24th Aug 2016 07:00
Starwood European Real Estate Finance Ltd (SWEF)SWEF: Half Yearly Report 24-Aug-2016 / 07:00 GMT/BSTDissemination of a Regulatory Announcement that contains inside information,transmitted by EQS Group AG.The issuer is solely responsible for the content of this announcement. --------------------------------------------------------------------------- 24 August 2016 Starwood European Real Estate Finance Limited Interim Financial Report and Unaudited Condensed Consolidated FinancialStatements for the six month period from 1 January 2016 to 30 June 2016 Corporate Summary Principal Activities and Investment ObjectiveThe investment objective of Starwood European Real Estate Finance Limited('the Company'), together with its subsidiaries Starfin Public GP Limited('the GP'), Starfin Public LP ('the Partnership') and Starfin Lux S.à.r.l.('Luxco') (together 'the Group') is to provide its shareholders withregular dividends and an attractive total return while limiting downsiderisk, through the origination, execution, acquisition and servicing of adiversified portfolio of real estate debt investments (including debtinstruments) in the UK and the wider European Union's internal market,focusing on Northern and Southern Europe. Whilst investment opportunitiesin the secondary market are considered, the Group's main focus is tooriginate direct primary real estate debt investments. The Group seeks to limit downside risk by focusing on secured debt withboth quality collateral and contractual protection. The typical loan termis between three and seven years. The Group aims to be appropriately diversified by geography, real estatesector, loan type and counterparty. The Group pursues investments acrossthe commercial real estate debt asset class through senior loans,subordinated loans and mezzanine loans, bridge loans, selected loan-on-loanfinancings and other debt instruments. StructureThe Company was incorporated with limited liability in Guernsey under theCompanies (Guernsey) Law, 2008, as amended, on 9 November 2012 withregistered number 55836, and has been authorised by the Guernsey FinancialServices Commission ('GFSC') as a registered closed-ended investmentcompany. The Company's ordinary shares were first admitted to the premiumsegment of the UK Listing Authority's Official List and to trading on theMain Market of the London Stock Exchange as part of its initial publicoffering which completed on 17 December 2012. Further issues took place inMarch 2013, April 2013, July 2015 and September 2015. The issued capitalduring the period comprises the Company's Ordinary Shares denominated inSterling. The Company makes its investments through Starfin Lux S.à.r.l ('Luxco'), anindirect wholly-controlled subsidiary not subject to regulation inLuxembourg or elsewhere. The Company's interest in Luxco is held through aGuernsey limited partnership, Starfin Public LP of which Starfin Public GPLimited is the General Partner. The GP is wholly owned and controlled bythe Company. Starfin Carry LP ('The Special Limited Partner') is the onlyother Limited Partner of the Partnership and is majority owned by theStarwood Capital Group ('Starwood') and has no control over the GP.References to the 'Group' refer to the Company, the GP, the Partnership andLuxco. The Investment Manager is Starwood European Finance Partners Limited ('theInvestment Manager'), a company incorporated in Guernsey with registerednumber 55819 and regulated by the GFSC. The Investment Manager hasappointed Starwood Capital Europe Advisers, LLP ('the Investment Adviser'),an English limited liability partnership authorised and regulated by theFinancial Conduct Authority, to provide investment advice, pursuant to anInvestment Advisory Agreement. Chairman's Statement InvestmentAs at 30 June 2016, the Group was fully invested with investments andcommitments of £323.8 million. The Group experienced substantial loanrepayments in the first half of the year. These came to £92.1 millionincluding amortisation, in addition to £37.7 million received in the lastquarter of 2015. Despite this, the Group remained substantially fullyinvested throughout the period as origination in the first half of 2016 hasbeen strong, with total commitments to new loans of approximately £100million, compared to an average of £35 - £40 million during the same periodin the prior two years. Pipeline and Placing ProgrammeSubsequent to the period end, on 10 August 2016, the Company issued70,839,398 New Ordinary Shares at 103.05 pence per Ordinary Share pursuantto the current Placing Programme, to raise £73 million before expenses. Thenet proceeds of the Placing have been committed to finance the acquisitionby the Group of a £75 million real estate mezzanine loan secured over a UKregional portfolio of budget hotels. Further details of the new loan areprovided in the Investment Manager's report. The second half of the year has historically been stronger for the Groupwith 65-100 per cent of loan origination in previous years occurring inthis period. Considering the maturity profile of the Group's remainingloans at 30 June 2016 set out on page 8, which shows that approximately 6per cent of the invested portfolio is expected to mature within the nextyear, the Board and Investment Manager recognise the likely need to raisefurther equity in order to fund pipeline transactions in the second half ofthe year. The Company expects to release a Prospectus to renew the PlacingProgramme in the coming months. OutlookThe impact of Brexit has been widely discussed. The Board and InvestmentManager continue to monitor the unfolding situation to assess how the Groupmay be affected. Though there is good reason for caution, and forheightened scrutiny and focus on the loan book, there is also reason to beoptimistic that the Group can continue to deliver excellent returns in theUK market without incremental risk. As the rest of Europe may not be immuneto increased volatility, with impending national elections and referendumsand continued financial market fragility, the Group will remain cautious inits approach to lending but alert to the opportunities that are bound toarise in a volatile market The Company continues to target a dividend at an annualised rate of 6.5pence per Ordinary Share and has declared a dividend of 1.625 pence perOrdinary Share (6.5 pence annualised) for each of the first two quarters of2016. Going ConcernUnder the UK Corporate Governance Code and applicable regulations, theDirectors are required to satisfy themselves that it is reasonable toassume that the Group is a going concern. The Directors have undertaken a rigorous review of the Group's ability tocontinue as a going concern including reviewing the on-going cash flows andthe level of cash balances as of the reporting date as well as takingforecasts of future cash flows into consideration. After making enquiriesof the Investment Manager and the Administrator and having reassessed theprincipal risks, the Directors considered it appropriate to adopt the goingconcern basis of accounting in preparing the Interim Financial Report andUnaudited Condensed Consolidated Financial Statements. The Group will continue to update you on progress by way of the quarterlyfact sheets and investment updates when deals are signed. Investment Manager's Report Investment DeploymentAs at 30 June 2016, the Group had investments and commitments of £323.8million as follows: Sterling equivalent Sterling equivalent principal unfunded commitment (1) Balance (1)Centre Point, London £45.0m -5 Star Hotel, London £13.0m -Center Parcs Bonds, UK £9.5m -Industrial Portfolio, UK £31.8m -Hospitals, UK £25.0m -Hotel, Channel Islands £27.0m -Varde Partners mixed £35.1m -portfolio, UKMixed use development, £6.5m £8.5mSouth East UKTotal Sterling Loans £192.9m £8.5mIndustrial Portfolio, £21.4m -NetherlandsOffice, Netherlands £11.5m -W Hotel, Netherlands £19.3m £1.3mRetail & Residential £4.6m -Portfolio, IrelandResidential Portfolio, £5.0m -Cork, IrelandResidential Portfolio, £6.5m -Dublin, IrelandLogistics, Dublin, £14.4m £3.6mIrelandTotal Euro Loans £82.7m £4.9mIndustrial Portfolio, £34.8m -Denmark,Total Danish Krona Loans £34.8m -Total Portfolio £310.4m £13.4m (1) Euro and Danish Krona balances translated to sterling at 30 June 2016exchange rates. Between 31 December 2015 to 30 June 2016, the following significantinvestment activity occurred (included in the table above): Hotel, Channel Islands: On 12 February 2016 the Group advanced a £26.95million whole loan in relation to a hotel in the Channel Islands. Thisspecific hospitality submarket is demonstrating solid performance and theasset financed is the market leader. The fixed rate facility has a