Starwood European Real Estate Finance Ltd (SWEF) SWEF: Full Year
Results for the Year Ended 31 December 2022 24-March-2023 / 07:14
GMT/BST
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Starwood European Real Estate Finance Limited
Full Year Results for the Year Ended 31 December 2022
Unlevered Annualised Portfolio Return Rises to 7.8%; 79%
Floating Rate Exposure
Orderly Realisation Strategy Approval Post Period End;
Additional 2.0 Pence Per Share Additional Dividend Declared
Starwood European Real Estate Finance Limited (the "Company")
and its subsidiaries ("SEREF" or the "Group"), a leading investor
originating, executing and managing a diverse portfolio of
high-quality real estate debt investments in the UK and Europe,
announces strong Full Year Results for the year ended 31 December
2022.
Following the approval of the Company's new investment objective
and policy as recommended to shareholders by the Board post period
end at the Company's EGM on 27 January 2023, the Company will
pursue a strategy of orderly realisation and the return of capital
over time to shareholders.
Highlights since IPO, 17 December 2012
-- 82.3 per cent NAV total return from a robust investment
strategy, including annualised NAV total returnsof 6.2 per cent
(excludes additional dividend of 2.0 pence for 2022 announced on 23
March 2023)
-- GBP1.6 billion capital invested in secured loans to high
quality real estate counterparties
-- 0 per cent loss track record reflecting a resilient
approach
-- GBP206 million in dividends paid to shareholders in a regular
source of income, paid quarterly
Highlights for the period, 12 months ended 31 December 2022
-- Strong cash generation - the portfolio as a whole continues
to support targeted annual dividend paymentsof 5.5 pence per
Ordinary Share, paid quarterly. A dividend of 5.5 per pence per
Ordinary Share represents a 6.2per cent dividend yield on the share
price as at 31 December 2022
-- Additional dividend - an additional dividend of 2.0 pence per
Ordinary Share has been declared postperiod end in respect of the
2022 earnings period, leading to a total declared distribution of
7.5 pence perOrdinary Share for the year
-- Income stability - all loan interest and scheduled
amortisation payments paid in full and on time
-- 79 per cent of the portfolio is contracted at floating
interest rates (with floors) which benefits theGroup in the current
rising interest rate environment
-- Portfolio remains robust - despite the economic disruption
and uncertainty experienced in 2022, theportfolio continues to
perform fully in line with expectations
-- Borrowers remain adequately capitalised and are expected to
continue to pay loan interest and capitalrepayments in line with
contractual obligations
-- Further strategic progress - in 2022, the Group committed a
total of GBP66 million to two new loans,located in the United
Kingdom and Europe, in the office, industrial and industrial
estates sectors
-- 51 per cent - share price total return since IPO in December
2012 (excludes additional dividend of 2.0pence for 2022 announced
on 23 March 2023)
-- Portfolio remains fully invested
Portfolio Statistics
As at 31 December 2022, the portfolio was invested in line with
the Group's investment policy. The key portfolio statistics are
summarised below:
31 December 2022 31 December 2021
Number of investments 20 19
Percentage of currently invested portfolio in floating rate loans 78.9% 78.0%
Invested Loan Portfolio unlevered annualised total return* 7.8% 6.9%
Invested Loan Portfolio levered annualised total return* 7.9% 7.0%
Weighted average portfolio LTV - to Group first GBP* 13.2% 16.4%
Weighted average portfolio LTV - to Group last GBP* 58.6% 61.9%
Average loan term (stated maturity at inception) 5.0 years 4.9 years
Average remaining loan term 1.7 years 2.3 years
Net Asset Value GBP416.1m GBP421.6m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP19.2m) (GBP8.5m)
Loans advanced at amortised cost (including accrued income) GBP432.5m GBP414.6m
Cash GBP3.6m GBP3.0m
Other net assets / liabilities (including the value of FX hedges) (GBP0.8m) GBP12.5m
*Alternative performance measure
John Whittle, Chairman of the Company commented:
"The twelve months ended 31 December 2022 represented another
highly successful year for the Group in an extraordinary year that
severely tested many investment strategies. Despite extremely
challenging, volatile and uncertain economic conditions, once again
the Group demonstrated resilient and consistent performance.
Crucially, once again all loan interest and scheduled amortisation
payments continue to be paid in full and on time. This is due to
the rigorous underwriting and diligent portfolio management that
have defined the Group's existence since 2012. Meanwhile,
underlying collateral valuations continue to provide reassuring
headroom. It is equally notable that while resilience is an
attractive feature, the portfolio has also been able to grow its
earnings in current market conditions, delivering a 7.8 per cent
annualised and unlevered portfolio return from the Group's 78.9 per
cent floating rate loans positions, covering the target dividend
1.24 times.
Despite this performance and strong shareholder support, under
the Group's discount control mechanism in Q1 2023, the Group would
have been required to offer shareholders an opportunity to redeem
up to 75 per cent of their holding in the Group as a result of the
Group's discount to its NAV per share being greater than 5 per cent
or more during the six-month period ending 31 December 2022. In
October 2022 the Board determined that following discussions with
larger shareholders, the likely take-up of this option would result
in the Company no longer being of viable size to provide
shareholders with significant liquidity and scale. Accordingly, a
resolution was passed at the Group's EGM on 27 January 2023 to
amend the Group's investment objective and policy to pursue a
strategy of orderly realisation and the return of capital over time
to shareholders.
While the Group's secure income investment style has fallen out
of favour it cannot be doubted that the Group has clearly met its
objectives at IPO and has established an enviable track record of
delivering stable and consistent income and risk adjusted returns.
This was especially marked in the Group's navigation of the huge
disruption of the Covid-19 epidemic without a single missed
payment, a remarkable achievement of which the Investment Adviser,
Investment Manager and the Board may be proud. To them all I
acknowledge my thanks as we look ahead to continuing to manage the
portfolio to preserve and maximise returns for shareholders as we
implement the Group's new orderly realisation strategy."
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company
Secretary +44 203 5303 630
Duke Le Prevost
Starwood Capital +44 (0) 20 7016 3655
Duncan MacPherson
Jefferies International Limited +44 (0) 20 7029 8000
Gaudi Le Roux
Stuart Klein
Harry Randall
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Hannah Ratcliff
Notes:
Starwood European Real Estate Finance Limited is an investment
company listed on the main market of the London Stock Exchange with
an investment objective to conduct an orderly realisation of the
assets of the Group. www.starwoodeuropeanfinance.com.
The Group is the largest London-listed vehicle to provide
investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance
Partners Limited, an indirect wholly owned subsidiary of the
Starwood Capital Group.
Starwood European Real Estate Finance
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2022
Overview
Financial Highlights
Key Highlights Year ended Year ended
31 December 2022 31 December 2021
NAV per Ordinary Share 105.20 p 103.09 p
Share Price 89.0 p 94.0 p
NAV total return (1) (2) 7.7% 4.6%
Share Price total return (1) (2) 0.45% 11.1%
Total Net Assets GBP416.1 m GBP421.6 m
Loans advanced at amortised cost (including accrued income) GBP432.5 m GBP414.6 m
Financial assets held at fair value through profit or loss GBP0.7 m GBP13.3 m
Cash and Cash Equivalents GBP3.6 m GBP3.0 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP19.0 m GBP8.5 m
Dividends per Ordinary Share (2) 5.5 p 5.5 p
Invested Loan Portfolio unlevered annualised total return (1) 7.8% 6.9%
Invested Loan Portfolio levered annualised total return (1) 7.9% 7.0%
Ongoing charges percentage (1) 1.1% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 13.2% 16.4%
Weighted average portfolio LTV to Group last GBP (1) 58.6% 61.9%
(1) Further explanation and definitions of the calculation is
contained in the section "Alternative Performance Measures" at the
end of this financial report.
(2) Excludes additional dividend for 2022 announced on 23 March
2023.
SHARE PRICE PERFORMANCE
As at 31 December 2022, the NAV was 105.20 pence per Ordinary
Share (2021: 103.09 pence) and the share price was 89.0 pence
(2021: 94.0 pence).
The Company's share price has been volatile since the market
turbulence caused by Covid-19 in March 2020. The volatility has
been driven by market conditions and trading flows rather than a
change in the Company's performance.
Objective and Investment Policy
INTRODUCTION
Starwood European Real Estate Finance Limited (the "Company")
was established in November 2012 to provide its shareholders with
regular dividends and an attractive total return while limiting
downside risk, through the origination, execution, acquisition and
servicing of a diversified portfolio of real estate debt
investments in the UK and the European Union's internal market.
The Company, 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"), has provided a regular dividend to
shareholders whilst preserving capital by limiting downside
risk.
On 31 October 2022, the Company announced, that following a
review of the Company's strategy and advice sought from its
advisers, the Board intended to recommend to shareholders that the
investment objective and policy of the Company were amended such
that the Board can pursue a strategy of orderly realisation and the
return of capital over time to shareholders (the "Proposed Orderly
Realisation"). If approved by the shareholders, the Company would
seek to return cash to shareholders in an orderly manner as soon as
reasonably practicable following the repayment of loans, while
retaining sufficient working capital for ongoing operations and the
funding of committed but currently unfunded loan commitments.
On 28 December 2022, a Circular relating to the Proposed Orderly
Realisation and containing a Notice of Extraordinary General
Meeting (EGM) was published. The Circular set out details of, and
sought shareholder approval for, certain proposals (the
"Proposals"). The Proposals were:
(a) a change to the Company's Investment Policy to reflect the
fact that the Company will cease making any new investments and
will pursue a realisation strategy of the remaining assets in the
Company's portfolio; and
(b) adoption of new articles which provide for the periodic
Compulsory Redemption of the Company's Shares at the discretion of
the Directors to allow cash to be returned to Shareholders
following the full or partial realisation of assets.
On 27 January 2023, these Proposals were approved at the
EGM.
The Investment Objective and Policy which applied prior to the
approval of the Proposals, and for the whole of 2022, are set out
in the prior year Annual Report which can be found on the company's
website https:// starwoodeuropeanfinance.com. The Investment
Objective applied for the whole of 2022 was to provide its
shareholders with regular dividends and an attractive total return
while limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments in the UK and the European Union's internal
market. The Investment Policy applied for the whole of 2022 was to
invest in a diversified portfolio of real estate debt investments
in the UK and the European Union's internal market as the Group had
done since its initial public offering ("IPO") in December
2012.
Set out below is the current Investment Objective and Policy of
the Company following the approval of the Proposals.
INVESTMENT OBJECTIVE
Following the Company's EGM on 27 January 2023, the Company's
investment objective is to conduct an orderly realisation of the
assets of the Group.
INVESTMENT POLICY
The assets of the Group will be realised in an orderly manner,
returning cash to Shareholders at such times and in such manner as
the Board may, in its absolute discretion, determine. The Board
will endeavour to realise all of the Group's investments in a
manner that achieves a balance between maximising the net value
received from those investments and making timely returns to
Shareholders.
The Group may not make any new investments save that:
-- investments may be made to honour commitments under existing
contractual arrangements or to preserve thevalue of any underlying
security; and
-- cash held by the Group pending distribution will be held in
either cash or cash equivalents for thepurposes of cash
management.
Subject to the above restrictions, the Company retains the
ability to seek to enhance the returns of selected loan investments
through the economic transfer of the most senior portion of such
loan investments which would be by way of syndication, sale,
assignment, sub-participation or other financing (including but not
limited to true sale securitisation, repurchase transactions and
loan-on-loan financing) 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.
Transactions with Starwood Capital Group or Other Accounts
Subject to the above restrictions, the Company retains the
ability to transact with 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 furtherance of the Company's investment
objective to conduct an orderly realisation of the Group's assets
(for example, sales of the Group's assets to companies within the
Starwood Capital Group or certain Other Accounts or amendments to
pre-existing arrangements). In order to manage the potential
conflicts of interest that may arise as a result of any such
transactions, any such proposed transaction may only be entered
into if the independent Directors of the Company have reviewed and
approved the terms of the transaction, complied with the conflict
of interest provisions in the Registered Collective Investment
Scheme Rules and Guidance, 2021 issued by the Guernsey Financial
Services Commission ("Commission") under The Protection of
Investors (Bailiwick of Guernsey) Law, 2020, as amended, and, where
required by the Listing Rules, Shareholder approval would be
obtained in accordance with the listing rules issued by the
Financial Conduct 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.
While Starwood Capital Group and certain Other Accounts are
party to certain pre-existing co-investment commitments, no new
co-investment arrangements are expected to be entered into by, or
in relation to, the Company in the future during the orderly
realisation of the Company's assets.
The change in investment objective does not impact the below
classifications.
Borrowings
The Company may utilise borrowings from time to time for working
capital and general corporate purposes provided such borrowings
will not exceed an amount equal to 30 per cent of the Net Asset
Value immediately following the drawdown of the borrowings.
In calculating the Company's borrowings for this purpose, any
liabilities incurred under its foreign exchange hedging
arrangements (described below) shall be disregarded.
Hedging
The Company will not enter into derivative transactions for
purely speculative purposes. However, the Company's investments
have been typically made in the currency of the country where the
underlying real estate assets are located. The Company may continue
to 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 have been 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.
FCA Listing Rule restrictions
The Company will continue to comply with the restrictions
imposed by the Listing Rules in force and as amended from time to
time.
Any material change to the Company's published investment policy
will be made only with the prior approval of the Financial Conduct
Authority and of Shareholders by ordinary resolution at a general
meeting of the Company.
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 and the Company remains
listed:
-- neither the Company nor any of its subsidiaries will conduct
any trading activity which is significant inthe context of its
group as a whole;
-- the Company will avoid cross-financing between businesses
forming part of its investment portfolio;
-- the Company will avoid the operation of common treasury
functions as between the Company and investeecompanies;
-- not more than 10 per cent, in aggregate, of the Company's NAV
will be invested in other listedclosed-ended investment funds;
and
-- the Company will, at all times, invest and manage its assets
in a way which is consistent with its objectof spreading investment
risk and in accordance with the published investment policy. As
required by the ListingRules, any material change to the investment
policy of the Company will be made only with the approval
ofshareholders.
Chairman's Statement
JOHN WHITTLE | Chairman
23 March 2023
Dear Shareholder,
On behalf of the Board, 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
2022.
The feeling of optimism across UK and global economies felt in
early 2022 - post the worst restrictions of the Covid-19 pandemic -
was soon replaced by concerns over energy prices, the rising cost
of living, higher interest rates and the Russian invasion of
Ukraine.
Domestically, the UK government and economy faced a number of
other setbacks in the second half of the year with three prime
ministers in as many months, government U-turns on economic policy
and a number of wide spread and widely impacting strikes across key
infrastructure sectors - by railway workers, nurses and UK Border
control, among others, at the end of the year.
Despite these challenging, volatile and uncertain economic and
political times, once again, the Group demonstrated its unique
portfolio resilience through the strength and consistency of its
results. It is significant, and very gratifying to note, that, once
again, all loan interest and scheduled amortisation payments have
continued to be paid in full and on time. This excellent result is
due both to the evident rigorous underwriting of borrowers and
sponsors and the diligent ongoing portfolio management by our
Investment Adviser and Manager. Meanwhile, underlying collateral
valuations continue to provide reassuring headroom in the event of
any asset under performance.
The last three years have demonstrated the positive fundamentals
of the Group's portfolio as an attractive risk-adjusted source of
alternative income tested in the harshest of market environments.
Against significant market challenges, the Group not only
maintained a stable Net Asset Value ('NAV') but also met its
dividend targets, delivering it's targetted annualised 5.5 pence
per share to shareholders as well as an additional dividend of 2p
per share announced on 23 March 2023.
Nevertheless, despite the resilience of the loan portfolio, a
share buyback programme (which was active from July 2022 to October
2022) and a stable NAV, the Company's share price has been unable
to meaningfully narrow its discount to the prevailing NAV which
initially occurred as a result of the wider market re-rating
following the onset of Covid-19 (in the first half of 2020).
Under the Company's discount control mechanisms (contained
within its Articles of Association), in Q1 2023 the Company would
have been required to offer shareholders an opportunity to redeem
up to 75 per cent of their holding in the Company as a result of
the Company's discount to its NAV per share being greater than five
per cent or more during the six-month period ending 31 December
2022 (the "Tender Offer").
However, in October 2022, the Board determined that, following
discussions with our larger shareholders, the likely take-up of a
potential future Tender Offer would be significant and as a result
the Company would no longer be of a viable size to provide
shareholders with sufficient liquidity and scale. Accordingly, the
Board resolved to recommend that the Company be placed into a
managed wind-down with the aim of enabling shareholders to realise
their entire holdings in the Company 'over time' in line with the
repayment of the relevant loan positions.
In reaching this decision, the Board considered a range of
options and several factors including the prevailing and persistent
discount to NAV of the shares, feedback from shareholders, and the
market capitalisation and liquidity of the shares.
In light of this, the Board recommended to shareholders that the
investment objective and policy of the Company were amended such
that the Board could pursue a strategy of orderly realisation and
the return of capital 'over time' to shareholders.
The orderly realisation strategy will not result in the
liquidation of the Company in the immediate future or require the
Company to dispose of assets within a defined timeframe. The new
strategy, approved by 99% of Shareholders voting at the Company's
Extraordinary General Meeting ('EGM') on 27 January 2023, will be
implemented in a manner that will seek to maximise value to
shareholders. It is intended that the Company's listing and target
annualised dividend of 5.5 pence per share will be maintained as
long as feasible during the orderly realisation.
The Board anticipates that the orderly realisation of the assets
will happen over a four to five year period with periodic share
redemptions being made as loans are repaid and commitments are
satisfied.
Whilst market sentiment may have changed and the secure income
generation offered has recently fallen out of favour I feel it is
worth reflecting that over its life the Group has successfully met
the original objectives set out at IPO, delivering stable and
consistent income and risk adjusted returns. To have endured the
huge disruption of the last couple of years without a single missed
payment is a remarkable achievement. My thanks to all involved -
the Investment Adviser, the Investment Manager and the Board.
HIGHLIGHTS FOR 2022
-- Strong cash generation - the portfolio as a whole continues
to support annual dividend payments of 5.5pence per Ordinary Share,
paid quarterly. A dividend of 5.5 pence per Ordinary Share
represents a 6.2 per centdividend yield on the share price as at 31
December 2022.
-- Additional dividend - an additional dividend of 2.0 pence per
share has been declared post period end inrespect of the 2022
earnings period, leading to a total declared distribution of 7.5
pence per share for the year.
-- Income stability - all loan interest and scheduled
amortisation payments paid in full and on time.
-- 79 per cent of the portfolio is contracted at floating
interest rates (with floors) which benefits theGroup in the current
rising interest rate environment.
-- Portfolio remains robust - despite the economic disruption
and uncertainty experienced in 2022, theportfolio continues to
perform fully in line with expectations.
-- Borrowers remain adequately capitalised and are expected to
continue to pay loan interest and capitalrepayments in line with
contractual obligations.
-- Further strategic progress - in 2022, the Group committed a
total of GBP66 million to two new loans,located in the United
Kingdom and Europe, in the office and industrial sectors.
-- 51 per cent - share price total return since IPO in December
2012 (excludes additional dividend for 2022announced on 23 March
2023).
-- Portfolio remains fully invested
INVESTMENT PERFORMANCE
Interest & Amortisation Payments
All loan interest and scheduled amortisation payments to date
have been paid in full and on time. This includes loans in sectors
that have been most impacted by the lasting impact of the Covid-19
pandemic, namely, hospitality and retail assets, where borrowers
continue to remain adequately capitalised as previously
reported.
Strong cash generation
The portfolio performance continues to support the targeted
annual dividend payments of 5.5 pence, paid quarterly.
Dividend support
79 per cent of the portfolio is contracted at floating interest
rates (with floors) which has started to provide an increase in
revenue as higher inflation has resulted in higher interest
rates.
The Invested Loan Portfolio unlevered annualised total return
has been increasing steadily as interest rates curves have moved
upwards. The year on year increase at 31 December 2022 was 90 basis
points (i.e. at 7.8 per cent, up from 6.9 per cent in December
2021). As interest rates continue to rise there is additional
support for the dividend cover.
INVESTMENT MOMENTUM
The Group closed two loans in 2022 - Office and Industrial
Portfolio in the UK and the Netherlands (total commitment which was
fully funded on signing - GBP5.5 million and EUR16.4 million
respectively, of which EUR16.4 million had been repaid by the year
end and of which GBP5.5 million was repaid in February 2023) and
Industrial Estate in the UK (total commitment - GBP46.2 million of
which GBP27.2 million was fully funded on signing).
The Group also funded a further GBP14.7 million in relation to
loan commitments made in prior years which were unfunded.
One loan, Office, Scotland (GBP5.0 million) was repaid in full
during the year but a further GBP51.9 million (including the
EUR16.4 million referred to above) was received in partial
repayments on loans which still have outstanding balances as at 31
December 2022.
As at 31 December 2019 to 2022 the Group had commitments as
shown in the table below.
2019 2020 2021 2022
Funded loans GBP411.1m GBP440.9m GBP412.0m GBP425.9m
Unfunded Commitments GBP78.2m GBP49.2m GBP44.5m GBP49.0m
Total GBP489.3m GBP490.1m GBP456.5m GBP474.9m
The contractual maturity of the Group's portfolio shows that as
at 31 December 2022, 40.5 per cent of invested loan balances held
were expected to mature in the next twelve months.
Q1 Q2 Q3 Q4 2022
NAV at beginning of the period 103.09 103.13 103.42 103.58 103.09
Quarterly Movements
Operating Income available to distribute(1) 1.36 1.47 1.77 2.20 6.80
Realised FX gains/(losses) not distributable(2) 0.78 0.29 0.00 0.00 1.07
Unrealised FX gains/(losses)(3) -0.73 -0.09 -0.46 0.67 -0.61
Dividend declared -1.37 -1.38 -1.37 -1.38 -5.50
Impact on NAV of shares bought back 0.00 0.00 0.22 0.13 0.35
NAV as end of period 103.13 103.42 103.58 105.20 105.20
(1) Operating Income available to distribute comprises loan
income recognised in the period less the cost of debt facilities
utilised by the Group and operating costs incurred. Included in
loan income recognised in Q4 2022 is circa GBP1.3m (equivalent to
0.34p per share) of loan income related to Office and Industrial
Portfolio, Netherlands which was fully repaid in December 2022 and
which benefited from early repayment income protection. The
Operating Income available to distribute also includes any realised
foreign exchange gains or losses upon settlement of hedges, except
those described in note 2.
(2) On occasion, the Group may realise a gain or loss on the
roll forward of a hedge if it becomes necessary to extend a capital
hedge beyond the initial anticipated loan term. If this situation
arises the Group will separate the realised FX gain or loss from
other realised FX gains or losses and not consider it available to
distribute or as a reduction in distributable profits. The FX gain
or loss will only be considered part of distributable reserves or
as a reduction in distributable profits when the rolled hedge
matures or is settled and the final net gain or loss on the capital
hedges can be determined.
(3) Unrealised foreign exchange gain/losses relate to the net
impact of changes in the valuation of foreign exchange hedges and
the sterling equivalent value of Euro loan investments (using the
applicable month end rate). Mis-matches between the hedge
valuations and the loan investments may occur depending on the
shape of the forward FX curve and this causes some movement in the
NAV. These unrealised FX gains / losses are not considered part of
distributable reserves.
NAV PERFORMANCE
As anticipated, and as in the past, we are pleased to report
that the Group's NAV has once again remained stable during the year
demonstrating the highly resilient credentials of the asset class
that contributes to its success as a reliable source of alternative
income. We do not expect to see significant movements in NAV as the
Group's loans are held at amortised cost and Euro exposures are
hedged.
The NAV would be materially impacted if an impairment in the
value of a loan was required but, despite the recent disruption to
markets in general no such impairment has been needed and the
Group's valuations remain stable and current (the average age of
valuations is 1.43 years). Please refer to the Investment Manager's
report for detailed sector performance reporting, information on
the accounting for our loans and the current loan to value position
for the portfolio as a whole and for each sector.
SHARE BUYBACKS AND SHARE PRICE PERFORMANCE
During the year, the Company's share price has been relatively
volatile, primarily as a result of dislocation across financial
markets. During the year the Company's share price has traded in a
range between 87.0 pence and 97.6 pence. The year-end share price
was 89.0 pence reflecting a 15.4 per cent discount to NAV.
The share price was supported in the latter half of 2022 by the
share buyback programme which ran from July 2022 until October
2022. During this period the Company bought back an aggregate
amount of 13.3 million shares at an average cost per share of 92.8
pence per share. These shares are held in Treasury.
FUTURE SHARE ISSUANCE
At the last Annual General Meeting ("AGM"), the Company sought
and received authority to disapply Pre-Emption Rights on the
allotment of equity securities for up to 10 per cent of the
Ordinary Shares in issue. As at the date of this report, this
authority has not been utilised and given the recent change in
policy it is not intended that this authority will be utilised or
renewed.
