieties in matters of financial
reporting or other matters insofar as they may affect
the Group; ? Providing advice to the Board on whether the
consolidated financial statements, taken as a whole, are fair,
balanced and understandable and provide the information
necessary for shareholders to assess the Group's
performance, business model and strategy; and ? Reporting to the
Board on how the Committee discharged all relevant responsibilities
at each Board meeting.
Financial Reporting
The primary role of the Audit Committee in relation to the
financial reporting is to review with the Administrator, Investment
Manager and the Auditor the appropriateness of the Annual Report
and Audited Consolidated Financial Statements and Interim Condensed
Consolidated Financial Statements, concentrating on, amongst other
matters: ? The quality and acceptability of accounting policies and
practices; ? The clarity of the disclosures and compliance with
financial reporting standards and relevant financial and
governance reporting requirements; ? Material areas in which
significant judgements have been applied or there has been
discussion with the Auditor; ? Whether the Annual Report and
Audited Consolidated Financial Statements, taken as a whole, is
fair, balanced and
understandable and provides the information necessary for the
shareholders to assess the Group's performance,
business model and strategy; and ? Any correspondence from
regulators in relation to the Group's financial reporting.
To aid its review, the Audit Committee considers reports from
the Administrator and Investment Manager and also reports from the
Auditor on the outcomes of their half-year review and annual audit.
The Audit Committee supports PricewaterhouseCoopers CI LLP ("PwC")
in displaying the necessary professional scepticism their role
requires.
The Audit Committee met four times during the year under review;
individual attendance of Directors is outlined on page 38. The main
matters discussed at those meetings were: ? Review and approval of
the annual audit plan of the external Auditor; ? Discussion and
approval of the fee for the external audit; ? Detailed review of
the Annual Report and Audited Consolidated Financial Statements and
recommendation for approval
by the Board; ? Review and approval of the interim review plan
of the external Auditor; ? Detailed review of the Interim Condensed
Consolidated Financial Statements and recommendation for approval
by the
Board; ? Discussion of reports from the external Auditor
following their interim review and annual audit; ? Assessment of
the effectiveness of the Auditor as described below; ? Assessment
of the independence of the external Auditor; ? Review of the
Group's key risks and internal controls; and ? Consideration of the
AIC Code, FRC Guidance on Audit Committees and other regulatory
guidelines.
The Committee has also reviewed and considered the
whistleblowing policy in place for the Administrator and other
service providers, and is satisfied the relevant staff can raise
concerns in confidence about possible improprieties in matters of
financial reporting or other matters insofar as they may affect the
Company.
Annual General Meeting
The Audit Committee Chairman, or other members of the Audit
Committee appointed for the purpose, shall attend each AGM of the
Company, prepared to respond to any shareholder questions on the
Audit Committee's activities.
Internal Audit
The Audit Committee considers at least once a year whether or
not there is a need for an internal audit function. Currently, the
Audit Committee does not consider there to be a need for an
internal audit function, given that there are no employees in the
Group and all outsourced functions are with parties /
administrators who have their own internal controls and procedures.
This is evidenced by the annual SOC 1 Type 2 Report provided by the
Administrator, which gives sufficient assurance that a sound system
of internal control is maintained at the Administrator.
SIGNIFICANT ISSUES IN RELATION TO THE CONSOLIDATED FINANCIAL
STATEMENTS
During the year, the Audit Committee considered a number of
significant risks in respect of the Annual Report and Audited
Consolidated Financial Statements. The Audit Committee reviewed the
external audit plan at an early stage and concluded that the
appropriate areas of audit risk relevant to the Group had been
identified and that suitable audit procedures had been put in place
to obtain reasonable assurance that the consolidated financial
statements as a whole would be free of material misstatements. The
table on the next page sets out the Audit Committee's view of the
key areas of risk and how they have addressed the issues.
Significant Issues Actions to Address Issue
The Audit Committee reviews the investment process of the Investment Manager and Investment
Adviser including the controls in place around deal sourcing, investment analysis, due
diligence and the role of the Investment Adviser's investment committee and the Investment
Manager's Board. The Audit Committee also reviews the controls in place around the effective
interest loan models and is notified regularly by the Investment Manager of any changes to
underlying assumptions made in the loan models.
The Audit Committee receives regular updates and reports on the performance of each loan and
discusses with the Investment Manager and Investment Adviser whether there are any indicators
of significant increase in credit risk or impaired or defaulted loans. The Audit Committee also
assesses the ECL methodology focussing on the estimation of probability of default, exposure at
Carrying amount and default and loss given default.
impairment/ expected
credit losses of loans
advanced
Formal loan performance reviews and credit risk assessments are also prepared by the Investment
Adviser and Investment Manager which are reviewed at each Audit Committee meeting and the Audit
Committee considers whether there are any indicators that would warrant a change to the
expected credit loss assessed for each loan advanced. For all new loans advanced, the
Investment Manager presents, as part of the investment recommendation process, their assessment
of any expected credit loss required at inception of the loan arrangement.
All existing loans advanced as at 31 December 2020 were assessed so as to ensure compliance
with IFRS 9 and while 6 loans amounting to GBP150,331,450 have been moved from Stage 1 to Stage
2, as disclosed in note 2 and on page 19 of the Investment Manager's report during the year
ended 31 December 2020, no expected credit losses were considered necessary based on the loan
to value ratios headroom as at 31 December 2020 and strong security packages in place.
Income from loans advanced is measured in accordance with the effective interest rate method.
The requirement to estimate the expected cash flows when forming an effective interest rate
model is subject to significant management judgements and estimates.
The Audit Committee discusses with the Investment Manager and Investment Adviser the reasons
for the changes in key assumptions made in the loan models such as changes to expected drawdown
Risk of fraud in income or repayment dates or other amendments to expected cash flows such as changes in interbank
from loans advanced rates on floating loans. The Audit Committee ensures that any changes made to the models are
justifiable based on the latest available information.
A separate income rationalisation which is prepared outside of the detailed loan models is
provided to the Board on a quarterly basis as a secondary check on the revenue being recognised
in the loan models. This is also reviewed by the Audit Committee and questions raised where
appropriate.
REVIEW OF EXTERNAL AUDIT PROCESS EFFECTIVENESS
The Audit Committee communicated regularly with the Investment
Manager, Investment Adviser and Administrator to obtain a good
understanding of the progress and efficiency of the audit process.
Similarly, feedback in relation to the efficiency of the Investment
Manager, Investment Adviser and other service providers in
performing their relevant roles was sought from relevant involved
parties, including the audit partner and team. The external Auditor
is invited to attend the Audit Committee meetings at which the
semi-annual and annual consolidated financial statements are
considered, also enabling the Auditor to meet and discuss any
matters with the Audit Committee without the presence of the
Investment Manager or the Administrator.
During the year, the Audit Committee reviewed the external
Auditor's performance, considering a wide variety of factors
including: ? The quality of service, the Auditor's specialist
expertise, the level of audit fee, identification and
resolution
of any areas of accounting judgement, and quality and timeliness
of papers analysing these judgements; ? Review of the audit plan
presented by the Auditor, and when tabled, the final audit findings
report; ? Meeting with the Auditor regularly to discuss the various
papers and reports in detail; ? Furthermore, interviews of
appropriate staff in the Investment Manager, Investment Adviser and
Administrator to
receive feedback on the effectiveness of the audit process from
their perspective; and ? Compilation of a checklist with which to
provide a means to objectively assess the Auditor's
performance.
The Audit Committee is satisfied with the Auditor's
effectiveness, and therefore does not consider it necessary to
require the Auditor to tender for the audit work.
AUDITOR'S TENURE AND OBJECTIVITY
The Group has developed an audit tender policy which the Board
will re-consider after five years from the appointment date of the
current Auditor. The Board re-considered this during 2017 and it
was deemed to still be applicable.
The Group's current Auditor, PwC, have acted in this capacity
since the Company's inaugural meeting on 22 November 2012. The
Committee reviews the Auditor's performance on a regular basis to
ensure the Group receives an optimal service and make regular
enquiries to confirm the quality findings of audit work undertaken
by both the firm and lead engagement partner on the audit. Subject
to annual appointment by shareholder approval at the AGM, the
appointment of the Auditor is formally reviewed by the Audit
Committee on an annual basis. PwC follows the FRC Ethical Standards
and their rotation rules require the lead audit partner to rotate
every 5 years, key partners involved in an audit every 7 years and
PwC's own internal policy would generally expect senior staff to
have consideration given to the threats to their independence after
7 years and to be rotated after 10 years. Rotation ensures a fresh
look without sacrificing institutional knowledge.
Rotation of audit engagement partners, key partners involved in
the audit and other staff in senior positions is reviewed on a
regular basis by the lead audit engagement partner. Roland Mills is
currently serving his third year of five as engagement partner.
PwC regularly updates the Audit Committee on the rotation of
audit partners, staff, level of fees, details of any relationships
between the Auditor and the Group, and also provides overall
confirmation of its independence and objectivity. There are no
contractual obligations that restrict the Group's choice of
Auditor. Any non-audit work would be reviewed by the Audit
Committee to confirm it appropriate under the FRC Ethical Standard
and approved by the Audit Committee Chairman prior to the Auditor
undertaking any work.
As a result of its review, the Audit Committee is satisfied that
PwC remains independent of the Group, the Investment Manager and
other service providers and the Audit Committee has no current
plans for re-tendering for the position of auditor to the Company.
The Audit Committee therefore recommends the continuing appointment
of PwC by the Board.
CONCLUSIONS IN RESPECT OF THE CONSOLIDATED FINANCIAL
STATEMENTS
The production and the audit of the Annual Report and Audited
Consolidated Financial Statements is a comprehensive process
requiring input from a number of different contributors. In order
to reach a conclusion on whether the Group's consolidated financial
statements are fair, balanced and understandable, as required under
the AIC Code, the Board has requested that the Audit Committee
advise on whether it considers that the Annual Report and
Consolidated Financial Statements fulfils these requirements. In
outlining its advice, the Audit Committee has considered the
following: ? The comprehensive documentation that is in place
outlining the controls in place for the production of the
Annual
Report and Audited Consolidated Financial Statements, including
the verification processes in place to confirm the
factual content; ? The detailed reviews undertaken at various
stages of the production process by the Investment Manager,
Investment
Adviser, Administrator, Auditor and the Audit Committee that are
intended to ensure consistency and overall
balance; ? Controls enforced by the Investment Manager,
Investment Adviser, Administrator and other third-party service
providers to ensure complete and accurate financial records and
security of the Group's assets; and ? The existence and content of
a satisfactory controls report that has been reviewed and reported
upon by the
Administrator's service Auditor to verify the effectiveness of
the internal controls of the Administrator, such as
the SOC 1 Type 2 Report.
As a result of the work performed, the Audit Committee has
concluded that it has acted in accordance with its' terms of
reference and has ensured the independence and objectivity of the
external Auditor. It has reported to the Board that the Annual
Report for the year ended 31 December 2020, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group's performance,
business model and strategy. The Board's conclusions in this
respect are set out in the Statement of Directors' Responsibilities
on page 47.
The Audit Committee has recommended to the Board that the
external auditor is re-appointed.
John Whittle | Audit Committee Chairman
25 March 2021
Statement of Directors' Responsibilities
The Directors are responsible for preparing consolidated
financial statements for each financial year which give a true and
fair view, in accordance with applicable laws and regulations, of
the state of affairs of the Company and of the profit or loss of
the Company for that year.
Company law requires the Directors to prepare financial
statements for each financial year. The consolidated financial
statements have been prepared in accordance with International
Financial Reporting Standards as adopted by the European Union
("IFRS"). In preparing the consolidated financial statements, the
Directors are required to: ? Select suitable accounting policies
and apply them consistently; ? Make judgments and estimates that
are reasonable and prudent; ? State whether applicable accounting
standards have been followed, subject to any material departures
disclosed and
explained in the consolidated financial statements; and ?
Prepare the consolidated financial statements on the going concern
basis unless it is inappropriate to presume that
the Company will continue in business.
The maintenance and integrity of the Company's website is the
responsibility of the Directors; the work conducted by the Auditor
does not involve consideration of the maintenance and integrity of
the website and, accordingly, the Auditor accepts no responsibility
for any changes that may have occurred to the consolidated
financial statements since they are initially presented on the
website. Legislation in Guernsey governing the preparation and
dissemination of the consolidated financial statements may differ
from legislation in other jurisdictions.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the consolidated financial statements comply with the
Companies (Guernsey) Law, 2008, as amended. They are also
responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Each of the Directors confirms that, to the best of their
knowledge: ? They have complied with the above requirements in
preparing the consolidated financial statements; ? There is no
relevant audit information of which the Company's Auditor is
unaware; ? All Directors have taken the necessary steps that they
ought to have taken to make themselves aware of any relevant
audit information and to establish that the Auditor is aware of
said information; ? The consolidated financial statements, prepared
in accordance with the applicable set of accounting standards,
give
a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and Group;
and ? The Chairman's Statement, Strategic Report, Investment
Manager's Report, Report of the Directors and Corporate
Governance Statement include a fair review of the development
and the position of the Company and the Group,
together with a description of the principal risks and
uncertainties that they face.
The UK Code, as adopted through the AIC Code by the Company,
also requires Directors to ensure that the Annual Report and
Consolidated Financial Statements are fair, balanced and
understandable. In order to reach a conclusion on this matter, the
Board has requested that the Audit Committee advise on whether it
considers that the Annual Report and Consolidated Financial
Statements fulfil these requirements. The process by which the
Committee has reached these conclusions is set out in the Report of
the Audit Committee on pages 42 to 46. Furthermore, the Board
believes that the disclosures set out on pages 6 to 29 of the
Annual Report provide the information necessary for shareholders to
assess the Company's performance, business model and strategy.
