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3rd Quarter Results
Eurocastle Investment Limited
19 October 2004
EUROCASTLE INVESTMENT LIMITED
Financial Report for the three months ended 30 September 2004
Third Quarter Highlights
•Net earnings of €3.2 million, or €0.17 per share.
•Cumulative distributable income of €0.37 per share.
•Declared first quarterly dividend of €0.30 per share, payable on 5
November at an annualized dividend rate of €1.20 per share.
•Total assets increased 36% from €638.5 million to €869.0 million during
the quarter.
•Established warehouse borrowing lines with an investment bank for
acquiring our second and third asset backed securities portfolios.
--------------------------------------------------------------------------------
Selected Financial Data Three Months Nine Months
(amounts in €'000, except share data and Ended Ended
supplemental data) 30 September 30 September
2004 2004
Operating Data
Net profit 3,183 6,970
Earnings per share 0.17 0.49
Weighted average number of shares
outstanding, diluted 18,943,733 14,302,043
As of As of
30 September 31st December
2004 2003
(Unaudited) (Audited)
Balance Sheet Data
Available for sale securities
(includes cash to be invested) 858,192 -
Comprising:
Commercial mortgage backed securities 490,122 -
Other asset backed securities 354,582 -
Restricted cash 13,488 -
Securities portfolio contract - 57,611
Cash and cash equivalents 1,619 1,690
Total assets 868,961 59,617
Debt obligations 654,027 -
Shareholders' equity 203,315 58,929
Supplemental Total Real Estate and Other ABS Securities Data as of 30 September
2004
Weighted average asset yield 4.25%
Weighted average liability cost 2.68%
Weighted average net spread 1.57%
Weighted average credit rating BBB+
Weighted average asset credit spread (above Euribor) 2.07%
Percentage investment grade 88%
Number of securities 67
Chairman's Statement
Third Quarter Review
Eurocastle Investment Limited (LSE: ECT) reported net earnings for the third
quarter ended 30 September 2004 of €3.2 million or €0.17 per share. As of 30
September 2004, the Company's stockholders' equity was €203.3 million or €11.01
per share.
Eurocastle's core business strategy is to invest in a diverse portfolio of
moderately credit sensitive European real estate securities, real estate related
assets and other European asset backed securities which we finance in a manner
designed to match the terms of our assets and liabilities. In the quarter ended
30 September 2004, Eurocastle purchased approximately €259 million of asset
backed securities.
We continue to find attractive opportunities to invest in the growing European
ABS markets. The investment pipeline for the fourth quarter is expected to be
strong, which is customary in the asset backed securities markets as originators
seek to manage their balance sheets. With our current commitments and the
expected investment pipeline, we anticipate being fully invested by year end.
Third Quarter 2004 Dividend
The board of directors of Eurocastle declared a dividend of €0.30 per share for
the quarter ended 30 September 2004. The record date for this dividend will be
29 October 2004 and the payment date will be on 5 November 2004.
Our aim is to pay out all or substantially all of Eurocastle's earnings in the
form of dividends to shareholders. Eurocastle intends to pay quarterly dividends
to shareholders.
Third Quarter Investment Activity
In the third quarter of 2004, we purchased €258.7 million in face amount of real
estate securities and other asset backed securities. The securities purchased
had an average credit rating of BBB+ and an average credit spread above Euribor
of 1.93%. Purchases of CMBS amounted to €130.1 million with an average spread of
1.77% and average rating of BBB+. Other ABS purchases amounted to €128.6 million
with an average spread of 2.09% and average rating of BBB. The net increase in
the face amount of securities during the quarter was €397.2 million which
includes securities purchased under the terms of a securities portfolio contract
with an investment bank.
Investment Portfolio
As of 30 September 2004, Eurocastle's total securities portfolio of €858.2
million included €490.1 million of commercial mortgage backed securities, €354.6
million of other asset backed securities and €13.5 million of restricted cash
held within Eurocastle CDO I pending investment in additional real estate
securities and other asset backed securities during the ramp-up period.
The securities portfolio is well diversified with 67 issues and an average life
of 3.9 years; 95% of the portfolio comprises floating-rate securities. The
portfolio is geographically diversified with direct exposures of 35% in the UK,
30% in Italy, 11% in Germany and 6% in France. The average credit quality of the
securities portfolio is BBB+, 88% of the securities are rated investment grade
and the average investment size is €9 million. The weighted average credit
spread was 2.07 % as of 30 September 2004. The weighted average credit spread
represents the yield premium on our securities over Euribor.