DIVIDS
Total dividends of 5.5 pence per Ordinary Share have been paid
to date in relation to the year ended 31 December 2022. In
addition, on 23 March 2023, the Company declared a special dividend
of 2 pence per Ordinary Share in respect of the year ending 31
December 2022 to be paid on 21 April 2023 to shareholders on the
register as at 31 March 2023.
The 2022 dividends paid to date (5.5 pence per Ordinary Share)
were covered 1.24 times by earnings (excluding unrealised FX gains
and FX gains realised on the roll forward of hedges). The Company
maintains a dividend reserve which is utilised, when needed, to
ensure dividends are not paid out of capital.
The Company intends to continue to target to pay a 5.5 pence per
Ordinary Share per annum (payable quarterly) going forward for as
long as feasible during the orderly realisation, and as noted above
due to increases in interest rates the dividend coverage and
headroom has improved. This will provide a level of dividend which
should be fully covered by earnings whilst ensuring the Company
maintains strong credit discipline.
On the share price at 31 December 2022, a dividend of 5.5 pence
represents a 6.2 per cent dividend yield.
BOARD COMPOSITION AND DIVERSITY
The Board believes strongly in the value and importance of
diversity in the boardroom and we continue to consider the
recommendations of the Davies, Hampton Alexander and Parker Reports
and these recommendations will be taken into account should the
appointment of a new director be required.
Based on the recent change to the FCA's Listing Rules regarding
the disclosure of diversity on listed company boards and executive
committees, effective for accounting periods starting from April
2022, the Board are considering the impact, if any, on disclosure
requirements.
I am very pleased with the current composition of the Board
(which is 50 per cent female) both in terms of experience, skills
and diversity which places us well for the upcoming challenges.
It had been anticipated that I would retire from the Board at
the end of 2023. However, the Board have suggested that I remain in
post to guide the Company through the orderly realisation of assets
and I am happy to accept their suggestion subject to the usual
shareholder agreement to my continuation in office.
Further details are provided on the succession planning in the
Corporate Governance Statement.
GOING CONCERN
Under the AIC Code and applicable regulations, the Directors are
required to satisfy themselves that it is reasonable to assume that
the Group is a going concern.
The Directors have undertaken a comprehensive review of the
Group's ability to continue as a going concern including a review
of the ongoing cash flows and the level of cash balances as of the
reporting date as well as forecasts of future cash flows.
Furthermore, the Directors have also considered, as disclosed in
these financial statements, the strategy of orderly realization and
return of capital to shareholders.
After making enquiries of the Investment Manager, Investment
Adviser and the Administrator and having reassessed the principal
risks, the Directors considered it appropriate to adopt the going
concern basis of accounting in preparing these Consolidated
Financial Statements.
OUTLOOK
The focus of the Group for 2023 is the commencement of the
orderly realisation strategy and the return of capital to
shareholders over time.
The Board believes it is important to communicate clearly with
you, our shareholders, and we will continue to inform you of the
Group's progress by way of the quarterly fact sheets and stock
market announcements. We welcome any comments you have on the way
in which we communicate and provide information to you.
My thanks to all of our services providers for their
perseverance in these challenging times.
On behalf of the Board, I would like to close by thanking
shareholders for your commitment and support. I look forward to
briefing you again on the Group's progress later this year.
John Whittle | Chairman
23 March 2023
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
Following the EGM held on 27 January 2023, the general corporate
purpose of the Company and the Group is to pursue a strategy of
orderly realisation and the return of capital over time to
shareholders.
OBJECTIVE, INVESTMENT POLICY AND BUSINESS MODEL
The Objective and Investment Policy describes the Group's
strategy and business model and is set out in the Overview section
of these Annual Accounts.
The Investment Manager is Starwood European Finance Partners
Limited, a Company incorporated in Guernsey with registered number
55819 and regulated by 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.
During 2023 the Board will consider what new and/or additional
performance measures (if any) should be used to measure its new
strategy of orderly realisation and return of capital to
shareholders.
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 the
ability of the Company or the Group 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.
Principal Risks
Financial Market Volatility (risk that dividends do not meet the
targeted levels and that the share price discount persists and
widens)
Subsequent to the EGM held on 27 January 2023 the Group's
strategy is for an orderly realisation of its assets and the return
of capital to shareholders. During the realisation period the
Company intends to target a similar per share level of dividends as
previously for as long as this is feasible and to return capital to
shareholders subject to maintaining sufficient cash to fund as yet
unfunded commitments on loans and ongoing operating costs.
The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies and, consequently, the
actual rate of return may be materially lower than the targeted
returns.
As a result, the level of dividends to be paid by the Company
may fluctuate and there is no guarantee that any such dividends
will be paid. Since March 2020 the shares have traded at a discount
to NAV per share and shareholders may be unable to realise their
investments through the secondary market at NAV per share.
The Board, along with the Investment Manager and the Investment
Adviser, monitor, review and consider the estimates and assumptions
that underpin the targeted returns of the business and, where
necessary, communicate any changes in those estimates and
assumptions to the market.
The Board monitors the level of premium or discount of the share
price to NAV per share and deployed a share buyback programme
during 2020, 2021 and 2022 in order to support the share price. The
new strategy of returning capital to shareholders over time should
mean that, subject to no unforeseen negative impacts on the value
of investments, shareholders will receive a return of capital
invested over time.
Long-Term Strategic Risk (risk that the business model is no
longer attractive)
Subsequent to the EGM held on 27 January 2023 the Group's
strategy is for an orderly realisation and return of capital to
shareholders. It is anticipated that the return of capital to
shareholders will be completed in the next four to five years.
The Group's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies and, consequently, the
actual rate of return may be materially lower than the targeted
returns.
The Directors regularly receive information on the performance
of the existing loans, including the performance of underlying
assets versus underwritten business plan and the likelihood of any
early repayments, or the need for any loan amendments.
The Board continues to monitor the revised investment strategy
and performance on an ongoing basis.
Market Deterioration Risk (risk of the economies in which the
Group operates either stagnating or going into recession)
The Group's investments are comprised principally of debt
investments in the UK and the European Union's internal market and
it is therefore exposed to economic movements and changes in these
markets. Any deterioration in the global, UK or European economy
could have a significant adverse effect on the activities of the
Group and may result in loan defaults or impairments.
The Covid-19 pandemic has had a material long term impact on
global economies and on the operations of the Group's borrowers
since 2020.
The situation in Ukraine, following the February 2022 incursion
into Ukraine by Russia, also presents a significant risk to
European and Global economies. While the Group has no direct or
known indirect involvement with Ukraine, Russia or Belarus it may
be impacted by the consequences of the instability caused by the
ongoing Ukrainian/ Russian conflict.
The impact of the United Kingdom's departure from the European
Union in 2020 still represents a potential threat to the UK economy
as well as wider Europe. On a cyclical view, the national economies
across Europe appear to be heading towards lower growth, and
alongside the economic impact of Covid-19 and the destabilising
impact of the conflict in Ukraine, towards recession.
In addition there is the impact of the ongoing high inflationary
environment to consider (driven by increasing interest rates,
energy costs and costs of living). This environment could make it
harder for Borrowers to meet their interest obligations to the
Group and to ultimately repay the loans advanced to them.
The Board have considered the impact of market deterioration on
the current and future operations of the Group and its portfolio of
loans advanced. Because of the cash and loan facilities available
to the Group and the underlying quality of the portfolio of loans
advanced, both the Investment Manager and the Board still believe
the fundamentals of the portfolio remain optimistic and that the
Group can adequately support the portfolio of loans advanced
despite current market conditions.
In the event of a loan default in the portfolio, the Group is
generally entitled to accelerate the loan and enforce security, but
the process may be expensive and lengthy, and the outcome is
dependent on sufficient recoveries being made to repay the
borrower's obligations and associated costs. Some of the
investments held would rank behind senior debt tranches for
repayment in the event that a borrower defaults, with the
consequence of greater risk of partial or total loss. In addition,
repayment of loans by the borrower at maturity could be subject to
the availability of refinancing options, including the availability
of senior and subordinated debt and is also subject to the
underlying value of the real estate collateral at the date of
maturity. The Group is mitigated against this with an average
weighted loan to value of the portfolio of 58.6 per cent.
Therefore, the portfolio should be able to withstand a significant
level of deterioration before credit losses are incurred.
The Investment Adviser has also mitigated the risk of credit
losses by undertaking detailed due diligence prior to the signing
of each loan. Whilst the precise scope of due diligence will have
depended on the proposed investment, such diligence will typically
have included independent valuations, building, measurement and
environmental surveys, legal reviews of property title, assessment
of the strength of the borrower's management team and key leases
and, where necessary, mechanical and engineering surveys,
accounting and tax reviews and know your customer checks.
The Investment Adviser, Investment Manager and Board have also
managed these risks in the past by ensuring a diversification of
investments in terms of geography, market and type of loan. Such
diversification will be harder to achieve as the company pursues a
strategy of orderly realization and does not enter into any new
investments. The Investment Manager and Investment Adviser operate
in accordance with the guidelines, investment limits and
restrictions as determined by the Board. The Directors review the
portfolio against these guidelines on a regular basis.
The Investment Adviser obtains regular performance reporting
from all borrowers and meets with all borrowers on a regular basis
to monitor developments in respect of each loan and reports to the
Investment Manager and the Board periodically and on an ad hoc
basis where considered necessary.
The Group's loans are held at amortised cost. The performance of
each loan is reviewed quarterly by the Investment Adviser for any
indicators of significant increase in credit risk, impaired or
defaulted loans. The Investment Adviser also provides their
assessment of any expected credit loss for each loan advanced. The
results of the performance review and allowance for expected credit
losses are discussed with the Investment Manager and the Board.
Two loans within the portfolio are currently classified as Stage
2 (increased risk of default). These loans account for 10.8 per
cent of the loans advanced by the Group as at 31 December 2022. No
expected credit losses have been recognised against any of the
loans, because of the strong LTVs across the loan portfolio and
strong contractual agreements with Borrowers, including against
these Stage 2 loans. The reasons, estimates and judgements
supporting this assessment are described in the Investment
Manager's report.
Interest Rate Risk
The Group is subject to the risk that the loan income and income
from the cash and cash equivalents will fluctuate due to movements
in interbank rates.
The loans in place at 31 December 2022 have been structured so
that 79 per cent are floating rate and 100 per cent of these
floating rate loans are subject to interbank rate floors such that
the interest cannot drop below a certain level, which offers some
protection against downward interest rate risk.
The remaining 21 per cent by value of the loans are fixed rate,
which provides protection from downward interest rate movements to
the overall portfolio (but also prevents the Group from benefiting
from any interbank rate rises on these positions).
Foreign Exchange Risk
The majority of the Group's investments are Sterling denominated
(63.1 per cent as at 31 December 2022) with the remainder being
Euro denominated. The Group is subject to the risk that the
exchange rates move unfavourably and that a) foreign exchange
losses on the Euro loan principals are incurred and b) that Euro
interest payments received are lower than anticipated when
converted back to Sterling and therefore returns are lower than the
underwritten returns.
The Group manages this risk by entering into forward contracts
to hedge the currency risk. All non-Sterling loan principal is
hedged back to Sterling to the maturity date of the loan.
Interest payments are normally hedged for the period for which
prepayment protection is in place. However, the risk remains that
loans are repaid earlier than anticipated and forward contracts
need to be broken early.
In these circumstances, the forward curve may have moved since
the forward contracts were placed which can impact the rate
received. In addition, if the loan repays after the prepayment
protection, interest after the prepayment-protected period may be
received at a lower rate than anticipated leading to lower returns
for that period. Conversely, the rate could have improved, and
returns may increase.
As a consequence of the hedging strategy employed as outlined
above, the Group is subject to the risk that it will need to post
cash collateral against the mark to market on foreign exchange
hedges which could lead to liquidity issues or leave the Group
unable to hedge new non-Sterling investments.
The Company had approximately GBP163.5 million (EUR184.1
million) of hedged notional exposure with Lloyds Bank plc at 31
December 2022 (converted at 31 December 2022 FX rates).
As at 31 December 2022, the hedges were in the money. If the
hedges move out of the money and at any time this mark to market
exceeds GBP15 million, the Company is required to post collateral,
subject to a minimum transfer amount of GBP1 million. This
situation is monitored closely, however, and as at 31 December
2022, the Company had sufficient liquidity and credit available on
the revolving credit facility to meet any cash collateral
requirements.
Risk of Default under the Revolving Credit Facilities
The Group is subject to the risk that a borrower could be unable
or unwilling to meet a commitment that it has entered into with the
Group as outlined above under market deterioration risk. As a
consequence of this, the Group could breach the covenants of its
revolving credit facilities and fall into default itself.
A number of the measures the Group takes to mitigate market
deterioration risk as outlined above, such as portfolio
diversification and rigorous due diligence on investments and
monitoring of borrowers, will also help to protect the Group from
the risk of default under the revolving credit facility as this is
only likely to occur as a consequence of borrower defaults or loan
impairments.
The Board regularly reviews the balances drawn under the credit
facility against commitments and reviews the performance under the
agreed covenants. The loan covenants are also stress tested to test
how robust they are to withstand default of the Group's
investments.
Cybercrime
The Group is subject to the risk of unauthorised access into
systems, identification of passwords or deleting data, which could
result in loss of sensitive data, breach of data physical and
electronic, amongst other potential consequences. This risk is
managed and mitigated by regular reviews of the Group's operational
and financial control environment. The matter is also contained
within service providers surveys which are completed by the Group's
service providers and are regularly reviewed by the Board. No
adverse findings in connection with the service provider surveys
have been found. The Company and its service providers have
policies and procedures in place to mitigate this risk, the
cybercrime risk continues to be closely monitored.
Regulatory risk
The Group is also subject to regulatory risk as a result of any
changes in regulations or legislation. Constant monitoring by the
Investment Adviser, Investment Manager and the Board is in place to
ensure the Group keeps up to date with any regulatory changes and
compliance with them.
Operational risk
The Group has no employees and is reliant on the performance of
third-party service providers. Failure by the Investment Manager,
Investment Adviser, Administrator or any other third-party service
provider to perform in accordance with the terms of its appointment
could have a material detrimental impact on the operation of the
Group.
The Board maintains close contact with all service providers to
ensure that the operational risks are minimised.
Emerging Risks
Emerging risks to the Group are considered by the Board to be
trends, innovations and potential rule changes relevant to the real
estate mortgage and financial sector. The challenge to the Group is
that emerging risks are known to some extent but are not likely to
materialise or have an impact in the near term. The Board regularly
reviews and discusses the risk matrix and has identified climate
change as an emerging risk.
Climate change
The consequences that climate change could have are potentially
severe but highly uncertain. The potential high impact of possible
losses has done a lot to raise the awareness of this risk in
investment circles. The Board, in conjunction with the Investment
Manager and Investment Adviser, considers the possible physical and
transitional impact of climate change on properties secured on
loans provided by the Group and includes the consideration of such
factors in valuation instructions of the collateral properties and
in considering any potential expected credit losses on loans. The
Investment Adviser considers the possible physical and transitional
impact of climate change as part of the origination process. In
addition, the Board, in conjunction with the Investment Adviser, is
monitoring closely the regulation and any developments in this area
(see 'Environmental, Social and Corporate' section for further
information).
ASSESSMENT OF PROSPECTS
The Group's strategy of an orderly realisation and return of
capital to shareholders (approved by the shareholders in January
2023) is central to an understanding of its prospects. The Group's
focus is twofold:
i) to proactively manage the investments already made to ensure
that the loans continue to perform and provide positive returns to
the Group, and
ii) return capital to shareholders on a timely basis subject to
ensuring the Group can continue to fund as yet unfunded loan
commitments (GBP49.0 million as at 31 December 2022) and meet its
operating costs.
The Group updates its plan and financial forecasts on a
quarterly basis and detailed financial forecasts are maintained and
reviewed by the Board regularly.
ASSESSMENT OF VIABILITY
The Directors have tested the potential impact on the Group of a
number of scenarios 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 all the
Stage 2 loans held default, resulting in aloss of interest income
and delay in the repayment of capital; and
-- Risk of default under the revolving credit facilities.
These scenarios represent 'severe but plausible' circumstances
that the Group could experience. The scenarios tested included:
-- A high level of loan default meaning that the Group stopped
receiving interest on the Stage 2 loans inthe portfolio and that
the outstanding capital on these loans was not received until 6 or
12 months after the loanmaturity date plus Sonia and Euribor rates
falling to 0% from 2024 onwards;
-- An analysis of the robustness of the covenants under the
revolving credit facility to withstand defaultof the underlying
investments; and
-- A deterioration in the valuation of the foreign exchange
hedges such that the Company is required to postcollateral up to
GBP5m.
The results of this stress testing showed that the Group would
be able to withstand a high level of underlying loan default or
impairment resulting from any of the risks identified over the
period of the financial forecasts albeit the dividend may need to
be reduced to reflect the reduced cash available.
VIABILITY STATEMENT
In addition to the assessment of prospects and viability above,
the Directors also have a reasonable expectation, based on the
scenario testing, that the Group will continue to meet its
liabilities as they fall due over the three-year period ending 31
December 2025, and therefore the Group is expected to remain viable
from both a business model and financial perspective.
Furthermore, the Directors have also considered, as disclosed in
these financial statements, the strategy of orderly realization and
return of capital to shareholders.
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 Manager
and Investment Adviser consider the Group's direct activities to
have a minimal direct impact on the environment. Nevertheless, the
Board regularly monitors and discusses ESG matters both at the
Board meetings and with the Investment Manager and Investment
Adviser.
The Investment Manager and Investment Adviser are part of the
Starwood Capital Group (SCG), which is a signatory to the UN
Principles for Responsible Investments (UNPRI). In assessing new
loans SCG evaluates environmental risks associated with any
investments as part of the underwriting process. A formal scope of
work is followed by the Investment Adviser, which requires an
environmental site assessment to be performed which identifies
environmental conditions that may have a material adverse impact on
the property being assessed or its immediate surrounding area and
an assessment of a property's sustainability and marketability
through the review of its environmentally friendly and unfriendly
characteristics.
The Board recognises that it has no direct control over a
borrower's company policy towards environment and social
responsibility and whilst it is an important part of the due
diligence process in understanding the impact of such issues,
decisions are not weighted towards those investments with stronger
environmental and social characteristics. It should be noted that a
number of the loans made by the Group involve refurbishment
projects and these will often improve the environmental impact of
the real estate concerned. Additionally, whilst it is not an
investment criteria, the Group's loan portfolio is significantly
funded in sectors with positive social impact such as hospitality,
healthcare and residential.
In carrying out its activities and in its relationship with the
community, the Group aims to conduct itself responsibly, ethically
and fairly; including in relation to social and human rights
issues. This approach is built into the Investment Adviser's
origination and underwriting process. Our risk management framework
is intended to facilitate an enterprise wide view of risk that
supports a strong and collaborative risk management culture within
the Board and with its relationship with SCG.
The Board (through its relationships with SCG, its brokers and
other advisers) is focused on maintaining a productive dialogue
with shareholders and gathering feedback to inform the decision
making at Board level.
SCG, with in excess of 4,500 employees worldwide, takes its
social responsibilities to its employees very seriously offering a
challenging, fast-paced and collegial environment to its employees.
SCG strives to create diverse and inclusive workplaces where all
employees can perform to their full potential and to be a good
corporate citizen for their communities by supporting charitable
organisations that promote education and social wellbeing.
As an investment fund, the Group outsources many of its
activities to external service providers and, therefore, the Group
has no direct Greenhouse Gas Emissions to report from its own
operations and is currently not required to report on any other
emission producing sources.
While there is some travel involved for the Directors and
representatives from the Investment Adviser, the Company's service
providers are Guernsey office-based companies, and the majority of
the Directors are based in Guernsey, thus having a relatively low
impact on the environment and negating the need for long commutes
or flights to and from Board meetings. As a result of Covid-19
there has been an acceleration in the use of interactive and
virtual technology for meetings, further reducing the need for
travel.
The Group has no employees and the Board is composed entirely of
non-executive Directors. Therefore, the Group is not within scope
of the Modern Slavery Act 2015 and is therefore not obliged to make
a human trafficking statement. However, the business of the Company
is conducted ethically and with integrity and has a zero tolerance
policy towards modern slavery.
BOARD DIVERSITY
The Board considers that its members have a balance of skills,
qualifications and experience which are relevant to the Company.
The Board supports the recommendations of the Davies Report, the
Hampton Alexander Review and the Parker Review and believes in the
value and importance of diversity in the boardroom and it continues
to consider the recommendations of these reports and reviews as
part of its succession planning.
The Company has no employees and therefore has no disclosures to
make in this regard.
John Whittle | Chairman
23 March 2023
Investment Manager's Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
After decades of declining interest rates and a long period of
benign inflation, 2022 saw a sea change in inflation and a knock on
effect into interest rates across the globe. Rising inflation was
driven by two key factors. First as a consequence of the Covid-19
pandemic global supply chains and shipments slowed in 2020 and 2021
causing worldwide shortages and affecting consumer patterns.
The causes of the economic slowdown included workers becoming
sick with Covid-19 as well as mandates and restrictions affecting
the availability of staff resulting in production and logistics
disruption with goods also remaining at port due to staffing
shortages. The related global chip shortage contributed to the
supply chain crisis, particularly in the automobile and electronics
sectors. During the Christmas and holiday season of 2021, an
increase in spending in North America, combined with the spread of
the Omicron variant of Covid-19, further exacerbated already tight
supplies.
To start with, the market largely expected these issues to be
transitory and inflation would settle back as an equilibrium in
supply chains was restored. As a result central banks were
initially cautious about raising rates which could stall a fragile
economic recovery.
Market concerns began to rise about more persistent inflation in
the later part of 2021, but the second driver that compounded the
issues was the war in Ukraine which further disrupted supply of
energy, commodities and food. The result was an unprecedented rise
in inflation in almost every country in the world and a huge policy
response.
Subsequently US, UK and Eurozone inflation has peaked at 9.1 per
cent,11.1 per cent and 10.6 per cent respectively. In response the
central banks have acted rapidly, with the US Fed Funds rate, UK
Bank of England Base Rate and the ECB deposit policy rate leaping
from 0-0.25 per cent, 0.25 per cent and -0.5 per cent to 4.25-4.5
per cent, 3.5 per cent and 2.0 per cent respectively between the
end of 2021 and the end of 2022. The knock on effect for longer
rates is that benchmarks such as the five year swap which are
typically the benchmark for commercial real estate loans have also
risen significantly. The US, UK and Euro 5 year swaps grew from
1.11 per cent, 1.05 per cent and -0.02 per cent to 3.70 per cent,
4.10 per cent and 3.18 per cent respectively during the year.
At the beginning of the year most economists had seen inflation
having peaked and the expectations of future interest rises having
peaked too. Goldman Sachs expected UK rates peaking at 4.5 per cent
in May 2023 versus expectations by some economists that they might
rise as far as 5 per cent or even 6 per cent previously, however
fears that inflation and higher rates will be more sticky have been
growing in recent weeks due to economic data particularly the
employment statistics.
Inflation and interest rates impact hard assets in a number of
ways. For example higher inflation in labour and construction
materials and higher interest rates for the financing of
development all lead to a higher overall construction cost which
can lead to reduced supply which benefits existing stock. Higher
rates generally can also put pressure on real estate yields that
may look less desirable versus other forms of long income such as
long dated bonds and higher financing costs will leave levered real
estate buyers with less free cash after debt. On the other side of
the coin, the income of real assets is often strongly linked to
inflation either through direct linking in the terms of a lease or
through correlation of revenue with inflation.
In markets such as logistics and residential to rent, low levels
of vacancy combined with high demand have seen increasing rents and
this trend is likely to continue in a number of areas where there
is insufficient new supply delivered although a bad recession could
reset demand and / or the tenants ability to pay. Rising rents will
be supportive of values in these asset classes even while yields
are softening.
Real estate and leveraged finance volumes fell significantly in
2022. Conditions have improved in the first weeks of 2023 but
volumes are still lower and pricing elevated. A large share of the
increase in financing costs has been the base interest rate
component mentioned earlier with spreads having widened as well.
Larger loans that require distributions through syndication CMBS or
CLOs are still rare in the US and there have been none in Europe.
However, we do continue to see steady underlying activity in
bilateral and small club deals with spreads in Europe having
changed much less than in the bond markets since 2021 albeit with
more conservative risk metrics and structures. As is common in
lower volume markets there has been an increased gap in appetite
between prime and secondary assets and stock selection through
asset class, sponsor and business plan combination is absolutely
key. Where rates settle is still uncertain and it is likely that
until the equilibrium is met we will still see smaller volumes both
in transaction and financing volumes.
We are also continuing to see the existing themes in the bank
lending market. There is a focus on stress tests, capital treatment
and managing risk weighted assets. As a result, the trend towards
banks working together with non-banks in co-origination or
financing of loans as opposed to providing direct loans is
persisting. This is evident in the latest Bayes lending survey
which tracks the UK commercial real estate lending market. The most
recent report shows that alternative lenders now provide 24 per
cent of new origination from almost none a decade ago and we see
that trend towards an increased portion of the market with non-bank
lenders continuing.