Having taken into account all the matters considered by the
Board and brought to the attention of the Board during the year
ended 31 December 2020, as outlined in the Chairman Statement,
Investment Manager's Report, Corporate Governance Statement,
Strategic Report and the Report of the Audit Committee, the Board
has concluded that the Annual Report and Audited Consolidated
Financial Statements for the year ended 31 December 2020, taken as
a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's
performance, business model and strategy.
For Starwood European Real Estate Finance Limited
Stephen Smith | Chairman
25 March 2021
Financial Statements
Independent Auditor's Report to the Members of Starwood European
Real Estate Finance Limited
Report on the audit of the consolidated financial statements
OUR OPINION
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of
Starwood European Real Estate Finance Limited (the "company") and
its subsidiaries (together "the group") as at 31 December 2020, and
of their consolidated financial performance and their consolidated
cash flows for the year then ended in accordance with International
Financial Reporting Standards as adopted by the European Union and
have been properly prepared in accordance with the requirements of
The Companies (Guernsey) Law, 2008.
WHAT WE HAVE AUDITED
The group's consolidated financial statements comprise: ? the
consolidated statement of financial position as at 31 December
2020; ? the consolidated statement of comprehensive income for the
year then ended; ? the consolidated statement of changes in equity
for the year then ended; ? the consolidated statement of cash flows
for the year then ended; and ? the notes to the consolidated
financial statements, which include significant accounting policies
and other
explanatory information.
BASIS FOR OPINION
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
INDEPENCE
We are independent of the group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements of the group, as required by the Crown
Dependencies' Audit Rules and Guidance, and we have fulfilled our
other ethical responsibilities in accordance with these
requirements. We are also independent in accordance with SEC
Independence Rules.
OUR AUDIT APPROACH
OVERVIEW
AUDIT SCOPE ? The company is based in Guernsey, has subsidiaries
located in Guernsey and Luxembourg and engages Starwood
European
Finance Partners Limited (the "Investment Manager") to manage
its assets. The consolidated financial statements are
a consolidation of the company and all the subsidiaries. ? We
conducted our audit of the consolidated financial statements from
information provided by Apex Fund and
Corporate Services (Guernsey) Limited (the "Administrator") and
its related group entities to whom the board of
directors has delegated the provision of certain functions. We
also had significant interaction with Starwood
Capital Europe Advisers, LLP (the "Investment Adviser") in
completing aspects of our overall audit work. ? We conducted our
audit work in Guernsey and we tailored the scope of our audit
taking into account the types of
investments within the group, the involvement of the third
parties referred to above, and the industry in which the
group operates. ? We performed an audit of the complete
financial information of the Guernsey and Luxembourg components of
the group. ? The components of the group where we performed full
scope audit procedures accounted for 100% of the consolidated
net assets and operating profit for the year.
KEY AUDIT MATTERS ? Carrying amount and impairment/expected
credit losses of loans advanced. ? Risk of fraud in income from
loans advanced. ? Management and the directors' consideration of
the impact of COVID-19.
MATERIALITY ? Overall group materiality was GBP8.5 million
(2019: GBP8.5 million) based on 2% of consolidated net assets. ?
Performance materiality: GBP6.4 million.
THE SCOPE OF OUR AUDIT
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the consolidated
financial statements. In particular, we considered where the
directors made subjective judgements; for example, in respect of
significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management
override of internal controls, including among other matters,
consideration of whether there was evidence of bias that
represented a risk of material misstatement due to fraud.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters, and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
This is not a complete list of all risks identified by our
audit.
Key audit matter How our audit addressed the Key audit matter
We evaluated management's processes and assumptions used
to measure the loans at amortised cost and used to
determine the level of impairment (if any) required on the
loans advanced, either at inception, or on an ongoing
basis, using the expected credit loss model. Our
procedures included:
? Detailed testing over the amortised cost models used
Carrying amount and impairment/expected credit losses of by management to value the loans at amortised cost
loans advanced using the effective interest rate method;
? Testing the assumptions and inputs into the amortised
Loans advanced at the year-end of GBP442.7 million (note 10) cost models and inspecting the associated agreements
are measured at amortised cost and comprise of both fixed and other legal documentation;
and floating rate loans. ? Back-testing procedures were also performed to assist
in our conclusions as to the cash flow forecasting
reliability applied by the Investment Adviser;
? Understanding of and evaluating the assumptions and
Loans advanced make up a significant part of the judgements made by the Investment Adviser in respect
consolidated statement of financial position and due to the of the ECL for each loan advanced including;
nature of this balance, their ongoing recoverability and ? Obtaining the Investment Adviser's impairment
impairment is subject to judgement and estimation, including papers and assessing the ECL methodology,
the calculation of expected credit losses ("ECL"). focussing on the estimation of probability of
default, exposure at default and loss given
default, and how forward-looking information was
considered in this regard;
The judgements exercised in determining the potential for ? Evaluating the consistency and appropriateness of
ECL could significantly impact the net asset value of the the Investment Adviser's assumptions applied in
group and this is considered to be a key source of determining whether any loan advanced was
estimation uncertainty as described in note 2c of the performing, underperforming or non-performing,
consolidated financial statements. including consideration as to whether a
significant increase in credit risk of each
borrower had occurred during the year;
? Obtaining evidence to support any significant
The specific areas of judgement include: assumptions presented in the assessment of the ECL
including consideration of the financial
? How management determine the underlying assumptions when information on the borrower and the collateral in
preparing impairment/ECL review analyses such as place to assess their ability to meet future
significant changes in the credit risk of a borrower, payment commitments, and progress against business
changes in the probability of default of a borrower, plans, including any impact caused by COVID-19;
changes in valuation of underlying collateral, the ? Inspecting the Investment Adviser's application of
ability of the borrowers to deliver in accordance with its impairment/expected credit loss criteria to
their business plans and their projected financial evaluate the appropriateness and completeness of
performance figures; and the loans moved between ECL stages;
? The impact of changes in the expected cash flows for ? Recalculating a targeted sample of the Investment
each loan on the carrying amount of the loans measured Adviser's sensitivity analysis of the
at amortised cost. loan-to-values ratios headroom; and
? Inspecting a sample of compliance certificates
signed by each respective underlying borrower in
respect of compliance with covenants as at the
year-end.
We did not identify any significant issues or concerns
from our procedures which required reporting to those
charged with governance.
Risk of fraud in income from loans advanced
Our procedures included:
Income from loans advanced for the year was GBP29.1 million
(Note 10) and was measured in accordance with the effective
interest rate method. The group has a key investment
objective to provide shareholders with regular dividends ? Assessing the judgements made in respect of the
through investment in debt instruments and therefore we estimated cash flows timing (versus the contractual
focussed on this risk. repayment date) and amount including arrangement,
origination and commitment fees, through testing of
the amortised cost models for each loan;
? Recalculating interest income using the original
The requirement to estimate the expected cash flows when effective interest rate, paying due consideration to
forming an effective interest rate model is subject to any early, partial or full prepayments;
significant management judgements and estimates, and as such ? Inspecting supporting documents, such as
could be open to manipulation by management of factors correspondence with the underlying borrower and timing
including: of cash receipts, as part of our assessment of
management's estimates and assumptions; and
? For those debt investments also held at 31 December
2019, comparing the estimated future cash flows in the
? Expected timing of repayments; amortised cost models as at 31 December 2020 and
? Expectations of partial or full prepayments; and evaluating the rationale behind any significant
? Associated exit fees and make-whole payments. changes to those cash flows from the 31 December 2019
models.
Changes to the estimated timings of cash flows can have a
significant impact on the recognition of income from loans We did not identify any significant issues or concerns
advanced and is considered to be a key source of estimation from our procedures which required reporting to those
uncertainty as described in note 2c of the consolidated charged with governance.
financial statements.
? We obtained from management the latest model that
supports the assessment and conclusion with respect to
the going concern statement;
? We discussed with management the critical estimates
and judgements applied in their assessment so we could
understand and challenge the rationale for the factors
incorporated into the model and the sensitivities
applied as a result of COVID-19;
? We inspected the assessment provided to evaluate
consistency with our understanding of the operations
of the group, the portfolio of loans advanced and with
any market commentary already made by the group. We
also agreed any key amendments, estimates and
judgements to underlying supporting information and
fact patterns where and as appropriate;
? We reviewed the model's stress testing to evaluate
whether management and the directors have considered a
balanced range of outcomes in their assessment of the
Management and the directors' consideration of the impact of impact of COVID-19 on the group;
COVID-19 ? We considered the appropriateness of the disclosures
made by management and the directors in respect to the
Management and the directors have considered the impact of impact of COVID-19 on the current and future
the COVID-19 pandemic on the current and future operations operations of the group;
of the group. In doing so, they have made estimates and ? From our review of directors' meetings minutes, we
judgements that are critical to the outcomes of these noted that the directors have analysed and are
considerations with a particular focus on the group's satisfied with the business continuity plans of all
ability to continue as a going concern for a period of at key service providers as part of their COVID-19
least 12 months from the date of approval of these financial operational resilience review;
statements. ? In discussing, challenging and evaluating the
estimates and judgments made by management in their
assessment, we noted the following factors that were
considered to be fundamental by management and the
As a result of the impact of COVID-19 on the wider financial directors in their consideration of the impact of
markets and the company's share price, we have determined COVID-19 on the current and future operations of the
management and the directors' consideration of the impact of group and which support the going concern statement;
COVID-19 (including their associated estimates and ? The group has low levels of leverage with debt of
judgements) to be a key audit matter. GBP19.5m as of 31 December 2020;
? The group has undrawn and available credit
facilities of GBP106.5m as of 31 December 2020;
? The group currently has no experience of notice of
Refer to the Chairman's Statement and Investment Manager's default within its portfolio of loans advanced;
Report for management and the directors' consideration of ? Management has identified that the loans advanced
COVID-19's impact to the group. to the retail and hospitality sectors are the most
exposed due to the adverse impact of COVID-19 on
these sectors. The directors remain confident in
the fundamentals of the markets in which the
group's assets are located and the borrower's
business plans for the assets in these sectors
over the medium to long term; and
? The portfolio of loans advanced (including those
with retail and hospitality exposure) are
considered by management to have sufficient levels
of headroom with respect to the portfolio's
loan-to-values ratios as disclosed in the
Investment Manager's Report.
Based on our procedures, we have not identified any
matters to report with respect to both management's and
the directors' consideration of the impact of COVID-19 on
the current and future operations of the group.
HOW WE TAILORED THE AUDIT SCOPE
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the consolidated
financial statements as a whole, taking into account the structure
of the group, the accounting processes and controls, and the
industry in which the group operates.
The company is based in Guernsey with two subsidiaries located
in Guernsey and three underlying subsidiaries located in
Luxembourg. The consolidated financial statements are a
consolidation of the company and all the subsidiaries.
Scoping was performed at the group level, irrespective of
whether the underlying transactions took place within the company
or within the subsidiaries. The group audit was led, directed and
controlled by PricewaterhouseCoopers CI LLP and all audit work for
material items within the consolidated financial statements was
performed in Guernsey by PricewaterhouseCoopers CI LLP.
The transactions relating to the company and the subsidiaries
are maintained by the Administrator and its related group entities
and therefore we were not required to engage with component
auditors from another PwC global network firm operating under our
instruction. Our testing was therefore performed on a consolidated
basis using thresholds which are determined with reference to the
overall group materiality and the risks of material misstatement
identified.
As noted in the overview, the components of the group for which
we performed full scope audit procedures accounted for 100% of the
consolidated net assets and operating profit for the year.
MATERIALITY
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality
for the consolidated financial statements as a whole as
follows:
Overall group GBP8.5 million (2019: GBP8.5 million)
materiality
How we 2% of consolidated net assets
determined it
Rationale for We believe consolidated net assets to be the appropriate basis for determining materiality since this
benchmark is a key consideration for investors when assessing financial performance. It is also a generally
applied accepted measure used for companies in this industry.
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% of overall
materiality, amounting to GBP6.4 million for the group financial
statements.
In determining the performance materiality, we considered a
number of factors - the history of misstatements, risk assessment
and aggregation risk and the effectiveness of controls - and
concluded that an amount at the upper end our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.4 million
(2019: GBP0.4 million) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.
REPORTING ON OTHER INFORMATION
The directors are responsible for the other information. The
other information comprises all the information included in the
Annual Report and Audited Consolidated Financial Statements (the
"Annual Report") but does not include the consolidated financial
statements and our auditor's report thereon.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report based on these responsibilities.
RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE AUDIT
Responsibilities of the directors for the consolidated financial
statements
As explained more fully in the Statement of Directors'
Responsibilities, the directors are responsible for the preparation
of the consolidated financial statements that give a true and fair
view in accordance with International Financial Reporting Standards
as adopted by the European Union, the requirements of Guernsey law
and for such internal control as the directors determine is
necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Auditor's responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also: ? Identify and assess the risks of
material misstatement of the consolidated financial statements,
whether due to
fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal control. ? Obtain an understanding of internal control
relevant to the audit in order to design audit procedures that
are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the
group's internal control. ? Evaluate the appropriateness of
accounting policies used and the reasonableness of accounting
estimates and related
disclosures made by the directors. ? Conclude on the
appropriateness of the directors' use of the going concern basis of
accounting and, based on the
audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast
significant doubt on the group's ability to continue as a going
concern over a period of at least twelve months
from the date of approval of the financial statements. If we
conclude that a material uncertainty exists, we are
required to draw attention in our auditor's report to the
related disclosures in the consolidated financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor's report.