About Eurocastle
Eurocastle Investment Limited is an investment company that invests in and
manages a diverse portfolio consisting primarily of European real estate related
asset-backed securities. Eurocastle is managed by Fortress Investment Group LLC,
a global alternative investment and asset management firm with approximately
US$10 billion of equity capital currently under management.
Conference Call
Management will conduct a conference call on Wednesday 20 October 2004 to review
the Company's financial results for the quarter ended 30 September 2004. The
conference call is scheduled for 3:00 P.M. London time (10:00 A.M. New York
time). All interested parties are welcome to participate on the live call. You
can access the conference call by dialing US (800) 762-6067 or International
(480) 629-9567 ten minutes prior to the scheduled start of the call; please
reference 'Eurocastle Third Quarter 2004 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 29 October 2004 by dialing US (800)
475-6701 or International (320) 365-3844; please reference access code '751228.'
Summary
We are pleased with our third quarter performance and the payment of our first
dividend as a public company. We believe that reporting on a quarterly basis, as
well as our dividend policy of paying out substantially all of our earnings,
will provide transparency and discipline to our financial reporting process. We
expect to be back in the capital markets in the first quarter of 2005 as our
pipeline of investment opportunities continues to grow.
Thank you for your continued commitment and support.
Wesley R. Edens
Chairman and Chief Executive Officer
19 October 2004
INDEPENDENT REVIEW REPORT TO EUROCASTLE INVESTMENT LIMITED
Introduction
We have been instructed by the Company to review the financial information for
the three months ended 30 September 2004 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 14. 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
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 three months
ended 30 September 2004.
Ernst & Young LLP
London
19 October 2004
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Notes Unaudited Unaudited 8 August 2003
Three Months Nine Months (Formation
Ended Ended Date) to
30 September 30 September 31 December
2004 2004 2003
€'000 €'000 €'000
--------------------------------------------------------------------------------
Operating income
Interest income 9,020 11,784 50
Gain on securities
portfolio contract 2,8 84 4,140 611
Loss on foreign currency
translation (230) (280) -
--------------------------------------------------------------------------------
Total operating income 8,874 15,644 661
--------------------------------------------------------------------------------
Operating expenses
Interest expense 4,512 6,320 -
Other operating expenses 3 1,179 2,354 759
--------------------------------------------------------------------------------
Total operating expenses 5,691 8,674 759
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net profit
(loss) 3,183 6,970 (98)
================================================================================
Earnings per ordinary share
(adjusted for share
consolidation)
Basic 10 0.17 0.49 (0.01)
Diluted 10 0.17 0.49 (0.01)
Weighted average ordinary
shares outstanding
(adjusted for share
consolidation)
Basic 11 18,463,670 14,140,801 11,857,670
Diluted 11 18,943,733 14,302,043 11,857,670
================================================================================
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Notes Unaudited 31 December
30 September 2003
2004 €'000
€'000
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents 1,619 1,690
Restricted cash 2 2,273 -
Securities portfolio contract 2,8 - 57,611
Asset backed securities, available for
sale (includes cash to be invested) 2,4 858,192 -
Derivative assets 8 973 -
Other assets 5 5,904 316
--------------------------------------------------------------------------------
Total assets 868,961 59,617
================================================================================
Equity and Liabilities
Capital and Reserves
Issued capital, no par value, unlimited
number of shares authorised,
18,463,670 shares issued and
outstanding at 30 September 2004
(11,857,670 at 31 December 2003,
adjusted for share consolidation) 11 192,842 59,027
Net unrealised gain on available for
sales securities 4 3,601 -
Accumulated profit (loss) 6,872 (98)
--------------------------------------------------------------------------------
Total equity 203,315 58,929
--------------------------------------------------------------------------------
Minority Interests 2 -
Liabilities
CDO bonds payable 9 347,780 -
Repurchase agreements 6 146,683 -
Warehouse borrowings 9 159,564 -
Trade and other payables 7 11,617 688
--------------------------------------------------------------------------------
Total liabilities 665,644 688
--------------------------------------------------------------------------------
Total equity and liabilities 868,961 59,617
================================================================================
The financial statements were approved by the board of directors on 19 October
2004.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited 8 August 2003
Nine Months (Formation
Ended Date) to
30 September 31 December
2004 2003
€'000 €'000
--------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net profit (loss) 6,970 (98)
Adjustments for:
Unrealised gain on securities portfolio
contract - (611)
Unrealised gain on foreign currency
contracts (973) -