PORTFOLIO STATISTICS
As at 31 December 2022, the portfolio was invested in line with
the Group's investment policy and is summarised below.
31 December 31 December
2022 2021
Number of investments 20 19
Percentage of invested portfolio in floating rate loans (1) 78.9% 78.0%
Invested Loan Portfolio unlevered annualised total return (1) 7.8% 6.9%
Invested Loan Portfolio levered annualised total return (1) 7.9% 7.0%
Weighted average portfolio LTV - to Group first GBP (1) 13.2% 16.4%
Weighted average portfolio LTV - to Group last GBP (1) 58.6% 61.9%
Average loan term (stated maturity at inception) 5.0 years 4.9 years
Average remaining loan term 1.7 years 2.3 years
Net Asset Value GBP416.1 m GBP421.6 m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP19.2 m) (GBP8.5 m)
Loans advanced at amortised cost (including accrued income) GBP432.5 m GBP414.6 m
Cash GBP3.6 m GBP3.0 m
Other net assets / (liabilities) (including the value of FX hedges) (GBP0.8 m) GBP12.5 m
(1) Alternative Performance Measure - refer to the definitions
and methodology.
The maturity profile of investments as at 31 December 2022 is
shown below.
Value of loans % of invested
Remaining years to contractual maturity* (GBPm) portfolio
0 to 1 years GBP172.6 40.5
1 to 2 years GBP107.4 25.2
2 to 3 years GBP86.7 20.4
3 to 5 years GBP59.2 13.9
* excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
PORTFOLIO DIVERSIFICATION
The Group continues to achieve good portfolio diversification as
shown in the tables below:
Country % of invested
assets
UK 63.1
Republic of Ireland 17.6
Spain 16.5
Netherlands 2.2
Germany 0.6
Sector % of invested
assets
Hospitality 38.7
Office 20.8
Retail 11.4
Residential 10.6
Light industrial 6.5
Healthcare 5.9
Life Sciences 4.6
Logistics 1.1
Other 0.4
Loan type % of invested
assets
Whole loans 70.0
Mezzanine 30.0
Loan currency % of invested
assets*
Sterling 63.1
Euro 36.9
* The currency split refers to the underlying loan currency;
however, the capital and interest during protected periods on all
non-sterling exposure is hedged back to sterling.
INVESTMENT DEPLOYMENT
As at 31 December 2022, the Group had 20 investments and
commitments of GBP474.9 million as follows:
Sterling Sterling Sterling Total
Transaction equivalent equivalent unfunded (Drawn
balance (1) commitment (1) and Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office, London GBP19.0 m GBP1.5 m GBP20.5 m
Hotel, Oxford GBP23.0 m GBP23.0 m
Hotel, Scotland GBP42.6 m GBP42.6 m
Hotel, North Berwick GBP15.0 m GBP15.0 m
Life Science, UK GBP19.5 m GBP7.1 m GBP26.6 m
Hotel and Office, Northern Ireland GBP11.5 m GBP11.5 m
Hotels, United Kingdom GBP32.0 m GBP18.6 m GBP50.6 m
Office and Industrial Portfolio, UK GBP5.5 m GBP5.5 m
Industrial Estate, UK GBP27.2 m GBP19.0 m GBP46.2 m
Total Sterling Loans GBP270.2 m GBP46.2 m GBP316.4 m
Three Shopping Centres, Spain GBP30.3 m GBP30.3 m
Shopping Centre, Spain GBP15.1 m GBP15.1 m
Hotel, Dublin GBP42.0 m GBP42.0 m
Office, Madrid, Spain GBP16.4 m GBP0.9 m GBP17.3 m
Mixed Portfolio, Europe GBP7.8 m GBP7.8 m
Mixed Use, Dublin GBP11.2 m GBP1.8 m GBP13.0 m
Office Portfolio, Spain GBP8.5 m GBP0.1 m GBP8.6 m
Office Portfolio, Ireland GBP21.7 m GBP21.7 m
Logistics Portfolio, Germany GBP2.7 m GBP2.7 m
Total Euro Loans GBP155.7 m GBP2.8 m GBP158.5 m
Total Portfolio GBP425.9 m GBP49.0 m GBP474.9 m
(1) Euro balances translated to sterling at period end exchange
rates.
Between 1 January and 31 December 2022, the following
significant investments activity occurred (included above):
Additional funding by the Group (new loans and existing
commitments)
NEW LOAN: Office and Industrial Portfolio, UK and The
Netherlands
On 26 May 2022, the Group announced its EUR16.4 million and
GBP5.5 million investment in a three-year multi-currency loan
secured on a portfolio of five offices and one industrial property
located in the Netherlands and the UK. The EUR16.4 million tranche
of the loan was repaid in December 2022 and the GBP5.5 million
tranche of the loan was repaid in February 2023.
NEW LOAN: Industrial Estate, UK
In September 2022 the Group funded the initial advance of a
GBP46.2 million floating rate whole loan secured by an industrial
estate in Loughborough, UK.
In addition to the new loans detailed above the Group also
funded a further GBP14.7 million in relation to loan commitments
made in prior years which were unfunded.
Loan Repayment
The following final loan repayment was received during the
year:
REPAYMENT OF LOAN: Office, Scotland
The GBP5 million loan repaid in full upon the sale of the
underlying property in line with the sponsors business plan during
the second quarter of 2022.
Amortisation and early partial repayments
The following material loan amortisation and early partial
repayment amounts were received during the year:
-- EUR16.8 million of unscheduled amortisation on the loan on
the Mixed Portfolio, Europe, following assetsales in line with the
borrower's business plan;
-- EUR16.4 million repayment of the euro tranche of the Office
and Industrial Portfolio, UK and TheNetherlands which was a new
loan in 2022, following asset sales in line with the borrower's
business plan;
-- EUR12.6 million of early partial repayment on Hotel, Dublin
from surplus cash;
-- EUR7.2 million of unscheduled amortisation on the loan on the
Office Portfolio, Dublin, following an assetsale in line with the
borrower's business plan;
-- EUR3.1 million of unscheduled amortisation on Logistics
Portfolio, Germany, following an asset sale in linewith business
plan; and
-- EUR1.5 million of scheduled amortisation on loan relating to
Three Shopping Centres, Spain loan.
PORTFOLIO OVERVIEW
The portfolio continues to perform in line with expectations.
All interest and scheduled amortisation has been paid in line with
contractual obligations. Borrowers are also continuing to make
progress on underwritten business plans including executing
strategic asset sales and paying down the loans.
During 2022, a total of GBP56.9 million was repaid. The majority
of these repayments were related to strategic underlying property
sales executed by borrowers in line with business plan and
typically following the completion of underwritten asset management
initiatives, with the remainder representing regular scheduled loan
amortisation or borrowers electing to voluntarily pay down loan
balances with surplus cash.
The Group's exposure to development and heavy refurbishment
projects continues to decrease as current developments reach
completion. As at 31 December 2022, GBP63 million or 13 per cent of
total loan commitments represented loans funding two construction
projects. Both of these projects are expected to have reached
substantial completion during the first quarter of 2023. The larger
of these projects (with a total Group loan commitment of GBP49
million) has pre-sold the majority of its residential for-sale
product and we are forecasting the loan to be fully repaid during
2023 from the proceeds of pre-sold unit completions.
The Group continues to closely monitor all of its loan
exposures. Asset classes representing more than 10 per cent of
total investments include Hospitality (39 per cent), Office (21 per
cent), Retail (11 per cent) and Residential (11 per cent). The
Hospitality exposure is diversified across seven different loan
investments. Hotel performance on the trading hotel assets has
continued to improve and recover from the pandemic very well during
2022. Despite the potential that trading may be impacted from lower
discretionary consumer spending related to inflationary pressures,
the Group's borrowers on trading assets such as hotels have
generally indicated a positive end to 2022 and the outlook for 2023
is cautiously optimistic based on forward sales activity as at year
end. Office exposure (21 per cent) is spread across eight loan
investments. Occupancy across the leased office portfolio has held
up well, with the vast majority of the underlying tenants renewing
leases and staying in occupation. We also continue to see
prospective new tenants being attracted particularly to newly
refurbished, high quality buildings. The Retail exposure (11 per
cent) has continued to perform in line with expectations; occupancy
continues to remain robust and footfall continues its post pandemic
recovery. Our retail loan borrowers continue their active asset
management and are signing new leases where tenants wish to expand
and renew existing leases. Residential exposure (11 per cent) is
predominantly related to the successfully pre-sold residential for
sale development project that is due to complete during the first
half of 2023, with the loan projected to be fully repaid in 2023.
In general, market outlook for residential product remains high as
rents have trended upwards with inflation over the prior year and
many markets remain supply challenged.
Across all loans we continue to benefit from material headroom
in underlying collateral value against the loan basis, with a
current weighted average LTV of 58.6 per cent across the portfolio.
These metrics are based on independent third-party appraisals which
are typically updated annually for income producing assets and
following completion on newly constructed or refurbished assets.
While the average age of valuations is just over one year for
income producing assets and we recognise that interest rate
increases within the last twelve months are expected to place
downward pressure on valuation inputs, we are confident in the very
significant buffer to absorb any negative valuation impact of the
current market. On loans where new valuations were instructed in
the second half of 2022, average values did not change materially
as in many cases increased rents and asset management initiatives
being achieved by sponsors outweighed or offset any increase in
discount or capitalisation rates.
LIQUIDITY AND HEDGING
The Group is very modestly levered with net debt of GBP15.4
million (3.7 per cent of NAV) at 31 December 2022 and has
significant liquidity available with undrawn revolving credit
facilities (see note 17(c) and note 23 for further information) to
fund existing commitments.
The way in which the Group's borrowing facilities are structured
means that it does not need to fund mark to market margin calls.
The Group does have the obligation to post cash collateral under
its hedging facilities. However, cash would not need to be posted
until the hedges were more than GBP20 million out of the money. The
mark to market of the hedges at 31 December 2022 was GBP0.7 million
(in the money) and with the robust hedging structure employed by
the Group, cash collateral has never been required to be posted
since inception. The Group has the majority of its investments
currently denominated in Sterling (although this can change over
time) and is a sterling denominated group. The Group is therefore
subject to the risk that exchange rates move unfavourably and that
a) foreign exchange losses on the loan principal are incurred and
b) that interest payments received are lower than anticipated when
converted back to Sterling and therefore returns are lower than the
underwritten returns. The Group manages this risk by entering into
forward contracts to hedge the currency risk. All non-Sterling loan
principal is hedged back to Sterling to the maturity date of the
loan (unless it was funded using the revolving credit facilities in
which case it will have a natural hedge). Interest payments are
generally hedged for the period for which prepayment protection is
in place. However, the risk remains that loans are repaid earlier
than anticipated and forward contracts need to be broken early. In
these circumstances the forward curve may have moved since the
forward contracts were placed which can impact the rate received.
In addition, if the loan repays after the prepayment protection,
interest after the prepayment protected period may be received at a
lower rate than anticipated leading to lower returns for that
period. Conversely the rate could have improved and returns may
increase.
EXPECTED CREDIT LOSSES (IMPAIRMENT)
All loans within the portfolio are classified and measured at
amortised cost less impairment. Under IFRS 9 a three stage approach
for recognition of impairment was introduced, based on whether
there has been a significant deterioration in the credit risk of a
financial asset since initial recognition. These three stages then
determine the amount of impairment provision recognised.
At Initial Recognise a loss allowance equal to 12 months expected credit losses resulting from default events
Recognition that are possible within 12 months.
After initial
recognition:
Stage 1 Credit risk has not increased significantly since initial recognition. Recognise 12 months expected
credit losses.
Credit risk has increased significantly since initial recognition.
Stage 2 Recognise lifetime expected losses.
Interest revenue recognised on a gross basis.
Credit impaired financial asset.
Stage 3 Recognise lifetime expected losses.
Interest revenue recognised on a net basis (i.e., losses are "above the line" and impact P&L and
NAV).
For the purposes of classifying between stages 1 to 3 after
initial recognition, the Group considers a change in credit risk
based on a combination of the following factors:
-- Underlying income performance is at a greater than 10 per
cent variance to the underwritten loan metrics;
-- Loan to Value is greater than 75-80 per cent;
-- Loan to Value or income covenant test results are at a
variance of greater than 5-10 per cent of loandefault covenant
level;
-- Late payments have occurred and not been cured;
-- Loan maturity date is within six months and the borrower has
not presented an achievable refinance orrepayment plan;
-- Covenant and performance milestones criteria under the loan
have required more than two waivers;
-- Increased credit risk has been identified on tenants
representing greater than 25 per cent of underlyingasset
income;
-- Income rollover / tenant break options exist such that a
lease up of more than 30 per cent of underlyingproperty will be
required within 12 months in order to meet loan covenants and
interest payments; and
-- Borrower management team quality has adversely changed.
At 31 December 2022 two loans which account for 10.8 per cent of
loans advanced by the Group are classified as Stage 2 and the
remaining loans are still classified as Stage 1. The loans
classified to Stage 2 are in the Spanish retail sector.
It is important to note that although these loans have been
classified as Stage 2 no ECLs have been recognized. This is because
the formula for calculating the expected credit loss is:
"Present Value of loan" x "probability of default" x "value of
expected loss".
Although credit risk has increased for these loans compared with
the credit risk at origination we have considered a number of
scenarios and as a result of these do not currently expect to
realise a loss in the event of a default (i.e. the last part of the
formula above is considered to be zero for all loans).
This assessment has been made, despite the continued global
economic pressure on the retail markets, 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 Stage 2 assets in particular continues to
be closely monitored and analysed, and we have sought input,
analysis and commentary from Spanish market advisers and have
updated external valuations during 2022 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:
-- Significant headroom on the two loans with LTVs of between 70
per cent and 73 per cent based on thelatest valuations dated June
2022;
-- Performance of the centres when local restrictions were
lifted following the different waves of Covid-19has been very
encouraging for future recovery; as a result we consider that
income in the centres is wellpositioned to recover post
pandemic;
-- We have determined that although there is pressure in this
market, it is unlike the UK retail market aswe are currently seeing
no evidence of significant liquidations in the Spanish retail
market.
FAIR VALUE OF PORTFOLIO VS AMORTISED COST
The table below represents the value of the loans based on a
discounted cash flow basis using different discount rates.
The effective interest rate ("EIR") - i.e. the discount rate at
which future cash flows equal the amortised cost, is 8.9 per cent.
We have sensitised the cash flows at EIR intervals of 0.5 per cent
up to +/- 2.0 per cent. The table reflects how a change in market
interest rates or credit risk premiums may impact the fair value of
the portfolio versus the amortised cost. The Group considers the
EIR of 8.9 per cent to be relatively conservative as many of these
loans were part of a business plan which involved transformation
and many of these business plans are either completed or well
advanced in execution and therefore significantly de-risked from
the original underwriting and pricing. The volatility of the fair
value to movements in discount rates is low due to the low
remaining duration of most loans.
Discount Rate Fair Value % of Book Value
6.0% (fair value) GBP453,301,433 104.8
6.9% GBP446,378,688 103.2
7.4% GBP442,812,482 102.4
7.9% GBP439,304,831 101.6
8.4% GBP435,854,418 100.8
8.9% GBP432,459,966 100.0
9.4% GBP429,120,227 99.2
9.9% GBP425,833,994 98.5
10.4% GBP422,600,089 97.7
10.9% GBP419,417,368 97.0
LOAN TO VALUE
Given the need for the Group and most of its peers to record
loans at amortised cost, the loan to value of companies in our
sector has understandably been an area of focus for many of our
shareholders and stakeholders seeking to understand underlying risk
further.
In order to try to assist in understanding the underlying credit
risk, we have always quoted the last GBP loan to value ("last LTV")
of our portfolio and have outlined further detail below on our
approach to this calculation.
Methodology
Our methodology to calculate the last LTV for each individual
loan is:
Total loan drawn less any deductible lender controlled cash
reserves and less any amortization received to date (including any
debt provided by other lenders which rank alongside or senior to
the Group's position)
Market value determined by the last formal lender valuation
received by the reporting date
Each individual loan LTV is then weighted by the amount of the
loan currently drawn (in the Group only, ignoring the position of
other third party lenders) to give a weighted average last LTV
across the Group's portfolio.
Valuations Process
The following describes the valuation basis that is used in our
calculation. As the vast majority of our portfolio is originated
directly by the Investment Adviser, the Group has discretion over
when and how to instruct valuations. We consider this to be a
strength of our valuation process as we have control over timing
and complete access to the detail of the valuation process and the
output. Where loans are not directly originated the lender could
have a lack of control over the timing and no input to the process
which we prefer to avoid where possible.
-- On the origination of a loan, for a straight forward standing
investment asset (for example, an occupiedoffice), the independent
open market value determined by an independent valuer under RICS
guidelines will be used.When considering the relevance of these
valuations in the current market, it is important to consider how
quickly aportfolio churns. Our average loan term from origination
to repayment is approximately 2.4 years and therefore ourvaluations
have been relatively fresh.
-- After loan origination the Group has the right under loan
documents to obtain valuations on an annualbasis at the expense of
the borrower (based on loan anniversary, not Group financial year
end). Where a follow onvaluation has been done we use the latest
valuation number in our calculations. However, the Group does
notinstruct independent third party valuations on a strict annual
basis, only when it is considered necessary anduseful to obtain
one. 65 per cent of the total income producing loan book have had
their valuation updated in thetwelve months to 31 December
2022.
-- For development projects there are a number of potential
valuation methodologies. Our selected approachis based on giving
the clearest and most consistent presentation of the risk. For
development projects ourcalculation includes the total facility
available and is calculated against the appraised market value
oncompletion of the relevant project. There are other potential
approaches such as using current drawn loan balanceand current
value or using total cost as a proxy for value. However each of
these approaches has limitations. Forexample, using the approach of
drawn loan balance divided by current project value will typically
understate theLTV in the earlier days of a development when less
debt is drawn before converging to a higher LTV that matches
ourmethodology at the end once all the debt is drawn. We generally
retain the same rights to valuation on developmentloans as for
investment assets. It is also worth noting that the weighting of
the loan within the portfoliocalculation is based off the latest
drawn balance and not the total loan commitment.
Change in Valuation Hospitality Retail Residential Other Total
-15% 67.5% 81.5% 67.6% 67.2% 69.0%
-10% 63.7% 77.0% 63.8% 63.5% 65.1%
-5% 60.4% 72.9% 60.5% 60.1% 61.7%
0% 57.3% 69.3% 57.4% 57.1% 58.6%
5% 54.6% 66.0% 54.7% 54.4% 55.8%
10% 52.1% 63.0% 52.2% 51.9% 53.3%
15% 49.9% 60.2% 49.9% 49.7% 51.0%
On the basis of the methodology previously outlined, at 31
December 2022 the Group has an average last LTV of 58.6 per cent
(2021: 61.9 per cent).
The table above shows the sensitivity of the loan to value
calculation for movements in the underlying property valuation and
demonstrates that the Group has considerable headroom within the
currently reported last LTVs.
Dividend Policy
To date, the Company has paid dividends of 5.5 pence per
Ordinary Share in respect of the year ended 31 December 2022 (2021:
5.5 pence per Ordinary Share). In addition, on 23 March 2023, the
Company declared a special dividend of 2 pence per Ordinary Share
in respect of the year ending 31 December 2022 to be paid on 21
April 2023 to shareholders on the register as at 31 March 2023.
Dividends are recognised in the Consolidated Statement of Changes
in Equity when declared. Dividends are usually paid within one
month of the declaration date.
The Company may pay dividends out of reserves provided that the
Board of Directors is satisfied on reasonable grounds that the
Company will, immediately after payment, satisfy the solvency test
(as defined in the Companies (Guernsey) Law, 2008, as amended), and
satisfy any other requirement in its memorandum and articles.
For the year ended December 2022 5.5 pence per share has been
paid out in dividends which to date was covered 1.24x by earnings
(excluding unrealised FX gains and losses and realised FX gains on
hedges relating to loans that have been extended). In addition, on
23 March 2023, the Company has declared a special dividend of 2
pence per Ordinary Share in respect of the year ending 31 December
2022 to be paid on 21 April 2023 to shareholders on the register as
at 31 March 2023. The Company maintains a dividend reserve which is
utilised, when needed, to ensure dividends are not paid out of
capital.
EVENTS AFTER THE REPORTING PERIOD
The following amounts have been drawn under existing
commitments, up to 23 March 2023:
-- Mixed Use, Dublin - EUR109,357
The following loan amortisation (both scheduled and unscheduled)
has been received since the year-end up to 23 March 2023:
-- Hotel, Dublin - EUR2,449,200
-- Hotel and Office, Northern Ireland - GBP1,000,000
-- Mixed Portfolio, Europe - EUR1,516,035
-- Three Shopping Centres, Spain - EUR359,732
The following loans have been repaid in full since year end up
to 23 March 2023:
-- Hotel, Oxford - GBP22,950,000
-- Office and Industrial Portfolio, UK - GBP5,500,000
During January and February 2023, a total amount of
GBP19,000,000 was paid to Morgan Stanley as repayment of amounts
owed as at 31 December 2022 under the credit facility held with
them.
On 21 January 2023 the Directors declared a dividend in respect
of the fourth quarter of 2022 of 1.375 pence per Ordinary Share
payable on 24 February 2023 to shareholders on the register at 3
February 2023.
In addition, on 23 March 2023, the Company declared a special
dividend of 2 pence per Ordinary Share in respect of the year
ending 31 December 2022 to be paid on 21 April 2023 to shareholders
on the register as at 31 March 2023.
Subsequent to year end the Lloyds credit facility agreement was
extended to May 2024 with a reduced facility amount of GBP25.0
million.
Starwood European Finance
Partners Limited | Investment Manager
23 March 2023
Governance
Board of Directors
JOHN WHITTLE | Non-executive Director - Chairman of the
Board
John is a Fellow of the Institute of Chartered Accountants in
England and Wales and holds the Institute of Directors Diploma in
Company Direction. He is a Non-Executive Director and Audit
Committee Chairman of The Renewable Infrastructure Group Ltd (FTSE
250), Sancus Lending Group Ltd (listed on AIM), and Chenavari Toro
Limited Income Fund Limited (listed on the SFS segment of the Main
Market of the London Stock Exchange). He was previously Finance
Director of Close Fund Services, a large independent fund
administrator, where he successfully initiated a restructuring of
client financial reporting services and was a key member of the
business transition team. Prior to moving to Guernsey, he was at
Pricewaterhouse in London before embarking on a career in business
services, predominantly telecoms. He co-led the business turnaround
of Talkland International (which became Vodafone Retail) and was
directly responsible for the strategic shift into retail
distribution and its subsequent implementation; he subsequently
worked on the private equity acquisition of Ora Telecom. John is a
resident of Guernsey.
GARY YARDLEY | Non-executive Director
Gary is a Fellow of the Royal Institution of Chartered Surveyors
and holds a degree in estate management from Southbank University
and an MBA. He has been a senior deal maker in the UK and European
real estate market for over 25 years. Gary was formally Managing
Director & Chief Investment Officer of Capital & Counties
Property PLC ("Capco") and led Capco's real estate investment and
development activities. Leading Capco's team on the redevelopment
of Earls Court, Gary was responsible for acquiring and subsequently
securing planning consent for over 11m sq. ft. at this strategic
opportunity area capable of providing over 7,500 new homes for
London. Gary was also heavily involved in the curation and growth
of the Covent Garden estate for Capco, now an established premier
London landmark. Gary is a Chartered Surveyor with over 30 years'
experience in UK & European real estate. He is a former CIO of
Liberty International and former equity partner of King Sturge and
led PwC's real estate team in Prague and Central Europe in the
early 1990s. Gary is a resident of the United Kingdom.
SHELAGH MASON | Non-executive Director - Management Engagement
Committee Chairman and Senior Independent Director
Shelagh Mason is a solicitor specialising in English commercial
property who retired as a consultant with Collas Crill LLP in 2020.
She is the Non-Executive Chairman of the Channel Islands Property
Fund Limited listed on the International Stock Exchange and is also
Non-Executive Chairman of Riverside Capital PCC, sits on the board
of Skipton International Limited, a Guernsey Licensed bank, and
until 28 February 2022, she was a Non-Executive Director of the
Renewables Infrastructure Fund a FTSE 250 company, standing down
after nine years on the board. In addition to the Company, she has
a non-executive position with Ruffer Investment Company Limited,
also a FTSE 250 company. Previously Shelagh was a member of the
board of directors of Standard Life Investments Property Income
Trust, a property fund listed on the London Stock Exchange for 10
years until December 2014. She retired from the board of Medicx
Fund Limited, a main market listed investment company investing in
primary healthcare facilities in 2017 after 10 years on the board.
She is a past Chairman of the Guernsey Branch of the Institute of
Directors and she also holds the IOD Company Direction Certificate
and Diploma with distinction. Shelagh is a resident of
Guernsey.