term of5 years and the Group expects to earn an attractive risk-adjusted return inline with its stated investment strategy. Residential Portfolio, Dublin: On 2 March 2016 the Group advanced a EUR7.9million whole loan relating to the acquisition of 44 apartments in SouthDublin. The sponsor is a highly regarded local investor and an existingborrower of the Group. The transaction represented the Group's third loansecured by rented residential units in Ireland, an attractive asset classdue to its consistent demand, stable income profile, and Ireland's growingeconomy. The floating rate facility has a term of 4 years and the Groupexpects to earn an attractive risk adjusted return in line with its statedinvestment strategy. Aldgate Tower, London: On 22 April 2016 the Group received full repaymentof £42.0 million for the Aldgate Tower, London loan as a result of the saleof the property. A number of loans in the portfolio benefit fromprepayment protection in their early years providing a level of incomeprotection should the loan repay whilst in that protected period. TheAldgate Tower loan was originated in December 2014 and the Group benefittedfrom such a provision. Salesforce Tower, London: On 7 April 2016 the Group received fullrepayment of the £9.9 million Salesforce Tower, London loan as a result ofthe refinancing of the property following its successful lease up. TheGroup had always anticipated that this loan would be repaid once thesponsor had achieved its business plan. Retail Portfolio, Finland: On 26 April 2016 the Group received fullrepayment of the loan as a result of the sale of the portfolio. This loanwas one of the first loans originated by the Group and it was due to maturethis year. Lifecare Residences, London: The Group started to receive repayments ofthe loan in April as the borrower started to sell the residentialproperties in line with its business plan. Full and final repayment wasreceived in early June. Varde Partners mixed portfolio: On 16 May 2016, the Group arranged a 3year £158.1 million floating rate facility for certain affiliated companiesof Varde Partners to refinance a portfolio of 141 retail, office andindustrial assets located throughout the UK. With 393 tenants theportfolio reflects very strong diversification in terms of tenant,geography and sector. The Group worked closely with a major investmentbank which provided the borrower with a £123 million senior loan facility,leaving the Group to advance a £35.1 million mezzanine facility on which itexpects to earn an attractive risk-adjusted return in line with its statedinvestment strategy. Mixed Use Development, South East UK: On 2 June 2016, the Group, togetherwith other Starwood affiliates, committed to a £75 million whole loan inrelation to three mixed use development projects in the south east ofEngland. In total the Group will fund a £15 million participation in thewhole loan with an initial drawdown of £6.5 million. The borrower's aim isto deliver strong mixed use schemes in the centre of high growth commuterlocations providing private residential for sale, retail, office, hotel andserviced apartments. These markets are demonstrating consistent, moderategrowth given the long term structural shortages of much needed new realestate supply. A large element of the schemes had already been presold toinstitutional investors ensuring the Group has a lower exposure on a debtper square foot basis. The floating rate facility has a term of 3 yearswith a single extension option of one year and the Group expects to earn anattractive risk-adjusted return in line with its stated investmentstrategy. Logistics, Dublin, Ireland: The Group committed to a EUR31.2 million fiveyear floating whole loan to support the acquisition of a portfolio of fullylet prime logistics assets in Dublin. Much of the portfolio is let on along term basis to a strong covenant which uses the assets as its nationalheadquarters. The loan had an initial drawdown of EUR17.6 million in Junewith a further drawdown of EUR4.4 million on 8 July 2016. Post-closing theadditional loan uses have proved to be unnecessary and the remainingcommitment will consequently not be drawn and has been cancelled. Inaddition, a prepayment of EUR7 million was received after 30 June 2016,leaving a net position remaining of EUR15 million. After 30 June 2016, the significant investment and share issuance activityoutlined below has occurred. Amortisation was also received on a number ofloans in line with expectations. Please see note 14 for furtherinformation. W Hotel, Netherlands: on 29 July 2016 the group received full repayment ofthe W Hotel Amsterdam loan as a result of the refinancing of the loanfollowing completion of the refurbishment and a period of trading. Issue of Shares: On 10 August 2016, the Company issued 70,839,398 NewOrdinary Shares pursuant to the Placing Programme, to raise £73 millionbefore expenses. The Issue Price was 103.05 pence per Ordinary Share,representing a premium of 2.7 per cent to the Net Asset Value per OrdinaryShare as at 31 July 2016 of 100.30 pence (ex-dividend). The net proceedsof the Placing were committed to be used to finance the acquisition by theGroup of a £75 million real estate mezzanine loan secured over a UKregional portfolio of budget hotels (the 'Regional Budget Hotel Portfolio,UK'). Regional Budget Hotel Portfolio, UK: On 23 August, the Group acquired themezzanine component of a package of loan facilities recently provided byinternationally recognised banks to fund the acquisition of a portfolio ofUK budget hotels. The portfolio is a homogeneous portfolio of UK regionallimited-service hotels that is geographically diversified, benefits fromstrong branding and management by an international operator and is nowowned by an experienced hotel investor. The new loan is a £75 million fiveyear floating rate loan, and the Group expects to earn an attractive risk-adjusted return in line with its stated investment strategy. As at 30 June 2016, the Net Asset Value ('NAV') was 100.92 pence perOrdinary Share and the share price was 105.75 pence. Portfolio StatisticsAs at 30 June 2016, the portfolio was invested in line with the Group'sinvestment policy and this is summarised below. Number of investments 16Percentage of currently invested 63.0%portfolio in floating rate loans (1)Invested Loan Portfolio annualised 8.2%total return (2)Weighted average portfolio LTV - to 18.4%Group first £ (3)Weighted average portfolio LTV - to 65.8%Group last £ (3)Average loan term (stated maturity at 4.4 yearsinception)Average remaining loan term 3.3 yearsNet Asset Value £307.0mAmount drawn under Revolving Credit £8.0mFacility (excluding accrued interest)Portfolio value (including accrued £315.0mincome)Cash £7.9mOther net assets/ (liabilities) -£7.9m(including hedges) (1) Calculated on loans currently drawn using the exchange rates applicablewhen the loans were funded.(2) Calculated on amounts currently outstanding, excluding undrawncommitments, and assuming all currently drawn loans are outstanding for thefull contractual term. Twelve of the loans are floating rate (partially orin whole and some with floors) and returns are based on an assumed profilefor future interbank rates but the actual rate received may be higher orlower. Calculated only on amounts funded to date and excluding committedamounts and cash un-invested. The calculation excludes the origination feepayable to the Investment Manager.