Annual Report and

Audited Consolidated

Financial Statements

for the year ended 31 December 2021

CONTENTS

Overview

Objective and Investment Policy 2

Financial Highlights 6

Chairman’s Statement 8

Strategic and Business Review

Strategic Report 12

Investment Manager’s Report 18

Governance

Board of Directors 28

Report of the Directors 29

Directors’ Remuneration Report 32

Corporate Governance Statement 33

Report of the Audit Committee 40

Statement of Directors’ Responsibilities 45

Financial Statements

Independent Auditor’s Report 47

Independent Auditor’s Report (US GAAS) 55

Consolidated Statement of Comprehensive Income 57

Consolidated Statement of Financial Position 58

Consolidated Statement of Changes in Equity 59

Consolidated Statement of Cash Flows 60

Notes to the Consolidated Financial Statements 61

Further Information

Alternative Performance Measures 98

Corporate Information 101

INVESTMENT OBJECTIVE

The investment objective of Starwood

European Real Estate Finance Limited (the

“Company”), together with its subsidiaries

Starfin Public Holdco 1 Limited, Starfin

Public Holdco 2 Limited, Starfin Lux S.à.r.l,

Starfin Lux 3 S.à.r.l, and Starfin Lux 4 S.à.r.l,

(collectively the “Group”), is to provide its

shareholders with regular dividends and an

attractive total return while limiting downside

risk, through the origination, execution,

acquisition and servicing of a diversified

portfolio of real estate debt investments in the

UK and the European Union’s internal market.

INVESTMENT POLICY

The Company invests in a diversified portfolio

of real estate debt investments in the UK and

the European Union’s internal market. Whilst

investment opportunities in the secondary

markets will be considered from time to

time, the Company’s predominant focus is to

be a direct primary originator of real estate

debt investments on the basis that this

approach is expected to deliver better pricing,

structure and execution control and a client

facing relationship that may lead to further

investment opportunities.

The Company will attempt to limit downside

risk by focusing on secured debt with both

quality collateral and contractual protection.

The Company anticipates that the typical

loan term will be between three and seven

years. Whilst the Company retains absolute

discretion to make investments for either

shorter or longer periods, at least 75 per cent

of total loans by value will be for a term of

seven years or less.

The Company’s portfolio is intended to be

appropriately diversified by geography,

real estate sector type, loan type and

counterparty.

The Company will pursue investments across

the commercial real estate debt asset class

through senior loans, subordinated loans and

mezzanine loans, bridge loans, selected loan-

on-loan financings and other debt instruments.

The split between senior, subordinated and

mezzanine loans will be determined by the

Overview

Objective and Investment Policy

Investment Manager in its absolute discretion

having regard to the Company’s target return

objectives. However, it is anticipated that

whole loans will comprise approximately

40-50 per cent of the portfolio, subordinated

and mezzanine loans approximately 40-50 per

cent and other loans (whether whole loans or

subordinated loans) between 0-20 per cent

(including bridge loans, selected loan-on-loan

financings and other debt instruments). Pure

development loans will not, in aggregate,

exceed 25 per cent of the Company’s Net

Asset Value (“NAV”) calculated at the time of

investment. The Company may originate loans

which are either floating or fixed rate.

The Company may seek to enhance the

returns of selected loan investments through

the economic transfer of the most senior

portion of such loan investments which may

be by way of syndication, sale, assignment,

sub-participation or other financing (including

true sale securitisation) to the same maturity

as the original loan (i.e., “matched funding”)

while retaining a significant proportion as a

subordinate investment. It is anticipated that

where this is undertaken it would generate a

positive net interest rate spread and enhance

returns for the Company. It is not anticipated

that, under current market conditions, these

techniques will be deployed with respect to

any mezzanine or other already subordinated

loan investments. The proceeds released

by such strategies will be available to the

Company for investment in accordance with

the investment policy.

Loan to Value (“LTV”)

The Company will typically seek to originate

debt where the effective loan to real estate

value ratio of any investment is between

60 per cent and 80 per cent at the time

of origination or acquisition. In exceptional

circumstances that justify it, the ratio may be

increased to an absolute maximum of 85 per

cent. In any event, the Company will typically

seek to achieve a blended portfolio LTV of no

more than 75 per cent (based on the initial

valuations at the time of loan origination or

participation acquisition) once fully invested.

Geography

The Company’s portfolio will be originated

from the larger and more established real

estate markets in the UK and European

Union’s internal market. UK exposure is

expected to represent the majority of the

Company’s portfolio. Investment in the

European Union’s internal market will mainly

be focused on Northern and Southern

Europe. Northern European markets

include Germany, France, Scandinavia,

Netherlands, Belgium, Poland, Switzerland,

Ireland, Slovakia and the Czech Republic.

Southern European markets include Italy

and Spain. The Company may however

originate investments in other countries in

the European Union’s internal market to the

extent that it identifies attractive investment

opportunities on a risk adjusted basis.

The Company will not invest more than 50

per cent of the Company’s NAV (calculated at

the time of investment) in any single country

save in relation to the UK, where there shall

be no such limit.

In the event that a member state ceases to

be a member of the European Union’s internal

market, it will not automatically cease to be

eligible for investment.

Real Estate Sector and Property Type

The Company’s portfolio will focus on lending

into commercial real estate sectors including

hospitality, office, retail, logistics, light industrial,

student accommodation, residential for sale

and multi-family rented residential. Investments

in student accommodation and residential

for sale are expected to be limited primarily

to the UK, while multi-family investments

are expected to be limited primarily to the

UK, Germany and Scandinavia. Further, not

more than 30 per cent, in aggregate, of the

Company’s NAV, calculated at the time of

investment, will be invested in loans relating to

residential for sale. No more than 50 per cent

of the Company’s NAV will be allocated to any

single real estate sector of the UK, except for

the UK office sector which is limited to 75 per

cent of the Company’s NAV.

Counterparty and Property Diversification

No more than 20 per cent of the Company’s

NAV, calculated at the time of investment, will

be exposed to any one borrower legal entity.

No single investment, or aggregate

investments secured on a single property or

group of properties, will exceed 20 per cent of

the Company’s Net Asset Value, calculated at

the time of investment.

Corporate Borrowings

Company or investment level recourse

borrowings may be used from time-to-

time on a short-term basis for bridging

investments, financing repurchases of Shares

or managing working capital requirements,

including foreign exchange hedging facilities

and on a longer term basis for the purpose

of enhancing returns to Shareholders and/

or to facilitate the underwriting of whole

loans with a view to syndication at a later

point. In this regard, the Company is limited

to aggregate short and long-term borrowings

at the time of the relevant drawdown in an

amount equivalent to a maximum of 30 per

cent of NAV but longer term borrowings will

be limited to 20 per cent of NAV in any event.

Hedging

The Company will not enter into derivative

transactions for purely speculative purposes.

However, the Company’s investments will

typically be made in the currency of the

country where the underlying real estate

assets are located. This will largely be in

Sterling and Euros. However, investments

may be considered in other European

currencies, and the Company may

implement measures designed to protect the

investments against material movements in

the exchange rate between Sterling, being

the Company’s reporting currency, and

the currency in which certain investments

are made. The analysis as to whether

such measures should be implemented

will take into account periodic interest,

principal distributions or dividends, as well

as the expected date of realisation of the

investment. The Company may bear a level of

currency risk that could otherwise be hedged

where it considers that bearing such

risk is advisable. The Company will only enter

into hedging contracts, such as currency

swap agreements, futures contracts, options

and forward currency exchange and other

derivative contracts when they are available

in a timely manner and on terms acceptable

to it. The Company reserves the right to

terminate any hedging arrangement in its

absolute discretion.

The Company may, but shall not be obliged

to, engage in a variety of interest rate

management techniques, particularly to

the extent the underlying investments are

floating rate loans which are not fully hedged

at the borrower level (by way of floating to

fixed rate swap, cap or other instrument).

Any instruments chosen may seek on the

one hand to mitigate the economic effect of

interest rate changes on the values of, and

returns on, some of the Company’s assets,

and on the other hand help the Company

achieve its risk management objectives. The

Company may seek to hedge its entitlement

under any loan investment to receive floating

rate interest.

Cash Strategy

Cash held by the Company pending

investment or distribution will be held in

either cash or cash equivalents, or various

real estate related instruments or collateral,

including but not limited to money market

instruments or funds, bonds, commercial

paper or other debt obligations with banks

or other counterparties having a A- or higher

credit rating (as determined by any reputable

rating agency selected by the Company),

Agency RMBS (residential mortgage-backed

securities issued by government-backed

agencies) and AAA rated CMBS (commercial

mortgage-backed securities).

Transactions with Starwood Capital Group

or Other Accounts

Without prejudice to the pre-existing co-

investment arrangements described below,

the Company may acquire assets from,

or sell assets to, or lend to, companies

within the Starwood Capital Group or any

fund, company, limited partnership or

other account managed or advised by any

member of the Starwood Capital Group

(“Other Accounts”). In order to manage

the potential conflicts of interest that may

arise as a result of such transactions, any

such proposed transaction may only be

entered into if the independent Directors of

the Company have reviewed and approved

the terms of the transaction, complied with

the conflict of interest provisions in the

Registered Collective Investment Scheme

Rules and Guidance, 2021 issued by the

Guernsey Financial Services Commission

(the “Commission”) under The Protection

of Investors (Bailiwick of Guernsey) Law,

2020, as amended, and, where required by

the Listing Rules, Shareholder approval is

obtained in accordance with the listing rules

issued by the UK Listing Authority. Typically,

such transactions will only be approved if: (i)

an independent valuation has been obtained

in relation to the asset in question; and (ii)

the terms are at least as favourable to the

Company as would be any comparable

arrangement effected on normal commercial

terms negotiated at arms’ length between the

relevant person and an independent party,

taking into account, amongst other things, the

timing of the transaction.

Co-investment Arrangements

Starwood Capital Group and certain Other

Accounts are party to certain pre-existing co-

investment commitments and it is anticipated

that similar arrangements may be entered

into in the future. As a result, the Company

may invest alongside Starwood Capital Group

and Other Accounts in various investments.

Where the Company makes any such co-

investments they will be made at the same

time, and on substantially the same economic

terms, as those offered to Starwood Capital

Group and the Other Accounts.

Overview

Objective and Investment Policy

UK Listing Authority Investment Restrictions

The Company currently complies with the

investment restrictions set out below and will

continue to do so for so long as they remain

requirements of the UK Listing Authority:

• neither the Company nor any of its

subsidiaries will conduct any trading activity

which is significant in the context of its group

as a whole;

• the Company will avoid cross-financing

between businesses forming part of its

investment portfolio;

• the Company will avoid the operation of

common treasury functions as between the

Company and investee companies;

• not more than 10 per cent, in aggregate, of

the Company’s NAV will be invested in other

listed closed-ended investment funds; and

• the Company must, at all times, invest

and manage its assets in a way which

is consistent with its object of spreading

investment risk and in accordance with the

published investment policy. The Directors do

not currently intend to propose any material

changes to the Company’s investment policy,

save in the case of exceptional or unforeseen

circumstances. As required by the Listing

Rules, any material change to the investment

policy of the Company will be made only with

the approval of shareholders.

Overview

Financial Highlights

Key Highlights

Year ended

31 December 2021

Year ended

31 December 2020

NAV per Ordinary Share 103.09 p 104.18 p

Share Price 94.0 p 90.0 p

NAV total return

(1)

.6% 6.3%

Share Price total return

(1)

11.1% -7.5%

Total Net Assets £421.6 m £426.7 m

Loans advanced at amortised cost

(including accrued income)

£414.6 m £442.7 m

Financial assets held at fair value

through profit or loss

£13.3 m £0.9 m

Cash and Cash Equivalents £3.0 m £2.9 m

Amount drawn under Revolving Credit

Facility (excluding accrued interest)

£8.5 m £19.5 m

Dividends per Ordinary Share 5.5 p 6.5 p

Invested Loan Portfolio unlevered

annualised total return

(1)

6.9% 6.7%

Invested Loan Portfolio levered

annualised total return

(1)

7.0% 7.0%

Ongoing charges percentage

(1)

1.0% 1.0%

Weighted average portfolio LTV to

Group first £

(1)

16.4% 18.2%

Weighted average portfolio LTV to

Group last £

(1)

61.9% 61.8%

(1)

Further explanation and definitions of the calculation is contained in the section

“Alternative Performance Measures” at the end of this financial report.

SHARE PRICE PERFORMANCE

As at 31 December 2021, the NAV was 103.09 pence per Ordinary Share

(2020: 104.18 pence) and the share price was 94.0 pence (2020: 90.0 pence).

The Company’s share price has been volatile since March 2020. This volatility has been driven

by market conditions and trading flows rather than a change in the Company’s NAV.

Source: Morningstar

Premium / discount (%)

Cumulative fair NAV total return index Share price total return index

Overview

Chairman’s Statement

JOHN WHITTLE | Chairman

23 March 2022

Dear Shareholder,

It is with immense pleasure that I write to you as your new Chairman to

present the Annual Report and Audited Consolidated Financial Statements

of Starwood European Real Estate Finance Limited for the year ended 31

December 2021. I have been a director of the Company since its inception

and it is now a great honour to be Chairman. I am looking forward to and am

committed to guiding and working alongside the Board to continue to deliver

value for all of our stakeholders.

As with the previous year, 2021 was again dominated by Covid-19 and the various restrictions

as Governments and we learnt to live with the pandemic. However, and again as with 2020,

the Group demonstrated the unique portfolio resilience that is clear to see in the strength

of these results. It is significant, and very gratifying to note, that, again, all loan interest

and scheduled amortisation payments were received on time. I believe that this excellent

result is due both to the evident rigorous underwriting of borrowers/sponsors and the very

diligent ongoing portfolio management by our Investment Adviser and Investment Manager.

Meanwhile, underlying collateral valuations continue to provide reassuring headroom in the

event of an asset underperforming compared with expectations.

2022 looks like it will be dominated by concerns about the situation in Ukraine and the wider

implications for Europe of the ongoing conflict there. My thoughts and sympathies are with

those caught up in the conflict and I hope that a quick, just and peaceful resolution is found.

The Group has no direct investment exposure to the Ukraine or Russia. We will continue to

closely monitor any potential adverse impacts on European economies and specifically for

the potential impacts on levels of operational disruption and liquidity flows.

Ultimately, the last two years have demonstrated the positive fundamentals of the Group’s

portfolio as an exceptionally attractive risk-adjusted source of alternative income tested

in the harshest of market environments. Against these market challenges, the Group not

only maintained a stable net asset valuation but also met its dividend targets, delivering an

annualised 5.5 pence per share to shareholders.

Going forward, the Group is seeing a strong pipeline of opportunities for 2022, and with the

increases in inflation rates currently being anticipated, the Group, with 78 per cent of the

portfolio contracted at floating interest rates, is extremely well placed should interest rates

increase as a result.

HIGHLIGHTS FOR 2021

• Strong cash generation - the portfolio as a whole continues to support annual dividend

payments of 5.5 pence per Ordinary Share, paid quarterly, and generates an annual dividend

yield of 5.9 per cent on the share price as at 31 December 2021

• Income stability - all loan interest and scheduled amortisation payments paid in full and on

time, despite unprecedented market disruption from Covid-19

• 78 per cent of the portfolio is contracted at floating interest rates (with floors) which will

benefit the Group if higher inflation results in higher interest rates

• Portfolio robust - despite pandemic-related disruption, the portfolio continues to perform in line

with expectations

• Borrowers remain adequately capitalised and are expected to continue to pay loan interest

and capital repayments in line with contractual obligations

• Further strategic progress - In 2021, the Group committed a total of £90.8 million to three

new loans, located in the United Kingdom, in the life sciences, office and hospitality sectors

• 11.1 per cent – Share price total return for the year ended 31 December 2021

• 50.7 per cent – Share price total return since inception in December 2012

• 6.6 per cent – Annualized net asset value total return since inception in December 2012

• Over £1.4 billion committed since inception

• Strong pipeline of opportunities -

The Investment Adviser and Investment Manager believe the current investment pipeline

is the strongest since the Group was established

• Portfolio remains fully invested

2018 2019 2020 2021

New loans to borrowers (commitment) £208.0m £224.7m £74.1m £90.8m

Loan repayments and amortisation -£137.2m -£198.3m -£81.4m -£103.5m

Net Commitment £70.8m £26.4m -£7.3m -£12.7m

OVERVIEW

As at 31 December 2021, the Group had

investments and commitments of £456.5

million (of which £44.5 million was committed

but unfunded at the end of the year). The

average remaining maturity of the Group’s

loan book was 2.3 years. The Group had net

debt of £8.5 million and unused debt facilities

of £117.5 million available to fund undrawn

commitments of £44.5 million and new

lending. The gross annualised levered total

return at the year end was 7.0 per cent. The

Net Asset Value (“NAV”) was £421.6 million,

being 103.09 pence per Ordinary Share.

The contractual maturity of the Group’s

portfolio shows that 25 per cent of loans

held are expected to mature in the next

twelve months. This reflects the normal

turnover of the portfolio with some limited

impact from the slow down in repayments

referred to above. The Investment Adviser

anticipates a strong level of transactional

activity in 2022 and continues to see

compelling value-add lending opportunities

for the Group. Given the above, we anticipate

that the Group will remain fully, or close to

fully, invested going forward.

In light of the considerable disruption from

Covid-19, the Board has sought to provide

more detailed updates and disclosure to

our shareholders during the last two years

through its quarterly factsheets. Please refer

to the Investment Manager’s report for more

detailed updates on portfolio performance.

STABILITY OF NET ASSET VALUE

“NAV”

Loans made by the Group are measured at

amortised cost less expected credit losses

(“ECLs”). This treatment is governed by

IFRS 9 with which the Group is obliged to

comply. We are not eligible to follow fair

value accounting for the vast majority of

our loans, and since inception only one loan

has been eligible to be measured at fair

value (the credit linked notes which repaid

in 2020). Therefore, our NAV does not show

significant fluctuations during periods of

market volatility. The NAV would show a more

significant change if we had to recognise an

expected credit loss (“ECL”). At this point

in time, we have no reason to believe that

any ECLs should be recognised against

any of the loans. The reasons, estimates

and judgements supporting our current

assessment are described in the Investment

Manager’s report.

INVESTMENT ACTIVITY

The Group closed three loans in 2021

– Life Sciences, UK (total commitment -

£26.6million), Hotel and Office, Northern

Ireland (total commitment - £13.5 million) and

Hotels, UK (total commitment - £50.7 million).

In 2020 and for the first part of 2021, as

activity in the investment and financing

markets slowed, there was in general

a significant reduction in the volume of

repayments compared to previous periods.

As might be expected, borrowers who had

previously decided to refinance or sell,

were unable or became reluctant to do so.

Despite this we received early repayment

of two loans during the year – Hotel, Spain

(£46.6 million) and Residential, London

(£24.5 million); in addition to £32.4 million

of amortisation on other loans within the

portfolio. Net commitments for the year

compared to the prior three years is shown in

the table above.

Whilst net commitments during the year fell

by £12.7 million, the Group funded a further

£28.5 million in relation to loan commitments

made in prior years which were unfunded at

the beginning of the year.

PORTFOLIO PERFORMANCE

All loan interest and scheduled amortisation

payments up to the date of this annual report

have been paid in full and on time.

The Investment Manager and Investment

Adviser have performed well during this

period of disruption. Robust underwriting,

extensive due diligence and considered

loan structuring have been combined to

produce a resilient portfolio which continues

to perform in spite of very considerable and

obvious stress tests. In some instances,

the Investment Manager and Investment

Adviser have worked closely with borrowers

to agree loan amendments and changes

to business plans, where appropriate.

The loan amendments such as income

covenant reliefs or additional time to reach

development milestones did not impact the

economic returns forecast from the loans.

In the sectors that are most affected by the

pandemic, hospitality and retail, borrowers

continue to meet their obligations including

regular interest and capital repayments in line

with the agreed business plans which were

revised to reflect the anticipated impact of

the pandemic.

Overview

Chairman’s Statement

Period

Dividend

declared

Payment

date

Amount

per share

1 January 2021 to 31 March 2021 23 April 2021 4 June 2021 1.375p

1 April 2021 to 30 June 2021 23 July 2021 3 September 2021 1.375p

1 July 2021 to 30 September 2021 22 October 2021 3 December 2021 1.375p

1 October 2021 to 31 December 2021 21 January 2022 25 February 2022 1.375p

Total 5.5p

FUTURE SHARE ISSUANCE

At the last Annual General Meeting (“AGM”),

the Company sought and received authority to

disapply Pre-Emption Rights on the allotment

of equity securities for up to 10 per cent of the

Ordinary Shares in issue. As at the date of this

report, this authority has not been utilised.

While the discount to NAV persists, we do not

intend to raise additional equity. Nevertheless,

the Board believes that the Group should

maintain its capacity to access equity capital

within a short time frame in expectation

of improved markets. As markets begin to

recover, the Board fully expect to see attractive

risk adjusted opportunities of which immediate

access to capital could have the following

additional benefits for the Company and

shareholders:

• to enable the Company to pursue larger

investment opportunities and broaden its

lending range and capacity;

• to enable the Company to increase

diversification and the depth of its portfolio;

• increased scale is attractive to a wider

investor base;

• a greater volume of shares, creating

increased secondary market activity; and

• fixed running costs spread across a larger

equity capital base reducing the Company’s

ongoing expenses per Share.

To take advantage of opportunities as and when

they present themselves, the Directors believe

it is appropriate for the Company to renew the

existing authorities at the forthcoming AGM, in

respect of issuance of up to 10 per cent of the

Ordinary Shares in issue.

DIVIDENDS

Total dividends of 5.5 pence per Ordinary Share

were declared in relation to the year ended 31

December 2021.

The 2021 dividends were covered 0.98x by

earnings (excluding unrealised FX gains). The

Company maintains a dividend reserve (within

retained earnings) built up over several years

which was partially utilised to ensure dividends

were not paid out of capital.

The Board recognises that a sustainable and

consistent dividend is of paramount importance

to our investors and intends to continue

to target 5.5 pence per annum (payable

quarterly) going forward. This will provide a

level of dividend which should be fully covered

by earnings whilst ensuring the Company

maintains strong credit discipline. The Board

will review this target periodically with a view

to potentially increasing it if conditions allow,

for example, if changes to the broader lower

interest rate environment lead to more earnings

for the Company (given that 78% of our

portfolio is on a floating rate basis).