CHARLOTTE DENTON | Non-executive Director - Audit Committee
Chairman
Charlotte is a Fellow of the Institute of Chartered Accountants
in England and Wales and holds a degree in politics from Durham
University. She is also a member of the Society of Trust and Estate
Practitioners, a Chartered Director and a fellow of the Institute
of Directors. During Charlotte's executive career she worked in
various locations through roles in diverse organisations, including
KPMG, Rothschild, Northern Trust, a property development startup
and a privately held financial services group. She has served on
boards for over fifteen years and is currently a Non-Executive
Director of various entities including Butterfield Bank (Guernsey)
Limited, the GP boards of Private Equity groups Cinven and Hitec
and the Investment Manager for NextEnergy. She is also the Audit
Chair for the listed Investment Company River and Mercantile UK
Micro Cap. Charlotte is a resident of Guernsey.
Report of the Directors
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The Principal Activities and Investment Objective are fully
detailed in the Objective and Investment Policy section.
STRUCTURE
The Company was incorporated with limited liability in Guernsey
under the Companies (Guernsey) Law, 2008, as amended, on 9 November
2012 with registered number 55836 and has been authorised by the
Guernsey Financial Services Commission as a registered closed-ended
investment company. The Company's Ordinary Shares were admitted to
the premium segment of the Financial Conduct Authority's ("FCA")
Official List and to trading on the Main Market of the London Stock
Exchange as part of its IPO which completed on 17 December 2012.
Further issues have taken place since IPO and are listed under
"Capital" below. The issued capital during the year comprises the
Company's Ordinary Shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l
(indirectly wholly owned via a 100% shareholding in Starfin Public
Holdco 1 Limited), Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l.
(both indirectly wholly owned via a 100% shareholding in Starfin
Public Holdco 2 Limited).
References to the Group refer to the Company and its
subsidiaries.
DIVID POLICY
The Company has a target dividend of 5.5 pence per Ordinary
Share per annum, based on quarterly dividend payments.
DIVIDS PAID AND PAYABLE
The Company has paid dividends of 1.375 pence per Ordinary Share
for each of the calendar quarters of 2022. To date, the Company has
paid a total of GBP22,107,601 in respect of 2022 (5.5 pence per
Ordinary Share) (2021: GBP22,490,120: 5.5 pence per Ordinary
Share). In addition, on 23 March 2023, the Company declared a
special dividend of 2 pence per Ordinary Share in respect of the
year ending 31 December 2022 to be paid on 21 April 2023 to
shareholders on the register as at 31 March 2023.
BUSINESS REVIEW
The Group's performance during the year to 31 December 2022, its
position at that date and the Group's future developments are
detailed in the Chairman's Statement, the Strategic Report and the
Investment Manager's Report.
CAPITAL
As part of the Company's IPO completed on 17 December 2012,
228,500,000 Ordinary Shares of the Company, with an issue price of
100 pence per share, were admitted to the premium segment of the UK
Listing Authority's Official List and to trading on the Main Market
of the London Stock Exchange.
The following issues have been made since the IPO:
Admission Date Number of Price (pence per
Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
15 May 2019 38,200,000 104.75
The Company holds 17,626,702 (2021: 4,308,125) shares in
treasury. The total number of voting rights in the Company is
395,592,696, which may be used by shareholders as the denominator
for the calculations by which they can determine if they are
required to notify their interest in, or a change to their interest
in, the Company under the Financial Conduct Authority's Disclosure
and Transparency Rules. As disclosed in the Chairman's Statement,
during the year ended 31 December 2022, the Company bought back
13,318,577 Ordinary Shares at an average cost of 92.84 pence per
share (2021: 660,000 Ordinary Shares at an average cost of 89.63
pence per share).
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders
pursuant to the FCA's Disclosure and Transparency Rules ("DTR") is
published via a Regulatory Information Service and is available on
the Company's website. The Company has been notified under Rule 5
of the DTR of the following holdings of voting rights in its shares
as at 31 December 2022 and as at the date of this report.
% holding of % holding of
Name Ordinary Shares at Ordinary Shares at
31 December 2022 7 March 2023
(the latest available)
BlackRock 19.37 19.27
Close Brothers Asset Management 7.72 7.84
Waverton Investment Management 7.71 7.99
Schroder Investment Management 5.85 6.39
Fidelity International 5.05 5.05
SG Private Banking 4.09 3.76
Premier Miton Investors 3.99 3.99
Quilter Cheviot Investment Manager 3.88 3.85
James Hambro & Partners 3.50 2.73
City of London 3.18 3.35
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown opposite:
Ordinary Shares at Ordinary Shares at
Name
31 December 2022 31 December 2021
John Whittle 33,866 23,866
Shelagh Mason 112,819 112,819
Charlotte Denton 44,444 -
Gary Yardley - -
The Directors have adopted a code of Directors' dealings in
Ordinary Shares, which is based on EU Market Abuse Regulation
("MAR"). MAR came into effect across the EU (including the UK) on 3
July 2016. The Board is responsible for taking all proper and
reasonable steps to ensure compliance with MAR by the Directors and
reviews such compliance on a regular basis.
EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting period are contained in
note 23 to the consolidated financial statements.
INDEPENT AUDITOR
The Directors, at the recommendation of the Audit Committee,
conducted a tender for the position of Independent Auditor to the
Company for the audit of the year-ending 31 December 2023 as a form
of best practice given PricewaterhouseCoopers CI LLP has served as
the Company's Independent Auditor for two consecutive terms of five
years. Following a competitive tender process, the Audit Committee
recommended that the Board continue to engage
PricewaterhouseCoopers CI LLP, who have been engaged since the
Company's inaugural meeting on 22 November 2012 and have been
re-appointed at each AGM held since. PricewaterhouseCoopers CI LLP
have 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.
ORDERLY REALISATION AND RETURN OF CAPITAL TO SHAREHOLDERS
Under the Company's discount control mechanisms (contained
within its previous Articles of Association), the Company would
have been required to offer to redeem up to 75 per cent of the
shares in issue as the Company's discount to its Net Asset Value
per share was greater than 5 per cent or more during the six-month
period ending 31 December 2022 (the "Tender Offer").
However, on 31 October 2022, the Company announced, that
following a review of the Company's strategy and advice sought from
its advisers, the Board intended to recommend to shareholders that
the investment objective and policy of the Company were amended
such that the Board can pursue a strategy of orderly realisation
and the return of capital over time to shareholders (the "Proposed
Orderly Realisation"). If approved by the shareholders, the Company
would seek to return cash to shareholders in an orderly manner as
soon as reasonably practicable following the repayment of loans,
while retaining sufficient working capital for ongoing operations
and the funding of committed but currently unfunded loan
commitments.
On 28 December 2022, a Circular relating to the Proposed Orderly
Realisation and containing a Notice of Extraordinary General
Meeting to be held on 27 January 2023 (the "EGM") was published.
The Circular set out details of, and sought shareholder approval
for, certain Proposals.
The Proposals were: a. a change to the Company's Investment
Policy to reflect the fact that the Company will cease making
anynew investments and will pursue a realisation strategy of the
remaining assets in the Company's portfolio; and b. adoption of the
New Articles which provide for the periodic Compulsory Redemption
of the Company's Sharesat the discretion of the Directors to allow
cash to be returned to Shareholders following the full or
partialrealisation of assets.
On 27 January 2023, these Proposals were approved at the
EGM.
The Investment Objective and Policy which applied prior to the
approval of the Proposals, and for the whole of 2022, are set out
in the prior year Annual Report. The current Investment Objective
and Policy of the Company following the approval of the Proposals
are set out above. The Company maintains share repurchase powers,
as approved at the 10 June 2022 Annual General Meeting, 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. It is not the intention of the Company to
raise fresh capital including through a placing programme (subject
to the publication of a prospectus of the Company) and through
opportunistic tap issues following the approval of the Proposals at
the EGM.
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 10 June 2022 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 2023. The Directors intend to
seek annual renewal of this buyback authority from Shareholders
each year at the Company's AGM.
As disclosed in the Chairman's statement, the Company has bought
back 13,318,577 shares during the year ended 31 December 2022 at an
average cost per share of 92.84 pence. These shares are held in
treasury.
John Whittle | Chairman
23 March 2023
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 GBP300,000 per annum.
Subject to this limit, it is the Company's policy to determine the
level of Directors' fees, having regard for the level of fees
payable to non-executive Directors in the industry generally, the
role that individual Directors fulfil in respect of
responsibilities related to the Board, Management Engagement
Committee and Audit Committee and the time dedicated by each
Director to the Company's affairs. Base fees are set out in the
table below.
Total Fee Total Fee
Director Role 2022 2021
GBP GBP
John Whittle Chairman with effect from 1 January 2022 60,000 45,000
Management Engagement
Shelagh Mason Committee Chairman and Senior 45,000 42,500
Independent Director
Charlotte Denton Audit Committee Chairman with effect from 1 January 2022 50,000 40,000
Gary Yardley Non-Executive Director with effect from 6 September 2021 42,000 12,712
Stephen Smith Chairman with effect to 31 December 2021 - 50,000
Aggregate fees 197,000 190,212
Aggregate expenses 6,373 5,198
Total 203,373 195,410
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 have entered into a letter of appointment
with the Company. The letters of appointment were reviewed and
amended in 2019 by an external party to ensure that they were in
line with market standards prevailing at the time. Each Director is
subject to annual re-election.
The Directors do not have any interests in contractual
arrangements with the Company or its investments during the year
under review, or subsequently. Each appointment can be terminated
in accordance with the Company's Articles and without compensation.
As outlined in the letters of appointment, each appointment can be
terminated at the will of both parties with one month's notice
either by (i) written resignation; (ii) unauthorised absences from
Board meetings for 12 months or more; (iii) written request of the
other Directors; or (iv) a resolution of the shareholders.
Directors' and Officers' liability insurance cover is maintained
by the Company but is not considered a benefit in kind nor
constitutes a part of the Directors' remuneration. The Company's
Articles indemnify each Director, Secretary, agent and officer of
the Company, former or present, out of assets of the Company in
relation to charges, losses, liabilities, damages and expenses
incurred during the course of their duties, in so far as the law
allows and provided that such indemnity is not available in
circumstances of fraud, wilful misconduct or negligence.
By order of the Board
John Whittle | Chairman
23 March 2023
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 2022, 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 and June 2021.
The Company is deemed to satisfy the GFSC Code provided that it
continues to conduct its governance in accordance with the
requirements of the AIC Code.
CHAIRMAN
Appointed to the position of Chairman of the Board on 1 January
2022, John Whittle is responsible for leading the Board in all
areas, including determination of strategy, organising the Board's
business and ensuring the effectiveness of the Board and individual
Directors. He also endeavours to produce an open culture of debate
within the Board.
The Chairman's appointment is in line with the previously
released Succession Plan. Prior to the Chairman's appointment, a
job specification was prepared which included an assessment of the
time commitment anticipated for the role. Discussions were
undertaken to ensure that the Chairman was sufficiently aware of
the time needed for his role and agreed to this upon signature of
his letter of appointment. Other significant business commitments
of the Chairman were disclosed to the Company prior to his
appointment to the Board and a current list of commitments is set
out in his biography..
The effectiveness and independence of the Chairman is evaluated
on an annual basis as part of the Board's performance evaluation;
the Management Engagement Committee Chairman is tasked with
collating feedback and discussing with the Chairman on behalf of
the rest of the Board.
As per the Company's Articles, all Directors, including the
Chairman, must disclose any interest in a transaction that the
Board and Committees will consider. To ensure that all Board
decisions are independent, the said conflicted Director is not
entitled to vote in respect of any arrangement connected to the
interested party but may be counted in the quorum.
JOHN WHITTLE | Chairman
BOARD
Independence and Disclosure
The Chairman confirms that the initial Board, consisting of
Messrs. Jonathan Bridel (resigned 31 December 2020), Stephen Smith
(resigned 31 December 2021) and himself were selected prior to the
Company's launch and were able to assume all responsibilities at an
early stage, independent of the Investment Manager and Investment
Adviser. Shelagh Mason was appointed as a non-executive Director
during 2020 and Charlotte Denton and Gary Yardley were appointed as
non-executive Directors on 1 January 2021 and 6 September 2021,
respectively, in accordance with the Board's previous Succession
Planning Memorandum. The Board is composed entirely of independent
non-executive Directors, who meet as required without the presence
of the Investment Manager or service providers to scrutinise the
achievement of agreed goals, objectives and monitor performance.
Through the Audit Committee and the Management Engagement Committee
they are able to ascertain the integrity of financial information
and confirm that all financial controls and risk management systems
are robust and analyse the performance of the Investment Manager
and other service providers on a regular basis.
Following the annual performance evaluation, it was deemed that
the Directors had been proven to challenge the Investment Manager
throughout the year under review, as minuted and recorded,
therefore for the purposes of assessing compliance with the AIC
Code, the Board as a whole considers that each Director is
independent of the Investment Manager and free from any business or
other relationship that could materially interfere with the
exercise of their independent judgment. If required, the Board is
able to access independent professional advice. The Investment
Manager is also requested to declare any potential conflicts
surrounding votes, share dealing and soft commissions on an annual
basis to the Board to help with the assessment of investments.
Open communication between the Investment Manager and the Board
is facilitated by regular Board meetings, to which the Investment
Manager is invited to attend and update the Board on the current
status of the Company's investments, along with ad hoc meetings as
required.
Coming to mutual agreement on all decisions, it was agreed that
the Board had acted in the best interests of the Company to the
extent that, if deemed appropriate, a Director would abstain or
have his objection noted, which would be reflected within the
minutes.
Similar to the process outlined above for the appointment of the
Chairman, a job specification was prepared for each initial
directorship which included an assessment of the time commitment
anticipated for the role to ensure each Director was aware of the
time commitment needed for the role. The Directors' other
significant business commitments were disclosed to the Company
prior to their appointment to the Board and were publicly disclosed
in the Company's Prospectus dated 28 November 2012. A similar
process was followed as part of the succession planning outlined
above. Any subsequent changes have been declared. Certain of these
commitments can be identified in each Director's biography. Details
of the skills and experience provided by each Director can also be
found in their biographies, alongside identification of the role
each Director currently holds in the Company.
The terms and conditions of appointment for non-executive
Directors are outlined in their letters of appointment and are
available for inspection by any person at the Company's registered
office during normal business hours and at the AGM for fifteen
minutes prior to and during the meeting. The letters of appointment
were previously reviewed 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.
The Board's position on diversity can be seen in the Strategic
Report. All Directors currently sit on all the Committees, with the
exception of the Chairman, who is not a member of the Audit
Committee; additionally, no single Director fills more than one
Committee chairmanship post.
Annual Performance Evaluation
The Board's balance is reviewed on a regular basis as part of a
performance evaluation review. Using a pre-determined template
based on the AIC Code's provisions as a basis for review, the Board
undertook an evaluation of its performance, and in addition, an
evaluation focusing on individual commitment, performance and
contribution of each Director was conducted. The Chairman then met
with each Director to fully understand their views of the Company's
strengths and to identify potential weaknesses. If appropriate, new
members are proposed to resolve any perceived issues, or a
resignation is sought. Following discussions and review of the
Chairman's evaluation by the other Directors, the Management
Engagement
Committee Chairman reviewed the Chairman's performance. Training
and development needs are identified as part of this process,
thereby ensuring that all Directors are able to discharge their
duties effectively.
Given the Company's size and the structure of the Board, no
external facilitator or independent third party was used in the
performance evaluation. The need to appoint an external facilitator
is reviewed by the Board on an annual basis.
Re-election and Board Tenure
There is currently no Nominations Committee for the Company as
it is deemed that the size, composition and structure of the
Company would mean the process would be inefficient and
counterproductive. The Board therefore undertakes a thorough
process of reviewing the skill set of the individual Directors, and
proposes new, or renewal of current appointments to the Board.
Each Director is required to be elected by shareholders at the
AGM following his appointment by the Board. As part of the
recommendations of the AIC Code, the Directors put themselves
forward for annual re-election. In light of this, all Directors,
are therefore submitting themselves for re-election.
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. Currently there is no gap that
currently needs to be filled. Should a gap be identified, the Board
would engage an independent search consultancy with no connection
to the Company or its Directors, to assist in appointments to
satisfy such gaps.
Succession Planning
The Company enters its eleventh year in 2023 and the Board has
been mindful in the implementation of the previously announced
succession plan. During Q4 2019, the Directors devised a Succession
Planning Memorandum. The Memorandum stated that a new Director was
to be appointed to the Board during the second half of 2021 giving
them time to get up to speed prior to Stephen Smith standing down
from the Board in December 2021. Charlotte Denton and Gary Yardley
were duly appointed on 1 January 2021 and 6 September 2021,
respectively.
Upon Stephen Smith's retirement from the Board during December
2021, John Whittle was subsequently appointed as Chairman of the
Board as of 1 January 2022. Charlotte Denton became Chairman of the
Audit Committee as of 1 January 2022. Shelagh Mason became the
Senior Independent Director as of 20 January 2022.
As disclosed in previous reports, it was the Board's intention
that John Whittle would remain on the Board until December 2023 in
light of (i) John Whittle's extensive familiarity with the Company;
(ii) the previously challenging market circumstances facing the
Company; and (iii) the extensive rotation of the Board in recent
years. Given the shareholder approval to progress the Orderly
Realisation and Return of Capital, as passed by shareholder
resolution at the Extraordinary General Meeting on 27 January 2023,
the Board are of the view that it is in shareholders' best
interests that John Whittle remains on the Board until the
completion of the Orderly Realisation and Return of Capital to
Shareholders. This will ensure that the Board and shareholders will
benefit from the significant experience and knowledge of the
Company and its portfolio that John Whittle has developed since the
Company's IPO.
In terms of the new appointments, with the approval of the
Orderly Realisation and Return of Capital and the previously
announced succession plan being largely completed, 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. To the extent applicable or
required, the Board will continue to consider diversity when making
the new appointments to the Board.
At present, the Directors wish to leave the succession and the
tenure policy of the Chairman open indefinitely, with no changes
currently planned.
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 reports; 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 the dividend policy;
appointments to the Board and constitution of Board Committees;
observation of relevant legislation and regulatory requirements;
and performance review of key service providers. The Board also
retains ultimate responsibility for Committee decisions; every
Committee is required to refer to the Board, who will make the
final decision.
Terms of reference that contain a formal schedule of matters
reserved for the Board of Directors and its duly authorised
Committee for decision has been approved and can be reviewed at the
Company's registered office.
The meeting attendance record is displayed in the Corporate
Governance statement. The Company Secretary acts as the Secretary
to the Board.
Audit Committee
The Board has established an Audit Committee which was composed
of all the independent members of the Board other than Chairman of
the Board. The Chairman of the Board, although not a member of the
Committee, may still attend the meetings upon invitation by the
Audit Committee Chairman. The Audit Committee, its membership and
its terms of reference are kept under regular review by the Board,
and it is confident that all members have sufficient financial
skills and experience, and competence relevant to the Company's
sector. John Whittle was the Audit Committee Chairman until 31
December 2021. Charlotte Denton was appointed on 24 March 2021 to
the Audit Committee and has become chairman of the Audit Committee
with effect from 1 January 2022.
The Audit Committee met four times during 2022 (2021: three
times). The Company Secretary acts as the Secretary to the Audit
Committee.
Owing to the size and structure of the Company, there is no
internal audit function. The Audit Committee has reviewed the need
for an internal audit function and perceived that the internal
financial and operating control systems in place within the Group
and its service providers, for example as evidenced by the Report
on Controls at a Service Organisation ("SOC 1 Type 2 Report") on
the internal procedures of the Administrator, give sufficient
assurance that a sound system of internal control is maintained
that safeguards shareholders' investment and Group's assets.
The Audit Committee is intended to assist the Board in
discharging its responsibilities for the integrity of the Group's
consolidated financial statements, as well as aiding the assessment
of the Group's internal control effectiveness and objectivity of
the external Auditors. Further information on the Audit Committee's
responsibilities is given in the Report of the Audit Committee.
Formal terms of reference for the Audit Committee are available
at the registered office and on the Company's website and are
reviewed on a regular basis.
Management Engagement Committee
The Company has established a Management Engagement Committee
which comprises all the Directors, with Shelagh Mason as the
Chairman of the Committee. The Management Engagement Committee's
main function is to review and make recommendations on any proposed
amendment to the Investment Management Agreement and keep under
review the performance of the Investment Manager; and undertake an
assessment of the Investment Manager's scope and responsibilities
as outlined in the service agreement and prospectus on a formal
basis every year. Discussions on the Investment Manager's
performance are also conducted regularly throughout the year by the
Board. Reviews of engagements with other service providers, such as
the Administrator, to ensure all parties are operating
satisfactorily are also undertaken by the Management Engagement
Committee so as to ensure the safe and accurate management and
administration of the Company's affairs and business and that they
are competitive and reasonable for Shareholders.
The Management Engagement Committee met twice during 2022 (2021:
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.
Management
Scheduled Ad hoc Audit
Engagement
Board Board(1) Committee
Committee
John Whittle 4 9 4 2
Shelagh Mason 4 10 4 2
Charlotte Denton 4 9 4 2
Gary Yardley 4 9 4 2
Total Meetings for year 4 10 4 2
(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.
The Company Secretary acts as the secretary to the Management
Engagement Committee.
Board and Committee Meeting Attendance
Individual attendance at Board and committee meetings is set out
above.
In addition to the scheduled quarterly and additional ad hoc
meetings, the Directors and the Investment Manager have been
provided with a number of videoconference or telephone investment
briefings by the Investment Adviser in order to keep the Directors
and the Investment Manager fully apprised and up to date with the
current investment status and progress. During 2018, a committee of
one Director was appointed to approve dividends should a quorum of
two Directors not be available.
BOARD REMUNERATION
As outlined in the Prospectus, Directors are paid in accordance
with agreed principles aimed at focusing on long-term performance
of the Company. Further information can be found in the Directors'
Remuneration Report.
COMPANY SECRETARY
Reports and papers, containing relevant, concise and clear
information, are provided to the Board and Committees in a timely
manner to enable review and consideration prior to both scheduled
and ad-hoc specific meetings. This ensures that Directors are
capable of contributing to, and validating, the development of
Company strategy and management. The regular reports also provide
information that enables scrutiny of the Company's Investment
Manager and other service providers' performance. When required,
the Board has sought further clarification of matters with the
Investment Manager and other service providers, both by means of
further reports and in-depth discussions, in order to make more
informed decisions for the Company.
Under the direction of the Chairman, the Company Secretary
facilitates the flow of information between the Board, Committees,
the 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 2022 is provided in the
Statement of Directors' Responsibilities.
Further information enabling shareholders to assess the
Company's performance, business model and strategy can be sourced
in the Chairman's Statement, the Strategic Report and the Report of
the Directors.
GOING CONCERN
The Directors also considered it appropriate to prepare the
financial statements on the going concern basis, as explained in
the 'Basis of preparation' paragraph in note 2(a) of the financial
statements which includes consideration of the EGM.
RISK CONTROL
In addition to the earlier assessment of principal risks and
uncertainties contained within the Strategic Report, the Board is
required annually to review the effectiveness of the Group's key
internal controls such as financial, operational and compliance
controls and risk management. The controls are designed to ensure
that the risk of failure to achieve business objectives is
minimised and are intended to provide reasonable assurance against
material misstatement or loss. This is not absolute assurance that
all risks are eliminated.
Through regular meetings of the Audit Committee, the Board seeks
to maintain full and effective control over all strategic,
financial, regulatory and operational issues. The Board maintains
an organisational and committee structure with clearly defined
lines of responsibility and delegation of authorities.
RISK MANAGEMENT
As part of the compilation of the risk register for the Company,
appropriate consideration has been given to the relevant control
processes and that risk is considered, assessed and managed as an
integral part of the business. The Company's system of internal
control includes inter alia the overall control exercise,
procedures for the identification and evaluation of business risk,
the control procedures themselves and the review of these internal
controls by the Audit Committee on behalf of the Board. Each of
these elements that make up the Company's system of internal
financial and operating control is explained in further detail as
below.
(i) Control Environment
The Company is ultimately dependent upon the quality and
integrity of the staff and management of the Investment Manager,
the Investment Adviser and its Fund Administration & Company
Secretarial service provider. In each case, qualified and able
individuals have been selected at all levels. The staff of both the
Investment Manager and Administrator are aware of the internal
controls relevant to their activities and are also collectively
accountable for the operation of those controls. Appropriate
segregation and delegation of duties is in place.
The Audit Committee undertakes a review of the Company's
internal financial and operating controls on a regular basis. The
Auditors of the Company consider internal controls relevant to the
Company's preparation and fair presentation of the consolidated
financial statements in order to design their audit procedures, but
not for the purpose of expressing an audit opinion on the
effectiveness of the Company's internal controls.
In its role as a third-party fund administration services
provider, Apex Fund and Corporate Services (Guernsey) Limited
produces an annual SOC 1 Type 2 Report on the internal control
procedures in place within Apex Fund and Corporate Services
(Guernsey) Limited and this is subject to review by the Audit
Committee and the Board.
