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REG-Eurocastle Inv. Ltd 3rd Quarter Results - Part 3
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
Eurocastle Investment Limited (the "Company") was incorporated in Guernsey,
Channel Islands on 8 August 2003 and commenced its operations on 21 October
2003. Eurocastle Investment Limited is a Euro denominated Guernsey closed-end
investment company listed on the London Stock Exchange as a property investment
company. The principal activities of the Company include the investing in,
financing and managing of European real estate securities, other European asset
backed securities, and other European real estate related assets.
The Company is externally managed by its manager, Fortress Investment Group LLC
(the "Manager"). The Company has entered into a management agreement (the
"Management Agreement") under which the Manager advises the Company on various
aspects of its business and manages its day-to-day operations, subject to the
supervision of the Company's Board of Directors. The Company has no direct
employees. For its services, the Manager receives an annual management fee
(which includes a reimbursement for expenses) and incentive compensation, as
described in the Management Agreement. The Company has no ownership interest in
the Manager.
In October 2003, the Company issued 118,576,700 ordinary shares through a
private offering to qualified investors at a price of €1 per share. Pursuant to
a written resolution of the Company dated 18 June 2004, the shareholders
resolved to receive one share in exchange for every ten shares previously held
by them. Immediately following this resolution, the Manager and its employees
held 1,356,870 ordinary shares. In June 2004, the Company issued 6,600,000
ordinary shares in its initial public offering at a price of €12.00 per share,
for net proceeds of €74.3 million. In June 2005 the Company completed a
secondary public offering issuing 5,740,000 ordinary shares at a price of €17.25
per share, for net proceeds of €95.0 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Compliance
The consolidated financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards (IFRS). The
financial statements are prepared in accordance with IAS 34 "Interim Financial
Statements." In preparing interim financial statements, the accounting
principles applied reflect the amendments to IAS and the adoption of new IFRS
which became effective from 1 January 2005. Other than in respect of these
changes, explained further below, the interim financial statements have been
prepared under the same accounting principles and methods of computation as in
the financial statements as at 31 December 2004 and for the year then ended. The
consolidated financial statements are presented in euros, the functional
currency of the Company, because the Company conducts its business predominantly
in euros.
The changes to IFRS effective 1 January 2005 have had the following impact on
the Company's consolidated interim financial statements:
IFRS 2 "Share-based payments" - Share options granted in 2003 and 2004 for the
purpose of compensating the Manager for its successful efforts in raising
capital for the Company have been accounted for at the fair value on grant date.
The fair values of such options at the date of grant have been debited to equity
as the costs of issuance of ordinary shares with corresponding increases in
other reserves.
IAS 39 Financial Instruments: Recognition and Measurement - Asset backed
securities, available for sale at fair value of €60 million (31 December 2004:
€468.0 million) and real estate loans of €36 million (31 December 2004: nil)
have been pledged to third parties in sale and repurchase agreements. In
accordance with the revisions to IAS 39 these securities have been reclassified
as pledged securities and loans in the balance sheet.
Both of the above changes in the accounting policies have been made in
accordance with the provisions of IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors with the corresponding adjustments reflected in
the prior period comparatives.
Basis of Preparation
The consolidated financial statements are prepared on a fair value basis for
derivative financial instruments, investment property, financial assets and
liabilities held for trading, and available-for-sale assets. Other financial
assets and liabilities and non-financial assets and liabilities are stated at
amortised or historical cost.
Basis of Consolidation
The consolidated financial statements comprise the financial statements of
Eurocastle Investment Limited and its subsidiaries for the nine months ended 30
September 2005. Subsidiaries are consolidated from the date on which control is
transferred to the Company and cease to be consolidated from the date on which
control is transferred from the Company.
At 30 September 2005, the Company's subsidiaries consisted of Eurocastle Funding
Limited ("EFL"), Eurocastle CDO I PLC ("CDO I"), Eurocastle CDO II PLC ("CDO
II"), Eurocastle CDO III PLC ("CDO III") and Eurocastle CDO IV PLC ("CDO IV"),
all limited companies incorporated in Ireland. The ordinary share capital of EFL
is held by outside parties and has no associated voting rights. The Company
retains control over EFL as the sole beneficial holder of secured notes issued
by EFL. In accordance with the Standing Interpretations Committee Interpretation
12 Consolidation - Special Purpose Entities, the Company consolidates CDO I, CDO
II, CDO III and CDO IV as it retains control over these entities and retains the
residual risks of ownership of these entities.