SHARE BUYBACKS AND SHARE

PRICE PERFORMANCE

The year end share price was 94.0 pence

reflecting an 8.8 per cent discount to NAV.

While the share price has been less volatile in

2021 compared with 2020, trading during the

year in a range of between 84.0 pence and

100.0 pence, it has still been more volatile than

your Board would like or than your Board feels

is justified given the Group’s strong long-term

performance track record, stable NAV and

positive outlook.

The share price was supported by the share

buy-back programme which commenced in

the second half of 2020 and continued until the

first quarter of 2021. During the first quarter of

the year the Company bought back 660,000

shares at an average cost per share of 89.54

pence per share and these shares are held in

treasury. Since then, no additional share buy

backs have been made although the Board

retains the authority to recommence them if

deemed necessary and may do so again if it

deems the circumstances to be appropriate.

The Company received the authority at the

2020 AGM to purchase up to 14.99 per cent of

the Ordinary Shares in issue at that date; this

authority was renewed at the 2021 AGM.

The Board continues to believe that the shares

represent very attractive value at their current

price and certain members of the Board and

individuals at the Investment Adviser have

made personal purchases during the year, and

their holdings are disclosed in note 22, Related

party transactions.

1111

OUTLOOK

The focus of the Group for 2022 is twofold:

(i) the continued robust asset management

of the existing loan portfolio; and

(ii) the continued efforts, alongside the

Investment Manager and the Investment

Adviser, to enhance both origination

capacity and portfolio construction

of the Group in order to continue to

deliver attractive risk adjusted returns

to its investors.

Industry wide we are continuing to see

a significant reduction in lending by

balance sheet bank lenders, particularly to

development, refurbishment and non-core

property asset classes. This ongoing trend will

inevitably produce interesting opportunities for

alternative lenders which we fully expect to

benefit our shareholders accordingly.

As set out in more detail in the Report of

the Directors, and subject to the discount

triggered realisation mechanism not being

activated, the Directors shall exercise the

discretion afforded to them under the

Articles to put forward a realisation vote

(as an ordinary resolution) to Shareholders

by no later than 28 February 2023. The

Board believes that, as a result of the strong

fundamentals supporting the Company’s

investment strategy, robust operating metrics

displayed by the Company which include

a consistent dividend yield and stable NAV,

combined with the strong financial position

of the Company, there is a compelling

rationale for shareholders to vote against

a realisation offer and realisation vote put

them. The Board looks forward to shareholder

engagement on this matter in the run up to

31 December 2022.

Finally, the Board note that one positive

outcome of the pandemic could be the

recognition by the global business community

of the need for affirmative action in relation

to climate change and other related

environmental, social and governance

considerations. The Board itself is aware of

its own responsibilities for environmental,

social and governance matters and has

taken additional professional advice regarding

these during the year. The Board believes

that the Group is meeting its regulatory

obligations on these matters but is looking

at ways to enhance its reporting, monitoring

and influencing of environmental, social and

governance issues.

The Board believes it is important to have

clear messaging to you, our shareholders, and

we will continue to inform you of the Group’s

progress by way of the quarterly fact sheets.

During the year we have contracted the

services of a public relations provider to make

our factsheets, and all our communications,

more relevant to our stakeholders.

We hope that you have seen this enhanced

accessibility and welcome any comments you

have on our communication and supply of

information to you.

BOARD COMPOSITION

I am delighted to welcome Gary Yardley

to the Board (Gary was appointed on 6

September 2021). Gary’s biography is set

out in the Report of the Directors and he

brings considerable experience to the Board

as well as a range of skills that we believe will

be both additive and complimentary to those

of the existing Board.

The Board is now well advanced in the

programme of board rotations with only my

own planned retirement at the end of 2023 in

sight. I am very pleased with the composition

of the Board and I believe we have a very

relevant diversity of skills and expertise which

places us well for the future.

I would like to thank Steve Smith, who left

the Board in December, for his outstanding

contribution to the establishment and success

of the Group. Steve’s departure is in line with

the Company’s succession planning process

for the phased retirement of Board members.

Steve leaves with our very best wishes.

FINALLY

In 2021, we have continued to be mindful

of the health and wellbeing of everyone

associated with the Group while ensuring that

our systems have remained fully functional

throughout this continued period of intense

disruption. My thanks to the Investment

Adviser, Investment Manager and all of our

service providers for their perseverance in

extraordinarily difficult times.

On behalf of the Board, I would like to

close by thanking shareholders for your

commitment. I sincerely hope that we all

have a more stable time in 2022, that the

situation in Ukraine can be swiftly resolved

and I look forward to briefing you on the

Group’s progress later this year.

John Whittle | Chairman

23 March 2022

Strategic and Business Review

Strategic Report

The Strategic Report describes the business

of the Group and details the uncertainties,

principal and emerging risks associated with

its activities.

CORPORATE PURPOSE

As an investment company, the general

corporate purpose is to provide long-term

prosperity to our shareholders through

providing regular dividends and preserving

capital by limiting downside risk. In addition

to this, the Board and Investment Manager

also recognise that by furthering their

understanding of the needs of other relevant

stakeholders, the Company can provide

better returns to its shareholders.

OBJECTIVE, INVESTMENT POLICY

AND BUSINESS MODEL

The Objective and Investment Policy describes

the Group’s strategy and business model.

The Investment Manager is Starwood

European Finance Partners Limited, a

Company incorporated in Guernsey with

registered number 55819 and regulated by the

Guernsey Financial Services Commission (the

“Commission”). The Investment Manager has

appointed Starwood Capital Europe Advisers,

LLP (the “Investment Adviser”), an English

limited liability partnership authorised and

regulated by the Financial Conduct Authority,

to provide investment advice, pursuant to an

Investment Advisory Agreement.

CURRENT AND FUTURE

DEVELOPMENT

A review of the year and outlook is contained in

the Investment Highlights and Portfolio Review

sections of the Investment Manager’s Report

and within the Chairman’s Statement.

PERFORMANCE

A review of performance is contained in the

Investment Highlights and Portfolio Review

sections of the Investment Manager’s Report.

A number of performance measures are

considered by the Board, the Investment

Manager and Investment Adviser in assessing

the Company’s success in achieving its

objectives. The Key Performance Indicators

(“KPIs”) used are established industry

measures to show the progress and

performance of the Group and are as follows:

• The movement in NAV per Ordinary Share;

• The movement in share price and the

discount / premium to NAV;

• The payment of targeted dividends;

• The portfolio yield, both levered and

unlevered;

• Ongoing charges as a percentage of

undiluted NAV; and

• Weighted average loan to value for

the portfolio.

Details of the KPIs achieved are shown in the

Financial Highlights section.

RISK MANAGEMENT

It is the role of the Board to review and manage

all risks associated with the Group, both those

impacting the performance and the prospects

of the Group and those which threaten the

ongoing viability. It is the role of the Board to

mitigate these either directly or through the

delegation of certain responsibilities to the Audit

Committee and Investment Manager.

The Board performs a review of a risk matrix at

each Board meeting.

The Board considers the following principal

risks could impact the performance and

prospects of the Group but do not threaten

ability of the Company to continue in operation

and meet its liabilities. In deciding which risks

are principal risks the Board considers the

potential impact and probability of the related

events or circumstances, and the timescale

over which they may occur. Consequently, it

has put in place mitigation plans to manage

those identified risks. Details of the principal

and emerging risks considered as part of the

review of the risk matrix are highlighted below.

Principal Risks

Financial Market Volatility (risk that

dividends and/or share price is lower

than anticipated)

The Group’s targeted returns are based

on estimates and assumptions that

are inherently subject to significant

business and economic uncertainties and

contingencies and, consequently, the actual

rate of return may be materially lower than

the targeted returns. In addition, the pace

of investment has, in the past and may in

the future, be slower than expected or the

principal on loans may be repaid earlier than

anticipated, causing the return on affected

investments to be less than expected.

Furthermore, 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. Since March 2020 and as a

direct impact of the uncertainty caused by

the Covid-19 pandemic the shares have

traded at a discount to NAV per share and

shareholders may be unable to realise their

investments through the secondary market

at NAV per share.

The Board, along with the Investment

Manager and the Investment Advisor,

monitor, review and consider the estimates

and assumptions that underpin the targeted

return of the business and, where necessary,

communicate any changes in those estimates

and assumptions to the market. The Group

has met its targeted returns since inception.

The Board monitors the level of premium

or discount of share price to NAV per share

and announced a share buyback programme

during 2020 in order to support the share

price following the drop in share price as

a direct result of the Covid-19 pandemic.

While the Directors may seek to mitigate

any discount to NAV per share through the

discount management mechanisms set out in

this Annual Report, there can be no guarantee

that they will do so or that such mechanisms

will be successful. Please see further

information on the discount management

mechanisms in the Report of the Directors.

Long-Term Strategic Risk (risk that the

business model is no longer attractive)

The Group’s targeted returns are based

on estimates and assumptions that are

inherently subject to significant business and

economic uncertainties and contingencies

and, consequently, the actual rate of return

may be materially lower than the targeted

returns. In addition, the pace of investment

has, in the past and may in the future, be

slower than expected or the principal on

loans may be repaid earlier than anticipated,

causing the return on affected investments

to be less than expected.

The Board, along with the Investment

Manager and the Investment Advisor,

monitor, review and consider the estimates

and assumptions that underpin the targeted

return of the business and, where necessary,

refocus the Group’s strategy to respond to

changes in the market.

The Investment Adviser provides the

Investment Manager and the Board with

a regular report on pipeline opportunities,

which includes an analysis of the strength

of the pipeline and the returns available. The

Directors also regularly receive information

on the performance of the existing loans,

including the performance of underlying assets

versus underwritten business plan and the

likelihood of any early repayments, the need

for any loan amendments to allow the loans

continue to perform in different economic

circumstances which may impact returns.

The Board monitors investment strategy

and performance on an ongoing basis and

regularly reviews the Investment Objective

and Investment Policy in light of prevailing

investor sentiment to ensure the Company

remains attractive to its shareholders.

Market Deterioration Risk (risk of the

economies in which the Group operates

either stagnate or go into recession)

The Group’s investments are comprised

principally of debt investments in the UK

and the European Union’s internal market

and it is therefore exposed to economic

movements and changes in these markets.

Any deterioration in the global, UK or

European economy could have a significant

adverse effect on the activities of the Group

and may result in significant loan defaults or

impairments.

The Covid-19 pandemic has had a material

impact on global economies and on the

operations of the Group’s borrowers during

2021 (as it had in 2020). The Covid-19

pandemic presented and potentially presents

a continued risk to growth and the full impact

of the consequences for the world economy

is unclear.

The situation in Ukraine, which has become

more unstable since February 2022 with

the incursion into Ukraine by Russia, also

presents a significant risk to European and

Global economies and, potentially, world

peace. While the Group has no direct or

known indirect involvement with Ukraine,

Russia or Belarus it may be impacted by

the consequences of the usability caused

by the Ukrainian/Russian conflict.

The impact of the United Kingdom’s

departure from the European Union in 2020

still represents a potential threat to the UK

economy as well as wider Europe. On a

cyclical view, the national economies across

Europe appear to be heading towards lower

growth, and alongside the economic impact

of Covid-19 and the destabilising impact of

the conflict in Ukraine, towards recession.

The Board have considered the impact of

market deterioration on the current and

future operations of the Group and its

portfolio of loans advanced. Because of the

cash and loan facilities available to the Group

and the underlying quality of the portfolio

of loans advanced, both the Investment

Manager and the Board still believe the

fundamentals of the portfolio remain

The Investment Adviser provides the

Investment Manager and the Board with

a regular report on pipeline opportunities,

which includes an analysis of the strength

of the pipeline and the returns available. The

Directors also regularly receive information

on the performance of the existing loans,

including the performance of underlying assets

versus underwritten business plan and the

likelihood of any early repayments, the need

for any loan amendments to allow the loans

continue to perform in different economic

circumstances which may impact returns.

Interest Rate Risk

The Group is subject to the risk that the loan

income and income from the cash and cash

equivalents will fluctuate due to movements

in interbank rates.

The Investment Adviser is managing the

transition from LIBOR to SONIA on behalf of

the Group. The Group has ensured that loan

agreements for the current portfolio are in

a form which accommodates the flexibilities

required to manage the transition.

The loans in place at 31 December 2021

have been structured so that 22 per cent

by value of the loans are fixed rate, which

provides protection from downward interest

rate movements to the overall portfolio (but

also prevents the Group from benefiting from

any interbank rate rises on these positions).

In addition, whilst the remaining 78 per cent

is classified as floating, 100 per cent of these

loans are subject to interbank rate floors

such that the interest cannot drop below a

certain level, which offers some protection

against downward interest rate risk. When

reviewing future investments, the Investment

Manager will continue to review such

opportunities to protect against downward

interest rate risk.

Foreign Exchange Risk

The majority of the Group’s investments are

Sterling denominated (circa 58 per cent as

at 31 December 2021) with the remainder

being Euro denominated. The Group is subject

to the risk that the exchange rates move

unfavourably and that a) foreign exchange

losses on the Euro loan principals are incurred

and b) that Euro interest payments received

The Investment Adviser meets with all

borrowers on a regular basis to monitor

developments in respect of each loan and

reports to the Investment Manager and the

Board periodically and on an ad hoc basis

where considered necessary.

The Group’s loans are held at amortised cost.

The performance of each loan is reviewed

quarterly by the Investment Adviser for any

indicators of significant increase in credit risk,

impaired or defaulted loans. The Investment

Adviser also provides their assessment of any

expected credit loss for each loan advanced.

The results of the performance review and

allowance for expected credit losses are

discussed with the Investment Manager and

the Board.

Six loans (one of which was fully repaid

in 2021), predominantly in the retail and

hospitality sectors, were moved to Stage

2 (increased risk of default) during 2020

as a result of the uncertainty caused by

the impact of the Covid-19 pandemic. Two

of these loans have now stabilised to the

extent that they have now been moved

back to Stage 1 (which indicates that they

are judged to be at the same risk of default

as they were when they were originally

underwritten). The three loans currently

classified as Stage 2 account for 14 per

cent of the loans advanced by the Group

as at 31 December 2021. No expected

credit losses have been recognised against

any of the loans, because of the strong

LTVs across the loan portfolio and strong

contractual agreements with Borrowers,

including against these Stage 2 loans.

The reasons, estimates and judgements

supporting this assessment are described in

the Investment Manager’s report.

Prepayment Risk (risk of more favorable

loan terms being available to borrowers

which would lead to the early prepayment

of loans advanced)

All loans are provided to borrowers on

a contractual basis which will ensure a

minimum return to the Group in the event of

early repayment.

Strategic and Business Review

Strategic Report

optimistic and that the Group can adequately

support the portfolio of loans advanced

despite current market conditions.

In the event of a loan default in the

portfolio, the Group is generally entitled to

accelerate the loan and enforce security,

but the process may be expensive and

lengthy, and the outcome is dependent on

sufficient recoveries being made to repay the

borrower’s obligations and associated costs.

Some of the investments held would rank

behind senior debt tranches for repayment in

the event that a borrower defaults, with the

consequence of greater risk of partial or total

loss. In addition, repayment of loans by the

borrower at maturity could be subject to the

availability of refinancing options, including

the availability of senior and subordinated

debt and is also subject to the underlying

value of the real estate collateral at the date

of maturity. The Group is mitigated against

this with an average weighted loan to value

of the portfolio of 61.9 per cent. Therefore,

the portfolio should be able to withstand a

significant level of deterioration before credit

losses are incurred.

The Investment Adviser also mitigates

the risk of credit losses by undertaking

detailed due diligence on each loan. Whilst

the precise scope of due diligence will

depend on the proposed investment, such

diligence will typically include independent

valuations, building, measurement and

environmental surveys, legal reviews of

property title, assessment of the strength of

the borrower’s management team and key

leases and, where necessary, mechanical

and engineering surveys, accounting and tax

reviews and know your customer checks.

The Investment Adviser, Investment Manager

and Board also manage these risks by

ensuring a diversification of investments in

terms of geography, market and type of loan.

The Investment Manager and Investment

Adviser operate in accordance with the

guidelines, investment limits and restrictions

policy determined by the Board. The Directors

review the portfolio against these guidelines,

limits and restrictions on a regular basis.

are lower than anticipated when converted

back to Sterling and therefore returns are

lower than the underwritten returns.

The Group manages this risk by entering into

forward contracts to hedge the currency risk.

All non-Sterling loan principal is hedged back

to Sterling to the maturity date of the loan.

Interest payments are normally hedged for

the period for which prepayment protection

is in place. However, the risk remains that

loans are repaid earlier than anticipated and

forward contracts need to be broken early.

In these circumstances, the forward curve

may have moved since the forward contracts

were placed which can impact the rate

received. In addition, if the loan repays after

the prepayment protection, interest after

the prepayment-protected period may be

received at a lower rate than anticipated

leading to lower returns for that period.

Conversely, the rate could have improved,

and returns may increase.

As a consequence of the hedging strategy

employed as outlined above, the Group is

subject to the risk that it will need to post

cash collateral against the mark to market on

foreign exchange hedges which could lead to

liquidity issues or leave the Group unable to

hedge new non-Sterling investments.

The Company had approximately £183.8

million of hedged notional exposure with

Lloyds Bank plc at 31 December 2021

(converted at 31 December 2021 FX rates).

As at 31 December 2021, the hedges were

in the money. If the hedges move out of the

money and at any time this mark to market

exceeds £15 million, the Company is required

to post collateral, subject to a minimum

transfer amount of £1 million. This situation

is monitored closely, however, and as at 31

December 2021, the Company had sufficient

liquidity and credit available on the revolving

credit facility to meet any cash collateral

requirements.

Risk of Default under the Revolving

Credit Facilities

The Group is subject to the risk that a

borrower could be unable or unwilling to

meet a commitment that it has entered

into with the Group as outlined above under

market deterioration risk. As a consequence

of this, the Group could breach the

covenants of its revolving credit facilities and

fall into default itself.

A number of the measures the Group takes to

mitigate market deterioration risk as outlined

above, such as portfolio diversification and

rigorous due diligence on investments and

monitoring of borrowers, will also help to

protect the Group from the risk of default

under the revolving credit facility as this is only

likely to occur as a consequence of borrower

defaults or loan impairments.

The Board regularly reviews the balances

drawn under the credit facility against

commitments and pipeline and reviews the

performance under the agreed covenants.

The loan covenants are also stress tested to

test how robust they are to withstand default

of the Group’s investments.

Cybercrime

The Group is subject to the risk of

unauthorised access into systems,

identification of passwords or deleting data,

which could result in loss of sensitive data,

breach of data physical and electronic,

amongst other potential consequences. This

risk is managed and mitigated by regular

reviews of the Group’s operational and

financial control environment. The matter

is also contained within service providers

surveys which is completed by Group’s

service providers and is regularly reviewed by

the Board. No adverse findings in connection

with the service provider surveys have

been found. The Company and its service

providers have policies and procedures in

place to mitigate this risk, the cybercrime risk

continues to be closely monitored.

Regulatory risk

The Group is also subject to regulatory risk

as a result of any changes in regulations

or legislation. Constant monitoring by the

Investment Advisor, Investment Manager

and the Board is in place to ensure the Group

keeps up to date with any regulatory changes

and compliance with them.

Operational risk

The Group has no employees and is reliant

on the performance of third-party service

providers. Failure by the Investment Manager,

Investment Adviser, Administrator or any

other third-party service provider to perform in

accordance with the terms of its appointment

could have a material detrimental impact on

the operation of the Company.

The Board maintains close contact with

all service providers to ensure that the

operational risks are minimised.

Emerging Risks

Emerging risks to the Group are considered

by the Board to be trends, innovations and

potential rule changes relevant to the real

estate mortgage and financial sector. The

challenge to the Group is that emerging

risks are known to some extent but are not

likely to materialise or have an impact in the

near term. The Board regularly reviews and

discusses the risk matrix and has identified

climate change as an emerging risk.

Climate change

The consequences that climate change could

have are potentially severe but highly uncertain.

The potential high impact of possible losses has

done a lot to raise the awareness of this risk in

investment circles. The Board, in conjunction

with the Investment Adviser, considers the

possible physical and transitional impact of

climate change on properties secured on

loans provided by the Group and includes

the consideration of such factors in valuation

instructions of the collateral properties and in

considering any potential expected credit losses

on loans. The Investment Adviser considers

the possible physical and transitional impact

of climate change as part of the origination

process. In addition, the Board, in conjunction

with the Investment Adviser, is monitoring

closely the regulation and any developments

in this area (see ‘Environmental, Social and

Corporate’ section for further information).

Strategic and Business Review

Strategic Report

ASSESSMENT OF PROSPECTS

The Group’s strategy is central to an

understanding of its prospects. The Group’s

focus is twofold:

i) to manage expected repayments, including

proactively managing the investments

already made to ensure that during times of

economic instability on either a macro (as

experienced during the year as a result of the

Covid-19 pandemic) or micro level, the loans

continue to perform and provide positive

returns to the Group, and

ii) continuing to grow the Group, by sourcing

investments with good risk adjusted returns

in order to minimise any potential for cash

drag and improve the Group’s returns. The

Group’s prospects are assessed primarily

through its strategic review process, which

the Board participates fully in. The Directors’

have assessed the prospects of the Group

over a period of three years which has been

selected because the strategic review covers

a three-year period. The Group updates its

plan and financial forecasts on a monthly basis

and detailed financial forecasts are maintained

and reviewed by the Board regularly.

In addition, the Directors have considered the

realisation vote which will, under the Articles,

take place no later than 28 February 2023. As

a result of the strong fundamentals supporting

the Company’s investment strategy, robust

operating metrics displayed by the Company

which include a consistent dividend yield and

stable NAV, combined with the strong financial

position of the Company, the Directors believe

there is a compelling rationale for shareholders

to vote against a Realisation Offer and

Realisation Vote and that the Company will

continuing as constituted.

ASSESSMENT OF VIABILITY

Although the strategic review reflects

the Directors’ best estimate of the future

prospects of the business, they have also

tested the potential impact on the Group of

a number of scenarios over and above those

included in the review, by quantifying their

financial impact. These scenarios are based

on aspects of the following selected principal

risks, which are detailed in this Strategic

Report, and as described below:

• Foreign exchange risk;

• Market deterioration risk; specifically the

risk that the all the Stage 2 loans held

default, resulting in a loss of interest income

and delay in the repayment of capital; and

• Risk of default under the revolving

credit facilities.

