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REG-Eurocastle Inv. Ltd Interim Results - Part 2
RNS Number:7149P
Eurocastle Inv. Ltd
Part 2 : For preceding part double-click [nRNSD7149P]
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CHAIRMAN'S STATEMENT
Overview
Eurocastle Investment Limited (LSE: ECT) reported net profit after taxation for
the quarter ended 30 June 2005 of e6.8 million, or e0.35 per diluted share, as
compared to e1.6 million, or e0.13 per diluted share, for the second quarter of
2004. The Company also reported net profit after taxation for the half year
ended 30 June 2005 of e13.2 million, or e0.69 per diluted share, as compared to
e3.8 million, or e0.32 per diluted share, for the first half of 2004. Funds from
operations (or FFO), which exclude a e0.5 million increase in the fair value of
the Company's credit-leased real estate classified as investment properties in
the balance sheet, amounted to e12.7 million and e6.2 million, respectively, for
the half year and quarter ended 30 June 2005. Eurocastle generated an FFO return
on average invested common equity of 12.6% for the quarter, and 12.8% for the
half year, ended 30 June 2005. As of 30 June 2005, the Company's shareholders'
equity was e291.9 million or e12.06 per outstanding share, as compared to e196.4
million, or e10.64 per outstanding share, as of 30 June 2004.
Eurocastle's core business strategy is to invest in and manage a diverse
portfolio consisting primarily of European real estate related debt and real
estate assets. The Company's objective is to deliver stable and growing
dividends and attractive risk-adjusted returns to shareholders by optimizing the
difference between the yield on investments and the cost of financing these
investments. Since Eurocastle's IPO in June 2004, the Company's annualized
dividends to shareholders have increased by approximately 17% from e1.20 to
e1.40 per share.
Although we are starting to see some widening of credit spreads, they continue
to be at historically tight levels. In spite of this, we have continued to
accretively invest capital in real estate debt and credit-leased real estate and
are pleased with the performance of our overall investment portfolio. As asset
spreads have tightened, our debt costs have declined correspondingly; the
weighted average net spread (or the yield on our assets minus the cost of our
debt) on the real estate debt portfolio was 1.44% at 30 June 2005, compared to
1.45% at the end of December 2004. The European real estate debt markets
continue to be active and growing. In the first half of 2005, new issuances of
real estate related debt totaled e100 billion, up 27% from the comparable period
in 2004. We expect this record growth to continue to provide Eurocastle with
significant accretive investment opportunities in real estate related debt.
Given our investment pace since the half year end and our current investment
pipeline, substantially all of the equity capital that we raised in June 2005 is
invested or committed to investments.
Second Quarter 2005 Dividend
We aim to pay out substantially all of Eurocastle's earnings in the form of
quarterly dividends to shareholders. On 14 June 2005, the Board of Directors of
Eurocastle declared a dividend of e0.35 per share for the quarter ended 30 June
2005, an increase of e0.02 per share from the prior quarter. The record date for
this increased dividend was 24 June 2005 and the payment date was 15 July 2005.
Investment Activity
Real Estate Debt Portfolio
In the half year ended 30 June 2005, Eurocastle purchased approximately e205
million of real estate related securities and e24 million of real estate related
loans, with approximately e159 million in face amount of real estate securities,
other asset backed securities and real estate loans having been purchased during
the quarter ended 30 June 2005. The securities purchased during the quarter had
an average credit rating of BBB and an average credit spread above Euribor of
1.22%. Purchases of CMBS in the second quarter amounted to e108.4 million, with
an average spread of 1.40% and average rating of BBB. RMBS purchases in the
second quarter amounted to e20.6 million, with an average spread of 0.85% and
average rating of BBB. Other ABS purchases in the second quarter amounted to
e29.9 million, with an average spread of 0.86% and average rating of A.