(3) LTV to Group last £ means the percentage which the total loancommitment less any amortisation received to date (when aggregated with anyother indebtedness ranking alongside and/or senior to it) bears to themarket value determined by the last formal lender valuation received by thedate of publication of these Financial Statements. LTV to first Group £means the starting point of the loan to value range of the loan commitments(when aggregated with any other indebtedness ranking senior to it). For WHotel, Centre Point and the mixed use development, south east UK, thecalculation includes the total facility available and is calculated againstthe market value on completion of the project. As discussed in the Chairman's Statement, the Group experienced substantialloan repayments in the first half of the year. These came to £92.1 millionof repayments and amortisation in addition to £37.7 million received in thelast quarter of 2015. It is worth noting, however, that, notwithstanding a repayment of 42 percent of the portfolio in such a short period, the Group has managed toremain substantially fully invested throughout and has continued to be ableto pay the dividend at target levels. The Group has achieved this throughutilising the £60 million revolving credit facility efficiently and beingcautious on when to raise additional equity. Origination in the first half of 2016 has been stronger than the first halfof any previous year with total commitments of approximately £100 millionbeing made compared to an average of £35 - £40 million in the prior twoyears. The impact of this new origination is also reflected in the maturityprofile of investments as at 30 June 2016: Remaining years to Principal value of % of invested portfoliocontractual maturity* loans0 to 1 years £19.3m 6.2%1 to 2 years £51.0m 16.4%2 to 3 years £113.9m 36.7%3 to 5 years £101.2m 32.6%5 to 10 years £25.0m 8.1% *excludes any permitted extensions. Note that borrowers may elect to repayloans before contractual maturity. The Group continues to achieve good portfolio diversification. The Board considers that the Group is engaged in a single segment ofbusiness, being the provision of a diversified portfolio of real estatebacked loans. The analysis presented in this report is presented todemonstrate the level of diversification achieved within that singlesegment. The Board does not believe that the Group's investmentsconstitute separate operating segments. Market Summary and Investment OutlookBrexit and the macro implications of Brexit have been thoroughly discussedthroughout all media forms and so we will look to avoid repetition here. The Group continues to monitor the unfolding situation to assess theimpacts upon it. Prior to Brexit, two annual information updates occurred, being the SavillsUK 'Financing Property' briefing and the publication of the previous year'sDe Montfort University UK lending study. The tone of both reviews of the UKlending and real estate market was a healthy but not overheated one albeitthat they were issued prior to the EU referendum. Savills nicknamed 2015 asthe 'Goldilocks Period': not too hot nor too cold. Given the impact of oiland China shocks, 2016 was already reflecting slight margin increases andLoan to Value ('LTV's) softening. Key points from the Savills and DeMontfort reports were as follows: - 2007 was another life - 64 per cent of lenders in 2007 thought that 80 per cent LTV was 'no risk' and senior bank LTVs were typically 70-80 percent LTV compared with 2016 where they were more typically 55-65 per cent. - The all-in cost of finance remains at generational lows. Although margins are consistently higher than previous cycles, LIBOR has never been this low. 5 year swap rates were 12.5 per cent in Q4 1989, 5.4 per cent in April 1999 and 1 per cent in May 2016. - With the UK All Property Equivalent Yield at just under 7 per cent, the spread with the cost of money remains extremely wide. - 2015 UK lending was £53.7 billion, being a 19 per cent increase from 2014. This is the first time since 2007 net lending was close to positive but still not quite. - Estimated total outstanding UK real estate finance of £211.6 billion at 2015 year-end was held 45 per cent by UK banks/building societies, 16 per cent by international banks, 15 per cent by insurance companies, 11 per cent by German banks, 6 per cent by North American lenders and 7 per cent by alternative lenders. - In 2015, the average maximum LTV levels for mezzanine decreased from 84 per cent to 80 per cent - this is still relatively high compared to the Group's own typical advance rates. - The limitations on UK banks are considerable today. These range from regulatory capital treatment issues to ring fencing which has led to a material reduction in their market share. In 2007, UK banks accounted for perhaps 60 per cent plus of new lending whereas now it is circa 30 per cent. - Alternative lenders (of which the Group is one) are seen favourably by borrowers who identify their speed, skills and flexibility as key attributes. - Key bubble signs not evident - with limited speculative development finance, low lending complexity, thoughtful lending policies, strong due diligence and no extravagant broker parties. Brexit subsequently followed the issuance of the Savills and De Montfortreports and it is simply too early to tell the full impact on the marketsin which the Group is active but the above suggests that the credit marketsare, on an overall basis, reasonably well placed to face any futurevolatility and uncertainty. The media frequently identify the property sector for analysis of some kindfollowing Brexit and seeks to use the data to identify future trends.Property data tends to lag the rest of the business world and it willprobably be some months before we can extract meaningful analysis,especially as the summer has definitely descended early on the propertyworld given recent events. With the uncertainty of the future post-Brexit,it is not helpful to add further macroeconomic views but we can imaginethere will be a modest recessionary environment until further clarity as tohow the UK will leave the EU is provided. The UK's short to long term fatewill then divide depending on whether the so called soft (single marketaccess) or hard (no single market access) Brexit occurs. In such a shortterm environment, the Group could foresee investment and leasing softeningand a 10-15 per cent value decline has been talked about especially in theoffice and perhaps retail sectors. Such a value decline has been reflectedand magnified (by gearing) in the recent UK listed property stockperformance and the very public open ended fund 'gating' as a result of aninsufficient discount penalty that led to a liquidity run. It is also worth highlighting a specific aspect of property lending beingthe Loan to Value covenant clause. LTV clauses exist as early warningdevices to allow the lender(s) to react to a changing situation withsufficient time and value headroom by triggering protections if theproperty value declines to a specified level. Today there is often a twotier covenant structure in place, namely that a very modest value declinewill lead to a loan cash sweep (whereby available cash flow is applied todebt repayment or trapped for a period of time to enhance collateral) andthen following a further modest decline an LTV default that allows for theloan to be accelerated for repayment. In the recent market, such covenantshave typically been set only 5-10 per cent away from the initial startingpoint. In post Brexit UK, one could imagine that value declines could wellimpact the LTV covenants of loans in the market. In itself it is unlikelythat this will lead to material impairments or losses, however what itmight engender is greater credit committee oversight and increased newlending caution from mainstream capital providers. This situation alsohighlights the obvious but nevertheless vital distinction between theprobability of default and probability of loss. Good property lending oftenseeks balanced but nevertheless rapid default in volatile markets. Thesetriggers may well not imply any actual impairment or loss but, rather,provide the lender(s) with stronger levels of control going forwards whenthe situation arises. Whilst there is of course good reason for caution, for heightened scrutinyand focus on the existing loan book, there is also reason to be optimisticthat the Group can look to again deliver excellent returns for moderaterisk in the UK market. The rest of Europe may not be immune to heightenedvolatility given the number of national elections and referendums in thecoming months and the ongoing financial market fragility. This argues thatenhanced lending vigilance should also be applied across the continentwhilst reiterating the optimistic sentiment that good lending opportunitiesshould arise. With the vast majority of near term loan repayments havingoccurred in recent months the Group is well placed to further grow with aloan maturity profile now well spread out over the coming 5 years. Principal Risks for the Remaining Six Months of the year to 31 December2016 The principal risks assessed by the Board relating to the Group weredisclosed in the Annual Report and Audited Consolidated FinancialStatements for the period to 31 December 2015. The Board and InvestmentManager have reassessed the principal risks and do not consider these risksto have changed. Therefore, the following are the principal risks assessedby the Board and the Investment Manager as relating to the Group for theremaining six months of the year to 31 December 2016. - The Group's targeted returns are based on estimates and assumptions that are inherently subject to significant business and economic uncertainties and contingencies, and the actual rate of return may be materially lower than the targeted returns. In addition, the pace of investment has in the past and may in the future be slower than expected, or principal