Eurocastle acquired its German bank branch and office portfolio of investment
properties through two German limited liability companies, Longwave Acquisition
GmbH ("Longwave") and Shortwave Acquisition GmbH ("Shortwave") which are held
through two Luxembourg companies (Eurobarbican and Luxgate), set up as societes
a responsabilite limitee. Longwave and Shortwave each own German companies which
have been used to hold one or several of the investment properties. These
companies were established as special purpose vehicles limited to holding the
single or multiple real estate investment properties acquired at the end of
December 2004. Longwave has 60 subsidiaries and Shortwave has 2 subsidiaries.
Luxgate owns all of the ordinary share capital of Eurobarbican which in turn
owns all of the share capital of Longwave and Shortwave.
Eurocastle acquired retail property in Germany through two German partnerships
Bastion Gmbh & Co. KG ("Bastion") and Belfry Gmbh & Co. KG ("Belfry"). These two
partnerships hold 9 and 21 assets respectively as at 30 September 2005. Each of
the two German partnerships are 100% owned by two Luxembourg limited partners
set up as societes a responsabilite limitee (Sarl), each such pair being held
fully by a further Luxembourg Sarl, which in turn is 100% owned by Eurocastle's
principal direct real estate holding entity, Luxgate Sarl, a subsidiary of
Eurocastle Investment Limited.
Eurocastle's investment in real estate fund units are held by Finial Sarl, a
Luxembourg limited company, which is 100% owned by Luxgate Sarl.
Financial Instruments
Classification
Financial assets and liabilities measured at fair value through the profit and
loss account are those instruments that the Company principally holds for the
purpose of short-term profit taking. These include securities portfolio
contracts, total return swaps, real estate fund units and forward foreign
exchange contracts that are not designated as effective hedging instruments.
Available-for-sale assets are financial assets that are not classified as held
for trading purposes, loans and advances, or held to maturity.
Available-for-sale instruments include real estate and other asset backed
securities.
Recognition
The Company recognises financial assets held for trading and available-for-sale
assets on the date it commits to purchase the assets (trade date). From this
date any gains and losses arising from changes in the fair value of the assets
are recognised.
A financial liability is recognised on the date the Company becomes party to
contractual provisions of the instrument.
Measurement
Financial instruments are measured initially at fair value plus, in the case of
a financial asset or liability not measured at fair value through profit and
loss, transaction costs that are directly attributable to the acquisition or
issue of the financial asset or financial liability.
Subsequent to initial recognition all trading instruments and available for sale
assets are carried at fair value.
All financial assets other than trading instruments and available-for-sale
assets are measured at amortised cost less impairment losses. Amortised cost is
calculated on the effective interest rate method. Premiums and discounts,
including initial transaction costs, are included in the carrying amount of the
related instrument and amortised based on the effective interest rate of the
instrument.
Fair value measurement principles
The fair value of financial instruments is based on their quoted market price at
the balance sheet date without any deduction for transaction costs. If a quoted
market price is not available, the fair value of the instrument is estimated
using pricing models or discounted cash flow techniques, as applicable.
Where discounted cash flow techniques are used, estimated future cash flows are
based on management's best estimates and the discount rate is a market related
rate at the balance sheet date for an instrument with similar terms and
conditions. Where pricing models are used, inputs are based on market related
measures at the balance sheet date.
The fair value of derivatives that are not exchange traded is estimated at the
amount that the Company would receive or pay to terminate the contract at the
balance sheet date taking into account current market conditions and the current
creditworthiness of the counterparties.
Gains and losses on subsequent measurement
Gains and losses arising from a change in the fair value of trading instruments
are recognised directly in the income statement. Gains and losses arising from a
change in the fair value of available-for-sale securities are recognised
directly in equity until the investment is derecognised (sold, collected, or
otherwise disposed of) or impaired, at which time the cumulative gain or loss
previously recognised in equity is included in the income statement for the
period.
Derecognition
A financial asset is derecognised when the Company loses control over the
contractual rights that comprise that asset. This occurs when the rights are
realised, expire or are surrendered. A financial liability is derecognised when
it is extinguished.
Assets held for trading and available-for-sale assets that are sold are
derecognised and corresponding receivables from the buyer for the payment are
recognised as of the date the Company commits to sell the assets. The Company
uses the specific identification method to determine the gain or loss on
derecognition.
Impairment
The Company assesses at each balance sheet date whether there is objective
evidence that a financial asset or group of financial assets is impaired. A
financial asset or a group of financial assets is impaired and impairment losses
are incurred if, and only if, there is objective evidence of impairment as a
result of one or more events that occurred after the initial recognition of the
asset (a 'loss event') and that loss event (or events) has an impact on the
estimated future cash flows of the financial asset or group of financial assets
that can be reliably estimated.