Loss on foreign currency translation 55
Accretion and amortisation (359) -
Shares granted to directors 72 -
Net change in operating assets and liablilities:
Increase in restricted cash (2,273)
Increase in other assets (5,591) (113)
Increase in trade and other payables 10,930 688
--------------------------------------------------------------------------------
Net cash flows used in operating
activities 8,831 (134)
--------------------------------------------------------------------------------
Cash Flows From Investing Activities
Securities portfolio contract deposit (59,000) (57,000)
Repayment of securities portfolio
contract deposit 119,388 -
Purchase of available for sale
securities (866,044) -
Repayment of security principal 9,106 -
--------------------------------------------------------------------------------
Net cash flows used in investing (796,550) (57,000)
activities
--------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of ordinary shares 138,488 59,288
Costs related to issuance of ordinary shares (4,745) (261)
Proceeds from issuance of bonds 351,000 -
Costs related to issuance of bonds (3,342) -
Borrowings under repurchase agreement 146,683 -
Borrowings under warehouse credit
facility 159,564 -
Repayment of deferred financing costs - (203)
--------------------------------------------------------------------------------
Net cash flows from financing
activities 787,648 58,824
--------------------------------------------------------------------------------
Net Increase/ (Decrease) in Cash and
Cash Equivalents (71) 1,690
Cash and Cash Equivalents, Beginning of
Period 1,690 -
Cash and Cash Equivalents, End of
Period 1,619 1,690
--------------------------------------------------------------------------------
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
-----------Issued Capital---------
Ordinary Shares
(adjusted for Net Unrealised Accumulated
share Amount Gains Profit (Loss) Total Equity
consolidation) €'000 €'000 €'000 €'000
-------------------------------------------------------------------------------------------------
At 8 August
2003
(Date of Formation) - - - - -
Issuance of
ordinary
shares 11,857,670 59,288 - - 59,288
Costs related
to issuance of
ordinary shares - (261) - - (261)
Net loss - - - (98) (98)
-------------------------------------------------------------------------------------------------
At 31 December
2003 11,857,670 59,027 - (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
Costs related
to issuance of
ordinary
shares on IPO - (4,745) - - (4,745)
Issuance of ordinary
shares to Directors 6,000 72 - - 72
Net unrealized gain on
available for sale
securities - - 3,601 - 3,601
Net profit - - - 6,970 6,970
------------------------------------------------------------------------------------------------
At 30 September
2004 18,463,670 192,842 3,601 6,872 203,315
================================================================================================
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands)
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. The principal activities of the Company include investing in, financing
and management of European real estate securities and other real estate related
assets and other asset backed securities. The directors consider the Company to
operate in a single business segment and one geographical segment, being Europe.
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
defined 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 €74.5 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The consolidated financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards (IFRS), which
comprise standards and interpretations approved by the International Accounting
Standards Board (IASB), and International Accounting Standards and Standing
Interpretations Committee interpretations approved by IASB's predecessor, the
International Accounting Standards Committee, that remain in effect. The
financial statements are prepared in accordance with IAS 34 'Interim Financial
Statements'. In preparing interim financial statements, the same accounting
principles and methods of computation are applied as in the financial statements
as at 31 December 2003 and for the period 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 Company commenced operations on 21 October 2003. As the Company's existence
is shorter than one year, comparative periods for the consolidated statement of
income, cash flows and statement of changes in equity are shown for the single
period 8 August to 31 December 2003.
The consolidated financial statements have been prepared on a historical cost
basis, except for the measurement at fair value of financial instruments held
for trading or available-for-sale purposes.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Consolidation
The consolidated financial statements comprise the financial statements of
Eurocastle Investment Limited and its subsidiaries drawn up to 30 September
2004.
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 out of the Company.
At 30 September 2004, the Company's subsidiaries consisted of its investment in
Eurocastle Funding Limited ('EFL'), a limited company incorporated in Ireland,
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 held by outside parties has no associated voting
rights. The Company retains control over EFL as the sole beneficial holder of
secured notes issued by EFL. The Company consolidates CDO I, CDO II and CDO III
as it retains the residual risks of ownership of these entities.
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.