After allowing for sales of securities and principal redemptions, the net
increase in face amount of real estate and other asset backed securities and
real estate related loans during the second quarter was e64.8 million, raising
the amount of these investments from e1,052.1 million at the last quarter end to
e1,116.9 million. We have also seen significant opportunities to invest in the
B-Note and mezzanine loan markets and have developed a robust pipeline of these
investments for the third quarter of 2005.
Credit-Leased Real Estate Portfolio
In the credit-leased real estate markets, we are continuing to build on our
successful December 2004 acquisition of 96 German properties from Deutsche Bank
AG by developing a strong investment pipeline of European credit-leased real
estate. During the quarter, we entered into negotiations to purchase up to e350
million of credit-leased real estate. On 25 July 2005, Eurocastle invested
approximately e184 million in assets backed by a portfolio of commercial
properties under long-term leases with the Italian government. Consistent with
our policy of match funding, this investment has been term financed on a fixed
rate basis.
Capital Markets
During the quarter, Eurocastle successfully completed a public offering of
5,740,000 shares resulting in gross proceeds to the Company of approximately e99
million (net proceeds e95 million) and closed two secured term financings to
match fund our real estate debt investments. Moreover, after the quarter, we
established a revolving credit facility to finance additional investments.
The term financing of the Company's first sterling-denominated portfolio of real
estate debt investments, Eurocastle CDO II, was completed on 5 May 2005.
Approximately £158 million, or 79%, of the £200 million issue was rated AAA by S
&P and Fitch respectively. The CDO has a weighted average life of approximately
ten years.
The term financing of the Company's second euro-denominated portfolio of real
estate investments, Eurocastle CDO III, was completed on 28 April 2005.
Approximately e324 million, or approximately 81%, of the e400 million issue was
rated AAA by S&P and Fitch respectively. The CDO also has a weighted average
life of approximately ten years.
On 14 July 2005, we established a e400 million three year extendable revolving
credit facility. We intend to use this facility to acquire additional real
estate debt and to refinance a significant part of the portfolio previously
financed under short-term repurchase agreements. Since 30 June 2005, our
short-term financings have been reduced by e120.6 million by using this
facility.
Investment Portfolio
Real Estate Debt Portfolio
As of 30 June 2005, Eurocastle's total real estate debt portfolio of
approximately e1.3 billion, which represents approximately 75% of the Company's
total assets, included e571.2 million of CMBS, e103.6 million of short-term
investments, e506.4 million of other asset backed securities, e47.2 million of
loans and e32.2 million of cash held pending investment in additional real
estate related debt. The real estate debt portfolio is well diversified with 92
securities and loans and an average life of approximately 3.6 years;
approximately 96% of the portfolio comprises floating-rate securities. The
portfolio is geographically diversified with direct exposures of 50% in the UK,
16% in Italy, 12% in Germany, 11% Pan European and 5% in France. The average
credit quality of the securities portfolio is BBB+ and approximately 89% of the
securities are rated investment grade. The portfolio's weighted average credit
spread was approximately 1.90% as of 30 June 2005.
Our real estate debt portfolio has continued to perform well. As of 30 June
2005, none of our securities or loans have defaulted, and there have been no
principal losses to date. We continue to seek investments that will generate
superior risk-adjusted returns with a long-term objective of capital
preservation and earnings stability in varying interest rate and credit cycles.
Credit-Leased Real Estate Portfolio
As of 30 June 2005, Eurocastle owned an approximately e319 million portfolio of
credit-leased real estate consisting of 96 German properties, or approximately
300,000 square meters of office space, which are leased primarily to Deutsche
Bank. Deutsche Bank continues to occupy most of the current space on a medium to
long-term basis. Since we acquired the portfolio in December, we have added 16
new leases, bringing the total occupancy of this portfolio to approximately 76%.
We continue to work on adding new tenants to our properties, as well as managing
the lease renewal or re-letting of space under leases that are expiring or near
expiration.
About Eurocastle
Eurocastle Investment Limited is a Euro-denominated Guernsey closed-end
investment company that invests in and manages a diverse portfolio consisting
primarily of European real estate related debt and real estate assets.