In the case of financial assets classified as available-for-sale, a significant
or prolonged decline in the fair value of the security below its cost is
considered in determining whether the assets are impaired. If any such evidence
exists for available-for-sale financial assets, the cumulative loss - measured
as the difference between the acquisition cost and the current fair value, less
any impairment loss on that financial asset previously recognised in profit or
loss - is removed from equity and recognised in the income statement.
Impairment losses recognised in the income statement on securities and loans are
not reversed through the income statement. Subsequent increases in the fair
values of debt instruments classified as available-for-sale, which can be
objectively related to an event occurring after previous impairment losses have
been recognised in the income statement, are recorded in the income statement.
Such reversals are then taken through the income statement only to the extent
previous impairment losses have been taken through the income statement.
Hedge accounting
Where there is a hedging relationship between a derivative instrument and a
related item being hedged, the hedging instrument is measured at fair value.
Where a derivative financial instrument hedges the exposure to variability in
the cash flows of recognised assets or liabilities, the effective part of any
gain or loss on re-measurement of the hedging instrument is recognised directly
in equity. The ineffective part of any gain or loss is recognised in the income
statement.
The gains or losses that are recognised in equity are transferred to the income
statement in the same period in which the hedged items affect the net profit and
loss.
Repurchase Agreements
Securities and real estate loans subject to repurchase agreements are
reclassified in the financial statements as pledged assets when the transferee
has the right by contract or custom to sell or repledge the collateral. The
counterparty liabilities have been classified as repurchase agreements.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks and in hand and short-term
deposits with an original maturity of three months or less.
Restricted Cash
Restricted cash comprises margin account balances held by derivative
counterparties as collateral for forward foreign exchange contracts, as well as
cash held by the trustees of CDO I, II and III securitisations as a reserve for
future trustee expenses. As such, these funds are not available for use by the
Group.
Investment Properties
Investment properties comprise land and buildings. In accordance with IAS 40,
property held to earn rentals and/or for capital appreciation is categorised as
investment property. Investment property is initially recognised at cost, being
the fair value of the consideration given, including real estate transfer taxes,
professional advisory fees and other acquisition costs. After initial
recognition, investment properties are measured at fair value, with unrealised
gains and losses recognised in the consolidated income statement.
The value of investment properties incorporates five properties which are held
by the Company under finance or operating leases. An associated liability is
recognised at an amount equal to the fair value of the leased property or, if
lower, the present value of the minimum lease payments, determined at the
inception of the lease.
Fair values for all investment properties have been determined by reference to
the existing rental income and operating expenses for each property and the
current market conditions in each geographical market. Fair values also
incorporate current valuation assumptions which are considered reasonable and
supportable by willing and knowledgeable parties.
Real Estate Fund Units
Real estate fund units are recorded at fair value in the consolidated balance
sheet, with any change in fair value recognised in the consolidated income
statement. The interest income is recognized in the income statement as it
accrues, taking into account the effective yield of the real estate fund units.
Deferred Financing Costs
Deferred financing costs represent costs associated with the issuance of
financings and are amortised over the term of such financing using the effective
interest rate method.
Interest-Bearing Loans and Borrowings
All loans and borrowings, including the Company's repurchase agreements, are
initially recognised at fair value, being the fair value of consideration
received, net of transaction costs incurred. Borrowings are subsequently stated
at amortised cost; any difference between proceeds net of transaction costs and
the redemption value is recognised in the income statement over the period of
the borrowings using the effective interest method.
Minority Interests
Minority interests represent interests held by outside parties in the Company's
consolidated subsidiaries.
Revenue Recognition
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Company and the revenue can be reliably measured.
Interest income and expenses are recognised in the income statement as they
accrue, taking into account the effective yield of the asset/liability or an
applicable floating rate. Interest income and expense include the amortisation
of any discount or premium or other differences between the initial carrying
amount of an interest bearing instrument and its amount at maturity calculated
on an effective interest rate basis.
Rental income is recognised on an accruals basis.
Income Tax
The Company is a Guernsey, Channel Islands limited company and is not subject to
taxation. The company's subsidiaries, EFL, CDO I, CDO II, CDO III and CDO IV are
Irish registered companies and are structured to qualify as securitisation
companies under section 110 of the Taxes Consolidation Act 1997. It is envisaged
that these companies will generate minimal net income for Irish income tax
purposes and no provision for income taxes has been made for these companies.
The Company's German subsidiary companies, Longwave and Shortwave, are subject
to German income tax on income arising from its investment properties, after the
deduction of allowable debt financing costs and other allowable expenses. The
taxation accrual for the nine months ended 30 September 2005 relates to these
subsidiaries.