Securities Portfolio Contract
The securities portfolio contract described in Note 8 qualifies as a derivative
financial instrument held for trading purposes under IASB rules. Derivative
financial instruments held for trading purposes are carried at fair value, which
includes valuation allowances for instruments for which liquid markets do not
exist. Changes in the fair value of derivative financial instruments held for
trading purposes are recorded as unrealized gains or losses in the income
statement. During the quarter ended 30 September 2004 the Company exercised its
option to purchase all of the securities held under the contract realising total
gains of €4.8 million.
Available For Sale Securities
All investments in available-for-sale securities are initially recognized at
cost, being the fair value of the consideration given and including acquisition
charges associated with the investment.
After initial recognition, investments which are classified as
available-for-sale are measured at fair value. The fair value of these
securities is estimated by obtaining counterparty quotations. Gains or losses on
available-for-sale investments are recognized as a separate component of equity
until the investment is sold, collected or otherwise disposed of, or until the
investment is determined to be impaired, at which time the cumulative gain or
loss previously reported in equity is included in income.
Securities available-for-sale which are owned directly by the consolidated
special purpose vehicles as shown separately in Note 4.
Deferred Financing Costs
Deferred financing costs represent costs associated with the issuance of
financings.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest-Bearing Loans and Borrowings
All loans and borrowings, including the Company's repurchase agreements, are
initially recognized at cost, being the fair value of the consideration received
net of issue costs associated with the borrowing.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortized cost using the effective interest rate
method. Amortized cost is calculated by taking into account any issue costs, and
any discount or premium on settlement.
Minority Interests
Minority interests represent interests held by outside parties in the Company's
consolidated subsidiaries.
Revenue
Revenue is recognized 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 is recognized as the interest accrues (based on the effective
yield of the asset).
Income Tax
The Company is a Guernsey, Channel Islands limited company. No provision for
income taxes has been made. The company's subsidiaries, EFL, CDO I, CDO II and
CDO III are Irish registered companies and are structured to qualify as
securitization 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.
Foreign Currency Translation
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transactions. Monetary assets and liabilities denominated in foreign
currencies are re-measured at the rate of exchange ruling at the balance sheet
date. All differences are taken to the income statement. Non-monetary assets and
liabilities denominated in foreign currencies, if any, are retranslated at the
historical exchange rate and all differences are recognized in equity.
Forward Exchange Contracts
The Company has entered into forward exchange contracts in connection with its
foreign currency denominated investments. These contracts, which do not qualify
for special hedge accounting under IAS 39, are initially recorded at cost, being
the fair value of the consideration given. Subsequently, these contracts are
measured and carried at fair value with the resulting gain or loss recorded in
current earnings.
3. OTHER OPERATING EXPENSES
Unaudited Unaudited 8 August 2003
Three Months Nine Months (Formation)
Ended Ended Date) to
30 September 30 June 2004 31 December
2004 €'000 2003
€'000 €'000
--------------------------------------------------------------------------------
Professional fees 217 614 484
Management fees 729 1,370 257
Other 233 370 18
--------------------------------------------------------------------------------
1,179 2,354 759
================================================================================
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the Company's available-for-sale securities at 30
September 2004 which have been marked to fair value through equity pursuant to
IAS 39. Unrealized losses that are considered other than temporary are
recognized currently in income. There were no such losses incurred from
incorporation to 30 September 2004.
Gross Unrealised Weighted Average
-------------------- --------------------
Current Face Amortised Carrying S & P Maturity
Amount Cost Basis Gains Losses Value Rating Coupon Yield Yield
----------------------------------------------------------------------------------------------------------
€'000 €'000 €'000 €'000 €'000
Portfolio I
CMBS 186,945 186,682 1,137 (7) 187,812 BBB+ 4.09% 4.11% 4.14
Other ABS 204,434 202,958 1,769 (223) 204,504 BBB+ 4.17% 4.34% 4.31
----------------------------------------------------------------------------------------------------------
Subtotal-
PortfolioI 391,379 389,640 2,906 (230) 392,316 BBB+ 4.13% 4.23% 4.23
----------------------------------------------------------------------------------------------------------
Portfolio II
CMBS 64,189 63,608 152 (105) 63,655 BB+ 4.94% 4.91% 4.76
Other ABS 48.038 48,277 151 (15) 48,413 BBB 3.98% 3.92% 5.81
---------------------------------------------------------------------------------------------------------
Subtotal-
Portfolio II 112,227 111,885 303 (120) 112,068 BBB- 4.53% 4.48% 5.21
---------------------------------------------------------------------------------------------------------
Portfolio III
CMBS 88,332 88,743 270 (67) 88,946 BBB+ 4.77% 4.66% 3.55
Other ABS 81,950 80,524 941 (100) 81,365 BBB 4.50% 4.22% 3.51
--------------------------------------------------------------------------------------------------------
Subtotal-
Portfolio III 170,282 169,267 1,211 (167) 170,311 BBB 4.64% 4.45% 3.53
--------------------------------------------------------------------------------------------------------
Total Portfolios
I to III 673,888 670,792 4,420 (517) 674,695 BBB 4.33% 4.33% 4.22
========================================================================================================
Other Securities
CMBS 150,698 149,832 354 (477) 149,709 AA- 3.40% 3.62% 2.61
Other ABS 20,500 20,479 - (179) 20,300 A- 3.60% 6.56% 4.41
-------------------------------------------------------------------------------------------------------
Total other
securities 171,198 170,311 354 (656) 170,009 A+ 3.42% 3.97% 2.83
=======================================================================================================
-------------------------------------------------------------------------------------------------------
845,086 841,103 4,774 (1,173) 844,704 BBB+ 4.14% 4.25% 3.94
=======================================================================================================
CMBS - Commercial Mortgage Backed Securities
Other ABS - Other Asset Backed Securities
The Carrying Value in the table above excludes restricted cash of €13.5 million
included in Portfolio I pending its investment in additional CMBS and other ABS
during the ramp-up period.