Eurocastle is managed by Fortress Investment Group LLC, a global alternative
investment and asset management firm with approximately US$15 billion of equity
capital currently under management.
Conference Call
Management will conduct a conference call on Thursday, 4 August 2005 to review
the Company's financial results for the half year and quarter ended 30 June
2005. The conference call is scheduled for 3:00 P.M. London time (10 A.M. New
York time). All interested parties are welcome to participate on the live
call. You can access the conference call by dialing +1-866-323-3742 (from
within the U.S.) or +1-706-643-0550 (from outside of the U.S.) ten minutes prior
to the scheduled start of the call; please reference "Eurocastle Half Year and
Second Quarter Earnings Call."
For those who are not available to listen to the live call, a replay will be
available until 11:59 P.M. New York time on 12 August 2005 by dialing
+1-800-642-1687 (from within the U.S.) or +1-706-645-9291 (from outside of the
U.S.); please reference access code "8170404."
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
INDEPENDENT REVIEW REPORT TO EUROCASTLE INVESTMENT LIMITED
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2005 which comprises Consolidated Income
Statements, Consolidated Balance Sheets, Consolidated Statements of Cash Flows,
Consolidated Statements of Changes in Equity and the related notes 1 to 17. We
have read the other information contained in the interim report and considered
whether it contains any apparent misstatements or material inconsistencies with
the financial information.
This report is made solely to the Company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' issued by the
United Kingdom Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company, for
our work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to interim figures should be consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1994/4
'Review of interim financial information' issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making enquiries
of group management and applying analytical procedures to the financial
information and underlying financial data, and based thereon, assessing whether
the accounting policies and presentation have been consistently applied, unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with United
Kingdom Auditing Standards and therefore provides a lower level of assurance
than an audit. Accordingly we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
Ernst & Young LLP
London
3 August 2005
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Notes Unaudited Unaudited
Half Year Half Year to
30 June 2005 30 June 2004
e'000 e'000
--------------------------------- ------ ------------- -------------
Operating income
Interest income 30,437 2,763
Rental income 12,655 -
Unrealised gain on securities
portfolio - 4,056
contract
Realised gain on disposal of
available-for-sale 1,853 -
securities
Increase in fair value of 513 -
investment properties
--------------------------------- ------ ------------- -------------
Total operating income 45,458 6,819
--------------------------------- ------ ------------- -------------
Operating expenses
Interest expense 25,495 1,808
Losses on foreign currency
contracts/currency 1,159 50
translation
Property expenses 1,202 -
Other operating expenses 3 4,100 1,175
--------------------------------- ------ ------------- -------------
Total operating expenses 31,956 3,033
--------------------------------- ------ ------------- -------------
Profit on ordinary activities
before 13,502 3,786
taxation
Taxation expense 287 -
================================== ====== ============= =============
Net profit after taxation 13,215 3,786
================================== ====== ============= =============
Earnings per ordinary share
(adjusted for share consolidation)
Basic 12 0.71 0.32
Diluted 12 0.69 0.32
Weighted average ordinary shares
outstanding
(adjusted for share consolidation)
Basic 12 18,529,515 11,930,263
Diluted 12 19,253,965 11,955,615
======================= ====== ============= =============
See notes to the consolidated interim financial statements
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Notes Unaudited 31 December 2004
30 June 2005
e'000 e'000
--------------------------------- ------ ------------- -------------
Assets
Cash and cash equivalents 87,650 10,293
Restricted cash 1,769 2,812
Asset backed securities,
available-for- 4 923,682 796,522
sale (includes cash to be
invested)
Asset backed securities pledged
under 4 289,703 467,962
repurchase agreements
Real estate related loans 5 33,170 21,938