However, future events or conditions may cause the group
to cease to continue as a going concern. ? Evaluate the overall
presentation, structure and content of the consolidated financial
statements, including the
disclosures, and whether the consolidated financial statements
represent the underlying transactions and events in
a manner that achieves fair presentation. ? Obtain sufficient
appropriate audit evidence regarding the financial information of
the entities or business
activities within the group to express an opinion on the
consolidated financial statements. We are responsible for
the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and
only for the members as a body in accordance with Section 262 of
The Companies (Guernsey) Law, 2008 and for no other purpose. We do
not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion: ? We have not received all the
information and explanations we require for our audit; ? Proper
accounting records have not been kept; or ? The consolidated
financial statements are not in agreement with the accounting
records.
We have no exceptions to report arising from this
responsibility.
CORPORATE GOVERNANCE STATEMENT
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement included within the Strategic Report is
materially consistent with the consolidated financial statements
and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to: ? The
directors' confirmation that they have carried out a robust
assessment of the emerging and principal risks; ? The disclosures
in the Annual Report that describe those principal risks, what
procedures are in place to identify
emerging risks and an explanation of how these are being managed
or mitigated; ? The directors' statement in the financial
statements about whether they considered it appropriate to adopt
the
going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the
group's ability to continue to do so over a period of at least
twelve months from the date of approval of the
financial statements; ? The directors' explanation as to their
assessment of the group's prospects, the period this assessment
covers and
why the period is appropriate; and ? The directors' statement as
to whether they have a reasonable expectation that the company will
be able to continue
in operation and meet its liabilities as they fall due over the
period of its assessment, including any related
disclosures drawing attention to any necessary qualifications or
assumptions.
Our review of the directors' statement regarding the longer-term
viability of the group was substantially less in scope than an
audit and only consisted of making inquiries and considering the
directors' process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the
Code; and considering whether the statement is consistent with the
consolidated financial statements and our knowledge and
understanding of the group and its environment obtained in the
course of the audit.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
financial statements and our knowledge obtained during the audit: ?
The directors' statement that they consider the Annual Report,
taken as a whole, is fair, balanced and
understandable, and provides the information necessary for the
members to assess the group's position, performance,
business model and strategy; ? The section of the Annual Report
that describes the review of effectiveness of risk management and
internal control
systems; and ? The section describing the work of the Audit
Committee.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
OTHER MATTER
As explained in note 21 to the financial statements, in addition
to our responsibility to audit and express an opinion on the
consolidated financial statements in accordance with ISAs and
Guernsey law, we have been requested by the directors to express an
opinion on the consolidated financial statements in accordance with
auditing standards generally accepted in the United States of
America as issued by the AICPA, in order to meet the requirements
of Rule 206(4)-2 under the Investment Advisers Act (the "Custody
Rule"). We have reported separately in this respect on page 56.
Roland Mills
For and on behalf of PricewaterhouseCoopers CI LLP Chartered
Accountants and Recognised Auditor
Guernsey, Channel Islands
25 March 2021
Independent Auditor's Report to the Directors of
Starwood European Real Estate Finance Limited (US GAAS)
We have audited the accompanying consolidated financial
statements of Starwood European Real Estate Finance Limited and its
subsidiaries (together "the group"), which comprise the
consolidated statements of financial position as of 31 December
2020 and 31 December 2019, and the related consolidated statements
of comprehensive income, changes in equity and cash flows for the
years then ended, and the notes to the consolidated financial
statements, which include a summary of significant accounting
policies.
MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL
STATEMENTS
Management is responsible for the preparation and fair
presentation of the consolidated financial statements in accordance
with International Financial Reporting Standards as adopted by the
European Union; this includes the design, implementation, and
maintenance of internal control relevant to the preparation and
fair presentation of consolidated financial statements that are
free from material misstatement, whether due to fraud or error.
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, we consider internal
control relevant to the group's preparation and fair presentation
of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
group's internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Starwood European Real Estate Finance Limited and its
subsidiaries as of 31 December 2020 and 31 December 2019, and the
results of their operations and their cash flows for the years then
ended in accordance with International Financial Reporting
Standards as adopted by the European Union.
OTHER MATTER
This report, including the opinion, has been prepared for and
only for the directors of Starwood European Real Estate Finance
Limited as a body in relation to the requirements of Rule 206(4)-2
of the Investment Advisers Act 1940 (the "Custody Rule") as it
applies to the company and for no other purpose. We do not, in
giving this opinion, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
25 March 2021
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2020
1 January 2020 1 January 2019
Notes to to
31 December 2020 31 December 2019
GBP GBP
Income
Income from loans advanced 10 29,052,521 26,890,182
Net foreign exchange gains 6 5,993,767 4,921,541
Net changes in fair value of financial assets at fair value through profit or 18 1,097,722 2,339,222
loss
Income from cash and cash equivalents - 535
Total income 36,144,010 34,151,480
Expenses
Investment management fees 22 3,186,943 3,077,665
Credit facility commitment fees 762,074 520,218
Credit facility interest 558,323 1,003,580
Credit facility amortisation of fees 387,448 390,350
Administration fees 3(b) 331,591 338,604
Legal and professional fees 288,111 263,725
Audit and non-audit fees 5 227,386 241,048
Other expenses 198,350 195,244
Directors' fees and expenses 4, 22 152,564 140,328
Broker's fees and expenses 3(d) 50,000 167
Facility agent fees 10,781 22,023
Total operating expenses 6,153,571 6,192,952
Operating profit for the year before tax 29,990,439 27,958,528
Taxation 20 81,953 60,898
Operating profit for the year 29,908,486 27,897,630
Other comprehensive income
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 232,417 6,451
Other comprehensive income for the year 232,417 6,451
Total comprehensive income for the year 30,140,903 27,904,081
Weighted average number of shares in issue 7 412,469,890 399,195,288
Basic and diluted earnings per Ordinary Share (pence) 7 7.25 6.99
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Financial Position
as at 31 December 2020
As at As at
Notes
31 December 2020 31 December 2019
GBP GBP
Assets
Cash and cash equivalents 8 2,939,408 36,793,674
Other receivables and prepayments 9 17,094 28,935
Financial assets at fair value through profit or loss 11 918,259 30,480,689
Loans advanced 10 442,659,649 390,647,516
Total assets 446,534,410 457,950,814
Liabilities
Credit facility 12 18,626,837 28,359,047
Trade and other payables 13 1,210,066 3,036,686
Total liabilities 19,836,903 31,395,733
Net assets 426,697,507 426,555,081
Capital and reserves
Share capital 15 408,031,544 411,205,161
Retained earnings 18,369,871 15,286,245
Translation reserve 296,092 63,675
Total equity 426,697,507 426,555,081
Number of Ordinary Shares in issue 15 409,571,273 413,219,398
Net asset value per Ordinary Share (pence) 104.18 103.23
These consolidated financial statements were approved and
authorised for issue by the Board of Directors on 25 March 2021,
and signed on its behalf by:
Chairman Director
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2020
Year ended 31 December 2020
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2020 411,205,161 15,286,245 63,675 426,555,081
Share buy backs (3,173,617) - - (3,173,617)
Dividends paid - (26,824,860) - (26,824,860)
Operating profit for the year - 29,908,486 - 29,908,486
Other comprehensive income:
Other comprehensive income for the year - - 232,417 232,417
Balance at 31 December 2020 408,031,544 18,369,871 296,092 426,697,507
Year ended 31 December 2019
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2019 371,929,982 13,006,376 57,224 384,993,582
Issue of share capital 40,014,500 - - 40,014,500
Cost of issues (739,321) - - (739,321)
Dividends paid - (25,617,761) - (25,617,761)
Operating profit for the year - 27,897,630 - 27,897,630
Other comprehensive income:
Other comprehensive income for the year - - 6,451 6,451
Balance at 31 December 2019 411,205,161 15,286,245 63,675 426,555,081
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2020
1 January 2020 to 1 January 2019 to
31 December 2020 31 December 2019
GBP GBP
Operating activities:
Operating profit for the year before tax 29,990,439 27,958,528
Adjustments:
Net interest income (29,052,521) (26,890,182)
Interest income on cash and cash equivalents - (535)
Net changes in fair value of financial assets at fair value through profit or loss (1,097,722) (2,339,222)
Decrease in prepayments and receivables 11,841 -
Decrease in trade and other payables (159,467) (4,279)
Net unrealised losses / (gains) on foreign exchange derivatives 7,676,819 (17,376,510)
Net foreign exchange (gains) / losses (12,848,644) 10,824,860
Credit facility interest 558,323 1,003,580
Credit facility amortisation of fees 387,448 390,350
Credit facility commitment fees 762,074 520,218
Currency translation difference (463,709) 471,376
Corporate taxes paid (151,052) (106,807)
(4,386,171) (5,548,623)
Loans advanced(1) (98,731,281) (185,959,804)
Loan repayments and amortisation 59,619,767 198,311,623
Credit linked note repayments 21,773,000 -
Origination fees paid (577,233) (1,962,601)
Interest, commitment and exit fee income from loans advanced 28,256,205 28,411,123
Interest received on Credit Linked Notes 1,210,333 2,339,946
Net cash inflow from operating activities 7,164,620 35,591,664
Cash flows from investing activities
Interest income from cash and cash equivalents - 535
Net cash inflow from investing activities - 535
Cash flows from financing activities
Share issue proceeds received - 40,014,500
Shares buy backs (3,088,030) -
Cost of share issue - (739,321)
Dividends paid (26,824,860) (25,617,761)
Proceeds under credit facility 41,985,860 148,035,219
Repayments under credit facility (52,067,717) (185,401,045)
Credit facility interest paid (492,331) (1,137,413)
Credit facility commitment fees paid (616,146) (499,063)
Credit facility arrangement fees and expenses paid - (572,358)
Net cash outflow from financing activities (41,103,224) (25,917,242)
Net increase in cash and cash equivalents (33,938,604) 9,674,957
Cash and cash equivalents at the start of the year 36,793,674 28,248,515
Net foreign exchange gains / (losses) on cash and cash equivalents 84,338 (1,129,798)
Cash and cash equivalents at the end of the year 2,939,408 36,793,674
(1) Net of arrangement fees of GBP780,584 (2019: GBP2,389,453)
withheld.
The accompanying notes form an integral part of these
consolidated financial statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2020
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (the "Company")
was incorporated with limited liability in Guernsey under the
Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with
registered number 55836, and has been authorised by the Guernsey
Financial Services Commission as registered closed-ended investment
scheme. The registered office and principal place of business of
the Company is 1, Royal Plaza, Royal Avenue, St Peter Port,
Guernsey, Channel Islands, GY1 2HL.
On 12 December 2012, the Company announced the results of its
IPO, which raised net proceeds of GBP223.9 million. The Company's
Ordinary Shares were admitted to the premium segment of the UK
Listing Authority's Official List and to trading on the Main Market
of the London Stock Exchange as part of its IPO which completed on
17 December 2012. Further issues took place in March 2013, April
2013, July 2015, September 2015, August 2016 and May 2019. On 10
August 2020 the Company announced the appointment of Jefferies
International Limited as buy-back agent to effect share buy backs
on behalf of the Company. As at year end 31 December 2020, the
Company had repurchased 3,648,125 Ordinary Shares at an average
price of 86.9 pence per share. These Ordinary Shares are held in
treasury.
The consolidated financial statements comprise the financial
statements of the Company, Starfin Public Holdco 1 Limited (the
"Holdco 1"), Starfin Public Holdco 2 Limited (the "Holdco 2"),
Starfin Lux S.à.r.l ("Luxco"), Starfin Lux 3 S.à.r.l ("Luxco 3")
and Starfin Lux 4 S.à.r.l ("Luxco 4") (together the "Group") as at
31 December 2020.
The Company's investment objective is to provide its
shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments (including debt instruments) in the UK and wider
European Union's internal market. To pursue its investment
objective, the Company, through the Holdco 1 and Holdco 2 (the
"Holdcos"), invests in the Luxco, Luxco 3 and Luxco 4 (the
"Luxcos") through both equity and profit participation instruments
or other funding instruments. The Luxcos then grant or acquire
loans (or other debt instruments) to borrowers in accordance with
the Group's investment policy. The Group expects all of its
investments to be debt obligations of corporate entities domiciled
or with significant operations in the UK and wider European Union's
internal market.
The Company has appointed Starwood European Finance Partners
Limited as the Investment Manager (the "Investment Manager"), a
company incorporated in Guernsey and regulated by the GFSC. The
Investment Manager has appointed Starwood Capital Europe Advisers,
LLP (the "Investment Adviser"), an English limited liability
partnership authorised and regulated by the Financial Conduct
Authority, to provide investment advice pursuant to an Investment
Advisory Agreement. The administration of the Company is delegated
to Apex Fund and Corporate Services (Guernsey) Limited (the
"Administrator"). 2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING
POLICIES
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied to the years presented, unless otherwise
stated. a. Going Concern
Note 17 includes the Group's objectives, policies and processes
for managing its capital, its financial risk management objectives,
details of financial instruments and exposure to credit risk and
liquidity risk. The Directors have undertaken a rigorous review of
the Group's ability to continue as a going concern including
assessing the possible impact of the COVID-19 pandemic on the
Group's portfolio, reviewing the ongoing cash flows and the level
of cash balances and available liquidity facilities as of the
reporting date as well as taking forecasts of future cash flows
into consideration.