The German subsidiaries Bastion GmbH & Co KG and Belfry GmbH & Co KG are also
subject to German income tax on rental income net of interest and other expense
deductions. No taxable income has been generated in these entities and therefore
no tax accrual has been made for the nine months ended 30 September 2005.
Foreign Currency Translation
The functional and presentation currency of the Company and its subsidiaries is
the euro. Transactions in foreign currencies are initially recorded in the
functional currency rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are
retranslated at the functional currency rate of exchange ruling at the balance
sheet date. All differences are taken to the consolidated income statement.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rate as at the date of initial
transaction. Non-monetary items measured at fair value in a foreign currency
are translated using the exchange rates at the date when the fair value was
determined.
Share-Based Payments
Share-based payments are accounted for based on their fair value on grant date.
In accordance with the transitional provisions of IFRS 2, Share-Based Payment
the Company has restated the comparative information by way of adjusting the
opening balance of equity for earlier periods. The effect of the transitional
provisions is in compliance with IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors.
3. OTHER OPERATING EXPENSES
Unaudited Unaudited Unaudited Unaudited
Three Months to Nine Months to Three Months to Nine Months to
30 September 30 September 30 September 30 September
2005 2005 2004 2004
€'000 €'000 €'000 €'000
----------- ------------- ------------- ------------ ------------
Professional
fees 353 1,149 217 614
Management
fees 1,088 2,537 729 1,370
Incentive fees 1,008 2,463 - -
Other 80 480 233 370
------------- ------------- ------------ ------------
2,529 6,629 1,179 2,354
============= ============= ============ ============
4. TAXATION EXPENSE
The taxation expense for the nine months ended 30 September 2005 relates to the
Company's German subsidiary companies as described in Note 2. The tax charge on
Longwave and Shortwave is based on German tax on income arising from its
investment properties, after the deduction of allowable debt financing costs and
other allowable expenses, and includes tax on the gain arising from the disposal
of a property during the period. Bastion and Belfry are subject to German income
tax on rental income net of interest and other expense deductions. No taxable
income has been generated in these entities and therefore no tax accrual has
been made for the nine months ended 30 September 2005.
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the Company's available-for-sale securities at 30
September 2005.
Gross Unrealised Weighted Average
Current Amortised
Face Cost Carrying S&P Maturity
Amount Basis Gains Losses Value Rating Coupon Yield (Years)
€'000 €'000 €'000 €'000 €'000
Portfolio I
CMBS 161,78 161,671 1,992 (36) 163,627 BBB 3.95% 3.99% 3.45
Other ABS 230,319 230,706 2,955 (147) 233,514 BBB+ 4.04% 4.07% 3.75
392,100 392,377 4,947 (183) 397,141 BBB+ 4.00% 4.04% 3.63
Portfolio II
CMBS 132,185 132,009 578 (476) 132,111 BBB 3.58% 3.63% 5.21
Other ABS 145,198 145,541 509 (454) 145,596 BBB 3.54% 3.49% 5.17
277,383 277,550 1,087 (930) 277,707 BBB 3.56% 3.56% 5.19
Portfolio III
CMBS 128,135 128,249 975 (163) 129,061 BBB- 4.20% 4.20% 4.78
Other ABS 152,913 152,715 1,267 (169) 153,813 BBB+ 3.89% 4.08% 3.50
281,048 280,964 2,242 (332) 282,874 BBB 4.03% 4.14% 4.08
Portfolio IV
CMBS 120,249 119,374 290 (58) 119,606 BBB+ 3.78% 3.99% 4.10
Other ABS 41,173 41,295 146 (116) 41,325 BBB 3.62% 3.52% 6.09
161,422 160,669 436 (174) 160,931 BBB+ 3.74% 3.87% 4.61
Total
Portfolio 1,111,953 1,111,560 8,712 (1,619) 1,118,653 BBB 3.86% 3.92% 4.27
Other Securities
CMBS 60,493 60,421 82 (105) 60,398 AA 2.63% 2.78% 0.11
Other ABS - - - - - - - -
60,493 60,421 82 (105) 60,398 AA 2.63% 2.78% 0.11
1,172,446 1,171,981 8,794 (1,724) 1,179,051 BBB+ 3.80% 3.86% 4.06
Restricted Cash - Cash to be Invested 24,701
Total Asset Backed Securities
(including cash to be invested) (unaudited) 1,203,752
CMBS - Commercial Mortgage Backed Securities
Other ABS - Other Asset Backed Securities
The securities within Portfolio I, II and III are encumbered by CDO
securitisations (Note 10).