may be repaid earlier than anticipated, causing the return on affected investments to be less than expected. In addition, if repayments are not promptly re-invested this may result in cash drag which may lower portfolio returns. As a result, the level of dividends to be paid by the Company may fluctuate and there is no guarantee that any such dividends will be paid. As a consequence, the shares may trade at a discount to NAV per share and Shareholders may be unable to realise their investments through the secondary market at NAV per share; - The Group is subject to the risk that the loan income and income from the cash and cash equivalents will fluctuate due to movements in interbank rates; - The Group's investments are comprised principally of debt investments in the UK, and the wider European Union's internal market and it is therefore exposed to economic movements and changes in these markets. Any deterioration in the global, UK or European economy could have a significant adverse effect on the activities of the Group and may result in significant loan defaults or impairments. In the event of a default the Group is generally entitled to enforce security, but the process may be expensive and lengthy and the outcome is dependent on sufficient capital being available to meet the borrower's obligations. Some of the investments made would rank behind senior debt tranches for repayment in the event that a borrower defaults, with the consequence of greater risk of partial or total loss. In addition, repayment of loans could be subject to the available of refinancing options, including the availability of senior and subordinated debt and is also subject to the underlying value of the real estate collateral at the date of maturity; and - The Group is subject to the risk that a borrower could be unable or unwilling to meet a commitment that it has entered into with the Group as outlined above. As a consequence of this, the Group could breach the covenants of its revolving credit facility, and fall into default. Related Party TransactionsRelated party disclosures are given in note 13 to the Unaudited CondensedConsolidated Financial Statements. Forward Looking StatementsCertain statements in this interim report are forward-looking. Althoughthe Group believes that the expectations reflected in these forward-lookingstatements are reasonable, it can give no assurance that these expectationswill prove to have been correct. Because these statements involve risksand uncertainties, actual results may differ materially from thoseexpressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statementswhether as a result of new information, future events or otherwise. Board of Directors Stephen Smith (non-executive Chairman - Chairman of the Board)Stephen is currently a director of Gatehouse Bank Plc (appointed in June2013) and a director of Tritax Big Box REIT Plc, which floated on theLondon Stock Exchange in December 2013. Previously, he was the ChiefInvestment Officer of British Land Company Plc, the FTSE 100 real estateinvestment trust from January 2010 to March 2013 with responsibility forthe group's property and investment strategy, leaving at the end of June2013. He was formerly Global Head of Asset Management and Transactions atAXA Real Estate Investment Managers, where he was responsible for the assetmanagement of a portfolio of more than EUR40 billion on behalf of lifefunds, listed property vehicles, unit linked and closed end funds. Priorto joining AXA in 1999 he was Managing Director at Sun Life Properties forfive years. Stephen is a UK resident. Jonathan Bridel (non-executive Director - Management Engagement CommitteeChairman)Jonathan is currently a non-executive Chairman or director of listed andunlisted companies comprised mainly of investment funds and investmentmanagers. These include The Renewables Infrastructure Group Limited (FTSE250), Alcentra European Floating Rate Income Fund Limited, Sequoia EconomicInfrastructure Income Fund Limited and Funding Circle SME Income FundLimited which are listed on the main market of the London Stock Exchangeand DP Aircraft I Limited and Fair Oaks Income Fund Limited. He waspreviously Managing Director of Royal Bank of Canada's investment businessin the Channel Islands. Prior to this, after working at Price WaterhouseCorporate Finance in London, Jonathan served in senior management positionsin the British Isles and Australia in banking, specialising in credit andin private businesses as Chief Financial Officer. Graduating from theUniversity of Durham with a degree of Master of Business Administration in1988, Jonathan also holds qualifications from the Institute of CharteredAccountants in England and Wales where he is a Fellow, the CharteredInstitute of Marketing and the Australian Institute of Company Directors.Jonathan is a Chartered Marketer and a member of the Chartered Institute ofMarketing, the Institute of Directors and a Chartered Fellow of theChartered Institute for Securities and Investment. Jonathan is a residentof Guernsey. John Whittle (non-executive Director - Audit Committee Chairman)John is a Fellow of the Institute of Chartered Accountants in England andWales and holds the Institute of Directors Diploma in Company Direction.He is a non-executive director of International Public Partnerships Limited(FTSE 250), India Capital Growth Fund Limited, Globalworth Real EstateInvestments Limited and Aberdeen Frontier Markets Investment CompanyLimited (all listed on AIM), Toro Ltd (listed on SFM), and also acts asnon-executive director to several other Guernsey investment funds. He waspreviously Finance Director of Close Fund Services, a large independentfund administrator, where he successfully initiated a restructuring ofclient financial reporting services and was a key member of the businesstransition team. Prior to moving to Guernsey he was at Price Waterhouse inLondon before embarking on a career in business services, predominantlytelecoms. He co-led the business turnaround of Talkland International (nowVodafone Retail) and was directly responsible for the strategic shift intoretail distribution and its subsequent implementation; he subsequentlyworked on the £20million private equity acquisition of Ora Telecom. Johnis also a resident of Guernsey. Statement of Directors' Responsibilities To the best of their knowledge, the Directors of Starwood European RealEstate Finance Limited confirm that: 1. The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting' as adopted by the European Union; and 2. The Interim Financial Report, comprising of the Chairman's Statement and the Investment Manager's Report, meets the requirements of an interim management report and includes a fair review of information required by DTR 4.2.4 R: (i) DTR 4.2.7R of the UK Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months and their impact on the Unaudited Condensed Consolidated Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and (ii) DTR 4.2.8R of the UK Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months and that have materially affected the Financial Position or performance of the Company during that period, and any material changes in the related party transactions disclosed in the last Annual Report. Independent Review Report to Starwood European Real Estate Finance Limited IntroductionWe have been engaged by Starwood European Real Estate Finance Limited(''the Company'') to review the Unaudited Condensed Consolidated FinancialStatements in the Interim Financial Report for the half year ended 30 June2016, which comprises the Unaudited Condensed Consolidated Statement ofComprehensive Income, the Unaudited Condensed Consolidated Statement ofFinancial Position, the Unaudited Condensed Consolidated Statement ofChanges in Equity, the Unaudited Condensed Consolidated Statement of CashFlows and related notes. We have read the other information contained inthe Interim Financial Report and considered whether it contains anyapparent misstatements or material inconsistencies with the information inthe Unaudited Condensed Consolidated Financial Statements. Directors' ResponsibilitiesThe Interim Financial Report is the responsibility of, and has beenapproved by, the Directors. The Directors are responsible for preparing theInterim Financial Report in accordance with the Disclosure and TransparencyRules of the United Kingdom's Financial Conduct Authority. As disclosed in note 2, the Annual Financial Statements of the Company areprepared in accordance with International Financial Reporting Standards asadopted by the European Union. The Unaudited Condensed ConsolidatedFinancial Statements included in this Interim Financial Report have beenprepared