After making enquiries of the Investment Manager and the
Administrator, and reviewing the viability model prepared by the
Investment Adviser, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational
existence for at least one year from the date the consolidated
financial statements were signed. Accordingly, the Directors
continue to adopt a going concern basis in preparing these
consolidated financial statements.
In addition to a going concern statement, the Directors have
undertaken a longer term viability assessment of the Group,
including the impact of Covid-19, the results of which can be found
on page 16 of the Strategic Report. A range of scenarios have been
evaluated as part of this analysis. The worst case scenario
evaluated was an interest payment default on all Stage 2 loans, and
simultaneously the repayment of the loan principal is not received
until 12 months after their maturity dates. In this scenario the
Group is still able to meet its liabilities as they fall due
although the dividend would need to be reduced to reflect the
reduced cash received. b. Statement of compliance
The Company has prepared its consolidated financial statements
in accordance with The Companies (Guernsey) Law, 2008 (as amended)
and International Financial Reporting Standards as adopted by the
European Union ("IFRS"), which comprise standards and
interpretations approved by the International Accounting Standards
Boards ("IASB") together with the interpretations of the IFRS
Interpretations Committee ("IFRIC") as approved by the
International Accounting Standards Committee ("IASC") which remain
in effect and were adopted by the European Union. The Directors of
the Company have taken the exemption in Section 244 of The
Companies (Guernsey) Law, 2008 (as amended) and have therefore
elected to only prepare consolidated and not separate financial
statements for the year. i. Standards and amendments to existing
standards effective 1 January 2020
Certain new accounting standards and interpretations have been
published that are effective 1 January 2020 and have not been
applied in preparing these consolidated financial statements. These
standards are not expected to have a material impact on the Group
in the current or future reporting periods and on foreseeable
future transactions. ii. New standards, amendments and
interpretations effective after 1 January 2020 and have not been
early adopted
A number of new standards, amendments to standards and
interpretations are effective for annual periods beginning after 1
January 2020, and have not been early adopted in preparing the
Group's consolidated financial statements. None of these are
expected to have a material effect on the consolidated financial
statements of the Group. c. Basis of preparation
These consolidated financial statements have been prepared on a
going concern basis and under the historical cost convention as
modified by the revaluation of certain assets and liabilities to
fair value.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires the Board of Directors to exercise its judgement in the
process of applying the Group's accounting policies. The areas
involving a higher degree of judgement or complexity, or areas
where assumptions and estimates are significant to the consolidated
financial statements relate to:
(i) Critical accounting estimates and assumptions ? Models used
for loans accounted at amortised cost use assumptions and estimates
regarding the receipt and timing of
scheduled and unscheduled payments of loans advanced. Changes in
these assumptions and estimates could impact
liquidity risk and the interest income (see note 17). ? The
discounted cash flow models used to calculate the fair value of the
credit linked notes (which were repaid in
June 2020) involved approximates and estimates of the timing of
cash flows and used significant unobservable inputs
that directly impacted the valuation of financial assets at fair
value through profit or loss (see note 11). ? The measurement of
both the initial and ongoing expected credit loss allowance for
financial assets measured at
amortised cost is an area that requires the use of significant
assumptions about credit behaviour such as
likelihood of borrowers defaulting and the resulting losses (see
note 2(h)).
(ii) Critical accounting judgements ? The functional currency of
subsidiary undertakings of the Company, which is considered by the
Directors to be Euro
for Luxco 3; Sterling for all other subsidiaries (see notes 2(e)
and 2(k)). ? The operating segments, of which the Directors are
currently of the opinion that the Company and its subsidiaries
are engaged in a single segment of business, being the provision
of a diversified portfolio of real estate backed
loans (see note 2(f)). ? The valuation of the credit linked
notes (which were repaid in June 2020) was derived from a model
prepared by the
Investment Adviser. The main inputs into the valuation model for
the CLNs were discount rates, market risk factors,
probabilities of default, expected credit loss levels and cash
flow forecasts. The key area of judgement was the
methodology and approach to model the fair value of credit
linked notes. ? A number of significant judgements are also
required in applying the accounting requirements for measuring
ECL,
such as determining the criteria for significant increase in
credit risk, choosing the appropriate model and
assumptions for the measurement of ECL, determining the
probabilities of default and loss given default (see note 2
(h)). d. Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiary undertakings) made up to the end of the reporting
period. Control is achieved where the Company has the power to
govern the financial and operating policies of an investee entity
so as to obtain benefits directly from its activities. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether
the Company controls another entity. The Company also assesses
existence of control where it does not have more than 50 per cent
of the voting power but is able to govern the financial and
operating policies by virtue of de-facto control.
Principal
Date of Ownership Country of
Subsidiary undertakings place of
Control % Establishment
business
Starfin Lux S.à.r.l 30/11/12 100 Luxembourg Luxembourg
Starfin Public Holdco 1 Limited 11/09/17 100 Guernsey Guernsey
Starfin Public Holdco 2 Limited 11/09/17 100 Guernsey Guernsey
Starfin Lux 3 S.à.r.l 19/09/17 100 Luxembourg Luxembourg
Starfin Lux 4 S.à.r.l 11/12/17 100 Luxembourg Luxembourg
Subsidiary undertakings are fully consolidated from the date on
which control is transferred to the Group. They are deconsolidated
from the date that control ceases.
The Group applies the acquisition method to account for business
combinations.
Acquisition-related costs are expensed as incurred. No
consideration, other than for the par value of any share capital or
capital contributions, has been paid in respect of the acquisition
of subsidiary undertakings. The Company acquired the subsidiaries
at the time of their initial establishment and hence they had no
net assets at the date of the acquisition.
Intercompany transactions, balances, income and expenses on
transactions between Group companies are eliminated on
consolidation. Profits and losses resulting from intercompany
transactions that are recognised in assets are also eliminated. e.
Functional and presentation currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates (the "functional
currency"). Therefore, the Directors have considered in assessing
the functional currency of each of the Group's entities: ? the
share capital of all members of the Group is denominated in
Sterling except for Lux 3 share capital which is
denominated in Euro; ? the dividends are paid in Sterling; ?
Euro non-investment transactions represent only a small proportion
of transactions in the Luxembourg entities; and ? proportion of non
Sterling investments in each portfolio of Luxembourg entities.
The functional and presentation currency of each Group entity is
Sterling, apart from Starfin Lux 3 S.à.r.l for which the functional
currency is Euro. Starfin Lux 3 S.à.r.l holds loans and investments
in Euro currencies. The Directors have also adopted Sterling as the
Group's presentation currency (as the Group holds a significant
proportion of its assets in the UK, although this may vary from
time to time, capital was raised in Sterling, Group expenses are
primarily incurred in Sterling and performance is measured in
Sterling) and, therefore, the consolidated financial statements for
the Company are presented in Sterling. f. Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker, who is responsible for
allocating resources and assessing performance of the operating
segments, has been identified as the Board, as the Board makes
strategic decisions. The Directors, after having considered the way
in which internal reporting is provided to them, are of the opinion
that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. Equally, based on the internal
reporting provided, the Directors do not analyse the portfolio
based on geographical segments. g. Financial assets and
liabilities
Classification and subsequent measurement
The Group classifies its financial assets into the following
measurement categories: at amortised cost, at fair value through
profit or loss and at fair value through other comprehensive
income. The classification depends on the purpose for which the
financial assets were acquired. Management determines the
classification of its financial assets at initial recognition.
Financial assets measured at amortised cost
A financial asset is measured at amortised cost if both of the
following conditions are met: (a) the financial asset is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and (b) the contractual
terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding. The carrying amount of these assets
is adjusted by any expected credit loss allowance recognised and
measured as described in note 2(h). Interest income from these
financial assets is included in "Income from loans advanced" using
the effective interest rate method.
Financial assets at fair value through other comprehensive
income
A financial asset is measured at fair value through other
comprehensive income if both of the following conditions are met:
(a) the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and
selling financial assets and (b) the contractual terms of the
financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount
outstanding. Movements in the carrying amount are taken through
other comprehensive income, except for the recognition of
impairment gains and losses, interest revenue and foreign exchange
gains and losses on the instrument's amortised cost which are
recognised in profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are
financial instruments that (a) either designated in this category
upon initial recognition or subsequently or (b) not classified in
any of the other categories. Financial assets at fair value through
profit or loss are carried in the statement of financial position
at fair value with net changes in fair value recognised in the
statement of profit or loss. This category includes currency
forward contracts and credit linked notes. Gains or losses on
credit linked notes measured at fair value through profit or loss
are recognised in profit or loss net of interest income received
from these financial assets and presented in the profit or loss
statements within "Net changes in fair value of financial assets at
fair value through profit or loss" in the period in which it
arises. Gains or losses on currency forward contracts are
recognised within "Net foreign exchange gains or losses".
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are
carried in the statement of financial position at fair value with
net changes in fair value recognised in profit or loss. These
comprise currency forward contracts which represent contractual
obligations to purchase domestic currency and sell foreign currency
on a future date.
Financial liabilities measured at amortised cost
Financial liabilities that are not classified through profit or
loss, including bank loans, are measured at amortised cost.
Recognition and measurement
Regular purchases and sales of financial assets are recognised
on the trade date, the date on which the Group commits to purchase
or sell the asset. Financial assets not carried at fair value
through profit or loss are initially recognised at fair value plus
transaction costs. Financial assets carried at fair value through
profit or loss are initially recognised at fair value, and
transaction costs are expensed in the Consolidated Statement of
Comprehensive Income. Financial assets at fair value through profit
or loss and financial assets at fair value through other
comprehensive income are subsequently carried at fair value.
Financial assets at amortised cost are subsequently measured using
the effective interest method and are subject to impairment using
the expected credit loss model. Gains and losses are recognised in
profit or loss when the asset is derecognised, modified or
impaired.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the investments have expired or have been
transferred and the Group has transferred substantially all risks
and rewards of ownership.
Financial liabilities are derecognised when they are
extinguished, that is, when the obligation specified in the
contract is discharged or cancelled or expires.
Amortised cost and effective interest rate
The amortised cost is the amount at which the financial asset or
financial liability is measured at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation
using the effective interest method of any difference between that
initial amount and the maturity amount and, for financial assets,
adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected
life of financial assets or financial liability to the gross
carrying amount of a financial asset (i.e., its amortised cost
before any loss allowance) or to the amortised cost of a financial
liability. The calculation does not consider expected credit losses
and includes transaction costs and all fees paid or received that
are integral to the effective interest rate.
Fair value estimation
The fair value of financial assets, which comprise financial
instruments such as credit linked notes ("CLNs"), not traded in an
active market, was determined using valuation techniques. The fair
value of the CLNs were determined by the Investment Adviser using a
valuation model. The main inputs into the valuation model for the
CLNs are discount rates, market risk premium adjustments to the
discount rate, probabilities of default and cash flow forecasts.
The Investment Adviser also performed a full analysis of the
performance of each underlying loan and with reference to other
inputs such as third party valuations of the underlying
collateral.
The fair value of financial assets, which comprise derivatives
not designated as hedges, are valued based on the difference
between the agreed price of selling or buying the financial
instruments on a future date and the price quoted on the year end
date for selling or buying the same or similar financial
instruments. h. Expected credit loss measurement
The Group follows a three-stage model for impairment based on
changes in credit quality since initial recognition as summarised
below: ? A financial instrument that is not credit-impaired on
initial recognition is classified as Stage 1 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's financial assets at amortised cost were all
classified within Stage 1 at inception for the following reasons: ?
All loans are the subject of very detailed underwriting, including
the testing of resilience to aggressive downside
scenarios with respect to the loan specifics, the market and
general macro economic changes, and therefore the
Group considers that value of losses given default ("LGD")
currently have a nil value for all loans; ? Loans have very robust
covenants in place which trigger as an early warning (long before
there would be any
indicators of significant increase in credit risk) and this
enables the Investment Adviser to become highly
involved in the execution of business plans to avoid ECL; ?
Loans have strong security packages and many are amortising with
relatively short terms which further reduces the
risk; and ? All loans have sufficient loan-to-value headroom
which further mitigates the risk of ECL.
During the year ended 31 December 2020 six loans with a value of
GBP150,331,450 were classified as Stage 2 and the remaining loans
are still classified as Stage 1. The loans classified to Stage 2
are predominantly in the retail and hospitality sectors (but not
all hospitality loans are in Stage 2). The main reason for moving
the loans to Stage 2 in the second quarter of 2020 was expected
income covenant breaches due to the disruption from Covid-19.
Following loan amendments agreed with borrowers, no income breaches
have occurred. Although these loans have been classified as Stage 2
loans, no expected credit loss has been recognised as although the
credit risk has increased for these loans, the Group does not
anticipate realising a loss in the event of a default. For further
information, see the page 39 of the Investment Manager's report.
The paragraph below describes how the Group determines when a
significant increase in credit risk has occurred, such that a loan
would move from Stage 1 to Stage 2.
The Group considers that for prepayments and capitalised cost,
the ECL is by default nil as these are non- monetary items with no
credit risks. For trade and other receivables the Group applies the
simplified approach which requires expected lifetime losses to be
recognised from initial recognition of the receivables.