Asset backed securities, available for sale at fair value of €60.4 million have
been pledged to third parties in sale and repurchase agreements. In accordance
with the revisions to IAS 39 Financial Instruments: Recognition and Measurement,
effective 1 January 2005, these securities have been reclassified as pledged
securities as follows:
Unaudited
30 September 31 December
2005 2004
€'000 €'000
------------- ----------
Asset backed securities, available for sale
(includes cash to be invested) 1,143,354 796,522
Asset backed securities pledged under
repurchase agreements 60,398 467,962
------------- ----------
Total asset backed securities 1,203,752 1,264,484
------------- ----------
Cumulative net unrealised gains on available for-sale-securities and hedge
instruments recognised in the statement of changes in equity were as follows:
Unaudited 31 December
2004
30 September
2005
€'000 €'000
------------- ----------
Unrealised gains on available-for-sale
securities 8,794 7,833
Unrealised losses on available-for-sale
securities (1,724) (1,229)
Unrealised (loss)/gain on hedge instruments
(Note 16) (5,976) 713
------------- ----------
1,094 7,317
------------- ----------
6. REAL ESTATE LOANS
Gross Unrealised Weighted Average
Current Amortised
Face Costs
Amount Basis Carrying S&P Maturity
Gains Losses Value Rating Coupon Yield (Years)
€'000 €'000 €'000 €'000 €'000
Real estate loans 100,165 99,632 - - 99,632 * 5.66% 5.70% 4.03
* Included in real estate loans are loans with a total current face amount of
€39.8 million and with an average rating of BB from Standard and Poors.
Real estate loans with a carrying value of €36.3 million have been pledged to
third parties in sale and repurchase agreements. In accordance with the
revisions to IAS 39 Financial Instruments: Recognition and Measurement,
effective 1 January 2005, these loans have been reclassified as pledged assets
as follows:
Unaudited
30 September 31 December
2005 2005
€'000 €'000
------------- -----------
Real estate loans 63,328 21,938
Real estate loans pledged under repurchase
agreements 36,304 -
------------- -----------
Total real estate loans 99,632 21,938
============= ===========
7. OTHER ASSETS
Unaudited 31 December
2004
30 September
2005
€'000 €'000
--------------------------- ------------- --- -------------
Interest receivable 12,210 7,800
Rent receivable 583 344
Deferred financing costs - 217
Prepaid expenses 396 227
Derivative assets 106 990
Unsettled security transactions 1,990 -
Fair value of total return swap (note
7.1) 428 -
Collateral deposit - total return swap 8,066 -
Other assets 1,158 -
------------- --- -------------
24,937 9,578
============= === =============
Deferred financing costs represented costs associated with the issuance of a
collateralised debt obligation and were offset against the proceeds of the
issuance.
7.1 Total Return Swap
In August 2005, a subsidiary entered into a total return swap with a major
investment bank, whereby it receives the sum of all interest (at an average of
Sterling LIBOR + 5.50%) and any positive change in value from a referenced term
loan with an initial notional amount of £15 million, and pays interest (at
Sterling Overnight Interbank Average - "SONIA") on the notional amount plus any
negative change in value amounts from such loan. The contract has been recorded
as a Derivative Asset and is treated as a trading asset that is not designated
as an Effective Hedging Instrument for accounting purposes and is therefore
marked to market through profit and loss. Under the contract, the subsidiary is
required to post an initial collateral deposit equivalent to 36.7% of the
notional amount and additional margin may be payable in the event of a decline
in the referenced term loan.
8. REAL ESTATE FUND UNITS
In July 2005, the Company purchased an €184 million interest in 1,450 Class A
real estate fund units backed by a portfolio of 394 properties in Italy. The
original term of the Lease Agreement is 9 years, automatically renewable for a
further 9 years, unless terminated by the Agenzia del Demanio, with a 12 month
prior notice. The properties have a total occupancy of 100%.
EUR '000
(unaudited)
-------------
At 1 January 2005 -
Purchase of real estate fund units 184,150
Less unit distribution (9,280)
Increase in fair value 7,122
-------------
At 30 September 2005 181,992
=============
9. INVESTMENT PROPERTIES
The table below shows the items aggregated under investment property in the
consolidated balance sheet:
EUR '000 (unaudited) Land & Leasehold Total
---------------- Buildings Property ----------
------------ -----------
At 1 January 2005 303,480 15,034 318,514
Additions 79,542 - 79,542
Disposals (459) - (459)
Increase in fair value 389 56 445
-------------- ------------- ----------
At 30 September 2005 382,952 15,090 398,042
============== ============= ==========
The Company acquired 30 retail properties in the August and September 2005 at a
cost of €79 million. These assets are located mainly in medium sized regional
towns in southern Germany and are 85% occupied by national retailers on long
term leases. The retail portfolio has a weighted average unexpired lease term of
10.9 years. The existing office portfolio consists of 96 office and banking hall
assets located throughout metropolitan and regional Germany, predominantly in
western Germany. The office portfolio was acquired from Deutsche Bank, which
remains the largest tenant, occupying approximately 52% of the portfolio by
area.