These scenarios represent ‘severe but

plausible’ circumstances that the Group could

experience. The scenarios tested included:

• A high level of loan default meaning that

the Group stopped receiving interest on

the Stage 2 loans in the portfolio and that

the outstanding capital on these loans was

not received until 12 months after the loan

maturity date;

• An analysis of the robustness of the

covenants under the revolving credit facility

to withstand default of the underlying

investments; and

• A deterioration in the valuation of the

foreign exchange hedges such that the

company is required to post collateral up

to £5m.

The results of this stress testing showed that

the Group would be able to withstand a high

level of underlying loan default or impairment

resulting from either of the risks identified

over the period of the financial forecasts

albeit the dividend may need to be reduced

to reflect the reduced cash received.

VIABILITY STATEMENT

In addition to the assessment of prospects

and viability above, the Directors also

have a reasonable expectation, based on

the scenarios testing, that the Group will

continue to meet its liabilities as they fall

due over the three-year period ending 31

December 2024, and therefore the Group

is expected to remain viable from both a

business model, strategic opportunity and

financial perspective.

Notwithstanding the above, and as disclosed

in note 2 to these financial statements, there

is a material uncertainty as to the outcome of

the realisation offer and realisation vote that

may cast substantial doubt on the Group’s

ability to continue as a going concern. The

financial statements have not been modified

in respect of this matter.

In connection with the viability statement,

the Board confirm that they have carried out

a robust assessment of the principal and

emerging risks facing the company, including

those that would threaten its business model,

future performance, solvency or liquidity.

ENVIRONMENTAL, SOCIAL AND

CORPORATE GOVERNANCE

“ESG”

As an investment company, the Board and the

Investment Adviser consider the Group’s direct

activities to have a minimal direct impact on

the environment. Nevertheless, the Board

regularly monitors and discusses ESG matters

both at the Board meetings and with the

Investment Manager and Investment Adviser.

The Investment Manager and Investment

Adviser are part of the Starwood Capital

Group (SCG), which is a signatory to the

UN Principles for Responsible Investments

(UNPRI). In assessing new loans SCG

evaluates environmental risks associated

with any investments as part of the

underwriting process. A formal scope of work

is followed by the Investment Adviser, which

requires an environmental site assessment to

be performed which identifies environmental

conditions that may have a material adverse

impact on the property being assessed

or its immediate surrounding area and an

assessment of a property’s sustainability

and marketability through the review of its

environmentally friendly characteristics.

The Board recognises that it has no direct

control over a borrower’s company policy

towards environment and social responsibility

and whilst it is an important part of the

due diligence process in understanding

the impact of such issues, decisions are

not weighted towards those investments

with stronger environmental and social

characteristics. It should be noted that a

number of the loans made by the Group

involve refurbishment projects and these

will often improve the environmental impact

of the real estate concerned. Additionally,

whilst it is not an investment criteria, the

Group’s loan portfolio is significantly funded

in sectors with positive social impact such as

hospitality, healthcare and residential.

In carrying out its activities and in its

relationship with the community, the Group

aims to conduct itself responsibly, ethically

and fairly; including in relation to social and

human rights issues. This approach is built

into the Investment Adviser’s origination and

underwriting process. Our risk management

framework is intended to facilitate an

enterprise wide view of risk that supports a

strong and collaborative risk management

culture within the Board and with its

relationship with SCG.

The Board (through its relationships with

SCG, its brokers and other advisers) is

focused on maintaining a productive dialogue

with shareholders and gathering feedback to

inform the decision making at Board level.

The SCG, with in excess of 4,100 employees

worldwide, takes its social responsibilities

to its employees very seriously offering

a challenging, fast-paced and collegial

environment to its employees. SCG strives

to create diverse and inclusive workplaces

where all employees can perform to their

full potential and to be a good corporate

citizen for their communities by supporting

charitable organisations that promote

education and social wellbeing.

As an investment fund, the Group outsources

many of its activities to external service

providers and, therefore, the Group has no

direct Greenhouse Gas Emissions to report

from its own operations and is currently not

required to report on any other emission

producing sources.

While there is some travel involved for

the Directors and representatives from

the Investment Adviser, the Company’s

service providers are Guernsey office-

based companies, and the majority of the

Directors are based in Guernsey, thus having

a relatively low impact on the environment

and negating the need for long commutes

or flights to and from Board meetings. As

a result of Covid-19 there has been an

acceleration in the use of interactive and

virtual technology for meetings, further

reducing the need for travel.

The Group has no employees and the Board

is composed entirely of non-executive

Directors. Therefore, the Group is not within

scope of the Modern Slavery Act 2015 and

is therefore not obliged to make a human

trafficking statement. However, the business

of the Company is conducted ethically and

with integrity and has a zero tolerance policy

towards modern slavery.

BOARD DIVERSITY

The Board considers that its members

have a balance of skills, qualifications

and experience which are relevant to

the Company. The Board supports the

recommendations of the Davies Report,

the Hampton Alexander Review and

the Parker Review and believes in the

value and importance of diversity in the

boardroom and it continues to consider

the recommendations of these reports and

reviews as part of its succession planning.

The Company has no employees and therefore

has no disclosures to make in this regard.

John Whittle | Chairman

23 March 2022

MARKET SUMMARY AND

INVESTMENT OUTLOOK

2021 was a very active year in many markets

and was a record year for Starwood’s

European real estate credit business with

new business of £2.8 billion and a pipeline

that continues to be at record volumes. We

saw similar trends in other areas of non-bank

lending to real estate. European CMBS volume

in 2021 was three times higher than in 2020

and over twice the past 5-year average with

€7.2 billion of new issuance. It was a record-

breaking year in the real estate corporate bond

space with issuance in the unsecured market

growing approximately 50 per cent compared

to 2020. There was over €66 billion of new

issuance in 2021 driven both by new issuers

making their debut in the unsecured market

and by M&A financing.

In the equity markets, there were also

healthy levels of activity in the real estate

sector during 2021. CBRE transaction data

showed total European transaction volume

of €359 billion topping the pre-pandemic

volume of €333 billion from 2019. In public

markets 2021 volumes are significantly higher

than recent years at €111 billion (versus

€51 billion, €72 billion and €53 billion for

2018, 2019 and 2020, respectively). For

the full year, the real estate equities have

out-performed UK equities as a whole. The

iShares UK Property ETF increased in 2021 by

25.5 per cent versus an increase in the FTSE

All-Share of 14.6 per cent.

The Investment Adviser recently spent time

with PWC discussing their Emerging Trends

in Real Estate 2022 report where many

themes resonated, and it is well worth a

read. PWC found sentiment in the industry

at a high level with business confidence,

profitability and headcount indices at some

of the highest levels of the last ten years. The

top four real estate business risks stated were

construction costs and resource availability,

availability of suitable assets, sustainability /

decarbonisation and government intervention.

It was interesting that only a relatively low

61 per cent of respondents were concerned

about sustainability / decarbonisation. As a

rapidly changing area, it will require even best

in class businesses to evolve with maturing

approaches to this important area. We can

see all four of these top risks at play in the

pipeline and our loan underwriting is tailored

to consider the specific risks. For example,

we are seeing good opportunities for lending

in the residential development space but

amongst other things we will be particularly

focussed on areas such as appropriate cost

overrun protections, understanding the

carbon impact of the project and regulatory

uncertainties such as the potential burden of

new levies on developers to address historical

cladding issues in the UK.

London regained the top spot from Berlin for

overall investment and development prospects

in the PWC report this year with Paris

retaining third place. UK and German volumes

taken together are greater than the rest of

Europe altogether. The dynamism, volume

and liquidity of the UK investment market are

some of the reasons that the UK makes up

the highest proportion of our European loan

book. Furthermore, PWC’s report highlights

strong investor sentiment to alternate real

estate asset classes. This is an area where

we continue to see good opportunities for

the Group with investments in life sciences,

healthcare, student, leisure and hospitality

already having featured. Working with high

quality operators in these specialist areas is

key and the Investment Adviser’s experience

and hands-on approach to underwriting

operational real estate and the operating

partners continues to position us well to serve

borrowers in these markets while achieving

excellent risk adjusted returns for the Group.

In the capital markets, the early days of

2022 saw markets dominated by inflation

considerations. New record inflation levels

continue month to month with January

headline inflation for the Eurozone coming

in at the highest recorded figure since the

inception of the Euro currency at 5.8 per cent

well ahead of economists’ expectations of 5.3

per cent. The UK CPI rate for January was

5.5 per cent and, in the US, the February

CPI level was 7.5 per cent. Much of the

increase in these inflation numbers comes

from increased energy costs, which are

likely to plateau at some point. Energy prices

were up 31.7 per cent compared to a year

earlier for Europe. After stripping out energy

and food, core inflation was 2.7 per cent for

Europe. This has been reflected in interest

rate markets where rates have risen rapidly

since the beginning of 2022. 5 year sterling

swap rates are currently at 1.76 per cent

having increased significantly from 0.37 per

cent since this time last year. The knock on

effect of higher interest rates has been felt

in growth stocks with non-profitable tech in

particular being negatively impacted. Overall

indices values are hiding some big differences

between winners and losers. In January

already the number of Nasdaq stocks was

down by 50 per cent or more and it was

almost at a record with 40 per cent of the

index’s firms having fallen by half from one-

year highs.

Markets that had already been jittery in early

2022 became increasingly volatile following

the invasion of Ukraine by Russia. In addition

to the broad market reaction, the rapid and

decisive high levels of coordinated sanctions

imposed on Russia have led to especially

sharp moves in companies with exposure to

Russia. Oil rose to its highest level for 14 years

and at its peak of $140 a barrel in early March

it almost touched all time highs. Persistently

higher oil and gas will compound pre-existing

inflationary pressures further. We are likely

to see continued reduced activity and higher

volatility levels in markets generally until a

clear picture of the consequences of Russia’s

actions emerges.

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Investment Manager’s Report

PORTFOLIO STATISTICS

As at 31 December 2021, the portfolio was invested in line with the Group’s investment policy

and is summarised below.

The maturity profile of investments as at 31 December 2021 is shown below.

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Investment Manager’s Report

31 December

2021

31 December

2020

Number of investments 19 18

Percentage of invested portfolio in floating rate loans

(1)

78.0% 79.2%

Invested Loan Portfolio unlevered annualised total return

(1)

6.9% 6.7%

Invested Loan Portfolio levered annualised total return

(1)

7.0% 7.0%

Weighted average portfolio LTV – to Group first £

(1)

16.4% 18.2%

Weighted average portfolio LTV – to Group last £

(1)

61.9% 61.8%

Average loan term (stated maturity at inception) 4.9 years 4.5 years

Average remaining loan term 2.3 years 2.4 years

Net Asset Value £421.6 m £426.7 m

Amount drawn under Revolving Credit Facility

(including accrued interest)

(£8.5 m) (£19.5 m)

Loans advanced at amortised cost

(including accrued income)

£414.6 m £442.7 m

Cash £3.0 m £2.9 m

Other net assets / (liabilities)

(including the value of FX hedges)

£12.5 m £0.7 m

(1)

Alternative Performance Measure – refer to page 98 for definitions and methodology.

excludes any permitted extensions. Note that borrowers may elect to repay loans before contractual maturity.

Sector

% of invested

assets

Hospitality 40.8

Office 22.1

Retail 12.4

Residential 11.3

Healthcare 6.1

Life Sciences 4.7

Light Industrial 1.2

Logistics 1.2

Other 0.2

Country

% of invested

assets

UK 56.8

Republic of Ireland 19.9

Spain 16.9

Netherlands 2.9

Germany 2.6

Finland 0.9

Remaining years to

contractual maturity

Value of loans

(£m)

% of invested

portfolio

0 to 1 years 104.6 25.4%

1 to 2 years 85.3 20.7%

2 to 3 years 106.5 25.8%

3 to 5 years 115.6 28.1%

Loan currency

% of invested

assets

Sterling 56.8

Euro 43.2

Loan type

% of invested

assets

Whole loans 64.4

Mezzanine 35.6

PORTFOLIO DIVERSIFICATION

The Group continues to achieve good portfolio

diversification as shown in the tables below:

The currency split refers to the underlying loan currency; however,

the capital and interest during protected periods on all non-sterling

exposure is hedged back to sterling.

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INVESTMENT DEPLOYMENT

As at 31 December 2021, the Group had 19 investments and commitments of £456.5 million as follows:

Transaction

Sterling

equivalent

balance

(1)

Sterling

equivalent unfunded

commitment

(1)

Sterling Total (Drawn

and Unfunded)

Hotels, UK £30.4 m £20.3 m £50.7 m

Hotel & Residential, UK £49.9 m - £49.9 m

Hotel, Scotland £42.6 m

£42.6 m

Life Science, UK £19.5 m £7.1 m £26.6 m

Hospitals, UK £25.0 m - £25.0 m

Hotel, Oxford £21.5 m £1.5 m £23.0 m

Office, London £13.9 m £6.6 m £20.5 m

Hotel, North Berwick £14.1 m £0.9 m £15.0 m

Hotel and Office, Northern Ireland £12.5 m - £12.5 m

Office, Scotland £5.0 m

£5.0 m

Total Sterling Loans £234.4 m £36.4 m £270.8 m

Hotel, Dublin £50.3 m - £50.3 m

Three Shopping Centres, Spain £29.9 m - £29.9 m

Office Portfolio, Ireland £26.6 m - £26.6 m

Mixed Portfolio, Europe £21.5 m - £21.5 m

Office, Madrid, Spain £15.5 m £0.8 m £16.3 m

Shopping Centre, Spain £14.3 m - £14.3 m

Mixed Use, Dublin £5.1 m £7.2 m £12.3 m

Office Portfolio, Spain £9.5 m £0.1 m £9.6 m

Logistics Portfolio, Germany £4.9 m - £4.9 m

Total Euro Loans £177.6 m £8.1 m £185.7 m

Total Portfolio £412.0 m £44.5 m £456.5 m

(1)

Euro balances translated to sterling at period end exchange rates.

Between 1 January and 31 December 2021,

the following significant investments activity

occurred (included in the table above):

New Loan: Life Science, UK: On 22 April

2021, the Group announced that it had

closed a £26.6 million floating rate whole

loan secured by a portfolio of four properties.

The properties consist of laboratory and

office spaces let to a diverse range of life

science occupiers in the UK. The financing

has been provided in the form of an initial

advance along with a smaller capex facility

to support the borrower’s value-enhancing

capex initiatives. The loan term is 4 years,

and the Group expects to earn an attractive

risk-adjusted return in line with its stated

investment strategy.

New Loan: Hotel & Office, Northern Ireland:

On 21 July 2021, the Group announced that it

had closed a £13.5 million floating rate whole

loan secured by a mixed use portfolio of hotel

and office property. The financing has been

provided in the form of an acquisition loan. The

loan term is 3 years, and the Group expects to

earn an attractive risk-adjusted return in line

with its stated investment strategy.

New Loan: Hotels, United Kingdom:

In November 2021, the Group announced

that it closed a £76 million floating rate,

acquisition and capital expenditure whole

loan secured on a portfolio of two UK

based hotel assets. This loan was closed

in conjunction with Starwood European

Real Debt Finance I and its subsidiaries, a

newly launched, Guernsey domiciled, private

debt fund acting as co-lender. The Group

has taken on two thirds of the £76 million

commitment, with the private debt fund

taking the other third. The loan term is five

years, and the Group expects to earn an

attractive risk-adjusted return in line with

its stated investment strategy. The portfolio

consists of two hotels in attractive city centre

locations in Manchester and Edinburgh. The

hotels will be rebranded, targeting domestic

and international visitors in two of Europe’s

best performing markets in 2021.

Loan Repayments

The following material loan repayments were

received during the year:

Repayment Of Loan: Residential, London -

This loan which had a balance outstanding of

£25.1 million on 31 December 2020 was fully

repaid during the first four months of 2021.

Repayment Of Loan: Hotel, Spain -

In July 2021, the Group received the full

and final repayment of its €54.2m loan on

a resort hotel in Spain.

Amortisation

The following material loan amortisation

amounts were received during the year:

• €7.1 million of unscheduled amortisation on

the loan on the mixed portfolio in Europe,

following a portfolio of asset sales which was

in line with the borrower’s business plan;

• £12.0 million of unscheduled amortisation

on Logistics Portfolio, UK, following a

portfolio of asset sales which was in line

with the borrower’s business plan; the UK

portion of this loan is now fully repaid but

the Euro portion is still outstanding;

• €0.6 million of unscheduled amortisation

on Logistics Portfolio, Germany, following

a portfolio of asset sales which was in line

with the borrower’s business plan; and

• €10.5 million of unscheduled amortisation

and partial repayment on Office Portfolio,

Spain, following an asset sale and

successful refinancing of that loan.

The Group also advanced £28.5 million

to borrowers to which it had outstanding

commitments during the year ended

31 December 2021.

PORTFOLIO OVERVIEW

The portfolio performed robustly throughout

2021 despite the backdrop of the pandemic.

Since year end the Russian / Ukrainian crisis

has fully emerged, however up to the date

of this report, there are no direct adverse

impacts on the portfolio and we will be

monitoring closing any indirect impact related

to matters such as energy cost inflation,

supply chain disruption, impacts on global

travel, liquidity flows etc. All loan interest

and scheduled amortisation payments up to

the date of 23 March 2022 have been paid

in full and on time in line with expectations.

There were no closures of trading assets,

construction or refurbishment projects

as a result of the Omicron variant related

disruption which emerged in late Q4 2021.

The office portfolio also continues to perform

very satisfactorily, and we have seen positive

instances of borrowers successfully leasing

refurbished office space above underwritten

projections and completing strong sales

processes where business plans have

been executed. All loans remain adequately

capitalised by sponsors.

All income producing assets securing the

loans undergo regular third party valuations,

with assets under development or heavy

refurbishment typically being valued prior

to commencement of projects and upon

achieving completion. The weighted average

age of the valuations for the income producing

portfolio (i.e. excluding loans for development

or heavy refurbishment) is 1.04 years as at

31 December 2021. The Group had an

average last £ LTV of 61.9 per cent across

the total loan portfolio (see Loan to Value

section below also).

Key updates in relation to pandemic impacted

sectors are outlined below:

Hospitality (41 per cent of funded

investment portfolio)

• The Group’s hospitality exposure is currently

weighted to leisure-dominated assets

located in the UK. Approximately 72 per cent

of the Group’s hotel exposure is secured

on assets that are leisure focused rather

than corporate or meeting and events

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Investment Manager’s Report

driven assets. 75 per cent of the Group’s

hospitality exposure is located in the UK,

where over the past six months, there have

been significantly fewer restrictions on the

hospitality trade than in other jurisdictions

and these UK markets have seen strong

domestic led demand following re-opening

of hotels in late Q2 2021.

• Furthermore, approximately 72 per cent

of the Group’s hospitality exposure is

secured on assets that have either been

comprehensively refurbished during 2021

or are in a phase of refurbishment or

construction with the capital in place to

complete the projects. These assets will

therefore have a strong new product with

which to compete and are expected to

perform well in their respective markets.

• The Group’s only exposure to a large

meeting and event driven hotel is “Hotel,

Dublin” (approximately 25 per cent of the

total hospitality exposure) which remained

subject to an occupational contract with

the Irish Health Executive during 2021.

The hotel successfully re-opened and

resumed normal trading activity in early

February 2022, shortly following the

maturity of this contract. It is expected

that the hotel will recover well, with trading

ramping back up during 2022 as the hotel

is domestic market focused, with a strong

order book of customers wishing to run

annual events that have been postponed for

up to two years.

Retail (12 per cent of funded investment

portfolio)

• All retail loans have continued to pay

interest and scheduled amortisation since

the onset of the pandemic.

• The Group’s exposure to retail is

predominantly comprised of the “Three

Shopping Centres, Spain” and “Shopping

Centre, Spain” loans. These are the only

stand-alone retail loans in the portfolio and

comprise 11 per cent of the Group’s total

funded investment portfolio and 87 per

cent of total retail exposure. All other retail

exposure is contained in a limited number of

mixed use portfolios.

• As previously reported, with restrictions

being eased over the second half of 2021

in Europe, along with high vaccination

rates, retail footfall traffic had recovered on

average to over 70 per cent in 2021 versus

2019 and the positive trajectory is expected

to continue into 2022.

• The sponsor continues active asset

management of the centres, having

executed a number of new lettings to

strong tenants during 2021 and deployed

additional equity to support tenant fit out

and incentives where warranted. Tenant

occupancy in aggregate across the centres

has continued to be robust and is on

average higher than pre-pandemic levels.

Office (22 per cent of funded investment

portfolio)

• There has been much debate about

the future of the office and what the

quantum and shape of demand will be

going forward. There is, however, an

established consensus that having good

quality office space for employees to gather

and collaborate is of vital importance to

business successes. The Group’s exposure

to office is considered to be well placed

and is highly diversified across eight

loan investments which comprise many

underlying individual properties located in

eight different countries across Europe.

The office portfolios have performed well

on rent collection and occupation during

the pandemic, with all loans continuing to

pay interest and any scheduled amortization

throughout.

• Just under 50 per cent of the Group’s office

exposure are loans where refurbishment

or construction facilities are in place which

will result in these assets being either brand

new attractive office buildings or newly

refurbished space upon completion of their

respective projects. An example of this

was realized in Q4 2021, where the office

building secured under the “Office, London”

loan, representing approximately 15 per

cent of the total office exposure, has been

successfully pre-let to a strong tenant. The

office building is located in Central London

and is currently under heavy refurbishment.

The rent agreed was in line with market and

ahead of the pre-pandemic underwritten

level. This letting has substantially de-risked

the Group’s exposure on this loan, even

in advance of the refurbishment project

completing. The pre-letting has further

demonstrated that demand for good quality

office space remains. Post year end the

sponsor of this office has agreed a sale of the

building to an institutional investor at a price

that exceeds the Company’s independent

valuation, we expect the loan to be repaid

during 2022.

LIQUIDITY AND HEDGING

The Group is very modestly levered with net

debt of £8.5 million (2.0 per cent of NAV)

at 31 December 2021 and has significant

liquidity available with undrawn revolving

credit facilities (see note 17(c) for further

information) of £117.5 million to fund existing

and new commitments.