Significant increase in credit risk - Stage 2
The Group uses both quantitative and qualitative criteria which
is monitored no less than quarterly in order to assess whether an
increase in credit risk has occurred. Increased credit risk would
be considered if, for example, all or a combination of the
following has occurred: ? underlying income performance is at a
greater than 10 per cent variance to the underwritten loan metrics;
? Loan to Value is greater than 75-80 per cent; ? Loan to Value or
income covenant test results are at a variance of greater than
5-10% of loan default covenant
level (note that loan default covenant levels are set tightly to
ensure that an early cure is required by the
borrower should they breach which usually involves decreasing
the loan amount until covenant tests are passed); ? late payments
have occurred and not been cured within 3 days; ? loan maturity
date is within six months and the borrower has not presented an
achievable refinance or repayment
plan; ? covenant and performance milestones criteria under the
loan have required more than two waivers; ? increased credit risk
has been identified on tenants representing greater than 25 per
cent of underlying asset
income; ? income rollover / tenant break options exist such that
a lease up of more than 30 per cent of underlying property
will be required within 12 months in order to meet loan
covenants and interest payments; and ? borrower management team
quality has adversely changed.
Default and credit-impaired assets - Stage 3
Non-performing financial assets would be classified with Stage
3, which is fully aligned with the definition of credit- impaired,
when one or more of the following has occurred: ? the borrower is
in breach of all financial covenants; ? the borrower is in
significant financial difficulty; and ? it is becoming probable
that the borrower will enter bankruptcy.
An instrument is considered to have been cured, that is no
longer in default, when it no longer meets any of the default
criteria for a sufficient period of time.
Write-off policy
The Group writes off financial assets, in whole or in part, when
it has exhausted all practically recovery efforts and has concluded
there is no reasonable expectation of recovery. Indicators that
there is no reasonable expectation of recovery include: ? ceasing
enforcement activity; and ? where the Group's recovery method is
foreclosing on collateral and the value of the collateral is such
that there
is no reasonable expectation of recovering in full.
Sensitivity analysis
The most significant period-end assumptions used for the
expected credit loss estimates are the LGD and probability of
default ("PD") as described above.
The default probabilities are based on loan-to-value ("LTV")
headroom which the Investment Adviser believes to be a good
predictor of the PD, in accordance with recent market studies of
European commercial real estate loans.
31 December 31 December
Reasonable possible shift (absolute value) 2020 ECL 2019 ECL
GBP GBP
LTV +25%(2019: +5%)
304,219 351,780
LGD +0.3%(2019: +0.3%)
Change in ECL allowance (+)
In measuring the LGD for this sensitivity analysis, the loans
advanced have been assessed on a collective basis as they possess
similar covenants and security package characteristics. The
selected LGD of 0.30% is based on the aggregate losses of all AAA
rated notes issued in Europe from 1995 to 2017 (totalling EUR177
billions), accordingly to recent market studies of European
commercial real estate loans. AAA rated notes are considered the
most representative of the Group's loan portfolio. The Investment
Adviser considers this to be a reasonable estimate for loss given
default.
As explained on Note 2 (b)(i), the year-end ECL are nil. Set out
in the table above is the sensitivity to the ECL as at 31 December
2020 and 31 December 2019 that could result from reasonable
possible changes in the LTV and LGD actual assumptions used for
calculation of ECL as at the respective year-end. On an individual
loan basis, the LTV was increased by 25% (2019: 5%), and a new PD
determined, which was multiplied by a constant LGD of 0.30% for all
loans and the loan exposure as at each year-end. All other
variables are held constant. i. Cash and cash equivalents
In the Consolidated Statement of Cash Flows, cash and cash
equivalents includes cash in hand, deposits held at call with banks
and other short-term highly liquid investments with original
maturities of three months or less. j. Share capital
Ordinary Shares are classified as equity. Incremental costs
directly attributable to the issue of new Ordinary Shares are shown
in equity as a deduction, net of tax, from the proceeds. k. Foreign
currency translation
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions or valuation where items are re-measured. Foreign
exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies
are recognised in the Consolidated Statement of Comprehensive
Income. Foreign exchange gains and losses that relate to loans
advanced, borrowings and cash and cash equivalents and all other
foreign exchange gains and losses are presented in the Consolidated
Statement of Comprehensive Income within "net foreign exchange
gains".
Group companies
The results and financial position of all the Group entities
that have a functional currency different from the presentation
currency of the Group are translated into the presentation currency
of the Group as follows: i. assets and liabilities for each
Statement of Financial Position presented are translated at the
closing rate at the
end of the reporting period; ii. income and expenses for each
Statement of Comprehensive Income are translated at average
exchange rates (unless
this average is not a reasonable approximation of the cumulative
effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at the
rate on the dates of the transactions); iii. share capital is
translated at historical cost (translated using the exchange rates
at the transaction date); and iv. all resulting exchange
differences are recognised in other comprehensive income.
The cumulative amount of translation exchange differences is
presented in a separate component of equity until disposal of the
entity.
Starfin Lux 3 S.à.r.l has Euro as its functional currency. l.
Interest income
Interest income on financial assets within Stage 1 and 2 is
recognised by applying the effective interest rate to the gross
carrying amount of financial assets. For financial assets that are
classified within Stage 3, interest revenue is calculated by
applying the effective interest rate to their amortised cost (that
is net of expected credit loss provision). Interest income on
non-performing financial assets at amortised cost is recognised to
the extent the Group expects to recover the interest
receivable.
Interest on cash and cash equivalents is recognised at amortised
cost basis. m. Origination, exit and loan arrangement fees
Origination fees paid to the Investment Manager and exit and
direct loan arrangement fees received will be recognised using the
effective interest rate method under loans advanced and amortised
over the lifetime of the related financial asset through income
from loans advanced in the Consolidated Statement of Comprehensive
Income. Syndication costs are recognised in the Consolidated
Statement of Comprehensive Income when incurred. n. Expenses
All other expenses are included in the Consolidated Statement of
Comprehensive Income on an accruals basis. o. Taxation
The Company is a tax-exempt Guernsey limited liability company
as it is domiciled and registered for taxation purposes in Guernsey
where it pays an annual exempt status fee under The Income Tax
(Exempt Bodies) (Guernsey) Ordinances 1989 (as amended).
Accordingly, no provision for Guernsey tax is made.
The Holdcos are exempted for Guernsey tax purposes, and
therefore no provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations
in Luxembourg and taxation is provided based on the results for the
year (see note 20). p. Other receivables
Trade and other receivables are amounts due in the ordinary
course of business. They are classified as assets. Trade and other
receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method,
less allowance for ECL. q. Other payables
Trade and other payables are obligations to pay for services
that have been acquired in the ordinary course of business. They
are classified as liabilities. Trade and other payables are
recognised initially at fair value and subsequently measured at
amortised cost using the effective interest rate method. r.
Dividend distributions
Dividend distributions to the Company's shareholders are
recognised as a liability in the Company's financial statements in
the period in which the dividends are declared by the Board of
Directors. s. Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount
reported on the Consolidated Statement of Financial Position when
there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis or
realise the asset and settle the liability simultaneously. t.
Financial liabilities at amortised cost
Financial liabilities at amortised cost, including bank loans
are initially recognised at fair value and subsequently measured at
amortised cost using the effective interest method. Financial
liabilities are derecognised when the contractual obligation is
discharged, cancelled or expires. u. Capitalised expenses on credit
facilities
Expenses in connection with the process of originating,
prolongation, or restructuring of a credit facility, such as
application and underwriting fees, are capitalised and subsequently
amortised over the period of the relevant credit facility in the
Consolidated Statement of Comprehensive Income within "credit
facility amortisation of fees". 3. MATERIAL AGREEMENTS a.
Investment management agreement
The Company and the Investment Manager have entered into an
investment management agreement, dated 28 November 2012 (the
"Investment Management Agreement"), (which was amended on 7 March
2014, 14 May 2014, 7 September 2015 and 6 October 2017) pursuant to
which the Investment Manager has been given overall responsibility
for the discretionary management of the Company's assets in
accordance with the Company's investment objectives and policy.
The Investment Manager is entitled to a management fee which is
calculated and accrued monthly at a rate equivalent to 0.75 per
cent per annum of NAV. In calculating such fee, there shall be
excluded from the Net Asset Value attributable to the Ordinary
Shares the uninvested portion of the cash proceeds of any new issue
of Shares (or C Shares) until at least 90 per cent of such proceeds
are invested in accordance with the Company's investment policy (or
deployed to repay borrowings under any credit facility of the Group
or other liabilities of the Group) for the first time. The
management fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset
origination fee of 0.75 per cent of the value of all new loan
investments made or acquired by the Group (see note 22). The asset
origination fee to be paid by the Group is expected to be paid upon
receipt by the Group of loan arrangement fees received on the
deployment of the Group's funds.
The Investment Management Agreement is terminable by either the
Investment Manager or the Company giving to the other not less than
12 months' written notice. The Company is also able to terminate
the appointment of the Investment Manager in the event of a change
of control of the Investment Manager. A change of control shall be
deemed to occur where a person acquires a direct or indirect
interest in the Investment Manager, which is calculated by
reference to 15 per cent or more of the voting rights. In addition
the Investment Management Agreement can be terminated by the
Company for any failure to act in good faith with the due skill,
care and diligence which would reasonably be expected from an
experienced manager in the sector and to exercise appropriate
prudence in the management of the Group's portfolio.
Pursuant to the Investment Management Agreement's provisions, a
performance fee would apply from 1 January 2018. The amount of such
Performance Fee is 20 per cent of the excess (if any) of the
returns generated by the Group over the Hurdle Total Return
(described below). The measurement period over which the
Performance Fee is calculated is two years, with the payment of any
performance fee earned being made at the end of each such two year
period.
The Hurdle Total Return will be achieved when the NAV of the
Company at the end of the two year period, plus the total of all
dividends declared and paid to Ordinary Shareholders in that two
year period, is equal to the NAV of the Company at the start of
each two year measurement period, as increased by 8 per cent per
annum, on a simple interest basis (but excluding performance fees
accrued and deemed as a creditor on the balance sheet at the start
of the two year measurement period). No performance fee will be
payable in relation to performance that recoups previous losses (if
any).
To the extent that the Company makes further issues of Ordinary
Shares and/or repurchases or redeems Ordinary Shares, the Hurdle
Total Return will be adjusted accordingly, by reference to the
issue proceeds of such further issues and dividends declared
subsequent to such issues. Other corporate actions will also be
reflected as appropriate in the calculation of the Hurdle Total
Return.
The Investment Manager has appointed Starwood Capital Europe
Advisers, LLP (the "Investment Adviser"), an English limited
liability partnership authorised and regulated by the Financial
Conduct Authority, to provide investment advice pursuant to an
Investment Advisory Agreement. b. Administration agreement
The Company has engaged the services of Apex Fund and Corporate
Services (Guernsey) Limited (the "Administrator") to act as
Administrator and Company Secretary. Under the terms of the service
agreement dated 25 September 2018, the Administrator is entitled to
a fee of no less than GBP225,000 per annum for Guernsey registered
companies of the Group, EUR96,000 for Luxembourg registered
subsidiaries and further amounts as may be agreed in relation to
any additional services provided by the Administrator. The
Administrator is, in addition, entitled to recover third party
expenses and disbursements. c. Registrar's agreement
The Company and Computershare Investor Services (Guernsey)
Limited (the "Registrar") entered into a Registrar agreement dated
28 November 2012, pursuant to which the Company appointed the
Registrar to act as Registrar of the Company for a minimum annual
fee payable by the Company of GBP7,500 in respect of basic
registration. d. Brokerage agreement
On 19 June 2020 Jefferies Group LLC ("Jefferies") was appointed
to act as Broker. Jefferies is entitled to receive a fee of
GBP50,000 per annum plus expenses. The previous brokerage agreement
with Stifel Nicolaus Europe Limited was terminated on the same
date. e. Licence agreement
The Company and Starwood Capital Group Management, LLC (the
"Licensor") have entered into a trade mark licence agreement dated
28 November 2012 (the "Licence Agreement"), pursuant to which the
Licensor has agreed to grant to the Company a royalty-free,
non-exclusive worldwide licence for the use of the "Starwood" name
for the purposes of the Company's business.
Under the terms of the Licence Agreement, it may be terminated
by the Licensor; (i) if the Investment Management Agreement or any
other similar agreement between the Company and the Investment
Manager (or either of their respective affiliates) is terminated
for any reason whatsoever or expires; (ii) if the Company suffers
an insolvency event or breaches any court order relating to the
Licence Agreement; or (iii) upon two months' written notice without
cause. f. Hedging agreements
The Company and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Company entered into a Professional Client
Agreement with Goldman Sachs, pursuant to which the parties can
enter into foreign exchange transactions with the intention of
hedging against fluctuations in the exchange rate between Sterling
and other currencies. Both agreements are governed by the laws of
England and Wales. g. Revolving credit facility
Under its investment policy, the Company is limited to borrowing
an amount equivalent to a maximum of 30 per cent of its NAV at the
time of drawdown, of which a maximum of 20 per cent can be longer
term borrowings. In calculating the Company's borrowings for this
purpose, any liabilities incurred under the Company's foreign
exchange hedging arrangements shall be disregarded.
On 4 December 2014, the Company entered into a GBP50 million
revolving credit facility with Lloyds Bank plc (the "Lloyds
Facility") which is intended for short-term liquidity. This
facility was amended and extended on 10 February 2021. The current
maturity date is 6 May 2022. The facility is secured by a pledge
over the bank accounts of the Company, its interests in Starfin
Public Holdco 1 Limited and the intercompany funding provided by
the Company to Starfin Public Holdco 1 Limited. Starfin Public
Holdco 1 Limited also acts as guarantor of the facility and has
pledged its bank accounts as collateral. The undertakings and
events of default are customary for a transaction of this
nature.