(ii) Identification and Evaluation of Business Risks
Another key business risk is the performance of the Company's
investments. This is managed by the Investment Manager, which
undertakes regular analysis and reporting of business risks in
relation to the loan portfolio, and then proposes appropriate
courses of action to the Board for their review.
(iii) Key Procedures
In addition to the above, the Audit Committee's key procedures
include a comprehensive system for reporting financial results to
the Board regularly, as well as quarterly impairment reviews of
loans conducted by the Board as a whole (including reports on the
underlying investment performance).
Although no system of internal control can provide absolute
assurance against material misstatement or loss, the Company's
system is designed to assist the Directors in obtaining reasonable
assurance that problems are identified on a timely basis and dealt
with appropriately. The Company, given its size, does not have an
internal audit function. It is the view of the Board that the
controls in relation to the Company's operating, accounting,
compliance and IT risks performed robustly throughout the year. In
addition, all have been in full compliance with the Company's
policies and external regulations, including:
-- Investment policy, as outlined in the IPO documentation, and
subsequently amended by EGMs held on 2 May2014, 9 March 2015, 6 May
2016 and 27 January 2023;
-- 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 2022.
In summary, the Board considers that the Company's existing
internal financial and operating controls, coupled with the
analysis of risks inherent in the business models of the Company
and its subsidiaries, continue to provide appropriate tools for the
Company to monitor, evaluate and mitigate its risks.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE ("AIFMD")
The AIFMD, which was implemented across the EU on 22 July 2013
with the transition period ending 22 July 2014, aims to harmonise
the regulation of Alternative Investment Fund Managers ("AIFMs")
and imposes obligations on managers who manage or distribute
Alternative Investment Funds ("AIFs") in the EU or who market
shares in such funds to EU investors. Following the UK's cessation
of EU membership on 31 January 2020, the FCA has implemented an
equivalent regulation ("UK AIFMD") for the marketing of AIFs in the
UK and to UK investors.
After seeking professional regulatory and legal advice, the
Company was established in Guernsey such that, upon implementation
of AIFMD it would be a Non-EU/UK AIF, with Starwood European
Finance Partners Limited appointed to act as the Non-EU/UK
AIFM.
In accordance with AIFMD disclosure obligations, note 6 provides
a summary of realised and unrealised gains and losses.
The Investment Manager does not receive an additional fee, to
that stated in notes 3 and 22, as a result of acting as the AIFM.
The Board of the Investment Manager received an aggregate fee of
GBP63,600 for the year ended 31 December 2022.
The marketing of shares in AIFs that are established outside the
EU/UK (such as the Company) to investors in an EU member state/ UK
is prohibited unless certain conditions are met. Certain of these
conditions are outside the Company's control as they are dependent
on the regulators of the relevant third country (in this case
Guernsey) and the relevant EU member state/UK entering into
regulatory co-operation agreements with one another.
The AIFM has given written notification to the United Kingdom
Financial Conduct Authority ("FCA"), pursuant to Regulation 59 of
the Alternative Investment Fund Managers Regulations 2013 (SI
1773/2013) (the "AIFM Regulations") of its intention to market the
shares to investors in the United Kingdom in accordance with the
AIFM Regulations and the rules and guidance of the FCA.
The AIFM has given written notification to the Netherlands
Authority for the Financial Markets ("AFM") pursuant to Article
1:13b section 1 and 2 of the Act on the Financial Supervision (Wet
op het financieel toezicht) (the "AFS") of its intention to market
the shares to investors in the Netherlands in accordance with the
AFS, any rules and regulations promulgated pursuant thereto and the
rules and guidance of the AFM.
On 12 February 2016, the AIFM obtained a marketing licence in
Sweden in accordance with Chapter 5, Section 10 of the Swedish
Alternative Investment Fund Managers Act (Sw. lag (2013:561) om
förvaltare av alternativa investeringsfonder). This enables shares
in the Company to be marketed to professional investors in
Sweden.
Currently, the National Private Placement Regime ("NPPR")
provides a mechanism to market Non-EU AIFs that are not allowed to
be marketed under the AIFMD domestic marketing regimes. The Board
is utilising NPPR in order to market the Company, specifically in
the UK, Sweden and the Netherlands. The Board works with the
Company's advisers to ensure the necessary conditions are met, and
all required notices and disclosures are made under NPPR.
Any regulatory changes arising from implementation of the AIFMD
(or otherwise) that limit the Company's ability to market future
issues of its shares may adversely affect the Company's ability to
carry out its investment policy successfully and to achieve its
investment objective, which in turn may adversely affect the
Company's business, financial condition, results of operations, NAV
and/or the market price of the Ordinary Shares.
The Board, in conjunction with the Company's advisers, will
continue to monitor the development of the AIFMD and its impact on
the Company. The Company will continue to use NPPR pending further
consultation from the European Securities and Marketing Authority
("ESMA").
The Board has considered the disclosure obligations under
Articles 22 and 23 and can confirm that the Company complies with
the various organisational, operational and transparency
obligations.
The Board has considered requirements of Articles 6 and 7 of
Regulation 2019/2088 on sustainability-related disclosures in the
financial services sector dated 27 November 2019 and have made the
necessary disclosures on the Company's website.
FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA") AND THE OECD COMMON
REPORTING STANDARDS ("CRS")
FATCA became effective on 1 January 2013 and is being gradually
implemented internationally. The legislation is aimed at
determining the ownership of US assets in foreign accounts and
improving US Tax compliance with respect to those assets.
More than 90 jurisdictions, including all 34 member countries of
the Organisation for Economic Co-operation and Development ("OECD")
and the G20 members, have committed to implement the Common
Reporting Standard for automatic exchange of tax information
("CRS"). Building on the model created by FATCA, the CRS creates a
global standard for the annual automatic exchange of financial
account information between the relevant tax authorities.
The Board in conjunction with the Company's service providers
and advisers have ensured that the Company complies with FATCA and
CRS's requirements to the extent relevant to the Company.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the
intention of the AIC Code is that the below matters set out in
section 172 of the UK Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business
objectives, the Company actively identifies, evaluates, manages and
mitigates risk as well as continually evolving the approach to risk
management. For further details in connection with Risk Management
of the Company, please refer to the Strategic Report and the
Corporate Governance Statement.
Our People
The Company has no employees, however, to succeed we need to
manage the Company's performance by bringing through talent to the
Board while ensuring we operate as efficiently as possible, as
demonstrated with the succession plan. For further details in
connection with the succession plan, please refer to the Corporate
Governance Statement.
Business Relationships
In order for the Company to succeed, it requires to develop and
maintain long-term relationships with service providers and
borrowers. The Company values all of its service providers and
borrowers.
Community and Environment
As an investment company, the Group's activities have minimal
direct impact on the environment. Please refer to the Strategic
Report for more details in connection with the impact of the
Group's operations on the community and environment.
Business Conduct
The Company is committed to act responsibly and ensure that the
business operates in a responsible and effective manner and with
high standards in order to meet its objectives.
Shareholders
The Board place a great deal of importance on communication with
all shareholders and envisage to continuing effective dialogue with
all shareholders. Please refer to section below for more details on
how the Company engages with the shareholders.
Throughout 2023, 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.
The Chairman met with multiple large shareholders in October
2022, where it was concluded that the likely take-up of a potential
future Tender Offer would be significant and that the Company would
no longer be of a viable size to provide shareholders with
sufficient liquidity and scale. Following these consultations and
the subsequent announcement on 31 October 2022, the Company's
Proposed Orderly Realisation was progressed and approved at the
EGM.
All Directors are available for discussions with the
shareholders, in particular the Chairman (John Whittle), Senior
Independent Director (Shelagh Mason) and the Audit Committee
Chairman (Charlotte Denton), as and when required.
Should a situation arise where shareholders cast a vote of 20
per cent or more against a board recommendation the directors will
consult with shareholders to understand their reasons behind this
vote. The Board will publish the views received from the
shareholders within six months of the shareholder meeting.
CONSTRUCTIVE USE OF AGM
The Notice of AGM is sent out at least 20 working days in
advance of the meeting. All shareholders have the opportunity to
put questions to the Board or Investment Manager, either formally
at the Company's AGM, informally following the meeting, or in
writing at any time during the year via the Company Secretary. The
Company Secretary is also available to answer general shareholder
queries at any time throughout the year.
By order of the Board
John Whittle | Chairman
23 March 2023
Report of the Audit Committee
The Board is supported by the Audit Committee, which during the
year comprised of Charlotte Denton, as Chairman, Shelagh Mason, and
Gary Yardley. John Whittle, as Chairman of the Board, does not sit
on the Audit Committee. The Board has considered the composition of
the Audit Committee and is satisfied that 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:
-- Reviewing the Group's internal financial controls, and the
Group's internal control and risk managementsystems;
-- Monitoring the need for an internal audit function
annually;
-- Monitoring and reviewing the scope, independence, objectivity
and effectiveness of the external Auditor,taking into consideration
relevant regulatory and professional requirements;
-- Making recommendations to the Board in relation to the
appointment, re-appointment and removal of theexternal Auditor and
approving their remuneration and terms of engagement, which in turn
can be placed before theshareholders for their approval at the
AGM;
-- Development and implementation of the Group's policy on the
provision of non-audit services by theexternal Auditor, as
appropriate;
-- Reviewing the arrangements in place to enable Directors and
staff of service providers to, in confidence,raise concerns about
possible improprieties in matters of financial reporting or other
matters insofar as they mayaffect the Group;
-- Providing advice to the Board on whether the consolidated
financial statements, taken as a whole, arefair, balanced and
understandable and provide the information necessary for
shareholders to assess the Group'sperformance, business model and
strategy; and
-- Reporting to the Board on how the Committee discharged all
relevant responsibilities at each Boardmeeting.
Financial Reporting
The primary role of the Audit Committee in relation to the
financial reporting is to review with the Administrator, Investment
Manager and the Auditor the appropriateness of the Annual Report
and Audited Consolidated Financial Statements and Interim Condensed
Consolidated Financial Statements, concentrating on, amongst other
matters:
-- The quality and acceptability of accounting policies and
practices;
-- The clarity of the disclosures and compliance with financial
reporting standards and relevant financialand governance reporting
requirements;
-- Material areas in which significant judgements have been
applied or there has been discussion with theAuditor;
-- Whether the Annual Report and Audited Consolidated Financial
Statements, taken as a whole, is fair,balanced and understandable
and provides the information necessary for the shareholders to
assess the Group'sperformance, business model and strategy; and
-- Any correspondence from regulators in relation to the Group's
financial reporting.
To aid its review, the Audit Committee considers reports from
the Administrator and Investment Manager and also reports from the
Auditor on the outcomes of their half-year review and annual audit.
The Audit Committee supports PricewaterhouseCoopers CI LLP ("PwC")
in displaying the necessary professional scepticism their role
requires.
The Audit Committee met four times during the year under review;
individual attendance of Directors is outlined in the Corporate
Governance Statement. The main matters discussed at those meetings
were:
-- Review and approval of the external Auditor and when tabled,
consideration of the final audit findingsreport;
-- Discussion and approval of the fee for the external
audit;
-- Detailed review of the Annual Report and Audited Consolidated
Financial Statements and recommendation forapproval by the
Board;
-- Review and approval of the interim review findings report of
the external Auditor;
-- Detailed review of the Interim Condensed Consolidated
Financial Statements and recommendation forapproval by the
Board;
-- Discussion of reports from the external Auditor following
their interim review and annual audit;
-- Assessment of the effectiveness of the external Auditor as
described below;
-- Assessment of the independence of the external Auditor;
-- Review of the Group's key risks and internal controls;
-- Consideration of the AIC Code, FRC Guidance on Audit
Committees and other regulatory guidelines; and
-- Consideration of the proposals received as part of the
competitive tender process conducted for the roleof the Company's
independent auditor for the audit of the year-ended 31 December
2023.
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.
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
Carrying amount assesses the ECL methodology focusing on the estimation of probability of default, exposure at
and impairment/ default and loss given default.
expected credit
losses of loans 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
advanced 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 2022 were assessed so as to ensure compliance with
IFRS 9. As disclosed in note 2 and in the Investment Manager's report, while two loans amounting to
GBP46,909,623 (2021: three loans amounting to GBP59,031,888 (one loan was moved to Stage 1 during 2022))
remain classified as Stage 2, during the year ended 31 December 2022, no expected credit losses were
considered necessary based on the loan to value ratios headroom as at 31 December 2022 and strong
security packages in place.
Income from loans advanced is measured in accordance with the effective interest rate method. The
requirement to estimate the expected cash flows when forming an effective interest rate model is
subject to significant management judgements and estimates.
Risk of fraud and The Audit Committee discusses with the Investment Manager and Investment Adviser the reasons for the
error in income changes in key assumptions made in the loan models such as changes to expected drawdown or repayment
from loans dates or other amendments to expected cash flows such as changes in interbank rates on floating
advanced 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
interim and annual consolidated financial statements are
considered, also enabling the Auditor to meet and discuss any
matters with the Audit Committee without the presence of the
Investment Manager or the Administrator.
During the year, the Audit Committee reviewed the external
Auditor's performance, considering a wide variety of factors
including:
-- The quality of service, the Auditor's specialist expertise,
the level of audit fee, identification andresolution of any areas
of accounting judgement, and quality and timeliness of papers
analysing these judgements;
-- Review of the audit plan presented by the Auditor, and when
tabled, the final audit findings report;
-- Meeting with the Auditor regularly to discuss the various
papers and reports in detail;
-- Furthermore, interviews of appropriate staff in the
Investment Manager, Investment Adviser andAdministrator to receive
feedback on the effectiveness of the audit process from their
perspective; and
-- Compilation of a checklist with which to provide a means to
objectively assess the Auditor's performance.
In addition to the regular and ad hoc meetings held with the
auditors, the Audit Committee Chairman and Chairman of the Company
received a presentation on PwC's use of technology in their audit
process on 7 February 2022.
AUDITOR'S TENURE AND OBJECTIVITY
The Group's current Auditor, PwC, have acted in this capacity
since the Company's inaugural meeting on 22 November 2012. The
Committee reviews the Auditor's performance on a regular basis to
ensure the Group receives an optimal service and make regular
enquiries to confirm the quality findings of audit work undertaken
by both the firm and lead engagement partner on the audit. Subject
to annual appointment by shareholder approval at the AGM, the
appointment of the Auditor is formally reviewed by the Audit
Committee on an annual basis. PwC follows the FRC Ethical Standards
and their rotation rules require the lead audit partner to rotate
every 5 years, key partners involved in an audit every 7 years and
PwC's own internal policy would generally expect senior staff to
have consideration given to the threats to their independence after
7 years and to be rotated after 10 years. Rotation ensures a fresh
look without sacrificing institutional knowledge.
Rotation of audit engagement partners, key partners involved in
the audit and other staff in senior positions is reviewed on a
regular basis by the lead audit engagement partner. Roland Mills is
currently serving his fifth year of five as engagement partner and
a new audit partner will be in place for the 31 December 2023
audit, with a full handover taking place at the conclusion of the
2022 year end audit.
PwC regularly updates the Audit Committee on the rotation of
audit partners, staff, level of fees, details of any relationships
between the Auditor and the Group, and also provides overall
confirmation of its independence and objectivity. There are no
contractual obligations that restrict the Group's choice of
Auditor. Any non-audit work would be reviewed by the Audit
Committee to confirm it appropriate under the FRC Ethical Standard
and approved by the Audit Committee Chairman prior to the Auditor
undertaking any work.
Following a review of PwC's tenure, the Audit Committee
recommended that the Board of Directors conduct a competitive
tender process for the role of the Company's independent auditor
for the audit of the year-ended 31 December 2023. Following the
completion of the competitive tender process, the Audit Committee
were satisfied that PwC were still best placed to service the
Company as its independent auditors and as such will be
recommending their continued appointment 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 ofthe Annual Report and
Audited Consolidated Financial Statements, including the
verification processes in place toconfirm the factual content;
-- The detailed reviews undertaken at various stages of the
production process by the Investment Manager,Investment Adviser,
Administrator, Auditor and the Audit Committee that are intended to
ensure consistency andoverall balance;
-- Controls enforced by the Investment Manager, Investment
Adviser, Administrator and other third-partyservice providers to
ensure complete and accurate financial records and security of the
Group's assets; and
-- The existence and content of a satisfactory controls report
that has been reviewed and reported upon bythe Administrator's
service Auditor to verify the effectiveness of the internal
controls of the Administrator, suchas the SOC 1 Type 2 Report.
As a result of the work performed, the Audit Committee has
concluded that it has acted in accordance with its' terms of
reference and has ensured the independence and objectivity of the
external Auditor. It has reported to the Board that the Annual
Report for the year ended 31 December 2022, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group's performance,
business model and strategy. The Board's conclusions in this
respect are set out in the Statement of Directors'
Responsibilities.
The Audit Committee has recommended to the Board that, following
a competitive tender process, the external auditor be re-appointed
for the 2023 year end annual report.
Charlotte Denton | Audit Committee
Chairman
23 March 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing consolidated
financial statements for each financial year which give a true and
fair view, in accordance with applicable laws and regulations, of
the state of affairs of the Company and of the profit or loss of
the Company for that year.
Company law requires the Directors to prepare financial
statements for each financial year. The consolidated financial
statements have been prepared in accordance with International
Financial Reporting Standards as adopted by the European Union
("IFRS"). In preparing the consolidated financial statements, the
Directors are required to:
-- Select suitable accounting policies and apply them
consistently;
-- Make judgments and estimates that are reasonable and
prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departuresdisclosed and explained
in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going
concern basis unless it is inappropriate topresume that the Company
will continue in business.
The maintenance and integrity of the Company's website is the
responsibility of the Directors; the work conducted by the Auditor
does not involve consideration of the maintenance and integrity of
the website and, accordingly, the Auditor accepts no responsibility
for any changes that may have occurred to the consolidated
financial statements since they are initially presented on the
website. Legislation in Guernsey governing the preparation and
dissemination of the consolidated financial statements may differ
from legislation in other jurisdictions.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the consolidated financial statements comply with the
Companies (Guernsey) Law, 2008, as amended. They are also
responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Each of the Directors confirms that, to the best of their
knowledge:
-- They have complied with the above requirements in preparing
the consolidated financial statements;
-- There is no relevant audit information of which the Company's
Auditor is unaware;
-- All Directors have taken the necessary steps that they ought
to have taken to make themselves aware ofany relevant audit
information and to establish that the Auditor is aware of said
information;
-- The consolidated financial statements, prepared in accordance
with the applicable set of accountingstandards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of theCompany and Group; and
-- The Chairman's Statement, Strategic Report, Investment
Manager's Report, Report of the Directors andCorporate Governance
Statement include a fair review of the development and the position
of the Company and theGroup, together with a description of the
principal risks and uncertainties that they face and take into
accountthe results of the EGM.
The UK Code, as adopted through the AIC Code by the Company,
also requires Directors to ensure that the Annual Report and
Consolidated Financial Statements are fair, balanced and
understandable. In order to reach a conclusion on this matter, the
Board has requested that the Audit Committee advise on whether it
considers that the Annual Report and Consolidated Financial
Statements fulfil these requirements. The process by which the
Committee has reached these conclusions is set out in the Report of
the Audit Committee. Furthermore, the Board believes that the
disclosures set out in 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 2022, 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 2022, taken as
a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's
performance, business model and strategy.
For Starwood European Real Estate Finance Limited
John Whittle | Chairman
23 March 2023
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 2022, 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 2022;
-- the consolidated statement of comprehensive income for the
year then ended;
-- the consolidated statement of changes in equity for the year
then ended;
-- the consolidated statement of cash flows for the year then
ended; and
-- the notes to the consolidated financial statements, which
include significant accounting policies andother explanatory
information.
BASIS FOR OPINION
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
INDEPENCE
We are independent of the group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements of the group, as required by the Crown
Dependencies' Audit Rules and Guidance. We have fulfilled our other
ethical responsibilities in accordance with these requirements.
OUR AUDIT APPROACH
OVERVIEW
Audit scope
-- The company is based in Guernsey, has subsidiaries located in
Guernsey and Luxembourg and engagesStarwood European Finance
Partners Limited (the "Investment Manager") to manage its assets.
The consolidatedfinancial statements are a consolidation of the
company and all the subsidiaries.
-- We conducted our audit of the consolidated financial
statements from information provided by Apex Fundand Corporate
Services (Guernsey) Limited (the "Administrator") and its related
group entities to whom the board ofdirectors has delegated the
provision of certain functions. We also had significant interaction
with StarwoodCapital Europe Advisers, LLP (the "Investment
Adviser") in completing aspects of our overall audit work.
-- We conducted our audit work in Guernsey and we tailored the
scope of our audit taking into account thetypes of investments
within the group, the involvement of the third parties referred to
above, and the industry inwhich the group operates.
-- We performed an audit of the consolidated financial
information of the company and its Guernsey andLuxembourg
subsidiaries and we consider them all as one component.
-- Scoping was performed at the group level, irrespective of
whether the underlying transactions took placewithin the company or
within any of the subsidiaries. Our testing was performed on a
consolidated basis usingthresholds which are determined with
reference to the overall group performance materiality and the
risks ofmaterial misstatement identified.
MATERIALITY
-- Overall group materiality: GBP8.3 million (2021: GBP8.4
million) based on 2% of consolidated net assets.
-- Performance materiality: GBP6.2 million (2021: GBP6.3
million).
THE SCOPE OF OUR AUDIT
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the consolidated
financial statements. In particular, we considered where the
directors made subjective judgements; for example, in respect of
significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. 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 the auditor's
professional judgement, were of most significance in the audit of
the consolidated financial statements of the current period and
include the most significant assessed risks of material
misstatement (whether or not due to fraud) identified by the
auditor, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters,
and any comments we make on the results of our procedures thereon,
were addressed in the context of our audit of the consolidated
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
KEY AUDIT MATTERS
-- Carrying amount, expected credit losses and impairment of
loans advanced
-- Risk of fraud in income from loans advanced
-- Amendment to group investment objective and policy to pursue
a strategy of orderly realisation
This is not a complete list of all risks identified by our
audit.
Key audit matter How our audit addressed the Key audit matter
We understood and evaluated the internal control
environment in place at the Administrator and the
Investment Adviser over the carrying amount of the loans
advanced, in particular management's processes and
assumptions used to measure the loans at amortised cost and
used to determine ECL and the level of impairment (if any)
required on the loans advanced, either at inception, or on
an ongoing basis.
We assessed the accounting policy for loans advanced for
compliance with International Financial Reporting Standards
as adopted by the European Union and planned and executed
our audit procedures to ensure that the loans advanced were
accounted for in accordance with the stated accounting
policy.
Carrying amount, expected credit losses and impairment of
loans advanced
Our procedures included:
As detailed within notes 2(g) and 10 to the consolidated
financial statements, loans advanced at the year-end of
GBP432.5 million are measured at amortised cost and comprise
of both fixed and floating rate loans. -- Detailed testing over the amortised cost
models used by management to value the loans at
amortised cost using the effective interest rate
method;
Loans advanced make up a significant part of the -- Testing and challenging the assumptions and
consolidated statement of financial position and due to the inputs into the amortised cost models and inspecting
nature of this balance, their carrying amount, expected the associated agreements and other legal
credit losses ("ECL") and impairment is subject to documentation;
judgement and estimation. -- Back-testing procedures were performed to
assist in our conclusions as to the cash flow
forecasting reliability applied by the Investment
Adviser;
The judgements exercised in determining the carrying -- Understanding, assessing and challenging the
amount, ECL and impairment of loans advanced could assumptions and judgements made by the Investment
significantly impact the net asset value of the group and Adviser in respect of the ECL for each loan advanced
this is considered to be a key source of estimation including;
uncertainty as described in note 2(c) and 2(h) of the
consolidated financial statements. ? obtaining the Investment Adviser's impairment
papers and assessing the ECL methodology, focussing on
and challenging the estimation of probability of
default, exposure at default and loss given default,
The specific areas of judgement include: and how forward-looking information was considered in
this regard;
? assessing the consistency and appropriateness
of the Investment Adviser's assumptions applied in
-- The impact of changes in the expected cash determining whether any loan advanced was performing,
flows for each loan on the carrying amount of the loans underperforming or non-performing, including
measured at amortised cost; and consideration as to whether a significant increase in
credit risk of each borrower had occurred during the
-- How management determine the underlying year;
assumptions when determining the carrying amount and ? obtaining evidence to support any significant
preparing the ECL and impairment review analyses, such assumptions presented in the assessment of the ECL,
as significant changes in the credit risk of a including consideration of the financial information on
borrower, changes in the probability of default of a the borrower and the collateral in place to assess
borrower, changes in valuation of underlying collateral their ability to meet future payment commitments, and
and the Loan-To-Value ratios headroom, the ability of progress against business plans, including any ongoing
the borrowers to deliver in accordance with their impact caused by COVID-19 or other global crises,
business plans and their projected financial including management's assessment of the Loan-To-Value
performance figures. ratio headroom for each of the loans;
? assessing the Investment Adviser's
application of its impairment and ECL criteria to
evaluate the appropriateness and completeness of the
Given the level of judgement and estimate used by loans moved between ECL stages;
management in determining the carrying amount, ECL, and ? recalculating a targeted sample of the
impairment of loans advanced, combined with the Investment Adviser's sensitivity analysis of the
significance of the balance of the loans advanced in the Loan-To-Values ratios headroom;
consolidated statement of financial position, meant that ? engaging our Real Estate valuation experts to
this was considered a key audit matter. work with our audit team through the inspection of a
sample of third-party real estate valuation reports on
the underlying properties against which collateral is
held by the group for the loans advanced, and which
underpin the Loan-To-Value considerations applied in
the ECL modelling; and
? inspecting a sample of compliance
certificates signed by each respective underlying
borrower in respect of compliance with covenants as at
the year-end.