The securities denoted Portfolio I is encumbered by the CDO I securitization
(Note 8). The securities denoted by Portfolio II and Portfolio III are
encumbered by the borrowings under the warehouse credit facilities for CDO II
and CDO III described in Note 9. Most of the securities categorized as other
above were encumbered by repurchase agreements (Note 6) as at 30 September 2004.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OTHER ASSETS
Unaudited 31 December
30 September 2003
2004 €'000
€'000
--------------------------------------------------------------------------------
Interest receivable 5,465 -
Deferred financing costs 50 203
Prepaid insurance 389 111
Other assets - 2
--------------------------------------------------------------------------------
5,904 316
================================================================================
Deferred financing costs represent costs associated with the issuance of a
collateralized debt obligation. These costs have been offset against the
proceeds of the issuance.
6. REPURCHASE AGREEMENTS
In February 2004, the Company entered into a master repurchase agreement with
certain major investment banks to finance the purchase of available-for-sale
securities. 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 resets or rolls 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 €146.7 million and 2.382%, respectively at 30 September 2004.
7. TRADE AND OTHER PAYABLES
Unaudited 31 December
30 September 2003
2004 €'000
€'000
--------------------------------------------------------------------------------
Unsettled security purchases 9,717 -
Interest payable 1,312 -
Due to affiliates 260 381
Accrued expenses 328 307
--------------------------------------------------------------------------------
11,617 688
================================================================================
8. DERIVATIVE FINANCIAL INSTRUMENTS
In November 2003, the Company entered into a securities portfolio contract with
a major investment bank (the 'Bank') whereby the Bank purchased European
commercial mortgage backed and other asset backed securities, targeted to
aggregate approximately €500 million, subject to the Company's right, but not
the obligation, to purchase such securities from the Bank. The Company had paid
a deposit to the Bank. In July 2004 the Company exercised its right to purchase
the securities. The fair value of the contract was calculated as the value of
the securities purchased by the Bank, adjusted for the cost of funding the
purchase of securities and any other applicable costs. The fair value of the
contract as at 31 December 2003 was approximately €57.6 million. The unrealized
gain on the securities portfolio contract at 31 December 2003 was approximately
€0.61 million.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the securities contract the Company was exposed to market
risk on the underlying securities as, should the intended securitization of such
assets not be consummated, the Company would be required to either purchase the
securities or pay the loss realized on the disposal up to the amount of any
deposits made by the Company under the contract, less any interest earned on the
deposits.
In connection with the Company's purchase of its available-for-sale securities,
the Company has entered into forward foreign currency exchange contracts. IAS 39
requires the Company to record any unrealized gain or loss on these contracts in
current earnings. At 30 September 2004, the net unrealized gain on these
contracts was approximately €1.0 million. The fair value of these contracts,
which has been recorded in derivative liabilities on the balance sheet, has been
calculated based on information obtained from an independent market data source.