The way in which the Group’s borrowing

facilities are structured means that it does not

need to fund mark to market margin calls. The

Group does have the obligation to post cash

collateral under its hedging facilities. However,

cash would not need to be posted until the

hedges are more than £20 million out of the

money. The mark to market of the hedges at

31 December 2021 was £13.6 million (in the

money) and with the robust hedging structure

employed by the Group, cash collateral has

never been required to be posted since

inception. The Group has the majority of its

investments currently denominated in Sterling

(although this can change over time) and is

a sterling denominated group. The Group is

therefore subject to the risk that exchange

rates move unfavourably and that a) foreign

exchange losses on the loan principal are

incurred and b) that interest payments

received are lower than anticipated when

converted back to Sterling and therefore

returns are lower than the underwritten

returns. The Group manages this risk by

entering into forward contracts to hedge the

currency risk. All non-Sterling loan principal

is hedged back to Sterling to the maturity

date of the loan (unless it was funded using

the revolving credit facilities in which case it

will have a natural hedge). Interest payments

are generally hedged for the period for which

prepayment protection is in place. However,

the risk remains that loans are repaid earlier

than anticipated and forward contracts need

to be broken early. In these circumstances

the forward curve may have moved since the

forward contracts were placed which can

impact the rate received. In addition, if the

loan repays after the prepayment protection,

interest after the prepayment protected

period may be received at a lower rate than

anticipated leading to lower returns for

that period. Conversely the rate could have

improved and returns may increase.

TRANSITION TO SONIA FROM

LIBOR

The Investment Manager has overseen the

transition from LIBOR to SONIA for each of

the loans impacted on behalf of the Group.

The Group had ensured that loan agreements

for the current portfolio are in a form which

accommodates the flexibilities required to

manage the transition. In addition, the three

new Sterling loans entered into during 2021

(and referred to elsewhere) have interest

charges linked to SONIA rather than LIBOR.

At Initial Recognition

Recognise a loss allowance equal to 12 months expected

credit losses resulting from default events that are possible

within 12 months.

After initial recognition:

Stage 1

Credit risk has not increased significantly since initial recognition.

Recognise 12 months expected credit losses.

Stage 2

Credit risk has increased significantly since initial recognition.

Recognise lifetime expected losses.

Interest revenue recognised on a gross basis.

Stage 3

Credit impaired financial asset.

Recognise lifetime expected losses.

Interest revenue recognised on a net basis (i.e., losses are

“above the line” and impact P&L and NAV).

EXPECTED CREDIT LOSSES

IMPAIRMENT

All loans within the portfolio are classified and

measured at amortised cost less impairment.

Under IFRS 9 a three stage approach for

recognition of impairment was introduced,

based on whether there has been a significant

deterioration in the credit risk of a financial

asset since initial recognition. These three

stages then determine the amount of

impairment provision recognised.

For the purposes of classifying between

stages 1 to 3 after initial recognition, the

Group considers a change in credit risk based

on a combination of the following factors:

• Underlying income performance is at a

greater than 10 per cent variance to the

underwritten loan metrics;

• Loan to Value is greater than 75-80 per cent;

• Loan to Value or income covenant test

results are at a variance of greater than

5-10 per cent of loan default covenant level;

• Late payments have occurred and not

been cured;

• Loan maturity date is within six months

and the borrower has not presented an

achievable refinance or repayment plan;

• Covenant and performance milestones

criteria under the loan have required more

than two waivers;

• Increased credit risk has been identified on

tenants representing greater than 25 per

cent of underlying asset income;

• Income rollover / tenant break options exist

such that a lease up of more than 30 per

cent of underlying property will be required

within 12 months in order to meet loan

covenants and interest payments; and

• Borrower management team quality has

adversely changed.

At 31 December 2020, six loans with a value

of 35.3 per cent of NAV were classified

as Stage 2 and the remaining loans were

classified as Stage 1. During 2021, one of the

loans classified as Stage 2 was fully repaid

and, at year end, two of the five remaining

Stage 2 loans were reclassified to Stage 1

loans following a review of their most recent

performance.

Therefore, at 31 December 2021, three loans

with a value of 14 per cent of NAV remain

classified as Stage 2 and the remaining loans

are classified as Stage 1. The loans classified

to Stage 2 are predominantly in the retail and

hospitality sectors (but not all hospitality loans

are in Stage 2). The main reason for leaving

these in Stage 2 was the continued impact of

Covid-19 on these assets.

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Investment Manager’s Report

It is important to note that although these

three loans have been classified as Stage 2,

no expected credit losses (“ECLs”) have been

recognised. This is because the formula for

calculating the expected credit loss is:

“Present Value of loan” x “probability of

default” x “value of expected loss”.

Although credit risk has increased since the

original inception of these loans, we have

considered a number of scenarios and as

a result of these do not currently expect to

realise a loss in the event of a default (i.e. the

last part of the formula above is considered to

be zero for all loans).

This assessment has been made, despite

the continued pressure on the hospitality and

retail markets from Covid-19, on the basis of

information in our possession at the date of

reporting, our assessment of the risks of each

loan and certain estimates and judgements

around future performance of the assets.

The position on any potential ECLs on the

Spanish retail assets in particular continues

to be closely monitored and analysed, and we

have sought input, analysis and commentary

from Spanish market advisers and an updated

external valuation (in Q1 2021) in this regard,

to supplement our own information. Although

we continue to update the information

available at this point in time, we have no

reason to believe that any ECLs should be

recognised against the Spanish Retail assets

determined to be Stage 2. The reasons,

estimates and judgements supporting our

current assessment are as follows:

• Significant headroom on the loans based on

the last independent valuations received with

an LTV of 77.2 per cent based on the latest

valuation dated March 2021;

• Performance of the centres when local

restrictions were lifted following the

different waves of Covid-19 has been very

encouraging for future recovery; as a result,

we consider that income in the centers is

well positioned to recover post pandemic;

FAIR VALUE OF PORTFOLIO VS

AMORTISED COST

The table below represents the fair value of

the loans based on a discounted cash flow

basis using different discount rates.

The effective interest rate (“EIR”) – i.e., the

discount rate at which future cash flows equal

the amortised cost, is 6.9 per cent. We have

sensitised the cash flows at EIR intervals of

0.5 per cent up to +/- 2.0 per cent. The table

reflects how a change in market interest rates

or credit risk premiums may impact the fair

value of the portfolio versus the amortised cost.

Further, the Group considers the EIR of 6.9 per

cent to be conservative as many of these loans

were part of a business plan which involved

transformation and many of these business

plans are either completed or well advanced in

execution and therefore significantly de-risked

from the original underwriting and pricing.

The volatility of the fair value to movements in

discount rates is low due to the low remaining

duration of most loans.

Discount Rate Value Calculated % of Book Value

4.9% £ 432.7 m 104.4%

5.4% £ 428.1 m 103.2%

5.9% £ 423.5 m 102.1%

6.4% £ 419.0 m 101.1%

6.9% £ 414.6 m = book value 100.0%

7.4% £ 410.3 m 99.0%

7.9% £ 406.1 m 97.9%

8.4% £ 402.0 m 96.9%

8.9% £ 397.9 m 96.0%

• We have determined that although there is

pressure in this market, it is unlike the UK

retail market as we are currently seeing no

evidence of significant liquidations in the

Spanish retail market.

• On the origination of a loan, for a straight

forward standing investment asset

(for example, an occupied office), the

independent open market value determined

by an independent valuer under RICS

guidelines will be used. When considering

the relevance of these valuations in the

current market, it is important to consider

how quickly a portfolio churns. Our average

loan term from origination to repayment is

approximately 2.4 years and therefore our

valuations have always been fresh.

• After loan origination, the Group has the

right under loan documents to obtain

valuations on an annual basis at the

expense of the borrower (based on loan

anniversary, not Group financial year end).

Where a follow on valuation has been

done we use the latest valuation number

in our calculations. However, the Group

does not instruct independent third party

valuations on a strict annual basis, only

when it is considered necessary and useful

to obtain one. 75.4 per cent of the total

income producing loan book have had their

valuation updated under our instruction in

the twelve months to 31 December 2021.

• For development projects there

are a number of potential valuation

methodologies. Our selected approach

is based on giving the clearest and most

consistent presentation of the risk. For

development projects our calculation

includes the total facility available and is

calculated against the appraised market

value on completion of the relevant project.

There are other potential approaches

such as using current drawn loan balance

and current value or using total cost as a

proxy for value. However, each of these

approaches has limitations. For example,

using the approach of drawn loan balance

divided by current project value will

typically understate the LTV in the earlier

days of a development when less debt is

drawn before converging to a higher LTV

that matches our methodology at the end

once all the debt is drawn. We generally

retain the same rights to valuation on

development loans as for investment

assets. It is also worth noting that the

weighting of the loan within the portfolio

calculation is based off the latest drawn

balance and not the total loan commitment.

Total loan drawn less any deductible lender

controlled cash reserves and less any

amortization received to date (including any

debt provided by other lenders which rank

alongside or senior to the Group’s position)

Market value determined by the last

formal lender valuation received by the

reporting date

LOAN TO VALUE

Given the need for the Group and most of its

peers to record loans at amortised cost, the

loan to value of companies in our sector has

understandably been an area of focus for

many of our shareholders and stakeholders

seeking to understand underlying risk further.

In order to try to assist in understanding the

underlying credit risk, we have always quoted

the last £ loan to value (“last LTV”) of our

portfolio and have outlined further detail below

on our approach to this calculation.

Methodology

Our methodology to calculate the last LTV for

each individual loan is:

Each individual loan LTV is then weighted by

the amount of the loan currently drawn (in the

Group only, ignoring the position of other third

party lenders) to give a weighted average last

LTV across the Group’s portfolio.

Valuations Process

The following describes the valuation basis

that is used in our calculation. As the vast

majority of our portfolio is originated directly

by the Investment Adviser, the Group has

discretion over when and how to instruct

valuations. We consider this to be a strength

of our valuation process as we have control

over timing and complete access to the detail

of the valuation process and the output.

Where loans are not directly originated the

lender could have a lack of control over the

timing and no input to the process which we

prefer to avoid where possible.

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Investment Manager’s Report

Change in

Valuation

Hospitality Retail Residential Other Total

-25% 81.9% 99.5% 79.3% 78.5% 82.6%

-20% 76.8% 93.3% 74.3% 73.6% 77.4%

-15% 72.3% 87.8% 69.9% 69.2% 72.9%

-10% 68.3% 82.9% 66.1% 65.4% 68.8%

-5% 64.7% 78.6% 62.6% 62.0% 65.2%

0% 61.4% 74.6% 59.4% 58.9% 61.9%

5% 58.5% 71.1% 56.6% 56.1% 59.0%

10% 55.8% 67.9% 54.0% 53.5% 56.3%

15% 53.4% 64.9% 51.7% 51.2% 53.8%

Dividend Policy

The Company declared dividends of 5.5 pence

per Ordinary Share in respect of the year

ended 31 December 2021 (2020: 6.5 pence

per Ordinary Share). These dividends are

recognised in the Consolidated Statement of

Changes in Equity when declared, which is

usually within one month after the end of the

financial period to which they relate. Dividends

are usually paid within one month of the

declaration date.

The Company may pay dividends out of

reserves provided that the Board of Directors

is satisfied on reasonable grounds that the

Company will, immediately after payment,

satisfy the solvency test (as defined in

the Companies (Guernsey) Law, 2008, as

amended), and satisfy any other requirement

in its memorandum and articles.

EVENTS AFTER THE REPORTING PERIOD

The following amounts have been drawn

under existing commitments, up to

23 March 2022:

• £3,619,265

The following loan amortisation (both

scheduled and unscheduled) has been

received since the year-end up to

23 March 2022:

• £614,876

No loans have been repaid in full since the

year-end up to 23 March 2022.

At 23 March 2022, the amounts drawn under

each of the Group’s credit facilities are:

• Morgan Stanley - £8.5 million

On 21 January 2022, the Directors declared

a dividend in respect of the fourth quarter

of 1.375 pence per Ordinary Share payable

on 25 February 2022 to shareholders on the

Starwood European Finance

Partners Limited | Investment Manager

23 March 2022

On the basis of the methodology previously

outlined, at 31 December 2021, the Group

has an average last LTV of 61.9 per cent.

The table below shows the sensitivity of

the loan to value calculation for movements

in the underlying property valuation

and demonstrates that the Group has

considerable headroom within the currently

reported last LTVs:

For the year ended December 2021, 5.5 pence

was paid out in dividends which was covered

0.98x by earnings (excluding unrealised FX

gains). The Company maintains a dividend

reserve which was partially utilised to ensure

dividends were not paid out of capital.

Governance

Board of Directors

JOHN WHITTLE | Non-executive Director – Chairman of the Board

John is a Fellow of the Institute of Chartered Accountants in England and Wales and holds the Institute of

Directors Diploma in Company Direction. He is a Non-Executive Director of The Renewable Infrastructure

Group Ltd (FTSE 250), Sancus Lending Group Ltd (listed on AIM), and Chenavari Toro Limited Income Fund

Limited (listed on the SFS segment of the Main Market of the London Stock Exchange). He was previously

Finance Director of Close Fund Services, a large independent fund administrator, where he successfully

initiated a restructuring of client financial reporting services and was a key member of the business transition

team. Prior to moving to Guernsey, he was at Pricewaterhouse in London before embarking on a career in

business services, predominantly telecoms. He co-led the business turnaround of Talkland International (which

became Vodafone Retail) and was directly responsible for the strategic shift into retail distribution and its

subsequent implementation; he subsequently worked on the private equity acquisition of Ora Telecom. John is

a resident of Guernsey.

GARY YARDLEY | Non-executive Director (appointed 6 September 2021)

Gary is a Fellow of the Royal Institution of Chartered Surveyors and holds a degree in estate management

from Southbank University and an MBA. He has been a senior deal maker in the UK and European real estate

market for over 25 years. Gary was formally Managing Director & Chief Investment Officer of Capital &

Counties Property PLC (“Capco”) and led Capco’s real estate investment and development activities. Leading

Capco’s team on the redevelopment of Earls Court, Gary was responsible for acquiring and subsequently

securing planning consent for over 11m sq. ft. at this strategic opportunity area capable of providing over

7,500 new homes for London. Gary was also heavily involved in the curation and growth of the Covent Garden

estate for Capco, now an established premier London landmark. Gary is a Chartered Surveyor with over 30

years’ experience in UK & European real estate. He is a former CIO of Liberty International and former equity

partner of King Sturge and led PwC’s real estate team in Prague and Central Europe in the early 1990s. Gary is

a resident of the United Kingdom.

SHELAGH MASON | Non-executive Director – Management Engagement

Committee Chairman and Senior Independent Director

Shelagh Mason is a solicitor specialising in English commercial property who retired as a consultant with Collas

Crill LLP in 2020. She is the Non-Executive Chairman of the Channel Islands Property Fund Limited listed on the

International Stock Exchange and is also Non-Executive Chairman of Riverside Capital PCC, sits on the board of

Skipton International Limited, a Guernsey Licensed bank, and until 28 February 2022, she was a Non-Executive

Director of the Renewables Infrastructure Fund a FTSE 250 company, standing down after nine years on the

board. In addition to the Company, she has a non-executive position with Ruffer Investment Company Limited.

Previously Shelagh was a member of the board of directors of Standard Life Investments Property Income Trust,

a property fund listed on the London Stock Exchange for 10 years until December 2014. She retired from the

board of Medicx Fund Limited, a main market listed investment company investing in primary healthcare facilities

in 2017 after 10 years on the board. She is a past Chairman of the Guernsey Branch of the Institute of Directors

and a member of the Chamber of Commerce, the Guernsey International Legal Association and she also holds

the IOD Company Direction Certificate and Diploma with distinction. Shelagh is a resident of Guernsey.

CHARLOTTE DENTON | Non-executive Director - Audit Committee Chairman

Charlotte is a Fellow of the Institute of Chartered Accountants in England and Wales and holds a degree in

politics from Durham University. She is also a member of the Society of Trust and Estate Practitioners, a

Chartered Director and a fellow of the Institute of Directors. During Charlotte’s executive career she worked in

various locations through roles in diverse organisations, including KPMG, Rothschild, Northern Trust, a property

development startup and a privately held financial services group. She has served on boards for over fourteen

years and is currently a Non-Executive Director of various entities including Butterfield Bank (Guernsey)

Limited, the GP boards of Private Equity groups Cinven and Hitec and the Investment Manager for NextEnergy.

Charlotte is a resident of Guernsey.

PRINCIPAL ACTIVITIES AND

INVESTMENT OBJECTIVE

The Principal Activities and Investment

Objective are fully detailed in the Objective

and Investment Policy section.

STRUCTURE

The Company was incorporated with limited

liability in Guernsey under the Companies

(Guernsey) Law, 2008, as amended, on 9

November 2012 with registered number

55836 and has been authorised by the

Guernsey Financial Services Commission

as a registered closed-ended investment

company. The Company’s Ordinary Shares

were admitted to the premium segment of

the Financial Conduct Authority’s (“FCA”)

Official List and to trading on the Main Market

of the London Stock Exchange as part of

its IPO which completed on 17 December

2012. Further issues have taken place since

IPO and are listed under “Capital” below. The

issued capital during the year comprises the

Company’s Ordinary Shares denominated

in Sterling.

The Company makes its investments through

Starfin Lux S.à.r.l (indirectly wholly-owned via

a 100% shareholding in Starfin Public Holdco

1 Limited), Starfin Lux 3 S.à.r.l and Starfin

Lux 4 S.à.r.l. (both indirectly wholly-owned

via a 100% shareholding in Starfin Public

Holdco 2 Limited).

References to the Group refer to the Company

and its subsidiaries.

DIVIDEND POLICY

The Company had a target dividend of 5.5

pence per Ordinary Share per annum, based

on quarterly dividend payments.

DIVIDENDS PAID

The Company declared dividends of 1.375

pence for each of the calendar quarters

of 2021. The Company paid a total of

£23,512,398 in respect of 2021 (5.5 pence

per Ordinary share) (2020: £26,824,860: 6.5

pence per Ordinary Share).

BUSINESS REVIEW

The Group’s performance during the year

to 31 December 2021, its position at that

date and the Group’s future developments

are detailed in the Chairman’s Statement,

the Strategic Report and the Investment

Manager’s Report.

CAPITAL

As part of the Company’s IPO completed on

17 December 2012, 228,500,000 Ordinary

Shares of the Company, with an issue price

of 100 pence per share, were admitted to the

premium segment of the UK Listing Authority’s

Official List and to trading on the Main Market

of the London Stock Exchange.

The following issues have been made since IPO:

The Company holds 4,308,125 (2020:

3,648,125) shares in treasury. The total

number of voting rights in the Company

is 408,911,273, which may be used by

shareholders as the denominator for the

calculations by which they can determine if

they are required to notify their interest in, or a

change to their interest in, the Company under

the Financial Conduct Authority’s Disclosure

and Transparency Rules. As disclosed in the

Chairman’s Statement, during the year ended

31 December 2021, the Company bought

back 660,000 Ordinary Shares at an average

price of 89.54 pence per share (2020:

3,648,125 Ordinary Shares at an average

price of 86.9 pence per share).

Admission Date

Number of

Ordinary Shares

Price (pence per

Ordinary Share)

21 March 2013 8,000,000 104.25

9 April 2013 1,000,000 104.50

12 April 2013 600,000 104.00

23 July 2015 23,780,000 103.00

29 September 2015 42,300,000 102.75

12 August 2016 70,839,398 103.05

15 May 2019 38,200,000 104.75

Governance

Report of the Directors

SUBSTANTIAL INTERESTS

Information provided to the Company by major

shareholders pursuant to the FCA’s Disclosure

and Transparency Rules (“DTR”) is published

via a Regulatory Information Service and is

available on the Company’s website. The

Company has been notified under Rule 5 of

the DTR of the following holdings of voting

rights in its shares as at 31 December 2021

and as at the date of this report.

Name

% holding of Ordinary

Shares at 31 December

2021

% holding of Ordinary

Shares at 1 March 2022

(the latest available)

BlackRock 18.82 18.52

Close Brothers Asset

Management

7.26 7.16

Schroder Investment

Management

7.25 7.07

Waverton Investment

Management

6.19 6.42

SG Private Banking 4.94 3.93

Fidelity International 4.57 4.57

Quilter Cheviot Investment

Management

4.19 4.04

Premier Miton Investors 3.78 3.78

James Hambro & Partners 3.32 3.42

Transact (EO) 3.17 3.03

The Directors have adopted a code of

Directors’ dealings in Ordinary Shares, which

is based on EU Market Abuse Regulation

(“MAR”). MAR came into effect across the

EU (including the UK) on 3 July 2016. The

Board is responsible for taking all proper

and reasonable steps to ensure compliance

with MAR by the Directors and reviews such

compliance on a regular basis.

EVENTS AFTER THE

REPORTING PERIOD

Details of events after the reporting period

are contained in note 23 to the consolidated

financial statements.

DIRECTORS’ INTERESTS

IN SHARES

The Directors’ interests in shares are

shown opposite:

Name

Ordinary Shares at

31 December 2021

Ordinary Shares at

31 December 2020

John Whittle 23,866 23,866

Shelagh Mason (appointed 1

September 2020)

112,819 17,688

Charlotte Denton (appointed

1 January 2021)

- -

Gary Yardley (appointed 6

September 2021)

- -

Stephen Smith (resigned 31

December 2021)

78,929 78,929

INDEPENDENT AUDITOR

The Directors, at the recommendation of

the Audit Committee, intend to conduct

a tender for the position of Independent

Auditor to the Company for the audit of the

year-ending 31 December 2023. The Audit

Committee recommended that the Board

progress an audit tender as best practice

considering that the current independent

auditor, PricewaterhouseCoopers CI LLP,

has served as the Company’s Independent

Auditor for two consecutive terms of five

years. PricewaterhouseCoopers CI LLP have

indicated their willingness to be included in

the tender process.

Governance

Report of the Directors

INVESTMENT MANAGER AND

SERVICE PROVIDERS

The Investment Manager during the year was

Starwood European Finance Partners Limited

(the “Investment Manager”), incorporated

in Guernsey with registered number 55819

and regulated by the GFSC and Alternative

Investment Fund Management Directive. The

Investment Manager has appointed Starwood

Capital Europe Advisers, LLP (the “Investment

Adviser”), an English limited liability partnership

authorised and regulated by the FCA, to

provide investment advice pursuant to an

Investment Advisory Agreement.

The administration of both the Company and

Investment Manager was delegated to Apex

Fund and Corporate Services (Guernsey)

Limited (the “Administrator”) during the year.