-- Obtained and reviewed management's
calculation with respect to any impairment on loans
advanced (if any).
Based on the audit procedures performed we have nothing to
report to those charged with corporate governance.
We assessed the accounting policy for the recognition of
interest income for compliance with International Financial
Reporting Standards as adopted by the European Union; and
we planned and executed our audit procedures to ensure that
income from loans had been accounted for in accordance with
the stated accounting policy.
Risk of fraud in income from loans advanced
We held discussions with the Investment Adviser and the
Income from loans advanced for the year was GBP33.4 million Administrator to understand and evaluate the processes in
(Note 10) and was measured in accordance with the place for recognising income from loans and to understand
accounting policies as described in note 2(l) of the the estimates made.
consolidated financial statements. The group has a key
investment objective to provide shareholders with regular
dividends through investment in debt instruments and
therefore we focussed on this risk. Our procedures included:
The requirement to estimate the expected cash flows when -- Detailed testing over the amortised cost
calculating an effective interest rate model is subject to models used by management to measure the loans at
significant management judgements and estimates, and as amortised cost and calculate the effective interest
such could be open to manipulation by management of factors income in the consolidated financial statements,
including: including how the arrangement, origination and
commitment fees, which are integral to the loan
arrangements, have been considered in the models;
-- Expected timing of repayments; -- Assessing the judgements made in respect of
-- Expectations of partial or full prepayments; the estimated cash flows timing (versus the contractual
and repayment date) and amount including arrangement,
-- Associated exit fees and make-whole payments. origination and commitment fees, through testing of the
amortised cost models for each loan;
-- Recalculating interest income using the
original effective interest rate, paying due
consideration to any early, partial or full prepayments
Changes to the estimated timings of cash flows can have a or management's re-estimate thereof;
significant impact on the recognition of income from loans -- Inspecting supporting documents, such as
advanced and is considered to be a key source of estimation correspondence with the underlying borrower and timing
uncertainty as described in note 2(c) of the consolidated of cash receipts, as part of our assessment of
financial statements. management's estimates and assumptions; and
-- For those loans advanced that were also held
at 31 December 2021, comparing the estimated future
cash flows in the amortised cost models as at 31
As a result of the significance of interest income and the December 2022 and evaluating the rationale behind any
level of estimation that can be applied, the risk of fraud significant changes from the estimated cash flows in
in income from loans advanced was considered a key audit the 31 December 2021 models.
matter.
Based on the audit procedures performed, we have nothing to
Amendment to group investment objective and policy to report to those charged with corporate governance.
pursue a strategy of orderly realisation
As referred to in note 2(a), on 28 December 2022, a
Circular relating to the Proposed Orderly Realisation and We obtained a detailed understanding of the Board's
containing a Notice of Extraordinary General Meeting (EGM) proposals with respect to the Proposed Orderly Realisation
was published which set out details of, and sought through discussions with the Board and the Investment
shareholder approval for, proposals with respect to the Adviser and from reviewing the Circular.
Board's recommendation to pursue a strategy of orderly
realisation of the group's loans advanced and the return of
capital over time to shareholders (the "Proposed Orderly
Realisation"). We considered these proposals in light of the requirements
of International Financial Reporting Standards as adopted
by the European Union, the current accounting policies of
the group and in considering the ongoing basis of
On 27 January 2023, these Proposals were approved at the preparation of the financial statements.
EGM. Based on the current terms of the group's loans
advanced, the orderly realisation could take up to 5 years
to complete and given the significant shift in the
investment strategy, we have considered this a key audit We also considered the adequacy of the disclosures made by
matter. the Directors with respect to the Proposed Orderly
Realisation in the Annual Report and Financial Statements.
Based on our enquiries and the matters considered above
with respect to the Proposed Orderly Realisation, we have
nothing to report to those charged with corporate
governance.
HOW WE TAILORED THE AUDIT SCOPE
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the consolidated
financial statements as a whole, taking into account the structure
of the group, the accounting processes and controls, the industry
in which the group operates, and we considered the risk of climate
change and the potential impact thereof on our audit approach.
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. We have
considered whether the consolidated subsidiaries included within
the group comprise separate components for the purpose of our audit
scope. However, we have taken into account the group's financial
reporting system and the related controls in place at the
Administrator and at the Investment Adviser, and based on our
professional judgement have tailored our audit scope to account for
the group's consolidated financial statements as a single
component.
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,
controlled and reviewed 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.
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 GBP8.3 million (2021: GBP8.4 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 members of the company when assessing financial performance. It is also a
applied generally 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% (2021: 75%) of
overall materiality, amounting to GBP6.2 million (2021: GBP6.3
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 of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.4 million
(2021: GBP0.4 million) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.
REPORTING ON OTHER INFORMATION
The other information comprises all the information included in
the Annual Report and Audited Consolidated Financial Statements
(the "Annual Report") but does not include the consolidated
financial statements and our auditor's report thereon. The
directors are responsible for the other information.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report based on these responsibilities.
RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE AUDIT
Responsibilities of the directors for the consolidated financial
statements
As explained more fully in the Statement of Directors'
Responsibilities, the directors are responsible for the preparation
of the consolidated financial statements that give a true and fair
view in accordance with International Financial Reporting Standards
as adopted by the European Union, the requirements of Guernsey law
and for such internal control as the directors determine is
necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Auditor's responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whetherdue to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidencethat is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a
materialmisstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion,forgery,
intentional omissions, misrepresentations, or the override of
internal control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit proceduresthat are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness ofthe group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimatesand related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, basedon the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may castsignificant doubt on the group's ability
to continue as a going concern over a period of at least twelve
monthsfrom the date of approval of the consolidated financial
statements. If we conclude that a material uncertaintyexists, we
are required to draw attention in our auditor's report to the
related disclosures in the consolidatedfinancial statements or, if
such disclosures are inadequate, to modify our opinion. Our
conclusions are based onthe audit evidence obtained up to the date
of our auditor's report. However, future events or conditions may
causethe group to cease to continue as a going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements,including the disclosures,
and whether the consolidated financial statements represent the
underlying transactionsand events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities orbusiness activities within
the group to express an opinion on the consolidated financial
statements. We areresponsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
ouraudit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and
only for the members as a body in accordance with Section 262 of
The Companies (Guernsey) Law, 2008 and for no other purpose. We do
not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we
require for our audit;
-- proper accounting records have not been kept; or
-- the consolidated financial statements are not in agreement
with the accounting records.
We have no exceptions to report arising from this
responsibility.
CORPORATE GOVERNANCE STATEMENT
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement, included within the Strategic Report is
materially consistent with the consolidated financial statements
and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
-- The directors' confirmation that they have carried out a
robust assessment of the emerging and principalrisks;
-- The disclosures in the Annual Report that describe those
principal risks, what procedures are in place toidentify emerging
risks and an explanation of how these are being managed or
mitigated;
-- The directors' statement in the consolidated financial
statements about whether they considered itappropriate to adopt the
going concern basis of accounting in preparing them, and their
identification of anymaterial uncertainties to the group's ability
to continue to do so over a period of at least twelve months from
thedate of approval of the consolidated financial statements;
-- The directors' explanation as to their assessment of the
group's prospects, the period this assessmentcovers and why the
period is appropriate; and
-- The directors' statement as to whether they have a reasonable
expectation that the company will be ableto continue in operation
and meet its liabilities as they fall due over the period of its
assessment, including anyrelated disclosures drawing attention to
any necessary qualifications or assumptions.
Our review of the directors' statement regarding the longer-term
viability of the group was substantially less in scope than an
audit and only consisted of making inquiries and considering the
directors' process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the
Code; and considering whether the statement is consistent with the
consolidated financial statements and our knowledge and
understanding of the group and its environment obtained in the
course of the audit.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
consolidated financial statements and our knowledge obtained during
the audit:
-- The directors' statement that they consider the Annual
Report, taken as a whole, is fair, balanced andunderstandable, and
provides the information necessary for the members to assess the
group's position, performance,business model and strategy;
-- The section of the Annual Report that describes the review of
effectiveness of risk management andinternal control systems;
and
-- The section of the Annual Report describing the work of the
Audit Committee.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
OTHER MATTERS
In due course, as required by the Financial Conduct Authority
Disclosure Guidance and Transparency Rule 4.1.14R, these
consolidated financial statements will form part of the
ESEF-prepared annual financial report filed on the National Storage
Mechanism of the Financial Conduct Authority in accordance with the
ESEF Regulatory Technical Standard ("ESEF RTS"). This auditor's
report provides no assurance over whether the annual financial
report will be prepared using the single electronic format
specified in the ESEF RTS.
As explained in note 21 to the consolidated financial
statements, in addition to our responsibility to audit and express
an opinion on the consolidated financial statements in accordance
with ISAs and Guernsey law, we have been requested by the directors
to express an opinion on the consolidated financial statements in
accordance with auditing standards generally accepted in the United
States of America as issued by the AICPA, in order to meet the
requirements of Rule 206(4)-2 under the Investment Advisers Act
(the "Custody Rule"). We have reported separately in this respect
within the Annual Report.
Roland Mills
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
23 March 2023
Independent Auditor's Report to the Directors of Starwood
European Real Estate Finance Limited (US GAAS)
OPINION
We have audited the accompanying consolidated financial
statements of Starwood European Real Estate Finance Limited ("the
Company") and its subsidiaries (together "the group"), which
comprise the consolidated statements of financial position as of 31
December 2022 and 31 December 2021 and the related consolidated
statements of comprehensive income, changes in equity and cash
flows including the related notes for the years then ended
(collectively referred to as the "consolidated financial
statements").
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects, the financial
position of the group as of 31 December 2022 and 31 December 2021,
and the results of their operations and their cash flows for the
years then ended in accordance with International Financial
Reporting Standards ("IFRSs") as adopted by the European Union.
BASIS FOR OPINION
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America (US GAAS). Our
responsibilities under those standards are further described in the
Auditors' Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are required to be
independent of the group and to meet our other ethical
responsibilities, in accordance with the relevant ethical
requirements relating to our audit. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.
RESPONSIBILITIES OF MANAGEMENT FOR THE CONSOLIDATED FINANCIAL
STATEMENTS
Management is responsible for the preparation and fair
presentation of the consolidated financial statements in accordance
with IFRSs as adopted by the European Union, and for the design,
implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, management
is responsible for assessing the group's ability to continue as
going concerns, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless
management either intends to liquidate the group or to cease
operations, or has no realistic alternative but to do so.
AUDITORS' RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether
the 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 absolute assurance and
therefore is not a guarantee that an audit conducted in accordance
with US GAAS will always detect a material misstatement when it
exists. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud
may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Misstatements are considered material if there is a substantial
likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the
consolidated financial statements.
In performing an audit in accordance with US GAAS, we:
-- Exercise professional judgement and maintain professional
scepticism throughout the audit.
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whetherdue to fraud or error,
and design and perform audit procedures responsive to those risks.
Such procedures includeexamining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated
financialstatements.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit proceduresthat are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness ofthe group's internal control. Accordingly,
no such opinion is expressed.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of significant accountingestimates made by
management, as well as evaluate the overall presentation of the
consolidated financialstatements.
-- Conclude whether, in our judgement, there are conditions or
events, considered in the aggregate, thatraise substantial doubt
about the group's ability to continue as a going concern for a
reasonable period of time.
We are required to communicate with those charged with
governance regarding, among other matters, the planned scope and
timing of the audit, significant audit findings, and certain
internal control-related matters that we identified during the
audit.
OTHER INFORMATION
Management is responsible for the other information included in
the Annual Report and Audited Consolidated Financial Statements
(the "Annual Report"). The other information comprises the
information included in the Annual Report, but does not include the
consolidated financial statements and our auditor's reports
thereon. Our opinion on the consolidated financial statements does
not cover the other information, and we do not express an opinion
or any form of assurance thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information and
consider whether a material inconsistency exists between the other
information and the consolidated financial statements or the other
information otherwise appears to be materially misstated. If, based
on the work performed, we conclude that an uncorrected material
misstatement of the other information exists, we are required to
describe it in our report.
RESTRICTION OF USE
This report, including the opinion, has been prepared for and
only for the directors in relation to the requirements of Rule
206(4)-2 of the Investment Advisers Act of 1940 (the "Custody
Rule") as it applies to the company and for no other purpose. We do
not, in giving this opinion, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
23 March 2023
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2022
1 January 2022 to 1 January 2021 to
Notes 31 December 2022 31 December 2021
GBP GBP
Income
Income from loans advanced 10 33,356,702 28,382,742
Net foreign exchange gains/(losses) 6 3,046,164 (3,043,374)
Total income 36,402,866 25,339,368
Expenses
Investment management fees 3(a), 22 3,122,755 3,147,075
Credit facility interest and amortisation of fees 1,080,499 685,815
Credit facility commitment fees 828,876 844,694
Legal and professional fees 437,622 266,154
Other expenses 432,649 179,262
Administration fees 3(b) 354,426 344,950
Audit and non-audit fees 5 233,773 229,387
Professional fees for the orderly realisation proposals 210,000 -
Directors' fees and expenses 4, 22 203,373 195,410
Broker's fees 3(d) 50,000 53,250
Total operating expenses 6,953,973 5,945,997
Operating profit for the year before tax 29,448,893 19,393,371
Taxation 20 90,287 100,452
Operating profit for the year 29,358,606 19,292,919
Other comprehensive loss
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 2(k) (112,256) (329,895)
Other comprehensive loss for the year (112,256) (329,895)
Total comprehensive income for the year 29,246,350 18,963,024
Weighted average number of shares in issue 7 404,881,933 408,939,505
Basic and diluted earnings per Ordinary Share (pence) 7 7.25 4.72
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Financial Position
as at 31 December 2022
As at As at
Notes 31 December 2022 31 December 2021
GBP GBP
Assets
Cash and cash equivalents 8 3,576,155 2,994,357
Other receivables and prepayments 9 26,792 37,652
Financial assets at fair value through profit or loss 11 706,661 13,291,598
Loans advanced 10 432,459,966 414,632,512
Total assets 436,769,574 430,956,119
Liabilities
Credit facility 12 18,863,204 7,914,993
Trade and other payables 13 1,758,606 1,484,526
Total liabilities 20,621,810 9,399,519
Net assets 416,147,764 421,556,600
Capital and reserves
Share capital 15 395,075,556 407,440,011
Retained earnings 21,218,267 14,150,392
Translation reserve (146,059) (33,803)
Total equity 416,147,764 421,556,600
Number of Ordinary Shares in issue 15 395,592,696 408,911,273
Net asset value per Ordinary Share (pence) 105.20 103.09
These consolidated financial statements were approved and
authorised for issue by the Board of Directors on 23 March 2023,
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 2022
Year ended 31 December 2022
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2022 407,440,011 14,150,392 (33,803) 421,556,600
Share buybacks (12,364,455) - - (12,364,455)
Dividends paid - (22,290,731) - (22,290,731)
Operating profit for the year - 29,358,606 - 29,358,606
Other comprehensive loss:
Other comprehensive loss for the year - - (112,256) (112,256)
Balance at 31 December 2022 395,075,556 21,218,267 (146,059) 416,147,764
Year ended 31 December 2021
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2021 408,031,544 18,369,871 296,092 426,697,507
Share buybacks (591,533) - - (591,533)
Dividends paid - (23,512,398) - (23,512,398)
Operating profit for the year - 19,292,919 - 19,292,919
Other comprehensive loss:
Other comprehensive loss for the year - - (329,895) (329,895)
Balance at 31 December 2021 407,440,011 14,150,392 (33,803) 421,556,600
The accompanying notes form an integral part of these
consolidated financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2022
1 January 2022 to 1 January 2021 to
31 December 2022 31 December 2021
GBP GBP
Operating activities:
Operating profit for the year before tax 29,448,893 19,393,371
Adjustments:
Net interest income (33,356,702) (28,382,742)
Decrease/(increase) in prepayments and receivables 10,860 (20,558)
Increase in trade and other payables 458,661 132,570
Net unrealised losses / (gains) on foreign exchange derivatives 12,584,938 (12,373,339)
Net foreign exchange (gains) / losses (15,292,556) 15,488,570
Net foreign exchange gains on hedges 5,618,298 895,944
Credit facility interest 707,171 236,071
Credit facility amortisation of fees 373,328 449,744
Credit facility commitment fees 828,876 844,694
Currency translation difference (5,663,501) 2,722,148
Corporate taxes paid (84,274) (87,724)
(4,366,008) (701,251)
Loans advanced(1) (60,788,846) (90,597,307)
Loan repayments and amortisation 56,894,392 103,474,780
Origination fees paid (872,020) (300,456)
Interest income from loans advanced 28,373,979 25,567,309
Commitment and exit fee income from loans advanced 1,211,844 1,115,354
Net cash inflow from operating activities 20,453,341 38,558,429
Cash flows from financing activities
Interest income from cash and cash equivalents - -
Net cash inflow from investing activities - -
Cash flows from financing activities
Share buybacks (12,364,455) (677,120)
Dividends paid (22,290,731) (23,512,398)
Proceeds under credit facility 94,223,490 63,800,000
Repayments under credit facility (84,158,141) (75,128,132)
Credit facility interest paid (533,577) (262,221)
Credit facility commitment fees paid (834,495) (647,799)
Net cash outflow from financing activities (25,957,909) (36,427,670)
Net increase / (decrease) in cash and cash equivalents (5,504,568) 2,130,759
Cash and cash equivalents at the start of the year 2,994,357 2,939,408
Net foreign exchange gains/(losses) on cash and cash equivalents 6,086,366 (2,075,810)
Cash and cash equivalents at the end of the year 3,576,155 2,994,357
(1) Net of arrangement fees of GBP820,118 (2021: GBP1,125,342)
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 2022
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (the "Company")
was incorporated with limited liability in Guernsey under the
Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with
registered number 55836, and has been authorised by the Guernsey
Financial Services Commission (the "GFSC") as a registered
closed-ended investment scheme. The registered office and principal
place of business of the Company is 1, Royal Plaza, Royal Avenue,
St Peter Port, Guernsey, Channel Islands, GY1 2HL.
On 12 December 2012, the Company announced the results of its
IPO, which raised net proceeds of GBP223.9 million. The Company's
Ordinary Shares were admitted to the premium segment of the UK
FCA's Official List and to trading on the Main Market of the London
Stock Exchange as part of its IPO which completed on 17 December
2012. Further issues took place in March 2013, April 2013, July
2015, September 2015, August 2016 and May 2019. On 10 August 2020
the Company announced the appointment of Jefferies International
Limited as buyback agent to effect share buybacks on behalf of the
Company. During the year ended 31 December 2022, the Company had
repurchased 13,318,577 (year ended 31 December 2021: 660,000)
Ordinary Shares at an average cost of 92.84 (year ended 31 December
2021: 89.63 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 2022.
The Company's investment objective is to conduct an orderly
realisation of the assets of the Group. The assets of the Group
will be realized in an orderly manner, returning cash to
Shareholders at such times and in such manner as the Board may, in
its absolute discretion, determine. The Board will endeavour to
realise all of the Group's investments in a manner that achieves a
balance between maximising the net value received from those
investments and making timely returns to Shareholders. Further
details have been covered under the Objective and Investment Policy
section.
The Company has appointed Starwood European Finance Partners
Limited as the Investment Manager (the "Investment Manager"), a
company incorporated in Guernsey and regulated by the GFSC. The
Investment Manager has appointed Starwood Capital Europe Advisers,
LLP (the "Investment Adviser"), an English limited liability
partnership authorised and regulated by the FCA, to provide
investment advice pursuant to an Investment Advisory Agreement. The
administration of the Company is delegated to Apex Fund and
Corporate Services (Guernsey) Limited (the "Administrator").
2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES
The 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, at the time of approving these
Annual Accounts, are required to satisfy themselves that they have
reasonable expectation that the Company has adequate resources to
continue in operational existence for the foreseeable future. At
the EGM of the Company held on 27 January 2023, following a
recommendation from the Board as published in the Circular and EGM
Notice dated 28 December 2022, the resolutions for the Proposed
Orderly Realisation received shareholder votes in favour amounting
to 99.97% of the shareholder votes cast, voting for a change to the
Company's Objective and Investments Policy which would lead to the
orderly realisation of the Company's assets and a return of capital
to shareholders. The Directors have undertaken a rigorous review of
the Group's ability to continue as a going concern, reviewing the
ongoing cash flows and the level of cash balances and available
liquidity facilities.
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, the
results of which can be found in the Strategic Report. A range of
scenarios have been evaluated as part of this analysis. The worst
case scenario evaluated was an interest payment default on all
Stage 2 loans, and simultaneously the repayment of the loan
principal is not received until 6 to 12 months after their maturity
dates and that Sonia and Euribor rates fall to 0% from 2024. In
this scenario the Group is still able to meet its liabilities as
they fall due although the dividend might 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 ("IFRS") as adopted
by the European Union, 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 2022
Certain new accounting standards and interpretations have been
published that are effective 1 January 2022 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 2022 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 2022, 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 measurement of both the initial and ongoing expected
credit loss allowance ("ECL") 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)). The
determination of ECL using the LTV headroom analysis is a key
estimate/judgement.
(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)).
? 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)).
Subsidiary Date of Ownership Country of
Control Principal place of business
undertakings % Establishment
Starfin Lux S.à.r.l 11/30/2012 100 Luxembourg Luxembourg
Starfin Public Holdco 1 Limited 9/11/2017 100 Guernsey Guernsey
Starfin Public Holdco 2 Limited 9/11/2017 100 Guernsey Guernsey
Starfin Lux 3 S.à.r.l 9/19/2017 100 Luxembourg Luxembourg
Starfin Lux 4 S.à.r.l 12/11/2017 100 Luxembourg Luxembourg
d) Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiary undertakings) made up to the end of the reporting
period. Control is achieved where the Company has the power to
govern the financial and operating policies of an investee entity
so as to obtain benefits directly from its activities. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether
the Company controls another entity. The Company also assesses
existence of control where it does not have more than 50 per cent
of the voting power but is able to govern the financial and
operating policies by virtue of de-facto control.
Subsidiary undertakings are fully consolidated from the date on
which control is transferred to the Group. They are de-consolidated
from the date that control ceases.
The Group applies the acquisition method to account for business
combinations.
Acquisition-related costs are expensed as incurred. No
consideration, other than for the par value of any share capital or
capital contributions, has been paid in respect of the acquisition
of subsidiary undertakings. The Company acquired the subsidiaries
at the time of their initial establishment and hence they had no
net assets at the date of the acquisition.
Intercompany transactions, balances, income and expenses on
transactions between Group companies are eliminated on
consolidation. Profits and losses resulting from intercompany
transactions that are recognised in assets are also eliminated.
e) Functional and presentation currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates (the "functional
currency"). Therefore, the Directors have considered in assessing
the functional currency of each of the Group's entities:
? the share capital of all members of the Group is denominated
in Sterling except for Luxco 3 share 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 Luxco 3 for which the functional currency is
Euro. Luxco 3 holds loans and investments in Euro currencies. The
Directors have also adopted Sterling as the Group's presentation
currency (as the Group holds a significant proportion of its assets
in the UK, although this may vary from time to time, capital was
raised in Sterling, Group expenses are primarily incurred in
Sterling and performance is measured in Sterling) and, therefore,
the consolidated financial statements for the Group are presented
in Sterling.
f) Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker, who is responsible for
allocating resources and assessing performance of the operating
segments, has been identified as the Board, as the Board makes
strategic decisions. The Directors, after having considered the way
in which internal reporting is provided to them, are of the opinion
that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio
of real estate backed loans. Equally, based on the internal
reporting provided, the Directors do not analyse the portfolio
based on geographical segments.
g) Financial assets and liabilities
Classification and subsequent measurement
The Group classifies its financial assets into the following
measurement categories: at amortised cost, at fair value through
profit or loss and at fair value through other comprehensive
income. The classification depends on the purpose for which the
financial assets were acquired.
Management determines the classification of its financial assets
at initial recognition.