Real estate related loans pledged
under repurchase agreements 5 14,069 -
Investment property 7 319,451 318,514
Other assets 6 12,918 9,578
--------------------------------- ------ ------------- -------------
Total assets 1,682,412 1,627,619
================================= ====== ============= =============
Equity and Liabilities
Capital and Reserves
Issued capital, no par value,
unlimited number of shares
authorised, 24,209,670 shares
issued and outstanding at 30
June 2005 13 286,814 192,309
Net unrealised gain on
available-for-sales securities 4 9,252 6,604
Hedging reserve 4,14 (6,179) 713
Accumulated profit 957 6,394
Other reserves 13 1,020 400
--------------------------------- ------ ------------- -------------
Total equity 291,864 206,420
--------------------------------- ------ ------------- -------------
Minority Interests 2 2
Liabilities
CDO bonds payable 8 789,563 347,877
Bank borrowings 9 244,004 608,849
Repurchase agreements 10 303,772 197,584
Taxation payable 287 -
Dividends payable 16 6,464 -
Trade and other payables 11 46,456 266,887
----------------------- ------ ------------- -------------
Total liabilities 1,390,546 1,421,197
----------------------- ------ ------------- -------------
Total equity and liabilities 1,682,412 1,627,619
======================= ====== ============= =============
See notes to the consolidated interim financial statements
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Unaudited
Half Year to Half Year to
30 June 2005 30 June 2004
e'000 e'000
---------------------------------------- ------------- ------------
Cash Flows From Operating Activities
Net profit before taxation 13,502 3,786
Adjustments for:
Unrealised gain on securities portfolio
contract - (4,056)
Unrealised (gain)/loss on foreign
currency contracts (76) 52
Accretion of discounts on securities (2,854) (171)
Amortisation of borrowing costs 525 -
Gain on disposal of available-for-sale
securities (1,853) -
Shares granted to Directors 27 72
Revaluation (gain) on investment properties (513) -
Net change in operating assets and liabilities:
Decrease/(Increase) in restricted cash 1,043 (1,381)
Increase in other assets (3,896) (2,616)
Increase in trade and other payables 27,441 1,690
---------------------------------------- ------------- ------------
Net cash flows used in operating activities 33,346 (2,624)
---------------------------------------- ------------- ------------
Cash Flows From Investing Activities
Securities portfolio contract deposit - (59,000)
Repayment of securities portfolio
contract deposit - 69,125
Addition to investment property (424) -
Net purchase of available-for-sale
securities/loans (308,215) (507,529)
Proceeds from sale of
available-for-sale-securities 87,317 568
---------------------------------------- ------------- ------------
Net cash flows used in investing activities (221,322) (496,836)
---------------------------------------- ------------- ------------
Cash Flows From Financing Activities
Proceeds of issuance of ordinary shares 99,015 138,488
Costs related to issuance of ordinary shares (3,998) (4,233)
Proceeds from issuance of bonds 445,943 351,000
Costs related to issuance of bonds (4,523) (3,342)
Borrowings under repurchase agreements 106,188 92,142
Repayments under warehouse borrowing facility (350,843) -
Repayment of bank borrowings (14,261) -
Dividends paid to shareholders (12,188) -
---------------------------------------- ------------- ------------
Net cash flows from financing activities 265,333 574,055
---------------------------------------- ------------- ------------
Net Increase in Cash and Cash Equivalents 77,357 74,595
Cash and Cash Equivalents, Beginning of Period 10,293 1,690
Cash and Cash Equivalents, End of Period 87,650 76,285
---------------------------------------- ------------- ------------
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Ordinary Share Other Net Hedging Accumulated Total
Shares Capital Reserves Unrealised Reserves Profit Equity
(adjusted for Gains/ (Loss)
share (Losses)
consolidation) e'000 e'000 e'000 e'000 e'000 e'000
----------------------------------------------------------------------------------------------
At 1 January
2004 (as
previously
reported) 11,857,670 59,027 - - - (98) 58,929
Effect of
adopting IFRS 2 - - 200 - - - 200
Costs related
to issuance
of shares on IPO - (200) - - - - (200)
----------------------------------------------------------------------------------------------
At 1 January
2004 (restated) 11,857,670 58,827 200 - - (98) 58,929
Second capital
call on existing
shares - 59,288 - - - - 59,288
Issuance of
ordinary