DISCOUNT CONTROL

The Company maintains share repurchase

powers that allow the Company to repurchase

Ordinary Shares in the Market up to 14.99

per cent of the share capital, subject to

annual renewal of the Shareholder authority.

In addition, the Company may raise fresh

capital including through a placing programme

(subject to the publication of a prospectus of

the Company) and through opportunistic tap

issues. Tap issues enable issuers such as the

Company (subject to obtaining the requisite

Shareholder authorities) to issue up to 10 per

cent of the securities already listed by way

of such issues over 12 months without any

requirement to publish a prospectus.

DISCOUNTTRIGGERED

REALISATION

The Company has in place a discount-triggered

realisation mechanism whereby if the Ordinary

Shares trade at an average discount to Net

Asset Value per Share of five per cent or

more during the six month period ending 31

December 2022 (and in the six month period

ending on the successive fifth anniversary

of such date) the Directors, at their absolute

discretion, may put forward a realisation offer

to Shareholders (subject to applicable law,

including the requirements of the Companies

(Guernsey) Law, 2008) (a “Realisation Offer”).

The terms of such Realisation Offer would

provide, broadly, that Shareholders may

request for up to 75 per cent of the Ordinary

Shares in issue to be realised for cash.

In the event that a Realisation Offer is made,

the Company will cease investment (except in

limited circumstances) in respect of Ordinary

Shares the subject of valid realisation requests

and will return capital to holders of such

Ordinary Shares over time, net of costs, as

investments mature or are otherwise realised.

If valid realisation requests exceed 75 per cent

of the Ordinary Shares in issue, the Directors

will, in their absolute discretion, consider

whether it is appropriate to put forward

alternative proposals which may include the

reorganisation or winding up of the Company.

The Directors realise that the Ordinary

Shares have been trading at a discount to

NAV since 22 February 2020, correlating

with the impact of the COVID-19 pandemic

experienced by the market.

The making of a Realisation Offer to

Shareholders will be considered by 31

December 2022.

REALISATION VOTE

In the event that the conditions for a Realisation

Offer (as described under “Discount-Triggered

Realisation”) are not satisfied and such offer is

not activated, the Directors shall exercise the

discretion afforded to them under the Articles

to put forward a realisation vote (as an ordinary

resolution) to Shareholders by no later than

28 February 2023 (and on successive five

year anniversaries of such date) (a “Realisation

Vote”).

If Shareholders vote in favour of this resolution,

then the Company will procure that a

Realisation Offer on substantially the same

terms as that described above is offered to

Shareholders.

Following the receipt of all elections, if either: (i)

more than 75 per cent of the Ordinary Shares

then in issue were elected for realisation; or the

NAV of the Company following the realisation

would be less than £100 million, the Directors

may exercise their discretion not to proceed

with the Realisation Offer and instead put

forward alternative proposals which are no less

favourable to electing Shareholders and which

may include the reorganisation or winding up of

the Company.

If Shareholders vote against the Realisation

Vote, then the Company will continue in

existence as it is then constituted without any

liquidity event for Shareholders.

As indicated in note 2 to these financial

statements, there is a material uncertainty as

to the outcome of the Realisation Offer and

Realisation Vote that may cast substantial

doubt on the Group’s ability to continue as a

going concern. The financial statements have

not been modified in respect of this matter.

SHARE BUYBACKS

The Company renewed its authority at the

recent AGM to purchase in the market up

to 14.99 per cent of the Ordinary Shares

in issue on 15 June 2021 at a price not

exceeding: (i) five per cent above the average

of the mid-market values of the Ordinary

Shares for the five Business Days before the

purchase is made; or (ii) the higher of the

last independent trade or the highest current

independent bid for the Ordinary Shares.

The Directors will give consideration to

repurchasing Shares under this authority, but

are not bound to do so, where the market

price of an Ordinary Share trades at more

than 7.5 per cent below the Net Asset Value

per Share for more than 3 months, subject

to available cash not otherwise required for

working capital purposes or the payment of

dividends in accordance with the Company’s

dividend policy.

If not previously used, this authority shall

expire at the conclusion of the Company’s

AGM in 2022. The Directors intend to seek

annual renewal of this buyback authority

from Shareholders each year at the

Company’s AGM.

As disclosed in the Chairman’s statement,

the Company has bought back 660,000

shares during the year ended 31 December

2021 at an average price per share of 89.54

pence. These shares are held in treasury.

John Whittle | Chairman

23 March 2022

Governance

Directors’ Remuneration Report

REMUNERATION POLICY

& COMPONENTS

The Board endeavours to ensure the

remuneration policy reflects and supports

the Company’s strategic aims and objectives

throughout the year under review. It has been

agreed that, due to the small size and structure

of the Company, a separate Remuneration

Committee would be inefficient; therefore, the

Board as a whole is responsible for discussions

regarding remuneration.

As per the Company’s Articles of Incorporation,

all Directors are entitled to such remuneration

as is stated in the Company’s Prospectus or

as the Company may determine by ordinary

resolution; to not exceed the aggregate overall

limit of £200,000. Subject to this limit, it is

the Company’s policy to determine the level

of Directors’ fees, having regard for the level

of fees payable to non-executive Directors in

the industry generally, the role that individual

Directors fulfil in respect of responsibilities

related to the Board, Management Engagement

Committee and Audit Committee and the time

dedicated by each Director to the Company’s

affairs. Base fees are set out in the table below.

Since year end, the Directors have appointed

Trust Associates to formally review the level

of Directors’ remuneration. Trust Associates

are considered to be independent of the

Company and its Directors. Following receipt

of Trust Associates’ review, the Board will

seek shareholders’ approval at the June 2022

AGM to increase the aggregate overall limit for

Directors’ remuneration to £300,000 in order to

aid with Board succession to attract and retain

high-calibre Directors.

Trust Associates considered the following items

during their review:

• The time commitment required of each

Director to appropriately discharge their

responsibilities;

Director

Role

Proposed

Total Fee

for 2022

Current

Total Fee

for 2022

Total Fee

2021

Total Fee

2020

John Whittle

Chairman with effect from

1 January 2022

60,000 50,000 45,000 45,000

Shelagh Mason

(appointed 1 September 2020)

Management Engagement

Committee Chairman and Senior

Independent Director

45,000 42,500 42,500 13,333

Charlotte Denton

(appointed 1 January 2021)

Audit Committee Chairman – with

effect from 1 January 2022

50,000 45,000 40,000 -

Gary Yardley

(appointed 6 September 2021)

Non-Executive Director 42,000 40,000 12,712 -

Stephen Smith

(resigned 31 December 2021)

Chairman - - 50,000 50,000

Jonathan Bridel

(resigned 31 December 2020)

Management Engagement

Committee Chairman

- -

42,500

Aggregate fees 197,000 177,500 190,212 150,833

Aggregate expenses - - 5,198 1,731

Total 197,000 177,500 195,410 152,564

• Additional fees where a Director’s duties

extend beyond those normally expected

as part of the Director’s appointment (e.g.

Chairmanship of the Board or one it’s

Committees); and

• Remuneration levels witnessed in the market.

The Board has reviewed the advice from its

independent consultant, Trust Associates,

on appropriate fee increases to apply and

the Board’s recommendations are set out

in the below table. This includes recognition

of the additional responsibility borne by the

Chairman (John Whittle), the Chairman of the

Audit Committee (Charlotte Denton) and the

Chairman of the Management Engagement

Committee (Shelagh Mason). The increases

also reflect fees seen in the market for

Directors of similar companies.

The Director fees are proposed to be increased

with effect from 1 January 2022 to the annual

amounts set out in the below table. The

Directors’ Remuneration Policy is subject to

shareholder approval at the June 2022 AGM.

As outlined in the Articles of Incorporation, the

Directors may also be paid for all reasonable

travelling, accommodation and other out-

of-pocket expenses properly incurred in

the attendance of Board or Committee

meetings, general meetings, or meetings with

shareholders or debentures of the Company or

otherwise in discharge of their duties; and all

reasonable expenses properly incurred by them

seeking independent professional advice on any

matter that concerns them in the furtherance

of their duties as Directors of the Company.

No Director has any entitlement to pensions,

paid bonuses or performance fees, has been

granted share options or been invited to

participate in long-term incentive plans. No

loans have been originated by the Company for

the benefit of any Director.

None of the Directors have a service contract

with the Company. Each of the Directors has

entered into a letter of appointment with the

Company. The letters of appointment were

reviewed and amended in 2019 by an external

party to ensure that they were in line with

market standards prevailing at the time. Each

Director is subject to annual re-election.

The Directors do not have any interests in

contractual arrangements with the Company or

its investments during the year under review,

or subsequently. Each appointment can be

terminated in accordance with the Company’s

Articles and without compensation. As outlined

in the letters of appointment, each appointment

can be terminated at the will of both parties

with one month’s notice either by (i) written

resignation; (ii) unauthorised absences from

Board meetings for 12 months or more; (iii)

written request of the other Directors; or (iv) a

resolution of the shareholders.

Directors’ and Officers’ liability insurance

cover is maintained by the Company but is not

considered a benefit in kind nor constitutes

a part of the Directors’ remuneration. The

Company’s Articles indemnify each Director,

Secretary, agent and officer of the Company,

former or present, out of assets of the

Company in relation to charges, losses,

liabilities, damages and expenses incurred

during the course of their duties, in so far

as the law allows and provided that such

indemnity is not available in circumstances of

fraud, willful misconduct or negligence.

23 March 2022

John Whittle

Chairman

By order of the Board

Governance

Corporate Governance Statement

JOHN WHITTLE | Chairman

As a regulated Guernsey incorporated

company with a Premium Listing on the

Official List and admission to trading on the

Main Market for Listed Securities of the

London Stock Exchange, the Company is

required to comply with the principles of the

UK Corporate Governance Code dated July

2018 (“UK Code”).

As an AIC member, the Board has also

considered the principles and provisions of

the AIC Code of Corporate Governance dated

February 2019 (“AIC Code”). The AIC Code

addresses all the principles set out in the

UK Code, as well as setting out additional

principles and provisions on issues of specific

relevance to the Company. The AIC Code has

been endorsed by the Financial Reporting

Council as ensuring investment company

boards fully meet their obligations to the UK

Code and LR 9.8.6 of the Listing Rules.

Except as disclosed within the report, the

Board is of the view that throughout the year

ended 31 December 2021, the Company

complied with the principles and provisions

of the AIC Code. Key issues affecting

the Company’s corporate governance

responsibilities, how they are addressed by

the Board and application of the AIC Code

are presented below. There is no information

that is required to be disclosed under

Listing Rule 9.8.4.

The UK Code includes provisions relating to:

the role of the chief executive; executive

Directors’ remuneration; and the need for

an internal audit function which are not

considered by the Board to be relevant to

the Company, being an externally managed

investment company. The Company has

therefore not reported further in respect of

these provisions.

The Guernsey Financial Services Commission

Finance Sector Code of Corporate

Governance (“GFSC Code”) came into force

in Guernsey on 1 January 2012 and was

amended in February 2016. The Company is

deemed to satisfy the GFSC Code provided

that it continues to conduct its governance

in accordance with the requirements of the

AIC Code.

CHAIRMAN

Appointed to the position of Chairman of

the Board on 1 January 2022, John Whittle

is responsible for leading the Board in all

areas, including determination of strategy,

organising the Board’s business and ensuring

the effectiveness of the Board and individual

Directors. He also endeavours to produce

an open culture of debate within the Board.

Stephen Smith was Chairman of the Board

during the year ended 31 December 2021

when he stepped down from the Board.

The Chairman’s appointment is in line with

previously released Succession Plan. Prior to

the Chairman’s appointment, a job specification

was prepared which included an assessment of

the time commitment anticipated for the role.

Discussions were undertaken to ensure the

Chairman was sufficiently aware of the time

needed for his role and agreed to upon signature

of his letter of appointment. Other significant

business commitments of the Chairman were

disclosed to the Company prior to appointment

to the Board and were publicly disclosed in the

Company’s Prospectus dated 28 November

2012. Any subsequent changes have been

declared. Certain of these commitments, and

their subsequent changes, can be identified in

his biography.

The effectiveness and independence of the

Chairman is evaluated on an annual basis as

part of the Board’s performance evaluation;

the Management Engagement Committee

Chairman is tasked with collating feedback and

discussing with the Chairman on behalf of the

rest of the Board.

As per the Company’s Articles, all Directors,

including the Chairman, must disclose any

interest in a transaction that the Board and

Committees will consider. To ensure all Board

decisions are independent, the said conflicted

Director is not entitled to vote in respect of any

arrangement connected to the interested party

but may be counted in the quorum.

BOARD

Independence and Disclosure

The Chairman confirms the initial Board,

consisting of Messrs. Jonathan Bridel (resigned

31 December 2020), Stephen Smith (resigned

31 December 2021) and John Whittle, were

selected prior to the Company’s launch and

were able to assume all responsibilities at an

early stage, independent of the Investment

Manager and Investment Adviser. Shelagh

Mason was appointed as a non-executive

Director during 2020 and during this year,

Charlotte Denton and Gary Yardley were

appointed as non-executive Directors on

1 January 2021 and 6 September 2021,

respectively, in accordance with the Boards

Succession Planning Memorandum. The

appointment of Gary Yardley to the Board

during the second half of 2021 was considered

sufficient by the Board to allow Gary time to

get up to speed prior to Stephen Smith’s step

down from the Board as of 31 December 2021

and John Whittle’s retirement from the Board in

December 2023 (as detailed in the Chairman’s

Statement). The Board is composed entirely

of independent non-executive Directors, who

meet as required without the presence of the

Investment Manager or service providers to

scrutinise the achievement of agreed goals,

objectives and monitor performance. Through

the Audit Committee and the Management

Engagement Committee they are able to

ascertain the integrity of financial information

and confirm that all financial controls and risk

management systems are robust and analyse

the performance of the Investment Manager

and other service providers on a regular basis.

Following the annual performance evaluation,

it was deemed that the Directors had been

proven to challenge the Investment Manager

throughout the year under review, as minuted

and recorded, therefore for the purposes of

assessing compliance with the AIC Code, the

Board as a whole considers that each Director

is independent of the Investment Manager and

free from any business or other relationship

that could materially interfere with the exercise

of their independent judgment. If required,

the Board is able to access independent

professional advice. The Investment Manager is

also requested to declare any potential conflicts

surrounding votes, share dealing and soft

commissions on an annual basis to the Board

to help with the assessment of investments.

Open communication between the Investment

Manager and the Board is facilitated by regular

Board meetings, to which the Investment

Manager is invited to attend and update the

Board on the current status of the Company’s

investments, along with ad hoc meetings as

required.

Coming to mutual agreement on all decisions,

it was agreed that the Board had acted in the

best interests of the Company to the extent

that, if deemed appropriate, a Director would

abstain or have his objection noted, which

would be reflected within the minutes.

Similar to the process outlined above for

the appointment of the Chairman, a job

specification was prepared for each initial

directorship which included an assessment of

the time commitment anticipated for the role

to ensure each Director was aware of the time

commitment needed for the role. The Directors’

other significant business commitments

were disclosed to the Company prior to their

appointment to the Board and were publicly

disclosed in the Company’s Prospectus dated

28 November 2012. A similar process was

followed when the two new directors were

appointed to the Board this year as part of

the succession planning outlined above. Any

subsequent changes have been declared.

Certain of these commitments can be identified

in each Director’s biography. Details of the skills

and experience provided by each Director can

also be found in their biographies, alongside

identification of the role each Director currently

holds in the Company.

The terms and conditions of appointment for

non-executive Directors are outlined in their

letters of appointment and are available for

inspection by any person at the Company’s

registered office during normal business hours

and at the AGM for fifteen minutes prior to and

during the meeting. The letters of appointment

were reviewed in the prior year by an external

party and amended to ensure that they are in

line with current market standards.

There is no executive Director function in

the Company; all day-to-day functions are

outsourced to external service providers.

Development

The Board believes that the Company’s

Directors should develop their skills and

knowledge through participation at relevant

courses. The Chairman is responsible for

reviewing and discussing the training and

development of each Director according to

specific needs. Upon appointment, all Directors

participate in discussions with the Chairman

and other Directors to understand the

responsibilities of the Directors, in addition to

the Company’s business and procedures. The

Company also provides regular opportunities

for the Directors to obtain a thorough

understanding of the Company’s business

by regularly meeting members of the senior

management team from the Investment

Manager, Investment Adviser and other service

providers, both in person, by phone and through

virtual meetings.

Balance of the Board and Diversity Policy

It is perceived that the Board is well-balanced,

with a wide array of skills, experience and

knowledge that ensures it functions correctly

and that no single Director may dominate the

Board’s decisions. Appointing an additional

Director as part of the succession planning

ensures stability during any transition period.

The Board’s position on diversity can be seen

in the Strategic Report. All Directors currently

sit on all the Committees, with the exception

of the Chairman, who is not a member of

the Audit Committee; additionally, no single

Director fills more than one Committee

chairmanship post.

Annual Performance Evaluation

The Board’s balance is reviewed on a regular

basis as part of a performance evaluation

review. Using a pre-determined template

based on the AIC Code’s provisions as a basis

for review, the Board undertook an evaluation

of its performance, and in addition, an

evaluation focusing on individual commitment,

performance and contribution of each Director

was conducted. The Chairman then met

with each Director to fully understand their

views of the Company’s strengths and to

identify potential weaknesses. If appropriate,

new members are proposed to resolve

any perceived issues, or a resignation is

sought. Following discussions and review

of the Chairman’s evaluation by the other

Directors, the Management Engagement

Committee Chairman reviewed the Chairman’s

performance. Training and development

needs are identified as part of this process,

thereby ensuring that all Directors are able to

discharge their duties effectively.

Governance

Corporate Governance Statement

Given the Company’s size and the structure

of the Board, no external facilitator or

independent third party was used in the

performance evaluation. The need to appoint

an external facilitator is reviewed by the Board

on an annual basis.

Re-election and Board Tenure

There is currently no Nominations Committee

for the Company as it is deemed that the size,

composition and structure of the Company

would mean the process would be inefficient

and counterproductive. The Board therefore

undertakes a thorough process of reviewing

the skill set of the individual Directors,

and proposes new, or renewal of current

appointments to the Board.

Each Director is required to be elected

by shareholders at the AGM following his

appointment by the Board. As part of the

recommendations of the AIC Code, the

Directors put themselves forward for annual

re-election. In light of this, all Directors, with

the exception of Gary Yardley, are therefore

submitting themselves for re-election. Gary

Yardley will have an election vote at the AGM

on 15 June 2022.

The Audit Committee Members and the Board

confirm that all Directors have proven their

ability to fulfil all legal responsibilities and to

provide effective independent judgment on

issues of strategy, performance, resources

and conduct. The Board therefore has no

hesitation in recommending to Shareholders

that all Directors are re-elected.

Appointment Process

The Directors appointment process involves

identifying gaps and needs in the Board’s

composition and then reviewing the skill

set of potential candidates with a view to

making an appointment that fills the identified

gaps and needs. Following this process,

the Board formally appointed Gary Yardley

in 2021 and announced his appointment to

the market in September 2021. The Board

engaged OSA Recruitment, an independent

search consultancy with no connection to the

Company or its Directors, to assist in the above

appointments.

Succession Planning

The Company enters its tenth year in 2022

and the Board has been mindful in the

implementation of the previously announced

succession plan. During Q4 2019, the Directors

devised a Succession Planning Memorandum.

The Memorandum states that a new Director

was to be appointed to the Board during the

second half of 2021 giving them time to get up

to speed prior to Stephen Smith standing down

from the Board in December 2021. Charlotte

Denton and Gary Yardley were duly appointed

on 1 January 2021 and 6 September 2021,

respectively.

Upon Stephen Smith’s retirement from the

Board during December 2021, John Whittle

was subsequently appointed as Chairman

of the Board as of 1 January 2022, until his

retirement in December 2023. Charlotte

Denton became Chairman of the Audit

Committee as of 1 January 2022. Shelagh

Mason became the Senior Independent

Director as of 20 January 2022.

As disclosed in previous reports, it is the

Boards’ intention that John Whittle would

remain on the Board until December 2023 in

light of (i) John Whittle’s extensive familiarity

with the Company; and (ii) the previously

challenging market circumstances facing

the Company; and (iii) the extensive rotation

of the Board in recent years. The Board

are of the view that it is in shareholders’

best interests that John Whittle remains

on the Board until December 2023, a year

longer than originally envisaged under the

Succession Planning Memorandum. This will

ensure that there is orderly succession of the

Board which allows the new Directors the

opportunity to benefit from the significant

experience the John Whittle has developed

since the Company’s IPO.

In terms of the new appointments, the

Directors believe that the current composition

of three Guernsey Directors and one Director

from the United Kingdom works well in terms

of satisfying the Company’s requirements. The

Board also intends to consider diversity when

making the new appointments to the Board.

The Board will consider the need to appoint

a formal search contractor to assist with the

appointments of new directors.

At present, the Directors wish to leave the

succession and the tenure policy of the

Chairman open until Mr Whittle’s departure

from the Board in 2023.

BOARD AND COMMITTEES

Board

Matters reserved for the Board include review

of the Company’s overall strategy and business

plans; approval of the Company’s half-yearly

and annual report; review and approval of any

alteration to the Group’s accounting policies

or practices and valuation of investments;

approval of any alteration to the Company’s

capital structure; approval of dividend policy;

appointments to the Board and constitution

of Board Committees; observation of relevant

legislation and regulatory requirements; and

performance review of key service providers.

The Board also retains ultimate responsibility

for Committee decisions; every Committee is

required to refer to the Board, who will make

the final decision.

Terms of reference that contain a formal

schedule of matters reserved for the Board of

Directors and its duly authorised Committee

for decision has been approved and can be

reviewed at the Company’s registered office.

The meeting attendance record is displayed

in the Corporate Governance statement. The

Company Secretary acts as the Secretary to

the Board.

Audit Committee

The Board has established an Audit Committee

which was composed of all the independent

members of the Board other than Chairman of

the Board. The Chairman of the Board, although

not a member of the Committee, may still

attend the meetings upon invitation by the Audit

Committee Chairman. The Audit Committee,

its membership and its terms of reference are

kept under regular review by the Board, and it is

confident all members have sufficient financial

skills and experience, and competence relevant

to the Company’s sector. John Whittle was the

Audit Committee Chairman until 31 December

2021. Charlotte Denton was appointed on 24

March 2021 to the Audit Committee and has

become chairman of the Audit Committee with

effect from 1 January 2022.