9. Bonds and Loans Payable
CDO Bonds
The following table presents certain information regarding Eurocastle's debt
obligations of Eurocastle CDO I as of 30 September 2004 (euros in thousands):
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 351,000 347,780 2.718% 7.86
================================================================================
Warehouse Borrowings
In July 2004, through its newly created subsidiaries CDO II and CDO III, the
Company exercised its option to purchase the 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 any additional securities to be acquired, are being
financed and held in a custody account by the bank. The Company is using this
credit facility as a means of accumulating securities intended to be used in
future securitization transactions ('CDO II' and 'CDO III'). Although, the
Company currently anticipates completing CDO II and CDO III in the near term,
there is no assurance that CDO II and CDO III will be consummated or on what
terms they will be consummated.
The terms of the credit facility provide for interest to be calculated with
reference to floating rate benchmarks (i.e. Euribor or Sterling Libor) plus 75
basis points. The total amounts drawn under the facility and the related
weighted average financing cost was €159.6 million and 2.89%, respectively at 30
September 2004.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 ordinary share equivalents
during the period.
The Company's ordinary share equivalents outstanding 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.
11. SHARE CAPITAL
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. As a result, the Company's total gross
capital was approximately €197.85 million. Under the Company's Articles of
Association, the Directors have the authority to effect the issuance of
additional ordinary shares or to create new classes of shares as they deem
necessary.
The following is a reconciliation of the weighted average number of ordinary
shares outstanding on a diluted basis.
Unaudited 8 August 2003
Three Months (Formation
Ended Date) to
30 September 31 December
2004 2003
--------------------------------------------------------------------------------
Weighted average number of ordinary
shares, outstanding basic 18,463,670 11,857,670
Dilutive effect of ordinary share
options 480,063 -
--------------------------------------------------------------------------------
Weighted average number of ordinary
shares outstanding, diluted 18,943,733 11,857,670
================================================================================
12. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS
The Company entered into the Management Agreement with the Manager in August
2003, which provides for an initial term of ten years with automatic three year
extensions, subject to certain termination rights. The Management Agreement may
be terminated by the Company by payment of a termination fee, as defined in the
Management Agreement, equal to the amount of management fees earned by the
Manager during the twelve consecutive calendar months immediately preceding the
termination, upon the vote of a majority of the holders of the outstanding
ordinary shares. Pursuant to the Management Agreement, the Manager, under the
supervision of the Company's board of directors, will formulate investment
strategies, arrange for the acquisition of assets, arrange for financing,
monitor the performance of the Company's assets and provide certain advisory,
administrative and managerial services in connection with the operations of the
Company. For performing these services, the Company will pay the Manager an
annual fee of 1.5% of the gross equity of the Company, as defined in the
Management Agreement.
EUROCASTLE INVESTMENT LIMITED AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Management Agreement provides that the Company will reimburse the Manager
for various expenses incurred by the Manager or its officers, employees and
agents on the Company's behalf, including the cost of legal, accounting, tax,
auditing, administrative and other similar services rendered for the Company by
providers retained by the Manager or, if provided by the Manager's employees, in
amounts which are no greater than those which would be payable to outside
professionals or consultants engaged to perform such services pursuant to
agreements negotiated on an arms-length basis.
To provide an incentive for the Manager to enhance the value of the Company's
ordinary stock, the Manager is entitled to receive incentive compensation on a
cumulative, but not compounding, basis in an amount equal to the product of (A)
25% of the euro amount by which (1) funds from operations ('FFO') of the Company
before the incentive compensation per ordinary share, exceeds (2) an amount
equal to (a) the weighted average of the price per ordinary share in any
offerings by the Company (adjusted for any prior capital dividends or
distributions) multiplied by (b) a simple interest rate of eight percent (8%)
per annum multiplied by (B) the weighted average number of ordinary shares
outstanding during such period.
FFO is used to compute the Company's incentive compensation to the Manager. FFO,
for these purposes, represents net income (computed in accordance with
International Financial Reporting Standards), plus depreciation and amortization
on real estate property (and excluding accumulated depreciation and amortization
from the computation of gain or loss on sold real estate property), after
adjustments for unconsolidated partnerships and joint ventures (calculated to
reflect FFO on the same basis).
At 30 September 2004 and 31 December 2003, management fees and expense
reimbursements of approximately €0.3 million and €0.4 million respectively, were
due to the Manager.
13. 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). In June 2004 following the IPO, the Manager was granted an
additional 660,000 options at an exercise price of €12 per share. The Manager
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.
14. SUBSEQUENT EVENTS
On 19 October the directors declared a third quarter 2004 interim dividend of
€0.30 per share to all holders of shares on 29 October 2004, the record date.
The total dividend payable on 5 November 2004 is €5.5 million.