In accordance with IAS 40, property held to earn rentals and/or for capital
appreciation is categorised as investment property. After initial recognition,
investment properties are measured at fair value, with unrealised gains and
losses recognised in the Consolidated Income Statement. Fair values for the
properties acquired during the period have been assessed by the company to be in
line with the initial cost of the properties including acquisition costs, and as
such, no profit or loss arising from changes in value have been brought to
account in the current period. These values are supported by reference to
comparable transactions in the market.
Investment properties have been valued at fair value and are determined by
reference to the existing rental income and operating expenses for each property
and the current market conditions in each geographical market. These values are
supported by an independent valuation.
The value of investment property incorporates five properties which are
considered finance or operating leases. As the Company has assumed substantially
all the risks and rewards associated with these assets, these have been treated
as investment property under the IAS 17 and IAS 40. These properties have been
recognised at fair value in the same manner as freehold property. An associated
liability representing the present value of lease payments to the freehold owner
has been included in the balance sheet.
During the quarter the Company disposed of a small parcel of land in the office
portfolio to the occupying tenant realising a profit on sale before tax of €0.7
million.
10. BONDS PAYABLE
CDO Bonds
As at 30 September 2005 (unaudited)
Class Rating Current Face Carrying Weighted Weighted
Amount Amount Average Average
€'000 €'000 Cost of Maturity
Financing
(in years)
---------- -------- ----------- -------- -------- --------
A,B and C Notes AAA/AA/A 872,257 863,055 2.70 8.5
========== ======== =========== ======== ======== ========
As at 31 December 2004
Class Rating Current Face Carrying Weighted Weighted
Amount Amount Average Average
€'000 €'000 Cost of Maturity
Financing
(in years)
---------- -------- ----------- -------- -------- --------
A and B Notes AAA/AA 351,000 347,877 2.78% 7.3
========== ======== =========== ======== ======== ========
None of the CDO bonds are due to be repaid within one year of the balance sheet
date.
11. BANK BORROWINGS
The bank borrowings comprises of:
Unaudited
30 September 31 December
2005 2004
€'000 €'000
----------------------- ---------------- ---- --------------
Warehouse borrowing (Note 11.1) - 350,843
Term finance (Note 11.2) 592,067 244,006
Revolving credit facility (Note 11.3) - 14,000
Other short term financing (Note 11.4) 10,396 -
----------------------- ---------------- ---- --------------
602,463 608,849
======================= ================ ==== ==============
11.1 Warehouse Borrowings
In July 2004, through its subsidiaries CDO II and CDO III, the Company exercised
its option to purchase securities under the securities portfolio contract for an
aggregate purchase price of approximately €77.5 million. The Company financed
the purchase price through a revolving credit facility arrangement with a major
investment bank, whereby the securities purchased, along with subsequent
securities acquired, were financed and held in a custody account by the bank.
The Company used this credit facility as a means of accumulating securities
intended to be used in future securitisation transactions. The Company completed
the securitisation of CDO III on 28 April 2005 and the securitisation of CDO II
on 5 May 2005. The proceeds of the securitisation issues allowed the CDO II and
CDO III warehouse borrowings to be repaid in full during the period.
The terms of the credit facility provided for interest to be calculated with
reference to floating rate benchmarks (i.e. Euribor or Sterling Libor) plus 75
basis points.
11.2 Term Financing
Real Estate Debt
On 14 July 2005, the Company through Eurocastle CDO IV PLC entered into a €400
million 3 year extendable warehouse facility with a major UK bank in order to
build and finance a portfolio of asset backed securities and real estate related
loans. The lender uses a rating agency CDO model to determine the level of
equity contribution the Company is required to make to support the portfolio
from time to time. The facility is secured over, inter alia, the collateral
making up the portfolio. The margin payable to the lender depends on the deemed
rating levels of the portfolio as determined by the rating agency model. As at
30 September 2005, €169 million had been drawn under the facility at an interest
rate of Euribor + 0.46% p.a.
Investment Properties
On 23 December 2004, in order to finance the acquisition of investment
properties the Company's subsidiaries entered into a €246.5 million term loan
facility with a major real estate lending bank. The facility is secured in the
customary manner for German real estate lending, granting security over, inter
alia, all the real estate purchased as well as over rental streams and bank
accounts. The remaining term of the facility is 7.8 years with final maturity in
April 2013. The interest rate on the loan is Euribor + 1.18% p.a, payable
quarterly.