shares on IPO 6,600,000 79,200 - - - - 79,200
Effect of
adoption of
IFRS 2 - fair
value of
share options - - 200 - - - 200
Costs related
to issuance of
ordinary shares
on IPO (including
e200k relating
to adoption
of IFRS 2) - (4,433) - - - - (4,433)
Issuance of
ordinary shares
to Directors 6,000 72 - - - - 72
Net unrealised
loss on
available for
sale securities - - - (609) - - (609)
Net profit - - - - - 3,786 3,786
----------------------------------------------------------------------------------------------
At 30 June 2004
(restated)
(unaudited) 18,463,670 192,954 400 (609) - 3,688 196,433
----------------------------------------------------------------------------------------------
At 1 July
2004 (restated) 18,463,670 192,954 400 (609) - 3,688 196,433
Costs related
to issuance
of ordinary
shares on IPO - (645) - - - - (645)
Net unrealised
gain on available
for sale securities - - - 7,213 - - 7,213
Net unrealised
gain on hedge
instruments - - - - 713 - 713
----------------------------------------------------------------------------------------------
Net gains not
recognised in
the income
statement - - 400 6,604 713 - 7,717
----------------------------------------------------------------------------------------------
Net profit
for the period - - - - - 8,245 8,245
----------------------------------------------------------------------------------------------
Total income
and expense
for the year - - 400 6,604 713 12,031 19,748
----------------------------------------------------------------------------------------------
Dividends - - - - - (5,539) (5,539)
paid
----------------------------------------------------------------------------------------------
At 31 December
2004(restated) 18,463,670 192,309 400 6,604 713 6,394 206,420
----------------------------------------------------------------------------------------------
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (cont'd)
Ordinary Share Other Net Hedging Accumulated Total
Shares Capital Reserves Unrealised Reserves Profit (Loss) Equity
(adjusted for Gains/
share (Losses)
consolidation) e'000 e'000 e'000 e'000 e'000 e'000
At 1 January
2005 18,463,670 192,309 400 6,604 713 6,394 206,420
Net unrealised
gain on
available-for-
sale securities - - - 4,038 - - 4,038
Issuance of
shares - June
2005 5,740,000 99,015 99,015
Costs related
to issue of
shares - June 2005 (3,998) (3,998)
Issuance of
ordinary shares
to Directors 6,000 108 108
Realised losses
reclassified
to the income
statement - - - 2 - - 2
Realised gains
reclassified
to the income
statement - - - (1,392) - - (1,392)
Net unrealised
loss on hedge
instruments - - - - (6,892) - (6,892)
Cost related
to issue of
options on
follow on
share issue (620) 620
----------------------------------------------------------------------------------------------
Net gains not
recognised in
the income
statement - - 1,020 9,252 (6,179) - 4,093
----------------------------------------------------------------------------------------------
Net profit for
the period - - - - - 13,215 13,215
----------------------------------------------------------------------------------------------
Total income
and expense
for the period - - - 2,648 (6,892) 13,215 8,971
----------------------------------------------------------------------------------------------
Dividends paid
and declared - - - - - (18,652) (18,652)
----------------------------------------------------------------------------------------------
At 30 June
2005
(unaudited) 24,209,670 286,814 1,020 9,252 (6,179) 957 291,864
==============================================================================================
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. 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 e1 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 e12.00 per share,
for net proceeds of e74.3 million. In June 2005 the Company completed a
secondary public offering issuing 5,740,000 ordinary shares at a price of e17.25
per share, for net proceeds of e95.0 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 e289.7 million (31 December
2004: e468.0 million) and real estate loans of e14 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 half year ended 30
June 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 June 2005, the Company's subsidiaries consisted of Eurocastle Funding
Limited ("EFL"), Eurocastle CDO I PLC ("CDO I"), Eurocastle CDO II PLC ("CDO
II") and Eurocastle CDO III PLC ("CDO III"), 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 and CDO III as it
retains control over these entities and retains the residual risks of ownership
of these entities.