On 18 December 2017, the Group entered into a separate GBP64
million secured borrowing facility with Morgan Stanley (the "MS
Facility"). This facility was amended and extended on 14 November
2019. The current maturity date is 14 November 2024 and the
borrowing facility was increased to GBP76 million. The debt can be
drawn in respect of underlying loans which are eligible under the
facility. Certain loans will not be eligible, for example mezzanine
loans and loans above 75 per cent loan to value. It is secured by a
customary security package of bank account pledges, intercompany
receivables security, share security over the two borrower entities
(Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l) and their shares.
The MS Facility does not have recourse to the Company. The
undertakings and events of default are customary for a facility of
this nature.
4. DIRECTORS' FEES
31 December 2020 31 December 2019
GBP GBP
Directors' emoluments 150,833 137,500
Other expenses 1,731 2,828
152,564 140,328
5. AUDIT AND NON-AUDIT FEES
The following table discloses the audit and non audit fees paid
to the auditors for audit and non-audit services and their
associated network firms for non-audit services, where and as
applicable.
31 December 2020 31 December 2019
GBP GBP
Audit and non-audit fees expensed in the Consolidated Statement of Comprehensive
Income
Audit of company 119,300 125,800
Audit of subsidiaries 70,342 63,811
Total audit 189,642 189,611
Audit related assurance services (Interim review) 23,083 22,145
Total assurance services 23,083 22,145
Non-audit services not covered above 14,661 29,292
Total non-audit services 37,744 51,437
Total fees expensed 227,386 241,048
Other non-audit services of GBP14,661 (2019: GBP29,292) expensed
in the Consolidated Statement of Comprehensive Income relate to tax
service and other disbursements. From 15 March 2020, these services
are now impermissible in accordance with the latest FRC Ethical
Standard and the Board have appointed an alternative service
provider as a result. The current charge relates to previously
allowable and approved services.
6. NET FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2020 31 December 2019
GBP GBP
Loans advanced gains - realised 647,000 3,608,147
Loans advanced losses - realised (1,134,619) (1,053,256)
Forward contracts gains - realised 1,131,404 1,515,324
Forward contracts losses - realised (328,698) (3,145,524)
Other gains - realised 1,229 1,754,235
Other losses - realised (422,347) (636,329)
Loans advanced gains - unrealised 13,776,618 83,487
Loans advanced losses - unrealised - (14,581,053)
Forward contracts gains - unrealised 397,778 17,650,771
Forward contracts losses - unrealised (8,074,598) (274,261)
5,993,767 4,921,541
7. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on
the operating profit of GBP29,908,486 (2019: GBP27,897,630) and on
the weighted average number of Ordinary Shares in issue during the
year of 412,469,890 (2019: 399,195,288) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of
GBP426,697,507 (2019: GBP426,555,081) and the actual number of
Ordinary Shares in issue at 31 December 2020 of 409,571,273 (2019:
413,219,398).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2020 31 December 2019
GBP GBP
Cash at bank 2,939,408 36,793,674
2,939,408 36,793,674
Cash and cash equivalents comprises cash held by the Group and
short term deposits held with various banking institutions with
original maturities of three months or less. The carrying amount of
these assets approximates their fair value. For further information
and the associated risks refer to note 17.
9. OTHER RECEIVABLES AND PREPAYMENTS
31 December 2020 31 December 2019
GBP GBP
Prepayments 17,094 28,935
17,094 28,935
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial
assets is discussed in note 2(g).
31 December 2020 31 December 2019
GBP GBP
UK
Residential, London 25,124,499 49,522,631
Hotel & Residential 49,914,595 39,861,178
Hospitals 25,362,367 25,354,300
Hotel, North Berwick 26,727,408 25,861,391
Hotel, Oxford 16,705,485 16,724,638
Hotel, Scotland 10,497,593 -
Logistics Portfolio 11,981,154 -
Office, London 13,368,457 12,697,122
Office, Scotland 4,894,738 4,470,792
Mixed Use Development, South East - 766,877
Ireland
Hotel, Dublin 54,730,169 51,576,017
Mixed Use, Dublin 3,112,893 592,335
Office Portfolio, Dublin 31,753,439 -
Spain
Three Shopping Centres 33,367,582 31,709,624
Hotel 47,379,721 25,225,534
Office Portfolio 19,375,687 18,050,874
Office & Hotel, Madrid 16,792,398 15,832,398
Shopping Centre 15,653,661 14,672,253
France
Office, Paris - 13,854,691
Germany
Logistics Portfolio 5,909,892 -
Europe
Mixed Portfolio, Europe 30,007,911 43,874,861
442,659,649 390,647,516
No element of loans advanced are past due or impaired. For
further information and the associated risks see the Investment
Manager's Report.
The table below reconciles the movement of the carrying value of
loans advanced in the year:
31 December 2020 31 December 2019
GBP GBP
Loans advanced at the start of the year 390,647,516 413,444,410
Loans advanced 97,794,862 189,678,726
Loan repayments and amortisation (59,619,767) (198,311,623)
Arrangement fees earned (780,584) (2,389,453)
Commitment fees earned (1,215,996) (688,884)
Exit fees earned (250,772) (1,983,925)
Origination fees for the year 546,194 1,684,798
Income from loans advanced 29,052,521 26,890,182
Interest payments received / accrued (26,789,437) (25,738,458)
Foreign exchange (losses) / gains 13,275,112 (11,938,263)
Loans advanced at the end of the year 442,659,649 390,647,516
Loans advanced at fair value 459,549,015 402,825,998
IFRS 7 requires the disclosure of the fair value of financial
instruments not measured at fair value for comparison to their
carrying amounts. The fair value of loans advanced has been
determined by discounting the expected cash flows at a market rate
of interest using the discounted cash flow model. For the avoidance
of doubt, the Group carries its loans advanced at amortised cost in
the consolidated financial statements, consistent with the
requirement of IFRS 9 as the Group's intention and business model
is to hold to collect the contractual cashlows of both interest and
the capital repayments thereof.
The following table sets out the sensitivity to the above
reported fair value to a change in the discount rate used in the
discounted cash flow model (see the Investment Manager's report on
page 20 for more information):
Discount Rate 31 December 2020 31 December 2020
Value Value increase / (decrease)
calculated GBP
GBP
4.8% 464,563,596 21,903,947
5.2% (Fair value) 459,549,015 16,889,366
5.3% 458,928,617 16,268,968
5.8% 453,401,431 10,741,782
6.3% 447,979,319 5,319,670
6.8% (Carrying value) 442,659,649 -
7.3% 437,439,862 (5,219,787)
7.8% 432,317,488 (10,342,161)
8.3% 427,290,124 (15,369,525)
8.8% 422,355,444 (20,304,205)
Discount Rate 31 December 2019 31 December 2019
Value Value increase / (decrease)
calculated GBP
GBP
4.8% 411, 597,859 20,950,343
5.3% 406,113,142 15,465,626
5.6% (fair value) 402,825,998 12,178,482
5.8% 400,743,718 10,096,202
6.3% 395,486,430 4,838,914
6.8% (carrying value) 390,647,516 -
7.3% 385,296,155 (5,351,361)
7.8% 380,357,361 (10,290,155)
8.3% 375,519,084 (15,128,432)
8.8% 370,778,652 (19,868,864) 11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise
currency forward contracts which represent contractual obligations
to purchase domestic currency and sell foreign currency on a future
date at a specified price and financial instruments designated at
fair value through profit or loss which are debt securities that
are managed by the Group and their performance is evaluated on a
fair value basis.
The underlying instruments of currency forwards become
favourable (assets) or unfavourable (liabilities) as a result of
fluctuations of foreign exchange rates relative to their terms. The
aggregate contractual or notional amount of derivative financial
instruments, the extent to which instruments are favourable or
unfavourable, and thus the aggregate fair values of derivative
financial assets and liabilities, can fluctuate significantly from
time to time. The foreign exchange derivatives are subject to
offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value
through profit or loss are set out below.
Fair values
Notional contract
Assets Liabilities Total
31 December 2020 amount(1)
GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 273,442,149 3,897,550 (2,979,291) 918,259
Total 273,442,149 3,897,550 (2,979,291) 918,259
(1) Euro amounts are translated at the year end exchange
rate
Fair values
Notional contract
Assets Liabilities Total
31 December 2019 amount(1)
GBP GBP GBP
GBP
Investments at fair value
through profit or loss
Credit Linked Notes, UK Real Estate N/a 21,885,611 - 21,885,611
Total 21,885,611 - 21,885,611
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 231,251,616 8,819,545 (224,467) 8,595,078
Total 231,251,616 8,819,545 (224,467) 8,595,078
(1) Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing
an amount equivalent to a maximum of 30 per cent of its NAV at the
time of drawdown, of which a maximum of 20 per cent can be longer
term borrowings. In calculating the Group borrowings for this
purpose, any liabilities incurred under the Company's foreign
exchange hedging arrangements shall be disregarded. The Group has
two credit facilities as described in note 3(g) of these financial
statements.
As at 31 December 2020 an amount of GBP19,500,000 (2019:
GBP29,704,000) was drawn and interest of GBP69,585 (2019:
GBP14,949) was payable.
The revolving credit facility capitalised costs are directly
attributable costs incurred in relation to the establishment of the
credit loan facilities and an amount of GBP942,748 (2019:
GBP1,359,902) was netted off against the loan facilities
outstanding.
The Group has maintained sufficient headroom against the
measures under, and is full compliance with, all loan
convenants.
The changes in liabilities arising from financing activities are
shown in the table below.
31 December 2020 31 December 2019
GBP GBP
Borrowings at the start of the year 28,359,047 67,764,943
Proceeds during the year 41,985,860 148,035,219
Repayments during the year (52,067,717) (185,401,045)
Interest expenses recognised for the year 558,323 1,003,580
Interest paid during the year (492,331) (1,137,413)
Credit facility fees incurred - (537,981)
Credit facility amortisation of fees 387,448 390,350
Foreign exchange and translation difference (103,793) (1,758,606)
Borrowings at the end of the year 18,626,837 28,359,047 13. TRADE AND OTHER PAYABLES
31 December 2020 31 December 2019
Loan amounts payable - 1,717,003
Investment management fees payable 799,584 801,074
Refinancing and restructuring fees payable - 207,098
Commitment fees payable 161,430 104,055
Audit fees payable 98,902 86,131
Share buyback payable 85,587 -
Tax provision 9,713 76,773
Origination fees payable - 31,572
Administration fees payable 7,771 12,980
Accrued expenses 17,079 -
Broker fees payable 25,000 -
Legal and professional fees payable 5,000 -
1,210,066 3,036,686 14. COMMITMENTS
As at 31 December 2020 the Group had outstanding commitments in
respect of loans not fully drawn of GBP49,104,643 (2019:
GBP77,997,899).
As at 31 December 2020 the Group has entered into forward
contracts under the Hedging Master Agreement with Lloyds Bank plc
to sell EUR302,627,550 (2019: EUR270,913,327) to receive Sterling.
At the end of the reporting period, these forward contracts have a
fair value of GBP918,259 asset (2019: GBP8,595,078 asset). 15.
SHARE CAPITAL
The share capital of the Company consists of an unlimited number
of redeemable Ordinary Shares of no par value which upon issue the
Directors may classify into such classes as they may determine. The
Ordinary Shares are redeemable at the discretion of the Board.
At the year end the Company had issued and fully paid up share
capital as follows:
31 December 2020 31 December 2019
Number of shares Number of shares
Ordinary Shares of no par value Issued and fully paid 413,219,398 413,219,398
Shares held in treasury (3,648,125) -
Total Ordinary Shares, excluding those in treasury 409,571,273 413,219,398
Rights attached to shares
The Company's share capital is denominated in Sterling. At any
general meeting of the Company each ordinary share carries one
vote. The Ordinary Shares also carry the right to receive all
income of the Company attributable to the Ordinary Shares, and to
participate in any distribution of such income made by the Company,
such income shall be divided pari passu among the holders of
Ordinary Shares in proportion to the number of Ordinary Shares held
by them.
Significant share movements
1 January 2020 to 31 December 2020:
Ordinary Shares Number GBP
Balance at the start of the year 413,219,398 419,495,150
Shares bought back in 2020 (3,648,125) (3,173,617)
Balance at the end of the year 409,571,273 416,321,533
Issue costs since inception (8,289,989)
Net proceeds 408,031,544
1 January 2019 to 31 December 2019:
Ordinary Shares Number GBP
Balance at the start of the year 375,019,398 379,480,650
Shares issued in 2019 38,200,000 40,014,500
Balance at the end of the year 413,219,398 419,495,150
Issue costs since inception (8,289,989)
Net proceeds 411,205,161 16. DIVIDS
Dividends will be declared by the Directors and paid in
compliance with the solvency test prescribed by Guernsey law. Under
Guernsey law, companies can pay dividends in excess of accounting
profit provided they satisfy the solvency test prescribed by the
Companies (Guernsey) Law, 2008. The solvency test considers whether
a company is able to pay its debts when they fall due, and whether
the value of a company's assets is greater than its liabilities.
The Group passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the
Group and the investment outlook, it is the Directors' intention to
pay quarterly dividends to shareholders (for more information see
Chairman's Statement).
The Group paid the following dividends in respect of the year to
31 December 2020:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2020 1.625 6,714,815 20 May 2020
30 June 2020 1.625 6,714,815 28 August 2020
30 September 2020 1.625 6,680,414 20 November 2020
31 December 2020(1) 1.625 6,644,808 5 March 2021
(1) Declared after year end and to be paid on 5 March 2021 to
shareholders on the register as at 5 February 2021.