On 17 August 2005, in order to finance the Belfry Portfolio, the Company entered
into a non-recourse €56.2 million ten year loan facility. The facility is
secured in the customary manner for German real estate lending, granting
security over, inter alia, the real estate purchased as well as rent
receivables, bank accounts and shares in the Borrower. The loan is a fixed rate
loan at 10 year Euribor swap rate plus a margin of 1.40%, payable quarterly.
On 30 September 2005, in order to finance the Bastion Portfolio, the Company
entered into a non-recourse €26.5 million seven year loan facility. The facility
is secured in the customary manner for German real estate lending, granting
security over, inter alia, the real estate purchased as well as rent
receivables, bank accounts and shares in the Borrower. The interest rate on the
loan is Euribor + 1.20%, payable quarterly.
Real Estate Fund Units
On 22 July 2005, the Company entered into a non-recourse 13 year loan facility
to finance its acquisition of 1,450 Class A Units in Fondo Immobili Pubblici.
The facility is secured over, inter alia, the 1,450 Class A Units, an assignment
of receivables under the units, a pledge over bank accounts and over shares in
the Borrower. The interest rate on the loan is Euribor + 1.95%, payable
semi-annually. On 21 October 2005, the Company acquired a further 50 Class A
Units through the same facility.
11.3 Revolving Credit Facility
In December 2004, the Company entered into a revolving €35 million credit
facility with Deutsche Bank as a means of securing access to temporary working
capital. The facility is secured by receivables flowing from CDO I, CDO II, CDO
III and EFL and with security assignments of the Company's rights under its
management agreement with Fortress Investment Group LLC. The facility contains a
number of financial covenants including a maximum leverage ratio and a minimum
interest cover ratio. The interest rate on drawn amounts is Euribor + 2.5% p.a.,
while on undrawn amounts it is 0.5% p.a. The facility was increased to €50
million on 26 May 2005.
11.4 Other Short Term Financing
In May 2005, in order to finance the participation in a loan made to SC Karanis
in connection with the Coeur Defense development in Paris, the Company entered
into a full recourse €11.3 million one year loan facility. The facility is
backed by a security assignment over the financed asset. It also contains an
obligation to ensure that loan to value remains below 75%. The loan bears a rate
of Euribor + 1.85%.
12. REPURCHASE AGREEMENTS
In 2004, the Company's consolidated subsidiary EFL entered into a master
repurchase agreement with certain major investment banks to finance the purchase
of available-for-sale securities. The obligations under those agreements are
guaranteed by the Company. The terms of the repurchase agreements provide for
interest to be calculated with reference to floating rate benchmarks (i.e.
Euribor or Sterling Libor) which reset or roll monthly or quarterly, with the
corresponding security coupon payment dates, plus an applicable spread.
The Company's carrying amount and weighted average financing cost of these
repurchase agreements was approximately €84.8 million and 2.60%, respectively at
30 September 2005.
13. TRADE AND OTHER PAYABLES
Unaudited 31 December
2004
30 September
2005
€'000 €'000
------------------------ ----------------- -------------
Security deposit 5,086 5,000
Unsettled security purchases 41,435 254,051
Interest payable 3,900 2,283
Due to affiliates - Manager 2,814 237
Derivative liabilities 5,976 -
Finance & operating lease payable 2,886 2,925
Accrued expenses & other payables 8,240 2,391
------------------------ ----------------- -------------
70,337 266,887
======================== ================= =============
14. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net profit (loss) available
to ordinary shareholders by the weighted average number of shares of ordinary
stock outstanding during the period.
Diluted earnings per share is calculated by dividing net profit (loss) available
to ordinary shareholders by the weighted average number of ordinary shares
outstanding plus the additional dilutive effect of potential ordinary shares
during the period.
The Company's potential ordinary shares during the period were the stock options
issued under its share option plan.
There have been no other transactions involving ordinary shares or potential
ordinary shares since the reporting date and before the completion of the
financial statements.
The following is a reconciliation of the weighted average number of ordinary
shares outstanding on a diluted basis.