The Audit Committee met three times during

2021 (2020: four times). The Company

Secretary acts as the Secretary to the

Audit Committee.

Owing to the size and structure of the

Company, there is no internal audit function.

The Audit Committee has reviewed the need

for an internal audit function and perceived

that the internal financial and operating control

systems in place within the Group and its

service providers, for example as evidenced

by the Report on Controls at a Service

Organisation (“SOC 1 Type 2 Report”) on the

internal procedures of the Administrator, give

sufficient assurance that a sound system of

internal control is maintained that safeguards

shareholders’ investment and Group’s assets.

The Audit Committee is intended to assist the

Board in discharging its responsibilities for the

integrity of the Group’s consolidated financial

statements, as well as aiding the assessment

of the Group’s internal control effectiveness

and objectivity of the external Auditors.

Further information on the Audit Committee’s

responsibilities is given in the Report of the

Audit Committee.

Formal terms of reference for the Audit

Committee are available at the registered

office and on the Company’s website and are

reviewed on a regular basis.

Management Engagement Committee

The Company has established a Management

Engagement Committee which comprises

all the Directors, with Shelagh Mason as the

Chairman of the Committee. The Management

Engagement Committee’s main function is

to review and make recommendations on

any proposed amendment to the Investment

Management Agreement and keep under

review the performance of the Investment

Manager; and undertake an assessment

of the Investment Manager’s scope and

responsibilities as outlined in the service

agreement and prospectus on a formal basis

every year. Discussions on the Investment

Manager’s performance are also conducted

regularly throughout the year by the Board.

Reviews of engagements with other service

providers, such as the Administrator, to ensure

all parties are operating satisfactorily are also

undertaken by the Management Engagement

Committee so as to ensure the safe and

accurate management and administration

of the Company’s affairs and business and

that they are competitive and reasonable for

Shareholders.

The Management Engagement Committee met

once during 2021 (2020: once) and undertook

a review of the key service providers to the

Group and the Company, utilising a service

provider questionnaire. No material weaknesses

were identified and the recommendation to the

Board was that the current arrangements were

appropriate and provided good quality services

and advice to the Company and the Group.

(1)

The ad hoc Board meetings are convened at short notice to deal with administrative matters. It is not therefore always logistically feasible, or a

necessity, for the Chairman of the Board to attend such meetings.

(2)

Meetings attended telephonically.

Scheduled

Board

Ad hoc

Board

(1)

Audit

Committee

Management

Engagement

Committee

Stephen Smith

(resigned

31 December 2021)

3 2 3 1

John Whittle 4 8 3 1

Shelagh Mason (appointed

1 September 2020)

4 7 3 1

Charlotte Denton (appointed

1 January 2021)

4 8 3 1

Gary Yardley (appointed 6

September 2021)

2 1 1 1

Total Meetings

for year

4 8 3 1

Formal terms of reference for the Management

Engagement Committee are available at the

registered office and the Company’s website

and are reviewed on a regular basis.

The Company Secretary acts as the secretary

to the Management Engagement Committee.

Board and Committee Meeting Attendance

Individual attendance at Board and committee

meetings is set out above.

In addition to the scheduled quarterly and

additional ad hoc meetings, the Directors and

the Investment Manager have been provided

with a number of telephone investment

briefings by the Investment Adviser in order

to keep the Directors and the Investment

Manager fully apprised and up to date with

the current investment status and progress.

During 2018, a committee of one Director

was appointed to approve dividends should a

quorum of two Directors not be available.

BOARD REMUNERATION

As outlined in the Prospectus, Directors are

paid in accordance with agreed principles

aimed at focusing on long-term performance

of the Company. Further information can be

found in the Directors’ Remuneration Report.

Governance

Corporate Governance Statement

COMPANY SECRETARY

Reports and papers, containing relevant,

concise and clear information, are provided to

the Board and Committees in a timely manner

to enable review and consideration prior to

both scheduled and ad-hoc specific meetings.

This ensures that Directors are capable of

contributing to, and validating, the development

of Company strategy and management. The

regular reports also provide information that

enables scrutiny of the Company’s Investment

Manager and other service providers’

performance. When required, the Board has

sought further clarification of matters with

the Investment Manager and other service

providers, both by means of further reports and

in-depth discussions, in order to make more

informed decisions for the Company.

Under the direction of the Chairman, the

Company Secretary facilitates the flow of

information between the Board, Committees,

Investment Manager and other service

providers through the development of

comprehensive, detailed meeting packs,

agendas and other media. These are circulated

to the Board and other attendees in sufficient

time to review the data.

Full access to the advice and services of the

Company Secretary is available to the Board;

in turn, the Company Secretary is responsible

for advising on all governance matters through

the Chairman. The Articles and schedule of

matters reserved for the Board indicate the

appointment and resignation of the Company

Secretary is an item reserved for the full Board.

A review of the performance of the Company

Secretary is undertaken by the Board on a

regular basis.

FINANCIAL AND BUSINESS

INFORMATION

An explanation of the Directors’ roles and

responsibilities in preparing the Annual

Report and Audited Consolidated Financial

Statements for the year ended 31 December

2021 is provided in the Statement of Directors’

Responsibilities.

Further information enabling shareholders to

assess the Company’s performance, business

model and strategy can be sourced in the

Chairman’s Statement, the Strategic Report

and the Report of the Directors.

GOING CONCERN

The Directors also considered it appropriate

to prepare the financial statements on the

going concern basis, as explained in the ‘Basis

of preparation’ paragraph in note 2 of the

financial statements.

RISK CONTROL

In addition to the earlier assessment of principal

risks and uncertainties contained within the

Strategic Report, the Board is required annually

to review the effectiveness of the Group’s key

internal controls such as financial, operational

and compliance controls and risk management.

The controls are designed to ensure that the

risk of failure to achieve business objectives

is minimised and are intended to provide

reasonable assurance against material

misstatement or loss. This is not absolute

assurance that all risks are eliminated.

Through regular meetings of the Audit

Committee, the Board seeks to maintain

full and effective control over all strategic,

financial, regulatory and operational issues.

The Board maintains an organisational and

committee structure with clearly defined lines

of responsibility and delegation of authorities.

RISK MANAGEMENT

As part of the compilation of the risk register

for the Company, appropriate consideration has

been given to the relevant control processes

and that risk is considered, assessed and

managed as an integral part of the business.

The Company’s system of internal control

includes inter alia the overall control exercise,

procedures for the identification and evaluation

of business risk, the control procedures

themselves and the review of these internal

controls by the Audit Committee on behalf of

the Board. Each of these elements that make

up the Company’s system of internal financial

and operating control is explained in further

detail as below.

(i) Control Environment

The Company is ultimately dependent upon

the quality and integrity of the staff and

management of the Investment Manager,

the Investment Adviser and its Fund

Administration & Company Secretarial service

provider. In each case, qualified and able

individuals have been selected at all levels.

The staff of both the Investment Manager

and Administrator are aware of the internal

controls relevant to their activities and are also

collectively accountable for the operation of

those controls. Appropriate segregation and

delegation of duties is in place.

The Audit Committee undertakes a review

of the Company’s internal financial and

operating controls on a regular basis. The

Auditors of the Company consider internal

controls relevant to the Company’s preparation

and fair presentation of the consolidated

financial statements in order to design their

audit procedures, but not for the purpose of

expressing an audit opinion on the effectiveness

of the Company’s internal controls.

In its role as a third-party fund administration

services provider, Apex Fund and Corporate

Services (Guernsey) Limited produces an

annual SOC 1 Type 2 Report on the internal

control procedures in place within Apex Fund

and Corporate Services (Guernsey) Limited

and this is subject to review by the Audit

Committee and the Board.

(ii) Identification and Evaluation of

Business Risks

Another key business risk is the performance of

the Company’s investments. This is managed

by the Investment Manager, which undertakes

regular analysis and reporting of business

risks in relation to the loan portfolio, and then

proposes appropriate courses of action to the

Board for their review.

(iii) Key Procedures

In addition to the above, the Audit Committee’s

key procedures include a comprehensive

system for reporting financial results to the

Board regularly, as well as quarterly impairment

reviews of loans conducted by the Board as

a whole (including reports on the underlying

investment performance).

Although no system of internal control can

provide absolute assurance against material

misstatement or loss, the Company’s system

is designed to assist the Directors in obtaining

reasonable assurance that problems are

identified on a timely basis and dealt with

appropriately. The Company, given its size, does

not have an internal audit function. It is the view

of the Board that the controls in relation to the

Company’s operating, accounting, compliance

and IT risks performed robustly throughout

the year. In addition, all have been in full

compliance with the Company’s policies and

external regulations, including:

• Investment policy, as outlined in the IPO

documentation, and subsequently amended

by EGMs held on 2 May 2014, 9 March 2015

and 6 May 2016;

• Personal Account Dealing, as outlined in the

Model Code;

• Whistleblowing Policy;

• Anti-Bribery Policy;

• Applicable Financial Conduct Authority

Regulations;

• Listing Rules, and Disclosure and

Transparency Rules;

• Treatment and handling of confidential

information;

• Conflicts of interest;

• Compliance policies; and

• Anti-Money Laundering Regulations.

There were no protected disclosures made

pursuant to the Company’s whistleblowing

policy, or that of service providers in relation

to the Company, during the year to 31

December 2021.

In summary, the Board considers that the

Company’s existing internal financial and

operating controls, coupled with the analysis

of risks inherent in the business models of

the Company and its subsidiaries, continue to

provide appropriate tools for the Company to

monitor, evaluate and mitigate its risks.

ALTERNATIVE INVESTMENT

FUND MANAGEMENT DIRECTIVE

“AIFMD”

The AIFMD, which was implemented across

the EU on 22 July 2013 with the transition

period ending 22 July 2014, aims to harmonise

the regulation of Alternative Investment Fund

Managers (“AIFMs”) and imposes obligations on

managers who manage or distribute Alternative

Investment Funds (“AIFs”) in the EU or who

market shares in such funds to EU investors.

Following the UK’s cessation of EU membership

on 31 January 2020, the FCA has implemented

an equivalent regulation (“UK AIFMD”) for the

marketing of AIFs in the UK and to UK investors.

After seeking professional regulatory and

legal advice, the Company was established

in Guernsey such that, upon implementation

of AIFMD it would be a Non-EU/UK AIF, with

Starwood European Finance Partners Limited

appointed to act as the Non-EU/UK AIFM.

In accordance with AIFMD disclosure

obligations, note 6 provides a summary of

realised and unrealised gains and losses.

The Investment Manager does not receive an

additional fee, to that stated in notes 3 and

22, as a result of acting as the AIFM. The

Board of the Investment Manager received an

aggregate fee of £60,000 for the year ended

31 December 2021.

The marketing of shares in AIFs that are

established outside the EU/UK (such as the

Company) to investors in an EU member state/

UK is prohibited unless certain conditions are

met. Certain of these conditions are outside

the Company’s control as they are dependent

on the regulators of the relevant third country

(in this case Guernsey) and the relevant EU

member state/UK entering into regulatory co-

operation agreements with one another.

The AIFM has given written notification

to the United Kingdom Financial Conduct

Authority (“FCA”), pursuant to Regulation 59

of the Alternative Investment Fund Managers

Regulations 2013 (SI 1773/2013) (the “AIFM

Regulations”) of its intention to market the

shares to investors in the United Kingdom in

accordance with the AIFM Regulations and the

rules and guidance of the FCA.

The AIFM has given written notification to the

Netherlands Authority for the Financial Markets

(“AFM”) pursuant to Article 1:13b section 1

and 2 of the Act on the Financial Supervision

(Wet op het financieel toezicht) (the “AFS”) of

its intention to market the shares to investors

in the Netherlands in accordance with the AFS,

any rules and regulations promulgated pursuant

thereto and the rules and guidance of the AFM.

On 12 February 2016, the AIFM obtained a

marketing licence in Sweden in accordance

with Chapter 5, Section 10 of the Swedish

Alternative Investment Fund Managers Act

(Sw. lag (2013:561) om förvaltare av

alternativa investeringsfonder). This enables

shares in the Company to be marketed to

professional investors in Sweden.

Currently, the National Private Placement

Regime (“NPPR”) provides a mechanism to

market Non-EU AIFs that are not allowed to be

marketed under the AIFMD domestic marketing

regimes. The Board is utilising NPPR in order

to market the Company, specifically in the UK,

Sweden and the Netherlands. The Board works

with the Company’s advisers to ensure the

necessary conditions are met, and all required

notices and disclosures are made under NPPR.

Any regulatory changes arising from

implementation of the AIFMD (or otherwise)

that limit the Company’s ability to market

future issues of its shares may adversely

affect the Company’s ability to carry out its

investment policy successfully and to achieve

its investment objective, which in turn may

adversely affect the Company’s business,

financial condition, results of operations, NAV

and/or the market price of the Ordinary Shares.

The Board, in conjunction with the Company’s

advisers, will continue to monitor the

development of the AIFMD and its impact on

the Company. The Company will continue

to use NPPR pending further consultation

from the European Securities and Marketing

Authority (“ESMA”).

The Board has considered the disclosure

obligations under Articles 22 and 23 and can

confirm that the Company complies with

the various organisational, operational and

transparency obligations.

The Board has considered requirements of

Articles 6 and 7 of Regulation 2019/2088 on

sustainability-related disclosures in the financial

services sector dated 27 November 2019 and

have made the necessary disclosures on the

Company’s website.

FOREIGN ACCOUNT TAX

COMPLIANCE ACT “FATCA” AND

THE OECD COMMON REPORTING

STANDARDS “CRS”

FATCA became effective on 1 January

2013 and is being gradually implemented

internationally. The legislation is aimed at

determining the ownership of US assets

in foreign accounts and improving US Tax

compliance with respect to those assets.

More than 90 jurisdictions, including all 34

member countries of the Organisation for

Economic Co-operation and Development

(“OECD”) and the G20 members, have

committed to implement the Common

Reporting Standard for automatic exchange of

tax information (“CRS”). Building on the model

created by FATCA, the CRS creates a global

standard for the annual automatic exchange

of financial account information between the

relevant tax authorities.

The Board in conjunction with the Company’s

service providers and advisers have ensured

that the Company complies with FATCA and

CRS’s requirements to the extent relevant to

the Company.

Governance

Corporate Governance Statement

SECTION 172 STATEMENT

Whilst directly applicable to UK domiciled

companies, the intention of the AIC Code is that

the below matters set out in section 172 of the

UK Companies Act, 2006 are reported.

Risk Management

In order to minimise the risk of failure to

achieve business objectives, the Company

actively identifies, evaluates, manages

and mitigates risk as well as continually

evolving the approach to risk management.

For further details in connection with Risk

Management of the Company, please refer

to the Strategic Report and the Corporate

Governance Statement.

Our People

The Company has no employees, however,

to succeed we need to manage Company’s

performance by bringing through talent to

the Board while ensuring we operate as

efficiently as possible, as demonstrated with

the succession plan. For further details in

connection with the succession plan, please

refer to the Corporate Governance Statement.

Business Relationships

In order for the Company to succeed, it

requires to develop and maintain long-term

relationships with service providers and

borrowers. The Company values all of its

service providers and borrowers.

Community and Environment

As an investment company, the Group’s

activities have minimal direct impact on the

environment. Please refer to the Strategic

Report for more details in connection with

the impact of the Group’s operations on the

community and environment.

Business Conduct

The Company is committed to act responsibly

and ensure that the business operates in a

responsible and effective manner and with

high standards in order to meet its objectives.

Shareholders

The Board place a great deal of importance

on communication with all shareholders and

envisage to continuing effective dialogue with

all shareholders. Please refer to section below

for more details on how the Company engages

with the shareholders.

Throughout 2022, the Board of the Company,

both individually and together, will continue to

review and challenge how the Company can

continue to act in good faith to promote the

success of the Company for the benefit of its

stakeholders in the decisions taken.

DIALOGUE WITH SHAREHOLDERS

The Directors place a great deal of importance

on communication with shareholders. The

Company’s Chairman, Investment Manager and

the Broker, aim to meet with large shareholders

at least annually, together with the Investment

Adviser, and calls are undertaken on a regular

basis with shareholders. The Board also

receives regular reports from the Broker on

shareholder issues. Publications such as the

Annual Report and Consolidated Financial

Statements and quarterly factsheets - which

in light of the considerable disruption from

Covid-19 the Board has sought to provide more

detailed updates and disclosures - are reviewed

and approved by the Board prior to circulation

and are widely distributed to other parties who

have an interest in the Company’s performance

and are available on the Company’s website.

All Directors are available for discussions

with the shareholders, in particular the

Chairman (John Whittle), Senior Independent

Director (Shelagh Mason) and the Audit

Committee Chairman (Charlotte Denton),

as and when required.

Should a situation arise where shareholders

cast a vote of 20 per cent or more against

a board recommendation the directors will

consult with shareholders to understand their

reasons behind this vote. The Board will publish

the views received from the shareholders

within six months of the shareholder meeting.

CONSTRUCTIVE USE OF AGM

The Notice of AGM is sent out at least 20

working days in advance of the meeting. All

shareholders have the opportunity to put

questions to the Board or Investment Manager,

either formally at the Company’s AGM,

informally following the meeting, or in writing

at any time during the year via the Company

Secretary. The Company Secretary is also

available to answer general shareholder queries

at any time throughout the year.

By order of the Board

John Whittle | Chairman

23 March 2022

Governance

Report of the Audit Committee

The Board is supported by the Audit

Committee, which during the year comprised of

John Whittle, as chairman until 31 December

2021, Shelagh Mason, Charlotte Denton

(appointed on 24 March 2021 to the Audit

Committee) and Gary Yardley (appointed on

11 November 2021 to the Audit Committee).

Subsequently following Stephen Smith’s step

down as Chairman of the Board, Charlotte

Denton has become chairman of the Audit

Committee with effect from 1 January 2022.

John Whittle, as Chairman of the Board, from

1 January 2022, no longer sits on the Audit

Committee. The Board has considered the

composition of the Audit Committee and is

satisfied it has sufficient recent and relevant

skills and experience, in particular the Board

has considered the requirements of the AIC

Code that the Audit Committee should have

at least one Member who has recent and

relevant financial experience and that the

Audit Committee as a whole has competence

relevant to the sector in which the Company

invests. The Board considers all of the relevant

requirements to have been met.

ROLE AND RESPONSIBILITIES

The primary role and responsibilities of the

Audit Committee are outlined in the Audit

Committee’s terms of reference, available at

the registered office, including:

• Monitoring the integrity of the consolidated

financial statements of the Group and any

formal announcements relating to the

Group’s financial performance, and reviewing

significant financial reporting judgements

contained within said statements and

announcements;

• Reviewing the Group’s internal financial

controls, and the Group’s internal control and

risk management systems;

• Monitoring the need for an internal audit

function annually;

• Monitoring and reviewing the scope,

independence, objectivity and effectiveness of

the external Auditor, taking into consideration

relevant regulatory and professional

requirements;

• Making recommendations to the Board in

relation to the appointment, re-appointment

and removal of the external Auditor and

approving their remuneration and terms of

engagement, which in turn can be placed

before the shareholders for their approval at

the AGM;

• Development and implementation of the

Group’s policy on the provision of non-

audit services by the external Auditor, as

appropriate;

• Reviewing the arrangements in place to

enable Directors and staff of service providers

to, in confidence, raise concerns about

possible improprieties in matters of financial

reporting or other matters insofar as they may

affect the Group;

• Providing advice to the Board on whether the

consolidated financial statements, taken as a

whole, are fair, balanced and understandable

and provide the information necessary

for shareholders to assess the Group’s

performance, business model and strategy;

and

• Reporting to the Board on how the Committee

discharged all relevant responsibilities at each

Board meeting.

Financial Reporting

The primary role of the Audit Committee in

relation to the financial reporting is to review

with the Administrator, Investment Manager

and the Auditor the appropriateness of the

Annual Report and Audited Consolidated

Financial Statements and Interim Condensed

Consolidated Financial Statements,

concentrating on, amongst other matters:

• The quality and acceptability of accounting

policies and practices;

• The clarity of the disclosures and

compliance with financial reporting

standards and relevant financial and

governance reporting requirements;

• Material areas in which significant

judgements have been applied or there has

been discussion with the Auditor;

• Whether the Annual Report and Audited

Consolidated Financial Statements,

taken as a whole, is fair, balanced

and understandable and provides the

information necessary for the shareholders

to assess the Group’s performance,

business model and strategy; and

• Any correspondence from regulators in

relation to the Group’s financial reporting.

To aid its review, the Audit Committee

considers reports from the Administrator

and Investment Manager and also reports

from the Auditor on the outcomes

of their half-year review and annual

audit. The Audit Committee supports

PricewaterhouseCoopers CI LLP (“PwC”)

in displaying the necessary professional

skepticism their role requires.

The Audit Committee met three times during

the year under review; individual attendance

of Directors is outlined in the Corporate

Governance Statement. The main matters

discussed at those meetings were:

• Review and approval of the external Auditor

and when tabled, consideration of the final

audit findings report;

• Discussion and approval of the fee for the

external audit;

• Detailed review of the Annual Report and

Audited Consolidated Financial Statements

and recommendation for approval by the

Board;

• Review and approval of the interim review

findings report of the external Auditor;

• Detailed review of the Interim Condensed

Consolidated Financial Statements and

recommendation for approval by the Board;

• Discussion of reports from the external

Auditor following their interim review and

annual audit;

• Assessment of the effectiveness of the

external Auditor as described below;

• Assessment of the independence of the

external Auditor;

• Review of the Group’s key risks and internal

controls; and

• Consideration of the AIC Code, FRC Guidance

on Audit Committees and other regulatory

guidelines.

The Committee has also reviewed and

considered the whistleblowing policy in

place for the Administrator and other service

providers and is satisfied the relevant staff can

raise concerns in confidence about possible

improprieties in matters of financial reporting

or other matters insofar as they may affect

the Company.

Annual General Meeting

The Audit Committee Chairman, or other

members of the Audit Committee appointed

for the purpose, shall attend each AGM

of the Company, prepared to respond to

any shareholder questions on the Audit

Committee’s activities.