The Group paid the following dividends in respect of the year to
31 December 2019:
Period to: Dividend rate per Share (pence) Net dividend Payment date
paid (GBP)
31 March 2019 1.625 6,094,065 24 May 2019
30 June 2019 1.625 6,714,815 30 August 2019
30 September 2019 1.625 6,714,815 22 November 2019
31 December 2019 1.625 6,714,815 21 February 2020 17. RISK MANAGEMENT POLICIES AND PROCEDURES
The COVID-19 outbreak is an ongoing situation that is evolving
and changing on a weekly basis. There has been a negative impact on
global economies and the future impact and outcome is still largely
unknown. While the outbreak has had a significant negative impact
on a lot of businesses worldwide, it has also created opportunities
in other sectors. The Directors continue to monitor the impact on
the Group and its investments.
The Group through its investment in whole loans, subordinated
loans, mezzanine loans, bridge loans, loan- on-loan financings and
other debt instruments is exposed to a variety of financial risks,
including market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group's overall risk
management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the
Group's financial performance.
It is the role of the Board to review and manage all risks
associated with the Group, mitigating these either directly or
through the delegation of certain responsibilities to the Audit
Committee, Investment Manager and Investment Adviser.
The Board of Directors has established procedures for monitoring
and controlling risk. The Group has investment guidelines that set
out its overall business strategies, its tolerance for risk and its
general risk management philosophy.
In addition, the Investment Manager monitors and measures the
overall risk bearing capacity in relation to the aggregate risk
exposure across all risk types and activities. Further details
regarding these policies are set out below: a. Market risk
Market risk includes market price risk, currency risk and
interest rate risk.
i) Market price risk
If a borrower defaults on a loan and the real estate market
enters a downturn it could materially and adversely affect the
value of the collateral over which loans are secured. However, this
risk is considered by the Board to constitute credit risk as it
relates to the borrower defaulting on the loan and not directly to
any movements in the real estate market. The Group's exposure to
market price risk arose from credit linked notes held by the Group
and classified as financial assets at fair value through profit or
loss. The Investment Manager regularly monitored the fair value of
credit linked notes (repaid in 2020 and no longer outstanding) and
no specific hedging activities were undertaken in relation to this
investment. The Investment Manager moderates market risk through a
careful selection of loans within specified limits. The Group's
overall market position is monitored by the Investment Manager and
is reviewed by the Board of Directors on an ongoing basis.
ii) Currency risk
The Group, via the subsidiaries, operates across Europe and
invests in loans that are denominated in currencies other than the
functional currency of the Company. Consequently the Group is
exposed to risks arising from foreign exchange rate fluctuations in
respect of these loans and other assets and liabilities which
relate to currency flows from revenues and expenses. Exposure to
foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board
accordingly.
The Group and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Group entered into a Professional Client
Agreement with Goldman Sachs, pursuant to which the parties can
enter into foreign exchange transactions with the intention of
hedging against fluctuations in the exchange rate between Sterling
and other currencies. The Group does not trade in derivatives but
holds them to hedge specific exposures and have maturities designed
to match the exposures they are hedging. The derivatives are held
at fair value which represents the replacement cost of the
instruments at the reporting date and movements in the fair value
are included in the Consolidated Statement of Comprehensive Income
under net foreign exchange losses/ (gains). The Group does not
adopt hedge accounting in the financial statements. At the end of
the reporting period the Group had 138 (2019: 113) open forward
contracts.
As at 31 December 2020 the Group had the following currency
exposure:
Danish Krone Sterling Euro Total
31 December 2020 GBP GBP GBP GBP
Assets
Loans advanced - 184,576,296 258,083,353 442,659,649
Financial assets at fair value through profit or loss - 918,259 - 918,259
Other receivables and prepayments - 17,094 - 17,094
Cash and cash equivalents 422 2,409,377 529,609 2,939,408
Liabilities
Revolving credit facility - (18,626,837) - (18,626,837)
Trade and other payables - (1,123,070) (86,996) (1,210,066)
Net currency exposure 422 168,171,119 258,525,966 426,697,507
Danish Krone Sterling Euro Total
31 December 2019 GBP GBP GBP GBP
Assets
Loans advanced - 125,736,298 264,911,218 390,647,516
Financial assets at fair value through profit or loss - 30,480,689 - 30,480,689
Other receivables and prepayments - 28,935 - 28,935
Cash and cash equivalents 671 6,566,136 30,226,867 36,793,674
Liabilities
Revolving credit facility - - (28,359,047) (28,359,047)
Trade and other payables - (139,704) (2,896,982) (3,036,686)
Net currency exposure 671 162,672,354 262,522,154 426,555,081
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase
or decrease by 10 per cent with all other variables held constant,
the net assets of the Group at 31 December 2020 would increase or
decrease by GBP25,852,597 (2019: GBP21,435,943). Should the
exchange rate of the Danish Krone against Sterling increase or
decrease by 10 per cent with all other variables held constant, the
net assets of the Group at 31 December 2020 would increase or
decrease by GBP42 (2019: GBP67). These percentages have been
determined based on potential volatility and deemed reasonable by
the Directors. This does not include the impact of hedges in place
which would be expected to reduce the impact.
In accordance with the Group's policy, the Investment Manager
monitors the Group's currency position, and the Board of Directors
reviews this risk on a regular basis.
iii) Interest rate risk
Interest rate risk is the risk that the value of financial
instruments and related income from loans advanced and cash and
cash equivalents will fluctuate due to changes in market interest
rates.
The majority of the Group's financial assets are loans advanced
at amortised cost, credit linked notes (repaid in 2020 and no
longer outstanding), receivables and cash and cash equivalents. The
Group's investments have some exposure to interest rate risk but
this is limited to interest earned on cash deposits and floating
interbank rate exposure for investments designated as loans
advanced. Loans advanced have been structured to include a
combination of fixed and floating interest and 79.2% (2019: 79.1%)
of investments designed as loans advanced at 31 December 2020 have
a floating interbank interest rate. The interest rate risk is
mitigated by the inclusion of interbank rate floors on floating
rate loans, preventing interest rates from falling below certain
levels.
The following table shows the portfolio profile of the financial
assets at 31 December 2020:
31 December 2020 31 December 2019
GBP GBP
Floating rate
Loans advanced(1) 347,477,400 309,007,305
Cash and cash equivalents 2,939,408 36,793,674
Financial assets at fair value through profit or loss - 21,885,611
Fixed rate
Loans advanced 95,182,249 81,640,211
Total financial assets subject to interest rate risk 445,599,057 449,326,801
(1) Loans advanced at floating rates include loans with
interbank rate floors.
At 31 December 2020, if interest rates had changed by 50 basis
points, with all other variables remaining constant, the effect on
the net profit and equity would have been as shown in the table
below:
31 December 2020 31 December 2019
GBP GBP
Floating rate
Increase of 50 basis points (1) 1,752,084 1,838,433
Decrease of 50 basis points (1,752,084) (1,838,433)
(1) Loans advanced at floating rates include loans with
interbank rate floors.
These percentages have been determined based on potential
volatility and deemed reasonable by the Directors.
b) Credit risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. The Group's main credit risk exposure
is in the investment portfolio, shown as loans advanced at
amortised cost and credit linked notes (repaid in 2020 and no
longer outstanding) designated at fair value through profit or
loss, where the Group invests in whole loans and also subordinated
and mezzanine debt which rank behind senior debt for repayment in
the event that a borrower defaults. There is a spread concentration
of risk as at 31 December 2020 due to several loans being advanced
since inception. There is also credit risk in respect of other
financial assets as a portion of the Group's assets are cash and
cash equivalents or accrued interest. The banks used to hold cash
and cash equivalents have been diversified to spread the credit
risk to which the Group is exposed. The Group also has credit risk
exposure in its financial assets classified as financial assets
through profit or loss which is diversified between hedge providers
in order to spread credit risk to which the Group is exposed. At
year-end our derivative exposures were with one counterparty.
With respect to the credit linked notes designated at fair value
through profit or loss, the Group held junior notes linked to the
performance of a portfolio of high quality UK real estate loans
owned by a major commercial bank. The credit linked notes were
repaid in June 2020. The transaction was structured as a synthetic
securitisation with risk transfer from the bank to the Group
achieved via the purchase of credit protection by the bank on the
most junior tranches. The credit risk to the Group was the risk
that one of the underlying borrowers defaults on their loan and the
Group was required to make a payment under the credit protection
agreement. Despite the different way in which the transaction was
structured the Group considered the risks to be fundamentally the
same as any other junior loan in the portfolio and monitored and
managed this risk in the same way as the other loans advanced by
the Group.
The total exposure to credit risk arises from default of the
counterparty and the carrying amounts of financial assets best
represent the maximum credit risk exposure at the year-end date. As
at 31 December 2020, the maximum credit risk exposure was
GBP446,517,316 (2019: GBP457,921,879).
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 sufficient loan-to-value headroom.
Despite the fact that six loans with a carrying value of
GBP150,331,450 have been moved from Stage 1 to Stage 2 during the
year ended 31 December 2020 (refer to the Investment Manager's
Report), no loss allowance has been recognised based on 12 month
and lifetime ECLs for Stage 1 and Stage 2 loans advanced
respectively, as based on the information available there is no
reason to believe that there has been any impairment in the value
of the loans held by the Group.
The Group uses both quantitative and qualitative criteria for
monitoring the loan portfolio as described in note 2 (h). The gross
carrying amount of loan portfolio is presented in the table below
and also represents the Group's maximum exposure to credit risks on
these assets.
Total as at Total as at
Stage 1 Stage 2 Stage 3 31 December 2020 31 December 2019
GBP GBP GBP GBP GBP
Loans advanced 292,328,199 150,331,450 - 442,659,649 390,647,516
Gross carrying amount 292,328,199 150,331,450 - 442,659,649 390,647,516
Less ECL allowance - - - - -
Carrying amount 292,328,199 150,331,450 - 442,659,649 390,647,516
All loans advanced as at 31 December 2019 were in Stage 1. A
reconciliation of changes in the loss allowance was not presented
as the allowance recognised at the end of the reporting period was
GBPnil (2019: GBPnil).
The Group maintains its cash and cash equivalents across various
different banks to diversify credit risk which have been all rated
A1 or higher by Moody's and this is subject to the Group's credit
risk monitoring policies as mentioned above.
Total as at Total as at
31 December 2020 31 December 2019
GBP GBP
Barclays Bank plc 1,275,464 35,818,792
Lloyds Bank plc 778 818
HSBC Bank plc 241 331
Royal Bank of Scotland International - 81
ING Luxembourg, SA 1,662,925 973,652
Total cash and cash equivalents 2,939,408 36,793,674
The carrying amount of cash and cash equivalents approximates
their fair value. c. Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient resources available to meet its liabilities as they fall
due. The Group's loans advanced are illiquid and may be difficult
or impossible to realise for cash at short notice.
The Group manages its liquidity risk through short term and long
term cash flow forecasts to ensure it is able to meet its
obligations. In addition, the Company is permitted to borrow up to
30 per cent of NAV and has entered into revolving credit facilities
of total of GBP126,000,000 (2019: GBP126,000,000) of which
GBP19,500,000 (2019: GBP29,704,000) was drawn at the end of the
reporting period.
The table below shows the maturity of the Group's non-derivative
financial assets and liabilities arising from the advancement of
loans by remaining contractual maturities at the end of the
reporting date. The amounts disclosed under assets are contractual,
undiscounted cash flows and may differ from the actual cash flows
received in the future as a result of early repayments:
Up to 3 months Between 3 and 12 months Over 12 months Total
31 December 2020 GBP GBP GBP GBP
Assets
Loans advanced 15,653,661 79,933,826 347,072,162 442,659,649
Liabilities and commitments
Loan commitments(1) (16,310,931) (25,822,395) (6,598,132) (48,731,458)
Credit facilities (69,585) (19,500,000) - (19,569,585)
Trade and other payables (1,210,066) - - (1,210,066)
(1,936,921) 34,611,431 340,474,030 373,148,540
(1) Loan commitments are estimated forecasted drawdowns at year
end.
Up to 3 months Between 3 and 12 months Over 12 months Total
31 December 2019 GBP GBP GBP GBP
Assets
Loans advanced 766,877 28,526,943 361,353,696 390,647,516
Financial assets at fair value through profit or - - 21,885,611 21,885,611
loss
Liabilities and commitments
Loan commitments(1) (14,896,152) (31,183,758) (25,455,384) (71,535,294)
Credit facilities (29,718,949) - - (29,718,949)
Trade and other payables (3,036,686) - - (3,036,686)
(46,884,910) (2,656,815) 357,783,923 308,242,198
(1) Loan commitments are estimated forecasted drawdowns at year
end.
The table below analyses the Group's derivative financial
instruments that will be settled on a gross basis into relevant
maturity groupings based on the remaining period at the end of the
reporting date. The amounts disclosed are the contractual
undiscounted cash flows:
31 December 2020
Up to 3 months Between 3 and 12 months Over 12 months Total as at 31 December 2020
Derivatives GBP GBP GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (3,619,250) (14,976,399) (254,846,500) (273,442,149)
Inflow 3,584,355 14,874,088 256,024,869 274,483,312
31 December 2019
Between 3 and Over Total as at
Up to 3 months 12 months 12 months 31 December 2019
Derivatives GBP GBP GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (2,753,442) (7,160,751) (221,337,422) (231,251,615)
Inflow 2,735,217 7,156,425 228,928,347 238,819,989
(1) Euro amounts translated at year end exchange rate.
Capital management policies and procedures
The Group's capital management objectives are: ? To ensure that
the Group will be able to continue as a going concern; and ? To
maximise the income and capital return to equity shareholders
through an appropriate balance of equity capital
and long-term debt.