in accordance with International Accounting Standard 34, 'InterimFinancial Reporting' as adopted by the European Union. Our ResponsibilityOur responsibility is to express to the Company a conclusion on theUnaudited Condensed Consolidated Financial Statements in the InterimFinancial Report based on our review. This report, including theconclusion, has been prepared for and only for the Company for the purposeof the Disclosure and Transparency Rules of the United Kingdom's FinancialConduct Authority and for no other purpose. We do not, in producing thisreport, accept or assume responsibility for any other purpose or to anyother person to whom this report is shown or into whose hands it may comesave where expressly agreed by our prior consent in writing. Scope of ReviewWe conducted our review in accordance with International Standard on ReviewEngagements 2410, 'Review of Interim Financial Information Performed by theIndependent Auditor of the Entity' issued by the International Auditing andAssurance Standards Board. A review of interim financial informationconsists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conductedin accordance with International Standards on Auditing and consequentlydoes not enable us to obtain assurance that we would become aware of allsignificant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. ConclusionBased on our review, nothing has come to our attention that causes us tobelieve that the UnauditedCondensed Consolidated Financial Statements in the Interim Financial Reportfor the half year ended 30 June 2016 are not prepared, in all materialrespects, in accordance with International Accounting Standard 34,''Interim Financial Reporting'' as adopted by the European Union, and theDisclosure and Transparency Rules of the United Kingdom's Financial ConductAuthority. PricewaterhouseCoopers CI LLP Publication of Interim Financial ReportThe maintenance and integrity of the Starwood European Real Estate FinanceLimited website is theresponsibility of the Directors; the work carried out by the Auditors doesnot involve consideration of these matters and, accordingly, the Auditorsaccept no responsibility for any changes that may have occurred to theInterim Financial Report and Unaudited Condensed Consolidated FinancialStatements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination ofFinancial Statements may differ from legislation in other jurisdictions. Unaudited Condensed Consolidated Statement of Comprehensive Income for theperiod ended 30 June 2016 1 January 2016 1 January 2015 1 January 2015 to to to 30 June 2016 30 June 2015 31 December 2015 Notes £ £ £ (unaudited) (unaudited) (audited) IncomeIncome from loans 6 14,055,008 9,793,289 22,716,523advancedIncome from cash 12,948 22,811 34,262and cashequivalentsOther income 577 - 9,307 Total income from 14,068,533 9,816,100 22,760,092investments ExpensesInvestment 13 1,140,459 881,192 1,976,640management feesDirectors' fees 13 62,756 58,261 138,841and travelexpensesAdministration 136,759 121,090 249,599feesAuditors' fees 68,644 80,507 135,882Broker's fees and 950 50,000 47,802expensesLegal and 96,028 60,471 151,158professional feesNet foreign 204,691 349,388 443,435exchange lossesRevolving credit 132,950 159,963 275,741facilitycommitment feesRevolving credit 114,005 115,405 230,662facilityamortisation offeesRevolving credit 290,533 3,298 226,964facility interestOther expenses 49,036 42,007 125,844 Total operating 2,296,811 1,921,582 4,002,568expensesOperating profit 11,771,722 7,894,518 18,757,524for the period /year before taxTaxation 12 2,661 1,856 2,439Operating profit 11,769,061 7,892,662 18,755,085for the period /year and totalcomprehensiveincome Weighted average 3 304,180,000 238,100,000 259,548,110number of sharesin issueBasic and diluted 3 3.87 3.31 7.23earnings perOrdinary Share(pence) Unaudited Condensed Consolidated Statement of Financial Position as at 30June 2016 As at As at As at 30 June 2016 30 June 2015 31 December 2015 Notes £ £ £ (unaudited) (unaudited) (audited ) AssetsCash and 4 7,932,190 2,604,326 520,558cashequivalentsOther 17,794 231,685 95,684receivablesandprepaymentsRevolving 5 98,344 327,605 212,348creditfacilitycapitalisedcostsLoans 6 315,010,353 232,143,801 307,694,advanced 827Financial 7 - 11,395,469 5,918,11assets at 5fair valuethroughprofit orloss Total assets 323,058,681 246,702,886 314,441, 532 LiabilitiesFinancial 7 7,183,140 - -liabilitiesat fairvaluethroughprofit orlossRevolving 8 8,039,241 8,003,298 8,162,40credit 5facilityTrade and 865,270 736,960 806,083otherpayablesTotal 16,087,651 8,740,258 8,968,48liabilities 8Net assets 306,971,030 237,962,628 305,473, 044 Capital andreservesShare 300,392,205 233,843,162 300,397,capital 205Retained 6,578,825 4,119,466 5,075,83earnings 9 Total equity 306,971,030 237,962,628 305,473, 044 Number of 304,180,000 238,100,000 304,180,Ordinary 000Shares inissue Net asset 100.92 99.94 100.43value perOrdinaryShare(pence) These Unaudited Condensed Consolidated Financial Statements were approvedand authorised for issue by the Board of Directors on 23 August 2016. The accompanying notes form an integral part of these Unaudited CondensedConsolidated Financial Statements. Unaudited Condensed Consolidated Statement of Changes in Equity for theperiod ended 30 June 2016Period ended Share capital Retained Total equity30 June 2016 earnings £ £ £ (unaudited) (unaudited) (unaudited) Balance at 1 300,397,205 5,075,839 305,473,044January 2016Issue of - - -sharecapitalCost of (5,000) - (5,000)issuesDividends - (10,266,075) (10,266,075)paidOperating profit and - 11,769,061 11,769,061total comprehensiveincome Balance at 300,392,205 6,578,825 306,971,03030 June 2016 Period ended Share capital Retained Total equity30 June 2015 earnings £ £ £ (unaudited) (unaudited) (unaudited) Balance at 1 233,843,162 4,441,254 238,284,416January 2015Dividends - (8,214,450) (8,214,450)paidOperating profit and - 7,892,662 7,892,662total comprehensiveincome Balance at 233,843,162 4,119,466 237,962,62830 June 2015 Year ended Share capital Retained Total equity31 December earnings2015 £ £ £ (audited) (audited) (audited)Balance at 1 233,843,162 4,441,254 238,284,416January 2015Issue of 67,971,650 - 67,971,650sharecapitalCost of (1,417,607) - (1,417,607)issuesDividends - (18,120,500) (18,120,500)paidOperating profit and - 18,755,085 18,755,085total comprehensiveincome -Balance at 300,397,205 5,075,839 305,473,04431 December2015 Unaudited Condensed Consolidated Statement of Cash Flows for the periodended 30 June 2015 1 January 2016 1 January 2015 1 January 2015 to to to 30 June 2016 30 June 2015 31 December 2015 £ £ £ (unaudited) (unaudited) (audited) Operatingactivities:Operating profit 11,769,061 7,892,662 18,755,085for the period /year and totalcomprehensiveincome AdjustmentsNet interest (14,055,008) (9,793,289) (22,716,523)incomeInterest income on (12,948) (22,811) (34,262)cash and cashequivalentsDecrease / 77,890 20,824 (63,722)(increase) inprepayments andreceivables(Decrease) / (61,027) (44,983) 28,869increase in tradeand other payablesNet loss / (gain) 13,101,255 (6,371,885) (894,531)on financialinstruments heldat fair valuethrough profit andlossNet foreign (13,248,630) 6,931,247 3,239,456exchange(losses) / gainRevolving credit 290,533 3,298 226,964facility interestRevolving credit 114,005 115,405 230,662facility amortisedRevolving credit 132,950 - 275,741facilitycommitment feesOther non-cash - (220,547) -items (1,891,919) (1,490,079) (952,261) Loans advanced 1 (88,743,585) (37,557,709) (145,454,076)Loans repaid 92,105,742 21,939,143 63,499,033Origination fees (697,828) (677,579) (1,372,444)paidOrigination (30,057) - (97,194)expenses paidInterest, 17,062,139 7,833,961 16,022,619commitment andexit fee incomefrom loansadvancedSyndication - (133,200) (133,200)expenses paid Net cash inflow 17,804,492 (10,085,463) (68,487,523)from operatingactivities Cash flows frominvestingactivitiesInterest income 12,948 22,811 34,262from cash and cashequivalents Net cash inflow 12,948 22,811 34,262from investingactivities Cash flows fromfinancingactivitiesNet share issue - - 66,554,043proceeds received2Cost of share (5,000) - -issuesRevolving credit (116,742) 8,000,000 8,155,816facility utilisedRevolving credit (296,955) - (220,375)facility interestpaidRevolving credit (129,075) - (280,470)facilitycommitment feespaidDividends paid (10,266,075) (8,214,450) (18,120,500) Net cash outflow (10,813,847) (214,450) 56,088,514from financingactivities Net decrease in 7,003,593 (10,277,102) (12,364,747)cash and cashequivalentsCash and cash 520,558 13,172,978 13,172,978equivalents at thestart of theperiod / yearNet foreign 408,039 (291,550) (287,673)exchange gain /(loss) on cash andcash equivalents Cash and cash 7,932,190 2,604,326 520,558equivalents at theend of theperiod / year 1 Net of arrangement fees of £ 1,503,322 (30 June 2015: £ 654,984; 31 December 2015: £ 1,479,139) withheld. 