Internal Audit

The Audit Committee considers at least once

a year whether or not there is a need for an

internal audit function. Currently, the Audit

Committee does not consider there to be a

need for an internal audit function, given that

there are no employees in the Group and

all outsourced functions are with parties /

administrators who have their own internal

controls and procedures. This is evidenced

by the annual SOC 1 Type 2 Report provided

by the Administrator, which gives sufficient

assurance that a sound system of internal

control is maintained at the Administrator.

SIGNIFICANT ISSUES IN RELATION

TO THE CONSOLIDATED

FINANCIAL STATEMENTS

During the year, the Audit Committee

considered a number of significant risks in

respect of the Annual Report and Audited

Consolidated Financial Statements. The

Audit Committee reviewed the external audit

plan at an early stage and concluded that

the appropriate areas of audit risk relevant

to the Group had been identified and that

suitable audit procedures had been put in

place to obtain reasonable assurance that the

consolidated financial statements as a whole

would be free of material misstatements.

The table on the next page sets out the Audit

Committee’s view of the key areas of risk and

how they have addressed the issues.

Significant Issues Actions to Address Issue

Carrying amount

and impairment/

expected credit

losses of loans

advanced

The Audit Committee reviews the investment process of the Investment Manager and Investment Adviser including

the controls in place around deal sourcing, investment analysis, due diligence and the role of the Investment Adviser’s

investment committee and the Investment Manager’s Board. The Audit Committee also reviews the controls in place

around the effective interest loan models and is notified regularly by the Investment Manager of any changes to

underlying assumptions made in the loan models.

The Audit Committee receives regular updates and reports on the performance of each loan and discusses with the

Investment Manager and Investment Adviser whether there are any indicators of significant increase in credit risk or

impaired or defaulted loans. The Audit Committee also assesses the ECL methodology focusing on the estimation of

probability of default, exposure at default and loss given default.

Formal loan performance reviews and credit risk assessments are also prepared by the Investment Adviser and

Investment Manager which are reviewed at each Audit Committee meeting and the Audit Committee considers

whether there are any indicators that would warrant a change to the expected credit loss assessed for each loan

advanced. For all new loans advanced, the Investment Manager presents, as part of the investment recommendation

process, their assessment of any expected credit loss required at inception of the loan arrangement.

All existing loans advanced as at 31 December 2021 were assessed so as to ensure compliance with IFRS 9. As

disclosed in note 2 and in the Investment Manager’s report, while three loans amounting to £59,031,888 (2020:

6 loans amounting to £150,331,450 (one loan was repaid during 2021)) remain classified as Stage 2, during the year

ended 31 December 2021, no expected credit losses were considered necessary based on the loan to value ratios

headroom as at 31 December 2021 and strong security packages in place.

Risk of fraud and

error in income

from loans

advanced

Income from loans advanced is measured in accordance with the effective interest rate method. The requirement to

estimate the expected cash flows when forming an effective interest rate model is subject to significant management

judgements and estimates.

The Audit Committee discusses with the Investment Manager and Investment Adviser the reasons for the changes

in key assumptions made in the loan models such as changes to expected drawdown or repayment dates or other

amendments to expected cash flows such as changes in interbank rates on floating loans. The Audit Committee ensures

that any changes made to the models are justifiable based on the latest available information.

A separate income rationalisation which is prepared outside of the detailed loan models is provided to the Board on a

quarterly basis as a secondary check on the revenue being recognised in the loan models. This is also reviewed by the

Audit Committee and questions raised where appropriate.

Governance

Report of the Audit Committee

REVIEW OF EXTERNAL AUDIT

PROCESS EFFECTIVENESS

The Audit Committee communicated

regularly with the Investment Manager,

Investment Adviser and Administrator to

obtain a good understanding of the progress

and efficiency of the audit process. Similarly,

feedback in relation to the efficiency of the

Investment Manager, Investment Adviser

and other service providers in performing

their relevant roles was sought from

relevant involved parties, including the audit

partner and team. The external Auditor

is invited to attend the Audit Committee

meetings at which the semi-annual and

annual consolidated financial statements

are considered, also enabling the Auditor

to meet and discuss any matters with the

Audit Committee without the presence of the

Investment Manager or the Administrator.

During the year, the Audit Committee

reviewed the external Auditor’s performance,

considering a wide variety of factors

including:

• The quality of service, the Auditor’s specialist

expertise, the level of audit fee, identification

and resolution of any areas of accounting

judgement, and quality and timeliness of

papers analysing these judgements;

• Review of the audit plan presented by the

Auditor, and when tabled, the final audit

findings report;

• Meeting with the Auditor regularly to discuss

the various papers and reports in detail;

• Furthermore, interviews of appropriate staff

in the Investment Manager, Investment

Adviser and Administrator to receive

feedback on the effectiveness of the audit

process from their perspective; and

• Compilation of a checklist with which to

provide a means to objectively assess the

Auditor’s performance.

The Audit Committee, whilst satisfied with the

Auditor’s effectiveness, has recommended

to the Board of Directors that a tender for

the position of Independent Auditor to the

Company be conducted for the year-ending

31 December 2023. The Audit Committee

recommended that the Board progress an

audit tender as best practice considering

that the current independent auditor,

PricewaterhouseCoopers CI LLP, has served

the Company for two consecutive terms of five

years. PricewaterhouseCoopers CI LLP have

indicated their willingness to be included in the

tender process.

AUDITOR’S TENURE

AND OBJECTIVITY

The Group’s current Auditor, PwC, have

acted in this capacity since the Company’s

inaugural meeting on 22 November 2012. The

Committee reviews the Auditor’s performance

on a regular basis to ensure the Group

receives an optimal service and make regular

enquiries to confirm the quality findings of audit

work undertaken by both the firm and lead

engagement partner on the audit. Subject to

annual appointment by shareholder approval

at the AGM, the appointment of the Auditor is

formally reviewed by the Audit Committee on

an annual basis. PwC follows the FRC Ethical

Standards and their rotation rules require the

lead audit partner to rotate every 5 years, key

partners involved in an audit every 7 years

and PwC’s own internal policy would generally

expect senior staff to have consideration given

to the threats to their independence after 7

years and to be rotated after 10 years. Rotation

ensures a fresh look without sacrificing

institutional knowledge.

Rotation of audit engagement partners, key

partners involved in the audit and other staff in

senior positions is reviewed on a regular basis

by the lead audit engagement partner. Roland

Mills is currently serving his fourth year of five

as engagement partner.

PwC regularly updates the Audit Committee

on the rotation of audit partners, staff, level

of fees, details of any relationships between

the Auditor and the Group, and also provides

overall confirmation of its independence and

objectivity. There are no contractual obligations

that restrict the Group’s choice of Auditor. Any

non-audit work would be reviewed by the Audit

Committee to confirm it appropriate under

the FRC Ethical Standard and approved by the

Audit Committee Chairman prior to the Auditor

undertaking any work.

Following a review of PwC’s tenure, the Audit

Committee has recommended that the Board

of Directors conducts a tender process for the

role of the Company’s independent auditor

for the audit of the year-ended 31 December

2023. PwC have indicated their willingness to

be included in the tender process.

CONCLUSIONS IN RESPECT

OF THE CONSOLIDATED

FINANCIAL STATEMENTS

The production and the audit of the Annual

Report and Audited Consolidated Financial

Statements is a comprehensive process

requiring input from a number of different

contributors. In order to reach a conclusion

on whether the Group’s consolidated

financial statements are fair, balanced and

understandable, as required under the

AIC Code, the Board has requested that

the Audit Committee advise on whether

it considers that the Annual Report and

Consolidated Financial Statements fulfils

these requirements. In outlining its advice,

the Audit Committee has considered the

following:

• The comprehensive documentation that is

in place outlining the controls in place for

the production of the Annual Report and

Audited Consolidated Financial Statements,

including the verification processes in place

to confirm the factual content;

• The detailed reviews undertaken at various

stages of the production process by the

Investment Manager, Investment Adviser,

Administrator, Auditor and the Audit

Committee that are intended to ensure

consistency and overall balance;

• Controls enforced by the Investment

Manager, Investment Adviser, Administrator

and other third-party service providers to

ensure complete and accurate financial

records and security of the Group’s assets;

and

• The existence and content of a satisfactory

controls report that has been reviewed

and reported upon by the Administrator’s

service Auditor to verify the effectiveness

of the internal controls of the Administrator,

such as the SOC 1 Type 2 Report.

Governance

Report of the Audit Committee

As a result of the work performed, the Audit

Committee has concluded that it has acted in

accordance with its’ terms of reference and

has ensured the independence and objectivity

of the external Auditor. It has reported to the

Board that the Annual Report for the year

ended 31 December 2021, taken as a whole, is

fair, balanced and understandable and provides

the information necessary for shareholders

to assess the Group’s performance, business

model and strategy. The Board’s conclusions

in this respect are set out in the Statement of

Directors’ Responsibilities.

The Audit Committee has recommended to the

Board that a tender process is conducted for

role of the Company’s independent auditor for

the 2023 year end annual report.

Charlotte Denton | Audit Committee

Chairman

23 March 2022

Governance

Statement of Directors’ Responsibilities

The Directors are responsible for preparing

consolidated financial statements for each

financial year which give a true and fair

view, in accordance with applicable laws

and regulations, of the state of affairs of

the Company and of the profit or loss of the

Company for that year.

Company law requires the Directors to

prepare financial statements for each

financial year. The consolidated financial

statements have been prepared in

accordance with International Financial

Reporting Standards as adopted by the

European Union (“IFRS”). In preparing the

consolidated financial statements, the

Directors are required to:

• Select suitable accounting policies and

apply them consistently;

• Make judgments and estimates that are

reasonable and prudent;

• State whether applicable accounting

standards have been followed, subject

to any material departures disclosed and

explained in the consolidated financial

statements; and

• Prepare the consolidated financial

statements on the going concern basis

unless it is inappropriate to presume that

the Company will continue in business.

The maintenance and integrity of the

Company’s website is the responsibility of

the Directors; the work conducted by the

Auditor does not involve consideration of the

maintenance and integrity of the website

and, accordingly, the Auditor accepts no

responsibility for any changes that may

have occurred to the consolidated financial

statements since they are initially presented

on the website. Legislation in Guernsey

governing the preparation and dissemination

of the consolidated financial statements may

differ from legislation in other jurisdictions.

The Directors are responsible for keeping

proper accounting records that are sufficient

to show and explain the Company’s

transactions and disclose with reasonable

accuracy at any time the financial position of

the Company and the Group and enable them

to ensure that the consolidated financial

statements comply with the Companies

(Guernsey) Law, 2008, as amended. They

are also responsible for safeguarding the

assets of the Company and the Group and

hence for taking reasonable steps for the

prevention and detection of fraud and other

irregularities.

Each of the Directors confirms that, to the

best of their knowledge:

• They have complied with the above

requirements in preparing the consolidated

financial statements;

• There is no relevant audit information of

which the Company’s Auditor is unaware;

• All Directors have taken the necessary

steps that they ought to have taken to

make themselves aware of any relevant

audit information and to establish that the

Auditor is aware of said information;

• The consolidated financial statements,

prepared in accordance with the applicable

set of accounting standards, give a true and

fair view of the assets, liabilities, financial

position and profit or loss of the Company

and Group; and

• The Chairman’s Statement, Strategic

Report, Investment Manager’s Report,

Report of the Directors and Corporate

Governance Statement include a fair review

of the development and the position of the

Company and the Group, together with

a description of the principal risks and

uncertainties that they face.

The UK Code, as adopted through the

AIC Code by the Company, also requires

Directors to ensure that the Annual Report

and Consolidated Financial Statements are

fair, balanced and understandable. In order to

reach a conclusion on this matter, the Board

has requested that the Audit Committee

advise on whether it considers that the

Annual Report and Consolidated Financial

Statements fulfil these requirements.

The process by which the Committee has

reached these conclusions is set out in the

Report of the Audit Committee on pages

40-44. Furthermore, the Board believes

that the disclosures set out on pages 6-9

of the Annual Report provide the information

necessary for shareholders to assess the

Company’s performance, business model

and strategy.

Having taken into account all the matters

considered by the Board and brought to

the attention of the Board during the year

ended 31 December 2021, as outlined in the

Chairman Statement, Investment Manager’s

Report, Corporate Governance Statement,

Strategic Report and the Report of the Audit

Committee, the Board has concluded that

the Annual Report and Audited Consolidated

Financial Statements for the year ended 31

December 2021, taken as a whole, is fair,

balanced and understandable and provides

the information necessary for shareholders

to assess the Company’s performance,

business model and strategy.

For Starwood European Real Estate

Finance Limited

John Whittle | Chairman

23 March 2022

4646

Financial Statements

Report on the audit of the consolidated financial statements

Financial Statements

Independent Auditor’s Report to the Members of

Starwood European Real Estate Finance Limited

OUR OPINION

In our opinion, the consolidated financial

statements give a true and fair view of the

consolidated financial position of Starwood

European Real Estate Finance Limited (the

“company”) and its subsidiaries (together

“the group”) as at 31 December 2021, and

of their consolidated financial performance

and their consolidated cash flows for the year

then ended in accordance with International

Financial Reporting Standards as adopted by

the European Union and have been properly

prepared in accordance with the requirements

of the Companies (Guernsey) Law, 2008.

WHAT WE HAVE AUDITED

The group’s consolidated financial statements

comprise:

• the consolidated statement of financial

position as at 31 December 2021;

• the consolidated statement of comprehensive

income for the year then ended;

• the consolidated statement of changes in

equity for the year then ended;

• the consolidated statement of cash flows for

the year then ended; and

• the notes to the consolidated financial

statements, which include significant

accounting policies and other explanatory

information.

BASIS FOR OPINION

We conducted our audit in accordance with

International Standards on Auditing (“ISAs”).

Our responsibilities under those standards are

further described in the Auditor’s responsibilities

for the audit of the consolidated financial

statements section of our report.

We believe that the audit evidence we have

obtained is sufficient and appropriate to

provide a basis for our opinion.

INDEPENDENCE

We are independent of the group in accordance

with the ethical requirements that are relevant

to our audit of the consolidated financial

statements of the group, as required by

the Crown Dependencies’ Audit Rules and

Guidance, and we have fulfilled our other

ethical responsibilities in accordance with these

requirements. We are also independent in

accordance with SEC Independence Rules.

MATERIAL UNCERTAINTY RELATED

TO GOING CONCERN

We draw attention to the going concern

disclosures in the basis of preparation

disclosures in note 2 to the consolidated

financial statements. These disclosures note

that there is a possibility of a realisation offer

being made or, failing that, a realisation vote

being put to the shareholders no later than

28 February 2023. Depending on the level

of realisation requests from shareholders,

the directors may put forward alternative

proposals which may include the reorganisation

or winding up of the company. There is a

material uncertainty as to the outcome of this

realisation offer and realisation vote that may

cast substantial doubt on the group’s ability to

continue as a going concern. Our opinion is not

modified in respect of this matter.

OUR AUDIT APPROACH

OVERVIEW

AUDIT SCOPE

• The company is based in Guernsey, has

subsidiaries located in Guernsey and

Luxembourg and engages Starwood

European Finance Partners Limited

(the “Investment Manager”) to manage

its assets. The consolidated financial

statements are a consolidation of the

company and all the subsidiaries.

• We conducted our audit of the consolidated

financial statements from information

provided by Apex Fund and Corporate

Services (Guernsey) Limited (the

“Administrator”) and its related group

entities to whom the board of directors has

delegated the provision of certain functions.

We also had significant interaction with

Starwood Capital Europe Advisers, LLP (the

“Investment Adviser”) in completing aspects

of our overall audit work.

• We conducted our audit work in Guernsey

and we tailored the scope of our audit taking

into account the types of investments within

the group, the involvement of the third

parties referred to above, and the industry in

which the group operates.

• We performed an audit of the financial

information of the company and its

Guernsey and Luxembourg subsidiaries and

we consider them all as one component.

• Scoping was performed at the group level,

irrespective of whether the underlying

transactions took place within the company

or within any of the subsidiaries. Our testing

was performed on a consolidated basis

using thresholds which are determined with

reference to the overall group performance

materiality and the risks of material

misstatement identified.

Report on the audit of the consolidated financial statements

KEY AUDIT MATTERS

• Carrying amount and impairment/expected

credit losses of loans advanced.

• Risk of fraud in income from loans advanced.

• Material uncertainty related to going concern.

MATERIALITY

• Overall group materiality: £8.4 million

(2020: £8.5 million) based on 2%

consolidated net assets.

• Performance materiality: £6.3 million.

THE SCOPE OF OUR AUDIT

As part of designing our audit, we determined

materiality and assessed the risks of material

misstatement in the consolidated financial

statements. In particular, we considered where

the directors made subjective judgements; for

example, in respect of significant accounting

estimates that involved making assumptions

and considering future events that are

inherently uncertain and we considered

the risk of climate change and the potential

impact thereof on our audit approach. As in

all of our audits, we also addressed the risk

of management override of internal controls,

including among other matters, consideration

of whether there was evidence of bias that

represented a risk of material misstatement

due to fraud.

KEY AUDIT MATTERS

Key audit matters are those matters that, in

our professional judgement, were of most

significance in our audit of the consolidated

financial statements of the current period

and include the most significant assessed

risks of material misstatement (whether or

not due to fraud) identified by the auditors,

including those which had the greatest effect

on: the overall audit strategy; the allocation of

resources in the audit; and directing the efforts

of the engagement team. These matters, and

any comments we make on the results of

our procedures thereon, were addressed in

the context of our audit of the consolidated

financial statements as a whole, and in

forming our opinion thereon, and we do not

provide a separate opinion on these matters. In

addition to the matter described in the Material

uncertainty related to going concern section,

we have determined the matters described

below to be the key audit matters to be

communicated in our report.

This is not a complete list of all risks identified

by our audit.

Financial Statements

Independent Auditor’s Report to the Members of

Starwood European Real Estate Finance Limited

Key audit matter How our audit addressed the Key audit matter

Carrying amount and impairment/expected credit losses of loans

advanced

Loans advanced at the year-end of £414.6 million (note 10) are

measured at amortised cost and comprise of both fixed and floating

rate loans.

Loans advanced make up a significant part of the consolidated

statement of financial position and due to the nature of this balance,

their amortised cost carrying amount, ongoing recoverability and

impairment is subject to judgement and estimation, including the

calculation of expected credit losses (“ECL”) as disclosed within note

2c of the consolidated financial statements.

The judgements exercised in determining the potential for ECL could

significantly impact the net asset value of the group and this is

considered to be a key source of estimation uncertainty as described in

note 2c of the consolidated financial statements.

The specific areas of judgement include:

• The impact of changes in the expected cash flows for each loan on

the carrying amount of the loans measured at amortised cost; and

• How management determine the underlying assumptions when

preparing impairment/ECL review analyses such as significant

changes in the credit risk of a borrower, changes in the probability

of default of a borrower, changes in valuation of underlying collateral

and the Loan-To-Value ratios headroom, the ability of the borrowers

to deliver in accordance with their business plans and their projected

financial performance figures.

We understood and evaluated the internal control environment in place

at the Administrator and the Investment Adviser over the carrying

amount of the loans advanced, in particular management’s processes

and assumptions used to measure the loans at amortised cost and

used to determine the level of impairment (if any) required on the

loans advanced, either at inception, or on an ongoing basis, using the

amortised cost model and ECL calculation.

We assessed the accounting policy for loans advanced for compliance

with International Financial Reporting Standards as adopted by the

European Union and planned and executed our audit procedures to

ensure that the loans advanced were accounted for in accordance with

the stated accounting policy.

Our procedures included:

• Detailed testing over the amortised cost models used by management

to value the loans at amortised cost using the effective interest rate

method;

• Testing the assumptions and inputs into the amortised cost models and

inspecting the associated agreements and other legal documentation;

• Back-testing procedures were also performed to assist in our

conclusions as to the cash flow forecasting reliability applied by the

Investment Adviser;

• Understanding of and evaluating the assumptions and judgements

made by the Investment Adviser in respect of the ECL for each loan

advanced including:

obtaining the Investment Adviser’s impairment papers and

assessing the ECL methodology, focussing on the estimation of

probability of default, exposure at default and loss given default,

and how forward-looking information was considered in this regard;

evaluating the consistency and appropriateness of the Investment

Adviser’s assumptions applied in determining whether any loan

advanced was performing, underperforming or non-performing,

including consideration as to whether a significant increase in credit

risk of each borrower had occurred during the year;

obtaining evidence to support any significant assumptions presented

in the assessment of the ECL, including consideration of the financial

information on the borrower and the collateral in place to assess their

ability to meet future payment commitments, and progress against

business plans, including any ongoing impact caused by COVID-19 or

other global crises, including management’s assessment of the Loan-

To-Value ratios headroom;

inspecting the Investment Adviser’s application of its impairment/

expected credit loss criteria to evaluate the appropriateness and

completeness of the loans moved between ECL stages;

recalculating a targeted sample of the Investment Adviser’s sensitivity

analysis of the Loan-To-Values ratios headroom;

engaging our Real Estate valuation experts to work with our audit

team through a sample of third-party real estate valuation reports

on the underlying properties against which collateral is held by the

group for the loans advanced, and which underpin the Loan-To-Value

considerations applied in the ECL modelling; and

inspecting a sample of compliance certificates signed by each

respective underlying borrower in respect of compliance with

covenants as at the year-end.

Based on the audit procedures performed, we have nothing to report to

those charged with corporate governance.

Key audit matter How our audit addressed the Key audit matter

Risk of fraud in income from loans advanced

Income from loans advanced for the year was £28.4 million (Note

10) and was measured in accordance with the accounting policies

as described in note 2l of the consolidated financial statements.

The group has a key investment objective to provide shareholders

with regular dividends through investment in debt instruments and

therefore we focussed on this risk.

The requirement to estimate the expected cash flows when

calculating an effective interest rate model is subject to significant

management judgements and estimates, and as such could be open

to manipulation by management of factors including:

• Expected timing of repayments;

• Expectations of partial or full prepayments; and

• Associated exit fees and make-whole payments.

Changes to the estimated timings of cash flows can have a

significant impact on the recognition of income from loans advanced

and is considered to be a key source of estimation uncertainty as

described in note 2c of the consolidated financial statements.

We assessed the accounting policy for the recognition of interest

income for compliance with International Financial Reporting Standards

as adopted by the European Union; and we planned and executed our

audit procedures to ensure that interest income had been accounted

for in accordance with the stated accounting policy.

We held discussions with the Investment Adviser and the Administrator

to understand and evaluate the processes in place for recognising

interest income and to understand the estimates made.