The capital of the Company is represented by the net assets
attributable to the holders of the Company's shares.
In accordance with the Group's investment policy, the Group's
principal use of cash (including the proceeds of the IPO and
subsequent tap issues and placings) has been to fund investments in
the form of loans sourced by the Investment Adviser and the
Investment Manager, as well as initial expenses related to the
issue, ongoing operational expenses and payment of dividends and
other distributions to shareholders in accordance with the
Company's dividend policy.
The Board, with the assistance of the Investment Manager,
monitors and reviews the broad structure of the Company's capital
on an ongoing basis. The Company has no imposed capital
requirements.
The Company's capital at the end of the reporting period
comprises:
31 December 2020 31 December 2019
GBP GBP
Equity
Equity share capital 408,031,544 411,205,161
Retained earnings and translation reserve 18,665,963 15,349,920
Total capital 426,697,507 426,555,081
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels: a. Quoted prices (unadjusted) in active
markets for identical assets or liabilities (level 1). b. Inputs
other than quoted prices included within level 1 that are
observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived
from prices including interest rates, yield curves,
volatilities, prepayment rates, credit risks and default rates)
or other market corroborated inputs (level 2). c. Inputs for the
asset or liability that are not based on observable market data
(that is, unobservable inputs)
(level 3).
The following table analyses within the fair value hierarchy the
Group's financial assets and liabilities (by class) measured at
fair value:
31 December 2020
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 918,259 - 918,259
Total - 918,259 - 918,259
31 December 2019
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 8,595,078 - 8,595,078
Investments at fair value through profit or loss - - 21,885,611 21,885,611
Total - 8,595,078 21,885,611 30,480,689
There have been no transfers between levels for the year ended
31 December 2020 (2019: nil).
Investments classified within Level 3 consisted of Credit Linked
Notes ("CLNs"). The fair value of the CLNs were determined by the
Investment Adviser using a discounted cash flow valuation model.
The main inputs into the valuation model for the CLNs were discount
rates, market risk factors, probabilities of default, expected
credit loss levels and cash flow forecasts. The Investment Adviser
also considered the original transaction price and recent
transactions of comparable instruments (where available), the
credit quality on the underlying reference portfolios and adjusted
the valuation model as deemed necessary.
The Directors were responsible for considering the methodology
and assumptions used by the Investment Adviser and for approving
the fair values reported at the financial period end.
The most significant input to the valuation model was the
discount rate applied to the cash flows. There were no CLNs held as
at the year end. As at 31 December 2019, if the discount rate was
increased/decreased by 1%, the fair value of the CLNs would have
reduced/increased by GBP298,155 /GBP306,372.
The table below presents the movement in level 3
investments.
31 December 31 December
2020 2019
GBP GBP
Balance at the start of the year 21,885,611 21,886,335
Cash interest received (1,210,333) (2,339,946)
Net gains recognised in profit or loss (1) 1,097,722 2,339,222
Redemptions during the year (21,773,000) -
Balance at the end of the year - 21,885,611
Changes in unrealised gains or losses for Level 3 assets held at year end and included in net - -
changes in fair value of financial assets at fair value through profit or loss
(1) The net gains for the year ended 31 December 2020 comprise
of GBP1,097,722 interest income on CLNs (31 December 2019:
GBP2,339,222).
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2020 but for which fair value is
disclosed:
31 December 2020
Total fair Total carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 459,549,015 459,549,015 442,659,649
Liabilities
Credit facility - 18,626,837 - 18,626,837 18,626,837
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2019 but for which fair value is
disclosed:
31 December 2019
Total fair Total carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 402,825,998 402,825,998 390,647,516
Liabilities
Credit facility - 28,359,047 - 28,359,047 28,359,047
For cash and cash equivalents, other receivables and
prepayments, trade and other payables, and credit facilities the
carrying amount is a reasonable approximation of the fair value.
The Group carries its loans advanced at amortised cost in the
consolidated financial statements. Refer to note 10 for further
information.
Cash and cash equivalents include cash at hand and fixed
deposits held with banks. Other receivables and prepayments include
the contractual amounts and obligations due to the Group and
consideration for advance payments made by the Group. Credit
facilities and trade and other payables represent the contractual
amounts and obligations due by the Group for contractual
payments.
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of shareholdings
advised to them, the Company has no immediate or ultimate
controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income
Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an
annual fee of GBP1,200.
The Luxembourg indirect subsidiaries of the Company are subject
to the applicable tax regulations in Luxembourg. The table below
analyses the tax charges incurred at Luxembourg level:
31 December 2020 31 December 2019
GBP GBP
Current tax
Tax expenses on profit of the reporting period 81,953 62,307
Tax adjustments on profit of previous periods - (395)
Tax refund for previous periods - (1,014)
Total current tax 81,953 60,898
The Luxco had no operating gains on ordinary activities before
taxation and was therefore for the year ended 31 December 2020
subject to the Luxembourg minimum corporate income taxation at
EUR4,815 (2019: 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% (2019:
24.94%).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment
Advisors Act 1940 (the "Custody Rule") the consolidated financial
statements of the Group have also been audited in accordance with
Generally Accepted Auditing Standards applicable in the United
States ("US GAAS"). As such two independent Auditor's reports are
included on pages 49 to 56, one under International Standards on
Auditing as required by the Crown Dependencies Audit Rules and the
other under US GAAS. Compliance with the Custody Rule also requires
a reconciliation of the operating profit and net assets under IFRS
to US GAAP.
The principal differences between IFRS and US GAAP relate to
accounting for financial assets that are carried at amortised cost.
Under US GAAP the calculation of the effective interest rate is
based on contractual cash flows over the asset's contractual life.
International Financial Reporting Standards, however, base the
effective interest rate calculation on the estimated cash flows
over the expected life of the asset.
The Directors have assessed the operating profit and NAV of the
Group under both IFRS and US GAAP and have concluded that no
material differences were identified and therefore no
reconciliation has been presented in these consolidated financial
statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions. Details on the Investment Manager and other related
party transactions are included in note 3 to the consolidated
financial statements.
The following tables summarise the transactions occurred with
related parties during the reporting period and outstanding at 31
December 2020 and 31 December 2019:
2020
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2020 31 December 2020
GBP GBP
Directors' fees and expenses paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel (resigned 31 December 2020) - 42,500
Shelagh Mason (appointed 1 September 2020) - 13,333
Expenses paid - 1,731
Investment Manager
Investment management fees 799,584 3,186,943
Origination fees - 546,194
Expenses - 68,279
2019
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2019 31 December 2019
GBP GBP
Directors' fees and expenses paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel - 42,500
Expenses paid - 2,828
Investment Manager
Investment management fees 801,074 3,077,665
Origination fees 31,572 1,684,798
Expenses paid - 100,624
2020
Dividends paid during
As at
Shareholdings and the year ended
dividends paid 31 December 2020
31 December 2020
Number of shares
GBP
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Shelagh Mason (appointed 1 September 2020) 287 17,688
Stephen Smith 5,130 78,929
John Whittle 1,356 23,866
Jonathan Bridel (resigned 31 December 2020) 771 11,866
Duncan MacPherson* 8,333 133,333
Lorcain Egan* 3,818 61,093
* Employees at the Investment Advisor
Post year end Shelagh Mason, Duncan MacPherson and Lorcain Egan
purchased 95,131, 116,667 and 22,585 shares respectively.
2019
Dividends paid during
As at
Shareholdings and the year ended
31 December 2019
dividends paid 31 December 2019
Number of shares
GBP
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel (resigned 31 December 2020) 771 11,866
Duncan MacPherson* - -
Lorcain Egan* - -
* Employees at the Investment Advisor
Other
The Group continues to participate in a number of loans in which
Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The
details of these loans are shown in the table below.
Loan Related party co-lenders
Hotel & Residential, UK STWD
Hotel, Spain STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD
23. EVENTS AFTER THE REPORTING PERIOD
The following cash amounts have been funded since the year end
up to the date of publication of this report:
Local Currency
Hotel, Scotland GBP3,867,454
Hotel, Spain EUR1,442,051
Mixed Use, Dublin EUR279,309
Office Portfolio, Spain EUR214,854
Office, London GBP154,634
The following loan amortisation (both scheduled and unscheduled)
has been received since the year end up to the date of publication
of this report:
Local Currency
Residential, London GBP20,959,870
Mixed Portfolio, Europe EUR1,765,799
Logistics Portfolio, Germany EUR644,207
Shopping Centre, Spain EUR317,344
The term of the loan on Hotel & Residential, UK (GBP49.9m)
has been extended by one year to 31 December 2022.
The Company has repaid GBP14.0 million of funding on its credit
facilities following the amortisation of the loans above. In
addition, the Company has drawn GBP3.0 million of funding on its
credit facilities to fund the amounts drawn under existing
commitments. At the date of publication of this report the amount
drawn under each facility are: ? Morgan Stanley Facility: GBP8.5
million ? Lloyds Facility: GBP0.0 million
On 22 January 2021 the Directors declared a dividend in respect
of the financial year ended 31 December 2020 of 1.625 pence per
share, GBP6,644,808 to be paid on 5 March 2021 to shareholders on
the register as at 5 February 2021.
On 1 January 2021 Charlotte Denton was appointed as a Director
of the Company.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") the Board has considered what APMs are included
in the Annual Financial Report and Audited Consolidated Financial
Statements which require further clarification. An APM is defined
as a financial measure of historical or future financial
performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial
reporting framework. APMs included in the financial statements,
which are unaudited and outside the scope of IFRS, are deemed to be
as follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets
attributable to equity shareholders divided by the number of
Ordinary Shares in issue, excluding any shares held in treasury.
The NAV per Ordinary Share is published monthly. This APM relates
to past performance and is used as a comparison to the share price
per Ordinary Share to assess performance. There are no reconciling
items between this calculation and the Net Asset Value shown on the
balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any
dividends paid, together with the rise or fall in the NAV per
Ordinary Share. This APM relates to past performance and takes into
account both capital returns and dividends paid to shareholders.
Any dividends received by a shareholder are assumed to have been
reinvested in the assets of the Company at its NAV per Ordinary
Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of
any dividends paid, together with the rise or fall in the share
price. This APM relates to past performance and assesses the impact
of movements in the share price on total returns to investors. Any
dividends received by a shareholder are assumed to have been
reinvested in additional shares of the Company at the time the
shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of
the Company is lower (discount) or higher (premium) than the NAV
per Ordinary Share at the date of reporting and relates to past
performance. The discount or premium is normally expressed as a
percentage of the NAV per Ordinary Share.
INVESTED LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the
quarterly reporting date of the estimated annual return on the
portfolio at that point in time. It is calculated individually for
each loan by summing the one-off fees earned (such as up-front
arrangement or exit fees charged on repayment) and dividing these
over the full contractual term of the loan, and adding this to the
annual returns. Where a loan is floating rate (partially or in
whole or with floors), the returns are based on an assumed profile
for future interbank rates, but the actual rate received may be
higher or lower. The return is calculated only on amounts funded at
the quarterly reporting date and excludes committed but undrawn
loans and excludes cash un-invested. The calculation also excludes
origination fees paid to the Investment Manager, which are
accounted for within the interest line in the financial
statements.
An average, weighted by loan amount, is then calculated for the
portfolio.
This APM gives an indication of the future performance of the
portfolio (as constituted at the reporting date). The calculation,
if the portfolio remained unchanged, could be used to estimate
"income from loans advanced" in the Consolidated Statement of
Comprehensive Income if adjusted for the origination fee of 0.75
basis points amortised over the average life of the loan. As
discussed earlier in this report the figure actually realised may
be different due to the following reasons: ? In the quoted return,
we amortise all one-off fees (such as arrangement and exit fees)
over the contractual life of
the loan, which is currently four years for the portfolio.
However, it has been our experience that loans tend to
repay after approximately 2.5 years and as such, these fees are
actually amortised over a shorter period. ? Many loans benefit from
prepayment provisions, which means that if they are repaid before
the end of the protected
period, additional interest or fees become due. As we quote the
return based on the contractual life of the loan
these returns cannot be forecast in the return. ? The quoted
return excludes the benefit of any foreign exchange gains on Euro
loans. We do not forecast this as the
loans are often repaid early and the gain may be lower than this
once hedge positions are settled.
Generally speaking, the actual annualised total return is likely
to be higher than the reported return for these reasons, but this
is not incorporated in the reported figure, as the benefit of these
items cannot be assumed.
PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same
basis as the unlevered annual return but takes into account the
amount of leverage in the Group and the cost of that leverage at
current LIBOR/EURIBOR 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 EURIBOR or LIBOR.
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.
Corporate Information
Directors
Stephen Smith (Non-executive Chairman)
John Whittle (Non-executive Director)
Shelagh Mason (Non-executive Director, appointed 1 September
2020)
Charlotte Denton (Non-executive Director, appointed 1 January
2021)
(all care of the registered office)
Investment Manager
Starwood European Finance
Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities
law)
Norton Rose LLP
3 More London Riverside London
SE1 2AQ United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
3rd Floor Natwest House Le Truchot
St Peter Port Guernsey GY1 1WD
Broker
Jefferies Group LLC
100 Bishopsgate
London, EC2N 4JL
United Kingdom
Administrator, Designated Manager
and Company Secretary
Apex Fund and Corporate Services
(Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Investment Adviser
Starwood Capital Europe Advisers, LLP 2nd Floor
One Eagle Place St. James's London
SW1Y 6AF United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Website:
www.starwoodeuropeanfinance.com
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ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
Sequence No.: 96324
EQS News ID: 1178729
End of Announcement EQS News Service
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