Eurocastle acquired its 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.
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 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 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 affects 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.
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 and CDO III 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 six months ended 30 June 2005 relates to these
subsidiaries.
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
Half Year to Half Year to
30 June 2005 30 June 2004
e'000 e'000
------------------- --------------
Professional fees 795 397
Management fees 1,449 641
Incentive fees 1,456 -
Other 400 137
------------------- --------------
4,100 1,175
=================== ==============
4. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the Company's available-for-sale securities at 30
June 2005.
Gross Unrealised Weighted Average
----------------- ------ ------- ------ -------
Current Amortised Gains Losses Carrying S&P Coupon Yield Maturity
Face Cost Value Rating (Years)
Amount Basis
------- -------- ------ ------ ------- ------ ------- ------ -------
e'000 e'000 e'000 e'000 e'000
Portfolio I
CMBS 159,288 159,197 2,002 (62) 161,137 BBB 3.96% 4.00% 3.31
Other ABS 231,583 231,761 3,492 (91) 235,162 A- 4.04% 4.04% 3.45
------- -------- ------ ------ ------- ------ ------- ------ -------
390,871 390,958 5,494 (153) 396,299 BBB+ 4.01% 4.02%
------- -------- ------ ------ ------- ------ ------- ------ -------
Portfolio II
CMBS 136,254 135,687 847 (107) 136,427 BBB 3.46% 3.51% 5.10
Other ABS 119,727 120,316 684 (324) 120,676 BBB 4.03% 3.94% 4.36
------- -------- ------ ------ ------- ------ ------- ------ -------
255,981 256,003 1,531 (431) 257,103 BBB 3.73% 3.71% 4.75
------- -------- ------ ------ ------- ------ ------- ------ -------
Portfolio III
CMBS 116,563 116,782 1,199 (136) 117,845 BBB- 4.31% 4.33% 4.24
Other ABS 106,547 105,894 1,754 (241) 107,407 BBB 4.08% 4.37% 2.94
------- -------- ------ ------ ------- ------ ------- ------ -------
223,110 222,676 2,953 (377) 225,252 BBB 4.20% 4.34% 3.62
------- -------- ------ ------ ------- ------ ------- ------ -------
------- -------- ------ ------ ------- ------ ------- ------ -------
Total
Portfolio 869,962 869,637 9,978 (961) 878,654 BBB 3.98% 4.01% 3.85
------- -------- ------ ------ ------- ------ ------- ------ -------
Other Securities
CMBS 156,460 155,538 429 (249) 155,718 BBB+ 3.47% 3.55% 2.36
Other ABS 42,993 43,140 155 (100) 43,195 A+ 3.18% 3.12% 3.71
------- -------- ------ ------ ------- ------ ------- ------ -------
199,453 198,678 584 (349) 198,913 A- 3.41% 3.46% 2.65
------- -------- ------ ------ ------- ------ ------- ------ -------
------- -------- ------ ------ ------- ------ ------- ------ -------
1,069,415 1,068,315 10,562 (1,310) 1,077,567 BBB+ 3.87% 3.91% 3.63
------- -------- ------ ------ ------- ------ ------- ------ -------
Short-Term
Investments
Certificate
of deposit 103,600 103,600 - - 103,600 A-1+ n/a 1.97% 0.1
------- -------- ------ ------ -------
Total 1,173,015 1,171,915 10,562 (1,310) 1,181,167
------- -------- ------ ------ -------
Restricted Cash 32,218
-------
Total Asset Backed Securities
(including cash to be
invested) (unaudited) 1,213,385
-------
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 8).
Asset backed securities, available for sale at fair value of e289.7 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:
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