Financial assets measured at amortised cost
A financial asset is measured at amortised cost if both of the
following conditions are met: (a) the financial asset is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and (b) the contractual
terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding. The carrying amount of these assets
is adjusted by any 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
Consolidated Statement of Comprehensive Income. This category
includes currency forward contracts. 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 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 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. Further details on the
valuation process are covered in the Investment Manager's
Report.
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 significant loan-to-value headroom which
further mitigates the risk of ECL.
During the year ended 31 December 2022 two loans with a carrying
value of GBP46,909,623 (31 December 2021: three loans amounting to
GBP59,031,888) have been classified as Stage 2, no loss allowance
has been recognised on 12-month and lifetime expected credit losses
for Stage 1 and Stage 2 loans advanced respectively, as based on
the information available there is no reason to believe that there
has been any impairment in the value of the loans held by the
Group. For further information, see the Investment Manager's
report. The paragraph below describes how the Group determines when
a significant increase in credit risk has occurred, such that a
loan would move from Stage 1 to Stage 2. No loans have been moved
to Stage 2 or to Stage 3 during 2022.
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 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 initial loan-to-value
("LTV") headroom which the Investment Adviser believes to be a good
predictor of the PD, in accordance with recent market studies of
European commercial real estate loans.
In measuring the LGD for this sensitivity analysis, the loans
advanced have been assessed on a collective basis as they possess
similar covenants and security package characteristics. The
selected LGD of 0.30% is based on the aggregate losses of all AAA
rated notes issued in Europe from 1995 to 2020 (totalling EUR177
billions), according to recent market studies of European
commercial real estate loans. AAA rated notes are considered the
most representative of the Group's loan portfolio. The Investment
Adviser considers this to be a reasonable estimate for loss given
default parameter.
As explained on Note 2 (b)(i), the year-end ECL are nil. Set out
below is the sensitivity to the ECL as at 31 December 2022 and 31
December 2021 that could result from reasonable possible changes in
the LTV and LGD actual assumptions used for calculation of ECL as
at the respective year-end. On an individual loan basis, the LTV
was increased by 25%, and a new PD determined, which was multiplied
by a constant LGD of 0.30% for all loans and the loan exposure as
at each year-end. All other variables are held constant.
Reasonable possible shift (absolute value) 31 December 2022 ECL 31 December 2021 ECL
GBP GBP
LTV +25% (2021: +25%)
LGD +0.3% (2021: +0.3%) 322,561 264,231
Change in ECL allowance (+)
i) Cash and cash equivalents
In the Consolidated Statement of Cash Flows, cash and cash
equivalents includes cash in hand, deposits held at call with banks
and other short-term highly liquid investments with original
maturities of three months or less.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs
directly attributable to the issue of new Ordinary Shares are shown
in equity as a deduction, net of tax, from the proceeds.
k) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions or valuation where items are re-measured. Foreign
exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies
are recognised in the Consolidated Statement of Comprehensive
Income. Foreign exchange gains and losses that relate to loans
advanced, borrowings and cash and cash equivalents and all other
foreign exchange gains and losses are presented in the Consolidated
Statement of Comprehensive Income within "net foreign exchange
losses/(gains)".
Group companies
The results and financial position of all the Group entities
that have a functional currency different from the presentation
currency of the Group are translated into the presentation currency
of the Group as follows:
i. assets and liabilities for each Statement of Financial
Position presented are translated at the 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.
Luxco 3 has Euro as its functional currency.
l) Interest income
Interest income on financial assets within Stage 1 and 2 is
recognised by applying the effective interest rate to the gross
carrying amount of financial assets. For financial assets that are
classified within Stage 3, interest revenue is calculated by
applying the effective interest rate to their amortised cost (that
is net of 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) Ordinances1989 (as amended).
Accordingly, no provision for Guernsey tax is made.
The Holdcos are exempted for Guernsey tax purposes, and
therefore no provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations
in Luxembourg and taxation is provided based on the results for the
year (see note 20).
p) Other receivables
Trade and other receivables are amounts due in the ordinary
course of business. They are classified as assets. Trade and other
receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method,
less allowance for ECL.
q) Other payables
Trade and other payables are obligations to pay for services
that have been acquired in the ordinary course of business. They
are classified as liabilities. Trade and other payables are
recognised initially at fair value and subsequently measured at
amortised cost using the effective interest rate method.
r) Dividend distributions
Dividend distributions to the Company's shareholders are
recognised as a liability in the Company's financial statements in
the period in which the dividends are declared by the Board of
Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount
reported on the Consolidated Statement of Financial Position when
there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis or
realise the asset and settle the liability simultaneously.
t) Financial liabilities at amortised cost
Financial liabilities at amortised cost, including bank loans
are initially recognised at fair value and subsequently measured at
amortised cost using the effective interest method. Financial
liabilities are derecognised when the contractual obligation is
discharged, cancelled or expires.
u) Capitalised expenses on credit facilities
Expenses in connection with the process of originating,
prolongation, or restructuring of a credit facility, such as
application and underwriting fees, are capitalised and subsequently
amortised over the period of the relevant credit facility in the
Consolidated Statement of Comprehensive Income within "credit
facility interest".
3. MATERIAL AGREEMENTS
a) Investment management agreement
The Company and the Investment Manager have entered into an
investment management agreement, dated 28 November 2012 (the
"Investment Management Agreement"), (which was amended on 7 March
2014, 14 May 2014, 7 September 2015 and 6 October 2017) pursuant to
which the Investment Manager has been given overall responsibility
for the discretionary management of the Company's assets in
accordance with the Company's investment objectives and policy.
The Investment Manager is entitled to a management fee which is
calculated and accrued monthly at a rate equivalent to 0.75 per
cent per annum of NAV. In calculating such fee, there shall be
excluded from the NAV attributable to the Ordinary Shares the
uninvested portion of the cash proceeds of any new issue of Shares
(or C Shares) until at least 90 per cent of such proceeds are
invested in accordance with the Company's investment policy (or
deployed to repay borrowings under any credit facility of the Group
or other liabilities of the Group) for the first time. The
management fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset
origination fee of 0.75 per cent of the value of all new loan
investments made or acquired by the Group (see note 22). The asset
origination fee to be paid by the Group is expected to be paid upon
receipt by the Group of loan arrangement fees received on the
deployment of the Group's funds.
The Investment Management Agreement is terminable by either the
Investment Manager or the Company giving to the other not less than
12 months' written notice. The Company is also able to terminate
the appointment of the Investment Manager in the event of a change
of control of the Investment Manager. A change of control shall be
deemed to occur where a person acquires a direct or indirect
interest in the Investment Manager, which is calculated by
reference to 15 per cent or more of the voting rights. In addition
the Investment Management Agreement can be terminated by the
Company for any failure to act in good faith with the due skill,
care and diligence which would reasonably be expected from an
experienced manager in the sector and to exercise appropriate
prudence in the management of the Group's portfolio.
Pursuant to the Investment Management Agreement's provisions, a
performance fee would apply from 1 January 2018. The amount of such
Performance Fee is 20 per cent of the excess (if any) of the
returns generated by the Group over the Hurdle Total Return
(described below). The measurement period over which the
Performance Fee is calculated is two years, with the payment of any
performance fee earned being made at the end of each such two year
period.
The Hurdle Total Return will be achieved when the NAV of the
Company at the end of the two year period, plus the total of all
dividends declared and paid to Ordinary Shareholders in that two
year period, is equal to the NAV of the Company at the start of
each two year measurement period, as increased by 8 per cent per
annum, on a simple interest basis (but excluding performance fees
accrued and deemed as a creditor on the balance sheet at the start
of the two year measurement period). No performance fee will be
payable in relation to performance that recoups previous losses (if
any).
To the extent that the Company makes further issues of Ordinary
Shares and/or repurchases or redeems Ordinary Shares, the Hurdle
Total Return will be adjusted accordingly, by reference to the
issue proceeds of such further issues and dividends declared
subsequent to such issues. Other corporate actions will also be
reflected as appropriate in the calculation of the Hurdle Total
Return.
The Investment Manager has appointed Starwood Capital Europe
Advisers, LLP (the "Investment Adviser"), an English limited
liability partnership authorised and regulated by the FCA, to
provide investment advice pursuant to an Investment Advisory
Agreement.
b) Administration agreement
The Company has engaged the services of Apex Fund and Corporate
Services (Guernsey) Limited (the "Administrator") to act as
Administrator and Company Secretary. Under the terms of the service
agreement dated 25 September 2018, the Administrator is entitled to
a fee of no less than GBP225,000 per annum for Guernsey registered
companies of the Group, EUR96,000 for Luxembourg registered
subsidiaries and further amounts as may be agreed in relation to
any additional services provided by the Administrator. The
Administrator is, in addition, entitled to recover third party
expenses and disbursements.
c) Registrar's agreement
The Company and Computershare Investor Services (Guernsey)
Limited (the "Registrar") entered into a Registrar agreement dated
28 November 2012, pursuant to which the Company appointed the
Registrar to act as Registrar of the Company for a minimum annual
fee payable by the Company of GBP7,500 in respect of basic
registration.
d) Brokerage agreement
On 19 June 2020 Jefferies Group LLC ("Jefferies") was appointed
to act as Broker. Jefferies is entitled to receive a fee of
GBP50,000 per annum plus expenses. The previous brokerage agreement
with Stifel Nicolaus Europe Limited was terminated on the same
date.
e) Licence agreement
The Company and Starwood Capital Group Management, LLC (the
"Licensor") have entered into a trade mark licence agreement dated
28 November 2012 (the "Licence Agreement"), pursuant to which the
Licensor has agreed to grant to the Company a royalty-free,
non-exclusive worldwide licence for the use of the "Starwood" name
for the purposes of the Company's business.
Under the terms of the Licence Agreement, it may be terminated
by the Licensor; (i) if the Investment Management Agreement or any
other similar agreement between the Company and the Investment
Manager (or either of their respective affiliates) is terminated
for any reason whatsoever or expires; (ii) if the Company suffers
an insolvency event or breaches any court order relating to the
Licence Agreement; or (iii) upon two months' written notice without
cause.
f) Hedging agreements
The Company and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Company entered into a Professional Client
Agreement with Goldman Sachs, pursuant to which the parties can
enter into foreign exchange transactions with the intention of
hedging against fluctuations in the exchange rate between Sterling
and other currencies. Both agreements are governed by the laws of
England and Wales.
g) Revolving credit facility
Under its investment policy, the Company is limited to borrowing
an amount equivalent to a maximum of 30 per cent of its NAV at the
time of drawdown, of which a maximum of 20 per cent can be longer
term borrowings. In calculating the Company's borrowings for this
purpose, any liabilities incurred under the Company's foreign
exchange hedging arrangements shall be disregarded.
On 4 December 2014, the Company entered into a GBP50 million
revolving credit facility with Lloyds Bank plc (the "Lloyds
Facility") which is intended for short-term liquidity. This
facility was amended and extended on 7 January 2022. The current
maturity date is 5 May 2023. Subsequent to year end the facility
was extended for a further year from May 2023 to May 2024, albeit
at a lower facility amount to GBP25.0 million. The facility is
secured by a pledge over the bank accounts of the Company, its
interests in Holdco 1 and the intercompany funding provided by the
Company to Holdco 1. Holdco 1 also acts as guarantor of the
facility and has pledged its bank accounts as collateral. The
undertakings and events of default are customary for a transaction
of this nature.
On 18 December 2017, the Group entered into a separate GBP64
million secured borrowing facility with Morgan Stanley (the "MS
Facility"). This facility was amended and extended on 14 November
2019. The current maturity date is 14 November 2024 and the
borrowing facility was increased to GBP76 million. The debt can be
drawn in respect of underlying loans which are eligible under the
facility. Certain loans will not be eligible, for example mezzanine
loans and loans above 75 per cent loan to value. It is secured by a
customary security package of bank account pledges, intercompany
receivables security, share security over the two borrower entities
(Luxco 3 and Luxco 4) and their shares. The MS Facility does not
have recourse to the Company. The undertakings and events of
default are customary for a facility of this nature.
4. DIRECTORS' FEES
31 December 2022 31 December 2021
GBP GBP
Directors' emoluments 197,000 190,212
Other expenses 6,373 5,198
203,373 195,410
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 2022 31 December 2021
GBP GBP
Audit and non-audit fees expensed in the Consolidated Statement
of Comprehensive Income
Audit of company 140,563 120,800
Audit of subsidiaries 68,215 84,756
Total audit 208,778 205,556
Audit related assurance services (Interim review) 24,995 23,831
Total assurance services 24,995 23,831
Non-audit services not covered above - -
Total non-audit services 24,995 23,831
Total fees expensed 233,773 229,387
6. NET FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2022 31 December 2021
GBP GBP
Loans advanced gains - realised 511,596 153,504
Loans advanced losses - realised (996,010) (1,929,067)
Forward contracts gains - realised 6,507,544 1,998,286
Forward contracts losses - realised (428,644) (330,105)
Other gains - realised 110,951 328,245
Other losses - realised (38,684) (49,430)
5,666,753 171,433
Loans advanced gains - unrealised 9,987,926 -
Loans advanced losses - unrealised (23,578) (15,588,146)
Forward contracts gains - unrealised 2,337,351 13,707,768
Forward contracts losses - unrealised (14,922,288) (1,334,429)
(2,620,589) (3,214,807)
3,046,164 (3,043,374)
On occasion, the Group may realise a gain or loss on the roll
forward of a hedge if it becomes necessary to extend a capital
hedge beyond the initial anticipated loan term. If this situation
arises the Group will separate the realised FX gain or loss from
other realised FX gains or losses and not consider it available to
distribute (or as a reduction in distributable profits). The FX
gain or loss will only be considered part of distributable reserves
when the rolled hedge matures or is settled and the final net gain
or loss on the capital hedges can be determined.
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 GBP29,358,606 (2021: GBP19,292,919) and on
the weighted average number of Ordinary Shares in issue during the
year of 404,881,933 (2021: 408,939,505) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of
GBP416,147,764 (2021: GBP421,556,600) and the actual number of
Ordinary Shares in issue at 31 December 2022 of 395,592,696 (2021:
408,911,273).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2022 31 December 2021
GBP GBP
Cash at bank 3,576,155 2,994,357
3,576,155 2,994,357
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 2022 31 December 2021
GBP GBP
Prepayments 26,792 37,439
Investment proceeds receivable - 213
26,792 37,652
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial
assets is discussed in note 2(g).
31 December 2022 31 December 2021
GBP GBP
UK
Hotel & Residential, UK 49,876,920 49,922,112
Hotel, Scotland 43,109,284 42,390,350
Hotels, United Kingdom 32,134,282 30,016,910
Industrial Estate, UK 27,435,196 -
Hospitals, UK 25,367,475 25,364,814
Hotel, Oxford 23,181,461 21,579,756
Life Science, UK 19,955,081 19,620,908
Office, London 19,336,450 14,156,850
Hotel, North Berwick 15,211,739 14,123,338
Hotel and Office, Northern Ireland 11,947,821 12,719,727
Office and Industrial Portfolio, UK 5,594,291 -
Office, Scotland - 5,121,199
Ireland
Hotel, Dublin 42,752,233 50,842,327
Office Portfolio, Ireland 21,950,119 26,570,048
Mixed Use, Dublin 11,469,547 5,108,054
Spain
Three Shopping Centres, Spain 31,023,568 30,171,573
Office, Madrid, Spain 16,510,039 15,595,042
Shopping Centre, Spain 15,886,055 14,736,977
Office Portfolio, Spain 9,027,980 9,845,168
Germany -
Logistics Portfolio 2,744,282 4,958,050
Europe
Mixed Portfolio 7,946,143 21,789,309
432,459,966 414,632,512
No element of loans advanced are past due or impaired. For
further information and the associated risks see the Investment
Manager's Report.
The table below reconciles the movement of the carrying value of
loans advanced in the year:
31 December 2022 31 December 2021
GBP GBP
Loans advanced at the start of the year 414,632,512 442,659,649
Loans advanced 61,420,419 91,935,602
Income from loans advanced 33,356,702 28,382,742
Foreign exchange gains/(losses) 9,478,582 (17,363,712)
Origination fees received for the year 872,020 300,456
Exit fees paid (501,062) (527,953)
Commitment fees paid (710,782) (586,841)
Arrangement fees paid (820,118) (1,125,342)
Interest payments received (28,373,979) (25,567,309)
Loan repayments (56,894,392) (103,474,780)
Loans advanced at the end of the year 432,459,966 414,632,512
Loans advanced at fair value 453,301,433 431,658,356
IFRS 7 requires the disclosure of the fair value of financial
instruments not measured at fair value for comparison to their
carrying amounts. The fair value of loans advanced has been
determined by discounting the expected cash flows at a market rate
of interest using the discounted cash flow model. For the avoidance
of doubt, the Group carries its loans advanced at amortised cost in
the consolidated financial statements, consistent with the
requirement of IFRS 9 as the Group's intention and business model
is to collect both interest and the capital repayments thereof.
The following table sets out the sensitivity to the above
reported fair value to a change in the discount rate used in the
discounted cash flow model (see the Investment Manager's report for
more information):
Discount Rate 31 December 2022 31 December 2022
Value Value increase /
calculated (decrease)
GBP GBP
6.0% (fair value) 453,301,433 20,841,467
6.9% 446,378,688 13,918,722
7.4% 442,812,482 10,352,516
7.9% 439,304,831 6,844,865
8.4% 435,854,418 3,394,452
8.9% (Carrying value) 432,459,966 -
9.4% 429,120,227 (3,339,739)
9.9% 425,833,994 (6,625,972)
10.4% 422,600,089 (9,859,877)
10.9% 419,417,368 (13,042,598)
Discount Rate 31 December 2021 31 December 2021
Value Value increase /
calculated (decrease)
GBP GBP
4.9% 432,710,809 18,078,297
5.1% (fair value) 431,658,356 17,025,843
5.4% 428,059,002 13,426,490
5.9% 423,496,872 8,864,360
6.4% 419,002,118 4,389,606
6.9% (Carrying value) 414,632,512 -
7.4% 410,325,896 (4,306,616)
7.9% 406,100,176 (8,532,336)
8.4% 401,953,326 (12,679,186)
8.9% 397,883,380 (16,749,132) 11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise
currency forward contracts which represent contractual obligations
to purchase domestic currency and sell foreign currency on a future
date at a specified price.
The underlying instruments of currency forwards become
favourable (assets) or unfavourable (liabilities) as a result of
fluctuations of foreign exchange rates relative to their terms. The
aggregate contractual or notional amount of derivative financial
instruments, the extent to which instruments are favourable or
unfavourable, and thus the aggregate fair values of derivative
financial assets and liabilities, can fluctuate significantly from
time to time. The foreign exchange derivatives are subject to
offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value
through profit or loss are set out below:
Fair values
Notional contract
Assets Liabilities Total
31 December 2022 amount(1)
GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 309,280,796 4,697,637 (3,990,976) 706,661
Total 309,280,796 4,697,637 (3,990,976) 706,661
(1) Euro amounts are translated at the year end exchange
rate
Fair values
Notional contract
Assets Liabilities Total
31 December 2021 amount(1)
GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 305,663,797 14,394,963 (1,103,365) 13,291,598
Total 305,663,797 14,394,963 (1,103,365) 13,291,598
(1) Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing
an amount equivalent to a maximum of 30 per cent of its NAV at the
time of drawdown, of which a maximum of 20 per cent can be longer
term borrowings. In calculating the Group's borrowings for this
purpose, any liabilities incurred under the Group's foreign
exchange hedging arrangements shall be disregarded. The Group has
two credit facilities as described in note 3(g) of these financial
statements.
As at 31 December 2022 an amount of GBP19,000,000 (2021:
GBP8,500,000) was drawn and interest of GBP181,907 (2021: GBP7,997)
was payable.
The revolving credit facility capitalised costs are directly
attributable costs incurred in relation to the establishment of the
credit loan facilities and an amount of GBP319,675 (2021:
GBP593,004) was netted off against the loan facilities
outstanding.
The changes in liabilities arising from financing activities are
shown in the table below.
31 December 2022 31 December 2021
GBP GBP
Borrowings at the start of the year 7,914,993 18,626,837
Proceeds during the year 94,223,490 63,800,000
Repayments during the year (84,158,141) (75,128,132)
Interest expenses recognised for the year 707,171 236,071
Interest paid during the year (533,577) (262,221)
Credit facility amortisation of fees 373,328 563,496
Foreign exchange and translation difference 335,940 78,942
Borrowings at the end of the year 18,863,204 7,914,993 13. TRADE AND OTHER PAYABLES
31 December 2022 31 December 2021
GBP GBP
Investment management fees payable 777,556 791,344
Audit fees payable 289,457 98,896
Accrued expenses 273,183 103,470
Administration fees payable 203,420 87,815
Commitment fees payable 164,855 169,746
Tax provision 25,727 19,742
Loan amounts payable 24,408 212,953
Directors' expense payable - 560
1,758,606 1,484,526 14. COMMITMENTS
As at 31 December 2022, the Group had outstanding commitments in
respect of loans not fully drawn of GBP49,063,014 (2021:
GBP44,543,155).
As at 31 December 2022, the Group has entered into forward
contracts under the Hedging Master Agreement with Lloyds Bank plc
to sell EUR309,280,796 (2021: EUR219,050,014) to receive Sterling.
At the end of the reporting period, these forward contracts have a
fair value of GBP706,661 asset (2021: GBP13,291,598 asset). 15.
SHARE CAPITAL
The authorised 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 2022 31 December 2021
Number of shares Number of shares
Ordinary Shares of no par value
413,219,398 413,219,398
Issued and fully paid
Shares held in treasury (17,626,702) (4,308,125)
Total Ordinary Shares, excluding
395,592,696 408,911,273
those in treasury
Rights attached to shares
The Company's share capital is denominated in Sterling. At any
general meeting of the Company each Ordinary Share carries one
vote. The Ordinary Shares also carry the right to receive all
income of the Company attributable to the Ordinary Shares, and to
participate in any distribution of such income made by the Company,
such income shall be divided pari passu among the holders of
Ordinary Shares in proportion to the number of Ordinary Shares held
by them.
Significant share movements
1 January 2022 to 31 December 2022:
Ordinary Shares Number GBP
Balance at the start of the year 408,911,273 415,730,000
Shares bought back in 2022 (13,318,577) (12,364,455)
Balance at the end of the year 395,592,696 403,365,545
Issue costs since inception (8,289,989)
Net proceeds 395,075,556
1 January 2021 to 31 December 2021:
Ordinary Shares Number GBP
Balance at the start of the year 409,571,273 416,321,533
Shares bought back in 2021 (660,000) (591,533)
Balance at the end of the year 408,911,273 415,730,000
Issue costs since inception (8,289,989)
Net proceeds 407,440,011 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 2022:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2022 1.375 5,622,530 27 May 2022
30 June 2022 1.375 5,606,271 26 August 2022
30 September 2022 1.375 5,439,400 25 November 2022
31 December 2022(1) 1.375 5,439,400 24 February 2023
(1) Declared after year end and to be paid on 24 February 2023
to shareholders on the register as at 3 February 2023. This was
declared after year end hence was not accrued at year end.
In addition, on 23 March 2023, the Company declared a special
dividend of 2 pence per Ordinary Share in respect of the year
ending 31 December 2022 to be paid on 21 April 2023 to shareholders
on the register as at 31 March 2023. As this special dividend was
declared after year end it was not accrued for at year end.
The Group paid the following dividends in respect of the year to
31 December 2021:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2021 1.375 5,622,530 4 June 2021
30 June 2021 1.375 5,622,530 3 September 2021
30 September 2021 1.375 5,622,530 3 December 2021
31 December 2021(1) 1.375 5,622,530 24 February 2022
(1) Declared after year end and were paid on 25 February 2022 to
shareholders on the register as at 4 February 2022.
17. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated
loans, mezzanine loans, bridge loans, loan-on-loan financings and
other debt instruments is exposed to a variety of financial risks,
including market risk (including currency risk and interest rate
risk), credit risk and liquidity risk. The Group's overall risk
management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the
Group's financial performance.
It is the role of the Board to review and manage all risks
associated with the Group, mitigating these either directly or
through the delegation of certain responsibilities to the Audit
Committee, Investment Manager and Investment Adviser.
The Board of Directors has established procedures for monitoring
and controlling risk. The Group has investment guidelines that set
out its overall business strategies, its tolerance for risk and its
general risk management philosophy.
In addition, the Investment Manager monitors and measures the
overall risk bearing capacity in relation to the aggregate risk
exposure across all risk types and activities. Further details
regarding these policies are set out below: a. Market risk
Market risk includes market price risk, currency risk and
interest rate risk.
i) Market price risk
If a borrower defaults on a loan and the real estate market
enters a downturn it could materially and adversely affect the
value of the collateral over which loans are secured. However, this
risk is considered by the Board to constitute credit risk as it
relates to the borrower defaulting on the loan and not directly to
any movements in the real estate market.