2 Net of share issue cost of £nil (30 June 2015 £nil; 31 December 2015: £1,057,802) withheld. Notes to the Unaudited Condensed Consolidated Financial Statements for theperiod ended 30 June 2016 1. General Information The Company is a close-ended investment company incorporatedin Guernsey. The Unaudited Condensed Consolidated FinancialStatements comprise the Financial Statements of the Company, the GP, thePartnership and the Luxco (together ''the Group'') as at 30 June 2016. 2. Basis of Preparation and Principal Accounting Policies The Company has prepared these Unaudited Condensed Consolidated FinancialStatements on a going concern basis in accordance with the Disclosure andTransparency Rules of the United Kingdom Financial Conduct Authority andIAS 34 Interim Financial Reporting as adopted by the European Union. Thisinterim Financial Report does not comprise statutory Financial Statementswithin the meaning of the Companies (Guernsey) Law, 2008, and should beread in conjunction with the Consolidated Financial Statements of theGroup as at and for the year ended 31 December 2015, which have beenprepared in accordance with International Financial ReportingStandards as adopted by the European Union. The statutory FinancialStatements for the year ended 31 December 2015 were approved by the Boardof Directors on 17 March 2016. The opinion of the Auditors on thoseFinancial Statements was unqualified and did not contain an emphasis ofmatter. The accounting policies adopted in this Interim FinancialReport are unchanged since 31 December 2015. This Interim FinancialReport for the period ended 30 June 2016 has been reviewed by the Auditorsbut not audited. Standards and Interpretations in issue and not yet effective: New standards Effective date IFRS 9 Financial Instruments - Classifications and Measurement 1 January2018 IFRS 15 Financial Instruments - Revenue from Contracts from Customers 1January 2018 Revised and amended standards Effective date IAS 7 Statement of Cash Flows 1 January 2017 The Directors are assessing the impact of these further changes. The preparation of the Unaudited Condensed Consolidated FinancialStatements requires management to make judgements, estimates andassumptions that affect the application of accounting policies and thereported amounts of assets and liabilities, income and expenses. Actualresults may differ from these estimates. In preparing these Unaudited Condensed Consolidated Financial Statements,the significant judgements made by management in applying the Group'saccounting policies and the key sources of estimation uncertainty were thesame as those that applied to the Annual Consolidated Financial Statementsfor the year ended 31 December 2015. 3. Earnings Per Share and Net Asset Value Per Share The calculation of basic earnings per Ordinary Share is based on theoperating profit of £11,769,061 (31 December 2015: £18,755,085) and onthe weighted average number of ordinary Shares in issue during the periodof 304,180,000 (31 December 2015: 259,548,110) Ordinary Shares. The calculation of NAV per Ordinary Share is based on a NAV of£306,971,030 (31 December 2015: £305,473,044) and the actual number ofOrdinary Shares in issue at 30 June 2016 of 304,180,000 (31 December 2015:304,180,000). 4. Cash and Cash Equivalents Cash and cashequivalentscomprise thefollowing: 30 June 2016 30 June 2015 31 December 2015 £ £ £Cash at bank 7,932,190 2,604,326 520,558 7,932,190 2,604,326 520,558 Cash and cash equivalents comprises cash and short term deposits held withvarious banking institutions with original maturities of three months orless. The carrying amount of these assets approximates their fair value. 5. Revolving Credit Facility Capitalised Costs The revolving credit facility capitalised costs are directly attributablecosts incurred in relation to the establishment of the £60 million loanfacility. 6. Loans Advanced 30 June 2016 30 June 2015 31 December 2015 £ £ £UKMaybourne Hotel - 11,238,404 -Group, LondonWest End - 10,157,547 -Development,LondonLifecare - 13,686,114 14,027,005Residences,LondonSalesforce - 13,577,468 11,859,123Tower, LondonCentre Point, 45,546,532 45,412,853 45,498,669LondonAldgate Tower, - 39,704,307 42,577,547London5 Star Hotel, 12,950,308 6,901,727 13,142,848LondonCenter Parcs 9,802,192 - 9,868,456Bonds, UKIndustrial 32,435,918 - 32,357,364Portfolio, UKHospitals, UK 25,347,652 - 25,502,202Hotel, Channel 27,534,512 - -IslandsVarde Partners 35,363,902 - -mixed portfolio,UKMixed use 6,358,950 - -development,South East UKNetherlandsOffice 11,542,901 10,034,985 10,362,243Industrial 21,686,660 14,382,543 20,515,407PortfolioW Hotel 19,636,978 12,073,845 15,865,865FinlandRetail - 27,293,162 24,548,879PortfolioDenmarkIndustrial 35,073,315 27,680,846 32,404,690PortfolioIrelandRetail and 4,773,536 - 4,584,580ResidentialPortfolioResidential 5,090,452 - 4,579,949Portfolio, CorkResidential 6,535,793 - -Portfolio, DublinLogistics, 15,330,752 - -Dublin 315,010,353 232,143,801 307,694,827 No element of loans advanced are past due or impaired. For furtherinformation and the associated risks see the Investment Manager's Report. The table below reconciles the movement of the carrying value of loansadvanced in the period / year: 30 June 2016 30 June 2015 31 December 2015 £ £ £Loans advanced at thestart of the period/ year 307,694,827 220,954,400 220,954,400Loans advanced 90,337,277 38,212,693 146,933,215Loans repaid (92,105,742) (21,939,143) (63,499,033)Arrangement fees (1,503,322) (654,984) (1,479,139)earnedCommitment fees earned (36,875) (51,081) (72,657)Accrued interestpurchased on loanacquisition (474,589) - 474,589Exit fees earned (2,515,759) (126,532) (227,417)Origination fees paid 723,796 251,204 946,069Origination expenses 30,057 - 97,194paidEffective interest 14,055,008 9,793,289 22,716,523income earnedInterest payments (14,034,916) (7,656,348) (16,197,134)received / accruedForeign exchange 12,840,591 (6,639,697) (2,951,783)lossesLoans advanced at the 315,010,353 232,143,801 307,694,827end of the period / yearLoans advanced at fair 328,088,808 241,188,965 320,752,322value For further information on the fair value of loans advanced, refer to note11. 7. Financial Assets at Fair Value through Profit and Loss Financial assets at fair value through profit and loss comprise currencyforward contracts which represent contractual obligations to purchase onecurrency and sell another currency on a future date at a specified price.The underlying instruments become favourable (assets) or unfavourable(liabilities) as a result of fluctuations of foreign exchange ratesrelative to their terms. The aggregate contractual or notional amount ofderivative financial instruments, the extent to which instruments arefavourable or unfavourable, and thus the aggregate fair values ofderivative financial assets and liabilities, can fluctuate significantlyfrom time to time. The fair value of derivative instruments held are setout below: GoldmanSachs: Notional contract Fair values amount 1 Assets Liabilities Total30 June 2016 £ £ £ £Foreign exchange derivativesCurrency forwards 24,694,820 145,576 (682,643) (537,067)Total 24,694,820 145,576 (682,643) (537,067) Lloyds Bankplc: Notional contract Fair values amount 1 Assets Liabilities Total30 June 2016 £ £ £ £Foreign exchange derivativesCurrency forwards 98,761,512 734,558 (7,380,631) (6,646,073)Total 98,761,512 734,558 (7,380,631) (6,646,073) Total: Notional contract Fair values amount 1 Assets Liabilities Total30 June 2016 £ £ £ £Foreign exchange derivativesCurrency forwards 123,456,331 880,134 (8,063,274) (7,183,140)Total 123,456,331 880,134 (8,063,274) (7,183,140) GoldmanSachs: Notional contract Fair values amount 1 Assets Liabilities Total31 December 2015 £ £ £ £Foreign exchange derivativesCurrency forwards 22,551,503 2,072,414 (87,249) 1,985,165Total 22,551,503 2,072,414 (87,249) 1,985,165 LloydsBank plc: Notional contract Fair values amount 1 Assets Liabilities Total31 December 2015 £ £ £ £Foreign exchange derivativesCurrency forwards 96,295,877 5,426,435 (1,493,485) 3,932,950Total 96,295,877 5,426,435 (1,493,485) 3,932,950 Total: Notional contract Fair values amount 1 Assets Liabilities Total31 December 2015 £ £ £ £Foreign exchange derivativesCurrency forwards 118,847,380 7,498,849 (1,580,734) 5,918,115Total 118,847,380 7,498,849 (1,580,734) 5,918,115 1 Euro and Danish Krone amounts are translated at theperiod / year end exchange rate 8. Revolving Credit Facility Under the Company's investment policy, the Company is limited toaggregate short and long term borrowings at the time of the relevantdrawdown of an amount equivalent to a maximum of 30 per cent of NAV butlonger term borrowings will be limited to 20 per cent of NAV in any event.In calculating the Company's borrowings for this purpose, anyliabilities incurred under the Company's foreign exchange hedgingarrangements shall be disregarded. The interest rate payable will depend onhow long the loan is outstanding: LIBOR plus 2.50 per cent per annum atinitial draw down and increasing for loans outstanding for more than sixmonths. The facility is secured by a pledge over the bank accounts of theCompany, its interests in Starfin Public LP and the intercompany fundingprovided by the Company to Starfin Public LP. Starfin Public LP also actsas guarantor of the facility and has pledged its bank accounts ascollateral. The undertakings and events of default are customary for atransaction of this nature. As at 30 June 2016 an amount of £8,039,074 (31December 2015: £8,155,816) was drawn and interest of £167 (31 December2015: £6,589) was payable. 