-------------------------------- ---------- ----------
Unaudited Unaudited
Nine Months Nine Months
Ended Ended
30 September 30 September
-------------------------------- 2005 2004
---------- ----------
Weighted average number of ordinary
shares, outstanding basic 20,443,707 14,140,801
Dilutive effect of ordinary share
options 762,316 161,242
-------------------------------- ---------- ----------
Weighted average number of ordinary
shares outstanding, diluted 21,206,023 14,302,043
================================ ========== ==========
15. SHARE CAPITAL AND RESERVES
The Company was registered in Guernsey on 8 August 2003 under the provisions of
the Companies (Guernsey) Law, 1994 (as amended). On 21 October 2003, the Company
issued 118,576,700 shares at €1.00 each. Pursuant to a written resolution of the
Company dated 18 June 2004 the Shareholders resolved to receive one share for
every ten shares previously held by them. In June 2004, through its initial
public offering, the Company received subscriptions for and issued 6,600,000
ordinary shares at a price of €12 each. At the same time, the Company issued
5,000 shares to Paolo Bassi and 1,000 shares to Keith Dorrian in their capacity
as Directors of the Company. The shares issued to the Directors were non-cash
shares, and were issued with nil proceeds. In April 2005 the Company issued a
further 5,000 shares to Paolo Bassi and 1,000 to Keith Dorrian in their capacity
as Directors of the company for nil proceeds. On 29 June 2005 the Company made a
second public offering and issued 5,740,000 ordinary shares at a price of €17.25
each. After issue costs, the secondary offering raised €95 million for the
Company.
Under the Company's Articles of Association, the Directors have the authority to
affect the issuance of additional ordinary shares or to create new classes of
shares as they deem necessary.
Other Reserves
Other reserves represent the fair value of share options at the grant date,
granted to the Manager in December 2003, June 2004 and June 2005.
16. HEDGE ACCOUNTING - CASH FLOW HEDGES OF INTEREST RATE RISK
The Company's policy is to hedge its exposure to interest rates and foreign
currencies on a case-by-case basis. Hedge accounting is only applied to cash
flow hedges of interest rate risk exposures. Interest rate swaps under which the
Company pays a fixed rate and receives a floating rate have been used to hedge
the interest rate risk on floating rate long-term bank borrowing.
The gain or loss on measurement of the fair value of the interest rate swaps has
been recognised in the statement of changes in equity to the extent that the
swaps are effective.
The details of interest rate swaps entered into by the Company are as follows:
Investment Property:
Unaudited
30 September 31 December
2005 2004
€000 €000
--------------- ----------------
Nominal amount 210,000 210,000
Pay rate 3.47 % 3.47%
Receive rate 3 Month Euribor 3 Month Euribor
Remaining life 7.6 years 8.3 years
Fair value of swaps (liabilities)/assets (4,835) 713
---------------------- --------------- ----------------
Real Estate Fund Units:
Unaudited 31 December
2004
30 September
2005
€000 €000
--------------- ----------------
Nominal amount 117,813 -
Pay rate 3.45% -
Receive rate 3 Month Euribor -
Remaining life 11.3 years -
Fair value of swaps liabilities (1,141) -
---------------------- --------------- ----------------
17. SHARE OPTION PLAN
In December 2003, the Company (with the approval of the Board of Directors and
pursuant to the confidential information memorandum dated August 2003) adopted a
nonqualified share option plan (the "Company Option Plan") for officers,
Directors, employees, consultants and advisors, including the Manager. In
December 2003, for the purpose of compensating the Manager for its successful
efforts in raising capital for the Company, the Manager was granted options
representing the right to acquire 1,185,767 ordinary shares at an exercise price
of €10 per share (number of shares and exercise price adjusted for share
consolidation). The fair value of the options at the date of grant was €0.2
million and was estimated by reference to an option pricing model.
In June 2004 following the IPO, the Manager was granted an additional 660,000
options at an exercise price of €12 per share. The fair value of the additional
options at the date of grant was €0.2 million and was also estimated by
reference to an option pricing model. In June 2005 following the secondary
public offering, the Manager was granted an additional 574,000 options at an
exercise price of €17.25 per share. The fair value of the additional options at
the date of grant was €0.6 million. The Manager's options represent an amount
equal to 10% of the ordinary shares issued by the Company. The options granted
to the Manager were fully vested on the date of grant and expire ten years from
the date of issuance.
The fair value at the date of grant of options granted to the Manager has been
offset against the proceeds from issuance of ordinary shares as the grant of
options is a cost of capital.
18. DIVIDENDS PAID & DECLARED
Unaudited
Nine months
ended
30 September
2005
€000
Paid during the 9 months ended 30 September 2005: 18,652
Equity dividends on ordinary shares:
Fourth quarter dividend for 2004: €0.33 (2003: nil) 6,093
First quarter dividend for 2005: €0.33 (2004: nil) 6,095
Second quarter dividend for 2005: €0.35 (2004: nil) 6,464
-------------
18,652
Third quarter dividend declared on 20 October 2005: €0.37
(2004: nil) 8,958
This information is provided by RNS
The company news service from the London Stock Exchange
END
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