The Investment Manager moderates market risk through a careful
selection of loans within specified limits. The Group's overall
market position is monitored by the Investment Manager and is
reviewed by the Board of Directors on an ongoing basis.
ii) Currency risk
The Group, via the subsidiaries, operates across Europe and
invests in loans that are denominated in currencies other than the
functional currency of the Company. Consequently the Group is
exposed to risks arising from foreign exchange rate fluctuations in
respect of these loans and other assets and liabilities which
relate to currency flows from revenues and expenses. Exposure to
foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board
accordingly.
The Group and Lloyds Bank plc entered into an international
forward exchange master agreement dated 5 April 2013 and on 7
February 2014 the Group entered into a Professional Client
Agreement with Goldman Sachs, pursuant to which the parties can
enter into foreign exchange transactions with the intention of
hedging against fluctuations in the exchange rate between Sterling
and other currencies. The Group does not trade in derivatives but
holds them to hedge specific exposures and have maturities designed
to match the exposures they are hedging. The derivatives are held
at fair value which represents the replacement cost of the
instruments at the reporting date and movements in the fair value
are included in the Consolidated Statement of Comprehensive Income
under net foreign exchange losses/ (gains). The Group does not
adopt hedge accounting in the financial statements. At the end of
the reporting period the Group had 109 (2021: 134) open forward
contracts.
As at 31 December 2022 the Group had the following currency
exposure:
Danish Krone Sterling Euro Total
31 December 2022
GBP GBP GBP GBP
Assets
Loans advanced - 273,150,000 159,309,966 432,459,966
Financial assets at fair value through - 706,661 - 706,661
Other receivables and prepayments - 16,792 10,000 26,792
Cash and cash equivalents 49 3,496,721 79,385 3,576,155
Liabilities
Revolving credit facility - (18,863,204) - (18,863,204)
Trade and other payables - (1,462,729) (295,877) (1,758,606)
Net currency exposure 49 257,044,241 159,103,474 416,147,764
Danish Krone Sterling Euro Total
31 December 2021
GBP GBP GBP GBP
Assets
Loans advanced - 192,279,327 222,353,185 414,632,512
Financial assets at fair value through - 13,291,598 - 13,291,598
Other receivables and prepayments - 17,094 20,558 37,652
Cash and cash equivalents 101 2,858,545 135,711 2,994,357
Liabilities
Revolving credit facility - (7,914,993) - (7,914,993)
Trade and other payables - (1,375,329) (109,197) (1,484,526)
Net currency exposure 101 199,156,242 222,400,257 421,556,600
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 2022 would increase or
decrease by GBP15,910,347 (2021: GBP22,240,026). 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 2022 would increase or
decrease by GBP5 (2021: GBP10). 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, 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 78.6% (2021: 76.8%) of investments
designed as loans advanced at 31 December 2022 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 2022:
31 December 2022 31 December 2021
GBP GBP
Floating rate
Loans advanced(1) 340,705,532 318,642,491
Cash and cash equivalents 3,576,155 2,994,357
Fixed rate
Loans advanced 91,754,434 95,990,021
Total financial assets subject to interest rate risk 436,036,121 417,626,869
(1) Loans advanced at floating rates include loans with
interbank rate floors.
At 31 December 2022, 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 2022 31 December 2021
GBP GBP
Floating rate
Increase of 50 basis points(1) 1,721,408 1,608,184
Decrease of 50 basis points (1,721,408) (1,608,184)
(1) Loans advanced at floating rates include loans with
interbank rate floors.
These percentages have been determined based on potential
volatility and deemed reasonable by the Directors. b. Credit
risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. The Group's main credit risk exposure
is in the investment portfolio, shown as loans advanced at
amortised cost, where the Group invests in whole loans and also
subordinated and mezzanine debt which rank behind senior debt for
repayment in the event that a borrower defaults. There is a spread
concentration of risk as at 31 December 2022 due to several loans
being advanced since origination. There is also credit risk in
respect of other financial assets as a portion of the Group's
assets are cash and cash equivalents or accrued interest. The banks
used to hold cash and cash equivalents have been diversified to
spread the credit risk to which the Group is exposed. The Group
also has credit risk exposure in its financial assets classified as
financial assets through profit or loss which is diversified
between hedge providers in order to spread credit risk to which the
Group is exposed. At year-end the derivative exposures were with
one counterparty.
The total exposure to credit risk arises from default of the
counterparty and the carrying amounts of financial assets best
represent the maximum credit risk exposure at the year-end date. As
at 31 December 2022, the maximum credit risk exposure was
GBP436,742,782 (2021: GBP430,918,680).
The Investment Manager has adopted procedures to reduce credit
risk exposure by conducting credit analysis of the counterparties,
their business and reputation which is monitored on an ongoing
basis. After the advancing of a loan a dedicated debt asset manager
employed by the Investment Adviser monitors ongoing credit risk and
reports to the Investment Manager, with quarterly updates also
provided to the Board. The debt asset manager routinely stresses
and analyses the profile of the Group's underlying risk in terms of
exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are
typically agreed at the time of the original loan underwriting,
forecasting headroom against covenants, reviewing market data and
forecast economic trends to benchmark borrower performance and to
assist in identifying potential future stress points. Periodic
physical inspections of assets that form part of the Group's
security are also completed in addition to monitoring the
identified capital expenditure requirements against actual borrower
investment.
The Group measures credit risk and ECL using probability of
default, exposure at default and loss given default. The Directors
consider both historical analysis and forward looking information
in determining any ECL. The Directors consider the loss given
default to be close to zero as all loans are the subject of very
detailed underwriting, including the testing of resilience to
aggressive downside scenarios with respect to the loan specifics,
the market and general macro changes. In addition to this, all
loans have very robust covenants in place, strong security packages
and significant loan- to-value headroom. During the year ended 31
December 2022, two loans with a value of GBP46,909,623 (31 December
2021: the three loans with a value of GBP59,031,888) remain
classified as Stage 2 and the remaining loans are classified as
Stage 1. 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. Since origination
these loans have been classified as Stage 2 loans, no expected
credit loss has been recognised at 31 December 2022 (2021: GBPnil)
as although the credit risk has increased for these loans, the
Group does not anticipate realising a loss in the event of a
default.
The Group uses both quantitative and qualitative criteria for
monitoring the loan portfolio as described in note 2 (h). The gross
carrying amount of loan portfolio is presented in the table below
and also represents the Group's maximum exposure to credit risks on
these assets.
Total as at Total as at
Stage 1 Stage 2 Stage 3
31 December 2022 31 December 2021
GBP GBP GBP
GBP GBP
Loans advanced 385,550,343 46,909,623 - 432,459,966 414,632,512
Gross carrying amount 385,550,343 46,909,623 - 432,459,966 414,632,512
Carrying amount 385,550,343 46,909,623 - 432,459,966 414,632,512
A reconciliation of changes in the loss allowance was not
presented as the allowance recognised at the end of the reporting
period was GBPnil (2021: 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 2022 31 December 2021
GBP GBP
Barclays Bank plc 2,276,081 2,980,544
ING Luxembourg, SA 1,299,092 12,743
Lloyds Bank plc 698 778
HSBC Bank plc 154 227
Royal Bank of Scotland International 130 65
Total cash and cash equivalents 3,576,155 2,994,357
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 (2021: GBP126,000,000) of which
GBP19,000,000 (2021: GBP85,00,000) 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 forecast future as a result of early repayments and
interest rate changes:
Between 3 and
Up to 3 months Over 12 months Total
31 December 2022 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 42,752,233 145,719,555 243,988,178 432,459,966
Liabilities and commitments
Loan commitments(1) (3,258,958) (20,660,608) (25,143,447) (49,063,014)
Credit facilities (182,879) (19,000,000) - (19,182,879)
Trade and other payables (1,758,606) - - (1,758,606)
37,551,790 106,058,947 218,844,731 362,455,467
(1) Loan commitments are estimated forecasted drawdowns at year
end.
Between 3 and
Up to 3 months Over 12 months Total
31 December 2021 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 14,736,977 90,989,466 308,906,069 414,632,512
Liabilities and commitments
Loan commitments(1) (8,324,454) (15,850,277) (19,186,697) (43,361,428)
Credit facilities (7,997) (8,500,000) - (8,507,997)
Trade and other payables (1,484,526) - - (1,484,526)
4,920,000 66,639,189 289,719,372 361,278,561
(1) Loan commitments are estimated forecasted drawdowns at year
end.
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 2022
Between 3 and Total as at
Up to 3 months Over 12 months
Derivatives 12 months 31 December 2022
GBP GBP
GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (45,083,803) (44,996,439) (72,650,196) (162,730,438)
Inflow 45,342,288 45,603,942 74,248,795 165,195,025
(1) Euro amounts translated at year end exchange rate.
31 December 2021
Between 3 and Total as at
Up to 3 months Over 12 months
Derivatives 12 months 31 December 2021
GBP GBP
GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (3,104,840) (51,449,438) (129,195,826) (183,750,104)
Inflow 3,115,540 52,103,985 132,586,030 187,805,555
(1) Euro amounts translated at year end exchange rate.
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 ofequity 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 2022 31 December 2021
GBP GBP
Equity
Equity share capital 395,075,556 407,440,011
Retained earnings and translation reserve 21,072,208 14,116,589
Total capital 416,147,764 421,556,600
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels: a. Quoted prices (unadjusted) in active
markets for identical assets or liabilities (level 1). b. Inputs
other than quoted prices included within level 1 that are
observable for the asset or liability,either directly (that is, as
prices) or indirectly (that is, derived from prices including
interest rates, yieldcurves, volatilities, prepayment rates, credit
risks and default rates) or other market corroborated inputs
(level2). c. Inputs for the asset or liability that are not based
on observable market data (that is, unobservableinputs) (level
3).
The following table analyses within the fair value hierarchy the
Group's financial assets and liabilities (by class) measured at
fair value:
31 December 2022
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 706,661 - 706,661
Total - 706,661 - 706,661
31 December 2021
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 13,291,598 - 13,291,598
Total - 13,291,598 - 13,291,598
There have been no transfers between levels for the year ended
31 December 2022 (2021: nil).
The Directors were responsible for considering the methodology
and assumptions used by the Investment Adviser and for approving
the fair values reported at the financial period end.
The following table summarises within the fair value hierarchy
the Group's assets and liabilities (by class) not measured at fair
value at 31 December 2022 but for which fair value is
disclosed:
31 December 2022
Total fair
Level 1 Level 2 Level 3 Total carrying amount
values
GBP GBP GBP GBP
GBP
Assets
Loans advanced - - 453,301,433 453,301,433 432,459,966
Total - - 453,301,433 453,301,433 432,459,966
Liabilities
Credit facility - 18,863,204 - 18,863,204 18,863,204
Total - 18,863,204 - 18,863,204 18,863,204
31 December 2021
Total fair
Level 1 Level 2 Level 3 Total carrying amount
values
GBP GBP GBP GBP
GBP
Assets
Loans advanced - - 431,658,356 431,658,356 414,632,512
Total - - 431,658,356 431,658,356 414,632,512
Liabilities
Credit facility - 7,914,993 - 7,914,993 7,914,993
Total - 7,914,993 - 7,914,993 7,914,993
For cash and cash equivalents, other receivables and
prepayments, trade and other payables and credit facilities the
carrying amount is a reasonable approximation of the fair value.
The Group carries its loans advanced at amortised cost in the
consolidated financial statements. Refer to note 10 for further
information.
The carrying amounts of the revolving credit facilities included
in the above tables are considered to approximate its fair values.
The fair value of loans advanced have been determined by
discounting the expected cash flows using a discounted cash flow
model based on the variable interest rates. For avoidance of doubt
the Group carries its loans advanced at amortised cost in the
financial statements. Refer to note 10 for further information.
Cash and cash equivalents include cash at hand and fixed
deposits held with banks. Other receivables and prepayments include
the contractual amounts and obligations due to the Group and
consideration for advance payments made by the Group. Credit
facilities and trade and other payables represent the contractual
amounts and obligations due by the Group for contractual
payments
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of shareholdings
advised to them, the Company has no immediate or ultimate
controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income
Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an
annual fee of GBP1,200.
The Luxembourg indirect subsidiaries of the Company are subject
to the applicable tax regulations in Luxembourg. The table below
analyses the tax charges incurred at Luxembourg level:
31 December 2022 31 December 2021
GBP GBP
Current tax
Tax expenses on profit of the reporting period 90,287 100,452
Total current tax 90,287 100,452
Luxco had no operating gains on ordinary activities before
taxation and was therefore for the year ended 31 December 2022
subject to the Luxembourg minimum corporate income taxation at
EUR4,815 (2021: EUR4,815). 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% (2021:
24.94%).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment
Advisors Act 1940 (the "Custody Rule") the consolidated financial
statements of the Group have also been audited in accordance with
Generally Accepted Auditing Standards applicable in the United
States ("US GAAS"). As such two independent Auditor's reports are
included, one under International Standards on Auditing as required
by the Crown Dependencies Audit Rules and the other under US GAAS.
Compliance with the Custody Rule also requires a reconciliation of
the operating profit and net assets under IFRS to US GAAP.
The principal differences between IFRS and US GAAP relate to
accounting for financial assets that are carried at amortised cost.
Under US GAAP the calculation of the effective interest rate is
based on contractual cash flows over the asset's contractual life,
however, under the IFRS basis, the effective interest rate
calculation is based on the estimated cash flows over the expected
life of the asset.
The Directors have assessed the operating profit and NAV of the
Group under both IFRS and US GAAP and have concluded that no
material differences were identified and therefore no
reconciliation has been presented in these consolidated financial
statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions. Details on the Investment Manager and other related
party transactions are included in note 3 to the consolidated
financial statements.
The following tables summarise the transactions occurred with
related parties during the reporting period and outstanding at 31
December 2022 and 31 December 2021:
2022
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2022 31 December 2022
GBP GBP
Directors' fees and expenses paid
John Whittle - 60,000
Shelagh Mason - 45,000
Charlotte Denton - 50,000
Gary Yardley - 42,000
Expenses paid - 6,373
Investment Manager
Investment management fees 777,556 3,122,755
Origination fees - 501,936
Expenses - 120,099
2021
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2021 31 December 2021
GBP GBP
Directors' fees and expenses paid
Stephen Smith (resigned 31 December 2021) - 50,000
John Whittle - 45,000
Shelagh Mason - 42,500
Charlotte Denton (appointed 1 January 2021) - 40,000
Gary Yardley (appointed 6 September 2021) - 12,712
Expenses paid 560 5,198
Investment Manager
Investment management fees 791,344 3,147,075
Origination fees 380,000 300,456
Expenses - 68,107
The following tables summarise the dividends paid to related
parties during the reporting period and number of Company's shares
held by related parties at 31 December 2022 and 31 December
2021:
2022
Dividends paid during
As at
Shareholdings and the year ended
31 December 2022
dividends paid 31 December 2022
Number of shares
GBP
Starwood Property Trust Inc. 502,700 9,140,000
SCG Starfin Investor LP 125,675 2,285,000
John Whittle 1,725 33,866
Charlotte Denton 1,833 44,444
Shelagh Mason 6,205 112,819
Duncan MacPherson* 8,333 133,333
Lorcain Egan* 3,818 61,093
* Employees at the Investment Adviser
2021
Dividends paid during
As at
Shareholdings and the year ended
31 December 2021
dividends paid 31 December 2021
Number of shares
GBP
Starwood Property Trust Inc. 525,550 9,140,000
SCG Starfin Investor LP 131,388 2,285,000
Stephen Smith (resigned 31 December 2021) 4,538 78,929
John Whittle 1,372 23,866
Shelagh Mason 6,487 112,819
Duncan MacPherson* 7,667 133,333
Lorcain Egan* 3,513 61,093
* Employees at the Investment Adviser
Other
The Group continues to participate in a number of loans in which
Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The
details of these loans are shown in the table below. The Group also
acted as co-lender with Starwood European Real Estate Debt Finance
I LP ("SEREDF I") an affiliate entity.
Loan Related party co-lenders
Hotel and Residential, UK STWD
Hotels, United Kingdom STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD
2 Hotels, UK SEREDF I
23. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 31 December 2022, the following amounts have been
drawn under existing commitments, up to 23 March 2023:
Local currency
Mixed Use, Dublin EUR109,357
Subsequent to 31 December 2022, the following loan amortisation
(both scheduled and unscheduled) has been received up to 23 March
2023:
Local currency
Hotel, Dublin EUR2,449,200
Hotel and Office, Northern Ireland GBP1,000,000
Mixed Portfolio, Europe EUR1,516,035
Three Shopping Centres, Spain EUR359,732
Subsequent to 31 December 2022, the following loans have been
repaid in full up to 23 March 2023:
Local currency
Hotel, Oxford GBP22,950,000
Office and Industrial Portfolio, UK GBP5,500,000
During January and February 2023, a total amount of
GBP19,000,000 was paid to Morgan Stanley as repayment of amounts
owed as at 31 December 2022 under the credit facility held with
them.
On 21 January 2023, the Directors declared a dividend in respect
of the fourth quarter of 1.375 pence per Ordinary Share payable on
24 February 2023 to shareholders on the register at 3 February
2023.
In addition, on 23 March 2023, the Company declared a special
dividend of 2 pence per Ordinary Share in respect of the year
ending 31 December 2022 to be paid on 21 April 2023 to shareholders
on the register as at 31 March 2023.
Subsequent to year end the Lloyds credit facility agreement was
extended to May 2024 with a reduced facility amount of GBP25.0
million.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance
Measures ("APMs") the Board has considered what APMs are included
in the Annual Financial Report and Audited Consolidated Financial
Statements which require further clarification. An APM is defined
as a financial measure of historical or future financial
performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial
reporting framework. APMs included in the financial statements,
which are unaudited and outside the scope of IFRS, are deemed to be
as follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets
attributable to equity shareholders divided by the number of
Ordinary Shares in issue, excluding any shares held in treasury.
The NAV per Ordinary Share is published monthly. This APM relates
to past performance and is used as a comparison to the share price
per Ordinary Share to assess performance. There are no reconciling
items between this calculation and the Net Asset Value shown on the
balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any
dividends paid, together with the rise or fall in the NAV per
Ordinary Share. This APM relates to past performance and takes into
account both capital returns and dividends paid to shareholders.
Any dividends received by a shareholder are assumed to have been
reinvested in the assets of the Company at its NAV per Ordinary
Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of
any dividends paid, together with the rise or fall in the share
price. This APM relates to past performance and assesses the impact
of movements in the share price on total returns to investors. Any
dividends received by a shareholder are assumed to have been
reinvested in additional shares of the Company at the time the
shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of
the Company is lower (discount) or higher (premium) than the NAV
per Ordinary Share at the date of reporting and relates to past
performance. The discount or premium is normally expressed as a
percentage of the NAV per Ordinary Share.
INVESTED LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the
quarterly reporting date of the estimated annual return on the
portfolio at that point in time. It is calculated individually for
each loan by summing the one-off fees earned (such as up-front
arrangement or exit fees charged on repayment) and dividing these
over the full contractual term of the loan, and adding this to the
annual returns. Where a loan is floating rate (partially or in
whole or with floors), the returns are based on an assumed profile
for future interbank rates, but the actual rate received may be
higher or lower. The return is calculated only on amounts funded at
the quarterly reporting date and excludes committed but undrawn
loans and excludes cash uninvested. The calculation also excludes
origination fees paid to the Investment Manager, which are
accounted for within the interest line in the financial
statements.
An average, weighted by loan amount, is then calculated for the
portfolio.
This APM gives an indication of the future performance of the
portfolio (as constituted at the reporting date). The calculation,
if the portfolio remained unchanged, could be used to estimate
"income from loans advanced" in the Consolidated Statement of
Comprehensive Income if adjusted for the origination fee of 0.75
basis points amortised over the average life of the loan. As
discussed earlier in this report the figure actually realised may
be different due to the following reasons:
-- In the quoted return, we amortise all one-off fees (such as
arrangement and exit fees) over thecontractual life of the loan,
which is currently four years for the portfolio. However, it has
been our experiencethat loans tend to repay after approximately 2.5
years and as such, these fees are actually amortised over ashorter
period.
-- Many loans benefit from prepayment provisions, which means
that if they are repaid before the end of theprotected period,
additional interest or fees become due. As we quote the return
based on the contractual life ofthe loan these returns cannot be
forecast in the return.
-- The quoted return excludes the benefit of any foreign
exchange gains on Euro loans. We do not forecastthis as the loans
are often repaid early and the gain may be lower than this once
hedge positions are settled.
Generally speaking, the actual annualised total return is likely
to be higher than the reported return for these reasons, but this
is not incorporated in the reported figure, as the benefit of these
items cannot be assumed.
PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same
basis as the unlevered annual return but takes into account the
amount of leverage in the Group and the cost of that leverage at
current SONIA rates.
ONGOING CHARGES PERCENTAGE
Ongoing charges represents the management fee and all other
operating expenses excluding finance costs and transactions costs,
expressed as a percentage of the average monthly net asset values
during the year and allows users to assess the running costs of the
Group. This is calculated in accordance with AIC guidance and
relates to past performance. The charges include the following
lines items within the Consolidated Statement of Comprehensive
Income:
-- Investment management fees
-- Administration fees
-- Audit and non-audit fees
-- Other expenses
-- Legal and professional fees
-- Directors' fees and expenses
-- Broker's fees and expenses
-- Agency fees
The calculation adds back any expenses unlikely to occur absent
any loan originations or repayments and as such, the costs
associated with hedging Euro loans back to sterling have been added
back. The calculation does not include origination fees paid to the
Investment Manager; these are recognised through "Income from loans
advanced".
WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST GBP
These are calculations made as at the quarterly reporting date
of the loan to value ("LTV") on each loan at the lowest and highest
point in the capital stack in which the Group participates. LTV to
"Group last GBP" means the percentage which the total loan
commitment less any amortisation received to date (when aggregated
with any other indebtedness ranking alongside and/or senior to it)
bears to the market value determined by the last formal lender
valuation received by the quarterly reporting date. LTV to "first
Group GBP" means the starting point of the loan to value range of
the loan commitments (when aggregated with any other indebtedness
ranking senior to it). For development projects, the calculation
includes the total facility available and is calculated against the
assumed market value on completion of the project.
An average, weighted by the loan amount, is then calculated for
the portfolio.
This APM provides an assessment of future credit risk within the
portfolio and does not directly relate to any financial statement
line items.
PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS
This is a calculation made as at the quarterly reporting date,
which calculates the value of loans, which has an element of
floating rate in part, in whole and including loans with floors, as
a percentage of the total value of loans. This APM provides an
assessment of potential future volatility of the income on loans,
as a large percentage of floating rate loans would mean that income
would move up or down with changes in SONIA.
AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM
The average loan term is calculated at the quarterly reporting
date by calculating the average length of each loan from initial
advance to the contractual termination date. An average, weighted
by the loan amount, is then calculated for the portfolio.
The average remaining loan term is calculated at the quarterly
reporting date by calculating the average length of each loan from
the quarterly reporting date to the contractual termination date.
An average, weighted by the loan amount, is then calculated for the
portfolio.
This APM provides an assessment of the likely level of
repayments occurring in future years (absent any early repayments)
which will need to be reinvested. In the past, the actual term of
loans has been shorter than the average contractual loan term due
to early repayments and so the level of repayments is likely to be
higher than this APM would suggest. However, this shorter actual
loan term cannot be assumed as it may not occur and therefore it is
not reported as part of this APM.
NET CASH
Net cash is the result of the Group's total cash and cash
equivalents minus total credit facility utilised as reported on its
consolidated financial statements.
UNUSED LIQUID FACILITIES
Unused liquid facilities is the result of the Group's total cash
and cash equivalents plus the available balance to withdraw under
existing credit facilities at the reporting date.
PORTFOLIO DIVERSIFICATION
The portfolio diversification statistics are calculated by
allocating each loan to the relevant sectors and countries based on
the value of the underlying assets. This is then summed for the
entire portfolio and a percentage calculated for each sector /
country.
This APM provides an assessment of future risk within the
portfolio due to exposure to specific sectors or countries and does
not directly relate to any financial statement line items.
Corporate Information
Directors
John Whittle (Non-executive Director)
Shelagh Mason (Non-executive Director)
Charlotte Denton (Non-executive Director)
Gary Yardley (Non-executive Director)
(all care of the registered office)
Investment Manager
Starwood European Finance
Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities
law)
Norton Rose Fullbright LLP 3 More London Riverside London
SE1 2AQ United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
1st Floor Tudor House Le Bordage St Peter Port Guernsey GY1
1DB
Broker
Jefferies Group LLC
100 Bishopsgate
London, EC2N 4JL
United Kingdom
Administrator, Designated Manager and Company Secretary
Apex Fund and Corporate Services (Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Investment Adviser
Starwood Capital Europe Advisers, LLP 2nd Floor
One Eagle Place St. James`s London
SW1Y 6AF United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques
St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Website:
www.starwoodeuropeanfinance.com
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group. The issuer is solely responsible for the
content of this announcement.
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ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 232221
EQS News ID: 1591043
End of Announcement EQS News Service
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