9. Dividends Dividends will be declared by the Directors and paid in compliance with thesolvency test prescribed by Guernsey law. Under Guernsey law, companies canpay dividends in excess of accounting profit provided they satisfy thesolvency test prescribed by the Companies (Guernsey) Law, 2008. Thesolvency test considers whether a company is able to pay its debts whenthey fall due, and whether the value of a company's assets is greater thanits liabilities. The Company passed the solvency test for each dividendpaid. Subject to market conditions, the financial position of the Company andthe investment outlook, it is the Directors' intention to continue topay quarterly dividends to Shareholders (for more information seeChairman's Statement). The Company paid the following dividends in respect of the period to 30June 2016: Dividend rate Net dividend Payment date per Share paid (£) (pence)Period to:31 March 2016 1.625 4,942,925 16 May 2016 After the end of the period, the Directors declared a dividend in respectof the financial period ended 30 June 2016 of 1.625 pence per share which will be paid on 25 August 2016 toShareholders on the register on 5 August 2016. The Company paid the following dividends in respect of the year to 31December 2015: Dividend rate Net dividend Payment date per Share paid (£) (pence)Period to:31 March 2015 1.75 4,166,750 30 April 201530 June 2015 1.75 4,582,900 31 July 201530 September 1.75 5,323,150 31 October 2015201531 December 2015 1.75 5,323,150 18 February 2016 10. Risk Management Policies and Procedures The Group through its investment in whole loans, subordinated loans,mezzanine loans, bridge loans, loan-on-loan financings and other debtinstruments is exposed to a variety of financial risks, including marketrisk (including currency risk and interest rate risk), credit risk andliquidity risk. The Group's overall risk management programme focuses onthe unpredictability of financial markets and seeks to minimisepotential adverse effects on the Group's financial performance. The Directors monitor and measure the overall risk bearingcapacity in relation to the aggregate risk exposure across all risktypes and activities. Even though the risks detailed in the AnnualReport and Financial Statements for the year ended 31 December 2015 stillremain appropriate, further information regarding these risk policies areoutlined below: i) Market risk Market risk includes market price risk, currency risk and interest raterisk. If a borrower defaults on a loan and the real estate market entersa downturn it could materially and adversely affect the value of thecollateral over which loans are secured. However, this risk is consideredby the Board to constitute credit risk as it relates to the borrowerdefaulting on the loan and not directly to any movements in the real estatemarket. As such the Directors do not consider that the Group issubject to market price risk. The Investment Manager moderates marketrisk through a careful selection of loans within specified limits. TheGroup's overall market position is monitored by the Investment Manager andis reviewed by the Board of Directors on an on-going basis. a) Currency risk The Group, via the subsidiaries, operates across Europe and invests inloans that are denominated in currencies other than the functional currencyof the Company. Consequently the Group is exposed to risks arising fromforeign exchange rate fluctuations in respect of these loans and otherassets and liabilities which relate to currency flows from revenues andexpenses. Exposure to foreign currency risk is hedged and monitored by theInvestment Manager on an on-going basis and is reported to the Boardaccordingly. b) Interest rate risk Interest rate risk is the risk that the value of financial instruments andrelated income from loans advanced and cash and cash equivalents willfluctuate due to changes in market interest rates. The majority of the Group's financial assets are loans advanced,receivables and cash and cash equivalents. The Group's investments havesome exposure to interest rate risk but this is limited to interest earnedon cash deposits and floating interbank rate exposure forinvestments designated as loans advanced. Loans advanced have beenstructured to include a combination of fixed and floating interest ratesto reduce the overall impact of interest rate movements. Further protectionis provided by including interbank rate floors, preventing interest ratesfrom falling below certain levels. ii) Credit risk Credit risk is the risk that a counterparty will be unable to pay amountsin full when due. The Group's main credit risk exposure is in the loanportfolio, shown as loans advanced, where the Group invests in whole loansand also subordinated and mezzanine debt which rank behind senior debtfor repayment in the event that a borrower defaults. There is a spreadconcentration of risk as at 30 June 2016 due to several loans beingadvanced since inception. There is also credit risk in respect of otherfinancial assets as a portion of the Group's assets are cash and cashequivalents or accrued interest. The banks used to hold cash and cashequivalents have been diversified to spread the credit risk to which theGroup is exposed. The Group also has credit risk exposure in its financialassets through profit and loss which is diversified between hedge providersin order to spread credit risk to which the Group is exposed. The totalexposure to credit risk arises from default of the counterparty and thecarrying amounts of financial assets best represent the maximum creditrisk exposure at the year end date. As at 30 June 2016, the maximum creditrisk exposure was £322,942,543 (31 December 2015: £314,229,184). The Investment Manager has adopted procedures to reduce credit riskexposure by conducting credit analysis of the counterparties, theirbusiness and reputation which is monitored on an on-going basis. Afterthe advancing of a loan a dedicated debt asset manager employed bythe Investment Adviser monitors on-going credit risk and reports to theInvestment Manager, with quarterly updates also provided to the Board. Thedebt asset manager routinely stresses and analyses the profile of theGroup's underlying risk in terms of exposure to significant tenants,performance of asset management teams and property managers againstspecific milestones that are typically agreed at the time of the originalloan underwriting, forecasting headroom against covenants, reviewingmarket data and forecast economic trends to benchmark borrowerperformance and to assist in identifying potential future stresspoints. Periodic physical inspections of assets that form part of theGroup's security are also completed in addition to monitoring theidentified capital expenditure requirements against actual borrowerinvestment. iii) Liquidity Liquidity risk is the risk that the Group will not have sufficientresources available to meet its liabilities as they fall due. The Group'sloans advanced are illiquid and may be difficult or impossible to realisefor cash at short notice. The Group manages its liquidity risk through short term and long term cashflow forecasts to ensure it is able to meet its obligations. In addition,the Company is permitted to borrow up to 30 per cent of NAV and has enteredinto a revolving credit facility of £60 million of which £8,039,241 wasdrawn on 30 June 2016 (31 December 2015: £8,003,298). As at 30 June 2016, the Group had £7,932,190 (31 December 2015: £520,558)available in cash and £865,270 (31 December 2015: £806,083) tradepayables. The Directors considered this to be sufficient cash available,together with the undrawn facilities on the revolving credit facility, tomeets the Group's liabilities. 11. Fair Value Measurement IFRS 13 requires the Company to classify fair value measurementsusing a fair value hierarchy that reflects the significance of theinputs used in making the measurements. The fair value hierarchy has thefollowing levels: (i) Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). (ii) Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices including interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates) or other market corroborated inputs (level 2). (iii) Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The following table analyses within the fair value hierarchy the Group'sfinancial assets and liabilities (by class) measured at fair value: 30 June 2016 Level 1 Level 2 Level 3 Total £ £ £ £LiabilitiesDerivative - (7,183,140) - (7,183,140)liabilitiesTotal - (7,183,140) - (7,183,140) 31 December 2015 Level 1 Level 2 Level 3 Total £ £ £ £AssetsDerivative - 5,918,115 - 5,918,115assetsTotal - 5,918,115 - 5,918,115 There have been no transfers between levels for the period ended 30 June2016 (31 December 2015: nil). The following table summarises within the fair value hierarchy the Group'sassets and liabilities (by class) not measured at fair value at 30 June2016 but for which fair value is disclosed: Level 1 Level 2 Level 3 Total fair Total values carrying amount £ £ £ £ £AssetsCash and - 7,932,190 - 7,932,190 7,932,190cashequivale-ntsOther - 17,794 - 17,794 17,794receivab-les andprepayme-ntsLoans - - 328,088,808 328,088,808 315,010,353advancedTotal - 7,949,984 328,088,808 336,038,792 322,960,337 Level 1 Level 2 Level 3 Total fair Total values carrying amount £ £ £ £ £Liabilit-iesTrade and - 865,270 - 865,270 865,270otherpayablesFinancial - 7,183,140 - 7,183,140 7,183,140liabilit-iesRevolving - 8,039,241 - 8,039,241 8,039,241creditfacilityTotal - 16,087,651 - 16,087,651 16,087,651 The following table summarises within the fair value hierarchy the Group'sassets and liabilities (by class) not measured at fair value at 31 December2015 but for which fair value is disclosed: Level 1 Level 2 Level 3 Total fair Total values carrying amount £ £ £ £ £AssetsCash and - 520,558 - 520,558 520,558cashequivale-ntsOther - 95,684 - 95,684 95,684receivab-les andprepayme-ntsLoans - - 320,752,322 320,752,322 307,694,827advancedTotal - 616,242 320,752,322 321,368,564 308,311,069 Level 1 Level 2 Level 3 Total fair Total values carrying amount £ £ £ £ £Liabilit-iesTrade and - 806,083 - 806,083 806,083otherpayablesRevolving - 8,162,405 - 8,162,405 8,162,405creditfacilityTotal - 8,968,488 - 8,968,488 8,968,488 The carrying values of the assets and liabilities included in the abovetable are considered to approximate their fair values, except for loansadvanced. The fair value of loans advanced has been determined bydiscounting the expected cash flows using a discounted cash flow model. Forthe avoidance of doubt, the Group carries its loans advanced at amortisedcost in the Financial Statements. Cash and cash equivalents include cash at hand and fixed deposits heldwith banks. Other receivables and prepayments include the contractualamounts and obligations due to the Group and consideration for advancepayments made by the Group. Trade and other payables represent thecontractual amounts and obligations due by the Group for contractualpayments. 12. Taxation The Company is exempt from Guernsey taxation under the Income Tax(Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual feeof £1,200 (31 December 2015: £1,200). The Luxembourg indirect subsidiary of the Company, Luxco, issubject to the applicable tax regulations in Luxembourg, as it isincorporated under the Securitization Law of 22 March 2004. 13. Related Party Transactions Parties are considered to be related if one party has the ability tocontrol the other party or exercise significant influence over the otherparty in making financial or operational decisions. Fees, expenses and other payments Outstanding at For the period ended 30 June 2016 30 June 2016 £ £Directors' fees andexpenses paidStephen Smith - 23,750John Whittle - 20,000Jonathan Bridel - 17,500Expenses paid - 1,506 Investment ManagerInvestment management 569,869 1,140,459fees earnedOrigination fees 25,968 723,796earnedExpenses 1,800 5,706 Outstanding at 31 For the year ended December 2015 31 December 2015 £ £Directors' fees and expensespaidStephen Smith - 46,250John Whittle - 37,500Jonathan Bridel - 33,750Placing Programme fees - 15,000Expenses paid - 6,341 Investment ManagerInvestment management fees 575,154 1,976,640earnedOrigination fees earned - 946,069Expenses 18,012 41,754 Hatfield PhillipsInternational 1Origination expenses - 50,000 1 Hatfield Phillips International is a subsidiary of Starwood Property Trust Shareholdings and dividends paid Dividends paid for the Asat period ended 30 June2016 30 June 2016 £ Number ofsharesStarwood Property Trust 309,825 9,180,000IncSCG Starfin Investor LP 77,119 2,285,000Stephen Smith 2,664 78,929John Whittle 400 11,866Jonathan Bridel 400 11,866 Dividends paid for the Asat year ended 31 December2015 31 December 2015 £ Number ofsharesStarwood Property Trust 639,331 9,180,000IncSCG Starfin Investor LP 158,808 2,285,000Stephen Smith 7,566 78,929John Whittle 572 11,866Jonathan Bridel 572 11,866 Other The Group continues to participate in a number of loans in which StarwoodProperty Trust, Inc. ('STWD') and Starfin European Debt TC, L.P. ('StarfinTC') acted as a co‐lender. The details of these loans are shown in thetable below. Loan Related party co-lenders Centre Point, London STWD, Starfin TC5 Star Hotel, London Starfin TCW Hotel, Netherlands STWD, Starfin TCMixed use development, South East STWDUK 14. Events After the Reporting Period On 10 August 2016, the Company issued 70,839,398 New Ordinary Sharespursuant to the Placing Programme, to raise £73 million before expenses.The Issue Price was 103.05 pence per Ordinary Share, representing a premiumof 2.7 per cent to the Net Asset Value per Ordinary Share as at 31 July2016 of 100.30 pence (ex-dividend). The net proceeds of the Placing werecommitted to be used to finance the acquisition by the Group of a £75million real estate mezzanine loan secured over a UK regional portfolio ofbudget hotels (the 'Regional Budget Hotel Portfolio, UK'). Since the period end, the Group had the following loan advances and loanrepayments: Loans advanced Loans repaid £ £Residential Portfolio, - 704DublinRetail and Residential - 799,682PortfolioVarde Partners mixed - 6,323,454Portfolio, UKHotel, Channel Islands - 100,000Logistics, Dublin, 3,793,762 5,826,100IrelandResidential Portfolio, - 29,356Cork, IrelandOffice, Netherlands - 29,762W Hotel, Netherlands - 17,967,378Regional Budget Hotel 75,000,000 -Portfolio, UK 78,793,762 31,076,436 Corporate Information Directors Registered OfficeStephen Smith (Non-executive 1, Royal Plaza, Royal AvenueChairman) St Peter Port,Jonathan Bridel (Non- Guernsey, GY1 2HLexecutive Director)John Whittle (Non-executive Investment AdviserDirector) Starwood Capital Europe Advisers, LLP 2nd Floor, One Eagle Place(all care of the registered St. James'soffice) London, SW1Y 6AF United KingdomInvestment ManagerStarwood European Finance Advocates to the Company (as to Guernsey law)Partners Limited Mourant Ozannes1, Royal Plaza, Royal Avenue 1 Le Marchant StreetSt Peter Port, St Peter PortGuernsey, GY1 2HL Guernsey, GY1 4HP Solicitors to the Company Independent Auditors(as to English law and U.S. PricewaterhouseCoopers CI LLPsecurities law) Royal Bank PlaceNorton Rose LLP 1 Glategny Esplanade3 More London Riverside St Peter PortLondon, SE1 2AQ Guernsey, GY1 4NDUnited Kingdom Principal BankersRegistrar Barclays Private Clients InternationalComputershare Investor LimitedServices (Guernsey) Limited PO Box 413rd Floor Le Marchant HouseNatwest House St Peter PortLe Truchot Guernsey, GY1 3BESt Peter PortGuernsey, GY1 1WD Website: www.starwoodeuropeanfinance.com BrokerDexion Capital plc1 Tudor StreetLondon, EC4Y 0AHUnited Kingdom Administrator, DesignatedManager and CompanySecretaryIpes (Guernsey) Limited1, Royal Plaza, Royal AvenueSt Peter Port,Guernsey, GY1 2HL --------------------------------------------------------------------------- Language: English ISIN: GG00B79WC100 Category Code: IR TIDM: SWEF Sequence Number: 3342 Time of Receipt: 23-Aug-2016 / 18:50 GMT/BST End of Announcement EQS News Service --------------------------------------------------------------------------- 495255 24-Aug-2016UK-Regulatory-announcement transmitted by DGAP - a service of EQS Group AG.The issuer is solely responsible for the content of this announcement.
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