Our procedures included:

• Detailed testing over the amortised cost models used by

management to measure the loans at amortised cost and calculate

the effective interest income in the consolidated financial statements,

including how the arrangement, origination and commitment fees,

which are integral to the loan arrangements, have been considered in

the models;

• Assessing the judgements made in respect of the estimated cash

flows timing (versus the contractual repayment date) and amount

including arrangement, origination and commitment fees, through

testing of the amortised cost models for each loan;

• Recalculating interest income using the original effective interest rate,

paying due consideration to any early, partial or full prepayments or

management’s re-estimate thereof;

• Inspecting supporting documents, such as correspondence with

the underlying borrower and timing of cash receipts, as part of our

assessment of management’s estimates and assumptions; and

• For those loans advanced also held at 31 December 2020, comparing

the estimated future cash flows in the amortised cost models as

at 31 December 2021 and evaluating the rationale behind any

significant changes to those cash flows from the 31 December 2020

models.

Based on the audit procedures performed, we have nothing to report

to those charged with corporate governance.

Financial Statements

Independent Auditor’s Report to the Members of

Starwood European Real Estate Finance Limited

Scoping was performed at the group level,

irrespective of whether the underlying

transactions took place within the company

or within the subsidiaries. The group

audit was led, directed and controlled by

PricewaterhouseCoopers CI LLP and all audit

work for material items within the consolidated

financial statements was performed in

Guernsey by PricewaterhouseCoopers CI LLP.

The transactions relating to the company

and the subsidiaries are maintained by the

Administrator and its related group entities and

therefore we were not required to engage with

component auditors from another PwC global

network firm operating under our instruction.

Our testing was therefore performed on a

consolidated basis using thresholds which

are determined with reference to the overall

group materiality and the risks of material

misstatement identified.

HOW WE TAILORED THE

AUDIT SCOPE

We tailored the scope of our audit to ensure

that we performed enough work to be able to

give an opinion on the consolidated financial

statements as a whole, taking into account

the structure of the group, the accounting

processes and controls, and the industry in

which the group operates.

The company is based in Guernsey with two

subsidiaries located in Guernsey and three

underlying subsidiaries located in Luxembourg.

The consolidated financial statements are

a consolidation of the company and all the

subsidiaries.

MATERIALITY

The scope of our audit was influenced by

our application of materiality. We set certain

quantitative thresholds for materiality. These,

together with qualitative considerations,

helped us to determine the scope of our

audit and the nature, timing and extent of our

audit procedures on the individual financial

statement line items and disclosures and

in evaluating the effect of misstatements,

both individually and in aggregate on the

consolidated financial statements as a whole.

Based on our professional judgement, we

determined materiality for the consolidated

financial statements as a whole as follows:

Overall group materiality £8.4 million (2020: £8.5 million)

How we determined it 2% of consolidated net assets

Rationale for benchmark

applied

We believe consolidated net assets to be the appropriate basis

for determining materiality since this is a key consideration

for members of the company when assessing financial

performance. It is also a generally accepted measure used for

companies in this industry.

We use performance materiality to reduce to

an appropriately low level the probability that

the aggregate of uncorrected and undetected

misstatements exceeds overall materiality.

Specifically, we use performance materiality

in determining the scope of our audit and the

nature and extent of our testing of account

balances, classes of transactions and

disclosures, for example in determining sample

sizes. Our performance materiality was 75%

of overall materiality, amounting to £6.3 million

(2020: £6.4 million) for the group financial

statements.

In determining the performance materiality,

we considered a number of factors – the

history of misstatements, risk assessment

and aggregation risk and the effectiveness of

controls - and concluded that an amount at the

upper end of our normal range was appropriate.

We agreed with the Audit Committee that we

would report to them misstatements identified

during our audit above £0.4 million (2020: £0.4

million) as well as misstatements below that

amount that, in our view, warranted reporting

for qualitative reasons.

REPORTING ON OTHER

INFORMATION

The other information comprises all the

information included in the Annual Report and

Audited Consolidated Financial Statements

(the “Annual Report”) but does not include

the consolidated financial statements and our

auditor’s report thereon. The directors are

responsible for the other information.

Our opinion on the consolidated financial

statements does not cover the other

information and we do not express any form

of assurance conclusion thereon.

In connection with our audit of the

consolidated financial statements, our

responsibility is to read the other information

and, in doing so, consider whether the

other information is materially inconsistent

with the consolidated financial statements

or our knowledge obtained in the audit, or

otherwise appears to be materially misstated.

If, based on the work we have performed,

we conclude that there is a material

misstatement of this other information,

we are required to report that fact. We

have nothing to report based on these

responsibilities.

RESPONSIBILITIES FOR THE

CONSOLIDATED FINANCIAL

STATEMENTS AND THE AUDIT

Responsibilities of the directors for the

consolidated financial statements

As explained more fully in the Statement

of Directors’ Responsibilities, the directors

are responsible for the preparation of the

consolidated financial statements that give

a true and fair view in accordance with

International Financial Reporting Standards

as adopted by the European Union, the

requirements of Guernsey law and for such

internal control as the directors determine

is necessary to enable the preparation of

consolidated financial statements that are

free from material misstatement, whether

due to fraud or error.

In preparing the consolidated financial

statements, the directors are responsible for

assessing the group’s ability to continue as

a going concern, disclosing, as applicable,

matters related to going concern and using

the going concern basis of accounting unless

the directors either intend to liquidate the

group or to cease operations, or have no

realistic alternative but to do so.

Auditor’s responsibilities for the audit of the

consolidated financial statements

Our objectives are to obtain reasonable

assurance about whether the consolidated

financial statements as a whole are free

from material misstatement, whether due

to fraud or error, and to issue an auditor’s

report that includes our opinion. Reasonable

assurance is a high level of assurance, but

is not a guarantee that an audit conducted

in accordance with ISAs will always detect

a material misstatement when it exists.

Misstatements can arise from fraud or error

and are considered material if, individually

or in aggregate, they could reasonably be

expected to influence the economic decisions

of users taken on the basis of these

consolidated financial statements.

Our audit testing might include testing

complete populations of certain transactions

and balances, possibly using data auditing

techniques. However, it typically involves

selecting a limited number of items for

testing, rather than testing complete

populations. We will often seek to target

particular items for testing based on their

size or risk characteristics. In other cases,

we will use audit sampling to enable us to

draw a conclusion about the population from

which the sample is selected.

Financial Statements

Independent Auditor’s Report to the Members of

Starwood European Real Estate Finance Limited

As part of an audit in accordance with ISAs,

we exercise professional judgement and

maintain professional scepticism throughout

the audit. We also:

• Identify and assess the risks of material

misstatement of the consolidated financial

statements, whether due to fraud or error,

design and perform audit procedures

responsive to those risks, and obtain audit

evidence that is sufficient and appropriate

to provide a basis for our opinion. The risk

of not detecting a material misstatement

resulting from fraud is higher than for one

resulting from error, as fraud may involve

collusion, forgery, intentional omissions,

misrepresentations, or the override of

internal control.

• Obtain an understanding of internal control

relevant to the audit in order to design

audit procedures that are appropriate in the

circumstances, but not for the purpose of

expressing an opinion on the effectiveness

of the group’s internal control.

• Evaluate the appropriateness of accounting

policies used and the reasonableness

of accounting estimates and related

disclosures made by the directors.

• Conclude on the appropriateness of the

directors’ use of the going concern basis

of accounting and, based on the audit

evidence obtained, whether a material

uncertainty exists related to events or

conditions that may cast significant doubt

on the group’s ability to continue as a going

concern over a period of at least twelve

months from the date of approval of the

consolidated financial statements. If we

conclude that a material uncertainty exists,

we are required to draw attention in our

auditor’s report to the related disclosures in

the consolidated financial statements or, if

such disclosures are inadequate, to modify

our opinion. Our conclusions are based on

the audit evidence obtained up to the date

of our auditor’s report. However, future

events or conditions may cause the group

to cease to continue as a going concern.

• Evaluate the overall presentation, structure

and content of the consolidated financial

statements, including the disclosures,

and whether the consolidated financial

statements represent the underlying

transactions and events in a manner that

achieves fair presentation.

• Obtain sufficient appropriate audit evidence

regarding the financial information of

the entities or business activities within

the group to express an opinion on the

consolidated financial statements. We are

responsible for the direction, supervision and

performance of the group audit. We remain

solely responsible for our audit opinion.

We communicate with those charged with

governance regarding, among other matters,

the planned scope and timing of the audit

and significant audit findings, including any

significant deficiencies in internal control that

we identify during our audit.

We also provide those charged with

governance with a statement that we

have complied with relevant ethical

requirements regarding independence, and

to communicate with them all relationships

and other matters that may reasonably be

thought to bear on our independence, and

where applicable, related safeguards.

From the matters communicated with those

charged with governance, we determine

those matters that were of most significance

in the audit of the consolidated financial

statements of the current period and are

therefore the key audit matters. We describe

these matters in our auditor’s report unless

law or regulation precludes public disclosure

about the matter or when, in extremely

rare circumstances, we determine that a

matter should not be communicated in our

report because the adverse consequences

of doing so would reasonably be expected to

outweigh the public interest benefits of such

communication.

Use of this report

This report, including the opinions, has been

epared for and only for the members as a

body in accordance with Section 262 of the

Companies (Guernsey) Law, 2008 and for

no other purpose. We do not, in giving these

opinions, accept or assume responsibility for

any other purpose or to any other person to

whom this report is shown or into whose hands

it may come save where expressly agreed by

our prior consent in writing.

REPORT ON OTHER LEGAL AND

REGULATORY REQUIREMENTS

Company Law exception reporting

Under the Companies (Guernsey) Law, 2008

e are required to report to you if,

in our opinion:

• We have not received all the information

and explanations we require for our audit;

• Proper accounting records have not been

kept; or

• The consolidated financial statements

are not in agreement with the accounting

records.

We have no exceptions to report arising from

this responsibility.

CORPORATE GOVERNANCE

STATEMENT

The Listing Rules require us to review the

directors’ statements in relation to going

concern, longer-term viability and that part of

the corporate governance statement relating

to the company’s compliance with the

provisions of the UK Corporate Governance

Code specified for our review. Our additional

responsibilities with respect to the corporate

governance statement as other information

are described in the Reporting on other

information section of this report.

The company has reported compliance

against the 2019 AIC Code of Corporate

Governance (the “Code”) which has been

endorsed by the UK Financial Reporting

Council as being consistent with the UK

Corporate Governance Code for the purposes

of meeting the company’s obligations, as an

investment company, under the Listing Rules

of the FCA.

Based on the work undertaken as part of

our audit, we have concluded that each

of the following elements of the corporate

governance statement, included within the

Strategic Report is materially consistent with

the consolidated financial statements and

our knowledge obtained during the audit,

and we have nothing material to add or draw

attention to in relation to:

• The directors’ confirmation that they have

carried out a robust assessment of the

emerging and principal risks;

• The disclosures in the Annual Report

that describe those principal risks, what

procedures are in place to identify emerging

risks and an explanation of how these are

being managed or mitigated;

• The directors’ statement in the consolidated

financial statements about whether they

considered it appropriate to adopt the going

concern basis of accounting in preparing

them, and their identification of any

material uncertainties to the group’s ability

to continue to do so over a period of at least

twelve months from the date of approval of

the consolidated financial statements;

• The directors’ explanation as to their

assessment of the group’s prospects, the

period this assessment covers and why the

period is appropriate; and

• The directors’ statement as to whether

they have a reasonable expectation that

the company will be able to continue in

operation and meet its liabilities as they

fall due over the period of its assessment,

including any related disclosures drawing

attention to any necessary qualifications or

assumptions.

Our review of the directors’ statement

regarding the longer-term viability of the

group was substantially less in scope than an

audit and only consisted of making inquiries

and considering the directors’ process

supporting their statements; checking that the

statements are in alignment with the relevant

provisions of the Code; and considering

whether the statement is consistent with the

consolidated financial statements and our

knowledge and understanding of the group

and its environment obtained in the course of

the audit.

In addition, based on the work undertaken

as part of our audit, we have concluded

that each of the following elements of the

corporate governance statement is materially

consistent with the consolidated financial

statements and our knowledge obtained

during the audit:

• The directors’ statement that they consider

the Annual Report, taken as a whole, is

fair, balanced and understandable, and

provides the information necessary for the

members to assess the group’s position,

performance, business model and strategy;

• The section of the Annual Report that

describes the review of effectiveness of

risk management and internal control

systems; and

• The section describing the work of the Audit

Committee.

We have nothing to report in respect of our

responsibility to report when the directors’

statement relating to the company’s

compliance with the Code does not properly

disclose a departure from a relevant provision

of the Code specified under the Listing Rules

for review by the auditors.

OTHER MATTERS

As required by the Financial Conduct

Authority Disclosure Guidance and

Transparency Rule 4.1.14R, these

consolidated financial statements will

form part of the ESEF-prepared annual

financial report filed on the National Storage

Mechanism of the Financial Conduct

Authority in accordance with the ESEF

Regulatory Technical Standard (“ESEF RTS”).

This auditor’s report provides no assurance

over whether the annual financial report

will be prepared using the single electronic

format specified in the ESEF RTS.

As explained in note 21 to the consolidated

financial statements, in addition to our

responsibility to audit and express an opinion

on the consolidated financial statements in

accordance with ISAs and Guernsey law,

we have been requested by the directors

to express an opinion on the consolidated

financial statements in accordance with

auditing standards generally accepted in the

United States of America as issued by the

AICPA, in order to meet the requirements of

Rule 206(4)-2 under the Investment Advisers

Act (the “Custody Rule”).

Roland Mills

For and on behalf of

PricewaterhouseCoopers CI LLP

Chartered Accountants and

Recognised Auditor

Guernsey, Channel Islands

23 March 2022

Financial Statements

Independent Auditor’s Report to the Members of

Starwood European Real Estate Finance Limited

OPINION

We have audited the accompanying

consolidated financial statements of

Starwood European Real Estate Finance

Limited (the “company”) and its subsidiaries

(together “the group”), which comprise the

consolidated statements of financial position

as of 31 December 2021 and 31 December

2020, and the related consolidated

statements of comprehensive income,

changes in equity and cash flows for the

years then ended, including the related notes

(collectively referred to as the “consolidated

financial statements”).

In our opinion, the accompanying

consolidated financial statements present

fairly, in all material respects, the financial

position of the group as of 31 December

2021 and 31 December 2020, and the

results of its operations and its cash flows

for the years then ended in accordance with

International Financial Reporting Standards

as adopted by the European Union.

BASIS FOR OPINION

We conducted our audit in accordance

with auditing standards generally accepted

in the United States of America (US

GAAS). Our responsibilities under those

standards are further described in the

Auditors’ responsibilities for the audit of

the consolidated financial statements

section of our report. We are required to be

independent of the group and to meet our

other ethical responsibilities, in accordance

with the relevant ethical requirements

relating to our audit. We believe that the

audit evidence we have obtained is sufficient

and appropriate to provide a basis for our

audit opinion.

SUBSTANTIAL DOUBT ABOUT THE

GROUP’S ABILITY TO CONTINUE

AS A GOING CONCERN

The accompanying consolidated financial

statements have been prepared assuming

that the group will continue as a going

concern. As discussed in the going concern

disclosures in the basis of preparation

disclosures in note 2 to the consolidated

financial statements, there is a possibility of a

realisation offer being made or, failing that, a

realisation vote being put to the shareholders

no later than 28 February 2023. Depending

on the level of realisation requests from

shareholders, the directors may put forward

alternative proposals which may include the

reorganisation or winding up of the company.

Note 2 has stated that substantial doubt

exists about the group’s ability to continue as

a going concern. Management’s evaluation of

the events and conditions and management’s

plans regarding these matters are also

described in note 2. The consolidated

financial statements do not include any

adjustments that might result from the

outcome of this uncertainty. Our opinion is

not modified with respect to this matter.

Financial Statements

Independent Auditor’s Report to the Directors of

Starwood European Real Estate Finance Limited (US GAAS)

Financial Statements

Independent Auditor’s Report to the Directors of

Starwood European Real Estate Finance Limited (US GAAS)

RESPONSIBILITIES OF

MANAGEMENT FOR THE

CONSOLIDATED FINANCIAL

STATEMENTS

Management is responsible for the preparation

and fair presentation of the consolidated

financial statements in accordance with

International Financial Reporting Standards as

adopted by the European Union, and for the

design, implementation, and maintenance of

internal control relevant to the preparation

and fair presentation of consolidated financial

statements that are free from material

misstatement, whether due to fraud or error.

In preparing the consolidated financial

statements, management is responsible for

assessing the group’s ability to continue as

a going concern for at least, but not limited

to, twelve months from the end of the

reporting period, disclosing, as applicable,

matters related to going concern and using

the going concern basis of accounting unless

management either intends to liquidate the

group or to cease operations, or has no

realistic alternative but to do so.

AUDITORS’ RESPONSIBILITIES

FOR THE AUDIT OF THE

CONSOLIDATED FINANCIAL

STATEMENTS

Our objectives are to obtain reasonable

assurance about whether the financial

statements as a whole are free from material

misstatement, whether due to fraud or error,

and to issue an auditors’ report that includes

our opinion. Reasonable assurance is a high

level of assurance but is not absolute assurance

and therefore is not a guarantee that an audit

conducted in accordance with US GAAS will

always detect a material misstatement when

it exists. The risk of not detecting a material

misstatement resulting from fraud is higher

than for one resulting from error, as fraud may

involve collusion, forgery, intentional omissions,

misrepresentations, or the override of internal

control. Misstatements are considered

material if there is a substantial likelihood that,

individually or in the aggregate, they would

influence the judgment made by a reasonable

user based on the financial statements.

In performing an audit in accordance with

US GAAS, we:

• Exercise professional judgment and

maintain professional skepticism throughout

the audit.

• Identify and assess the risks of material

misstatement of the consolidated financial

statements, whether due to fraud or error,

and design and perform audit procedures

responsive to those risks. Such procedures

include examining, on a test basis, evidence

regarding the amounts and disclosures in

the consolidated financial statements.

• Obtain an understanding of internal control

relevant to the audit in order to design

audit procedures that are appropriate in the

circumstances, but not for the purpose of

expressing an opinion on the effectiveness

of the group’s internal control. Accordingly,

no such opinion is expressed.

• Evaluate the appropriateness of accounting

policies used and the reasonableness of

significant accounting estimates made

by management, as well as evaluate the

overall presentation of the consolidated

financial statements.

• Conclude whether, in our judgment, there

are conditions or events, considered in

the aggregate, that raise substantial doubt

about the group’s ability to continue as a

going concern for a reasonable period of

time.

We are required to communicate with those

charged with governance regarding, among

other matters, the planned scope and timing

of the audit, significant audit findings, and

certain internal control-related matters that

we identified during the audit.

OTHER INFORMATION

Management is responsible for the other

information included in the Annual Report and

Audited Consolidated Financial Statements

(the “Annual Report”). The other information

comprises the information included in the

Annual Report, but does not include the

consolidated financial statements and our

auditor’s reports thereon. Our opinion on the

consolidated financial statements does not

cover the other information, and we do not

express an opinion or any form of assurance

thereon.

In connection with our audit of the

consolidated financial statements,

our responsibility is to read the other

information and consider whether a material

inconsistency exists between the other

information and the consolidated financial

statements or the other information

otherwise appears to be materially

misstated. If, based on the work performed,

we conclude that an uncorrected material

misstatement of the other information exists,

we are required to describe it in our report.

RESTRICTION OF USE

This report, including the opinion, has been

prepared for and only for the directors in

relation to the requirements of Rule 206(4)-2

of the Investment Advisers Act of 1940 (the

“Custody Rule”) as it applies to the company

and for no other purpose. We do not, in giving

this opinion, accept or assume responsibility

for any other purpose or to any other person

to whom this report is shown or into whose

hands it may come save where expressly

agreed by our prior consent in writing.

PricewaterhouseCoopers CI LLP

Chartered Accountants,

Guernsey, Channel Islands

23 March 2022

Financial Statements

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2021

Notes

1 January 2021 to

31 December 2021

1 January 2020 to

31 December 2020

Income

Income from loans advanced 10 28,382,742 29,052,521

Net foreign exchange (losses)/gains 6 (3,043,374) 5,993,767

Net changes in fair value of financial assets at fair value through

profit or loss

18 - 1,097,722

Total income 25,339,368 36,144,010

Expenses

Investment management fees 3, 22 3,147,075 3,186,943

Credit facility commitment fees 844,694 762,074

Credit facility interest 685,815 945,771

Administration fees 3(b) 344,950 331,591

Legal and professional fees 266,154 288,111

Audit and non-audit fees 5 229,387 227,386

Directors' fees and expenses 4, 22 195,410 152,564

Other expenses 179,262 198,350

Broker's fees and expenses 3(d) 53,250 50,000

Facility agent fees

10,781

Total operating expenses 5,945,997 6,153,571

Operating profit for the year before tax 19,393,371 29,990,439

Taxation 20 100,452 81,953

Operating profit for the year 19,292,919 29,908,486

Other comprehensive (loss)/income

Items that may be reclassified to profit or loss

Exchange differences on translation of foreign operations

2(k) (329,895) 232,417

Other comprehensive (loss)/income for the year (329,895) 232,417

Total comprehensive income for the year 18,963,024 30,140,903

Weighted average number of shares in issue 7 408,939,505 412,469,890

Basic and diluted earnings per Ordinary Share (pence) 7 4.72 7.25

The accompanying notes form an integral part of these consolidated financial statements.

Notes

As at

31 December 2021

As at

31 December 2020

Assets

Cash and cash equivalents 8 2,994,357 2,939,408

Other receivables and prepayments 9 37,652 17,094

Financial assets at fair value through profit or loss 11 13,291,598 918,259

Loans advanced 10 414,632,512 442,659,649

Total assets 430,956,119 446,534,410

Liabilities

Credit facility 12 7,914,993 18,626,837

Trade and other payables 13 1,484,526 1,210,066

Total liabilities 9,399,519 19,836,903

Net assets 421,556,600 426,697,507

Capital and reserves

Share capital 15 407,440,011 408,031,544

Retained earnings 14,150,392 18,369,871

Translation reserve (33,803) 296,092

Total equity 421,556,600 426,697,507

Number of Ordinary Shares in issue 15 408,911,273 409,571,273

Net asset value per Ordinary Share (pence) 103.09 104.18

The accompanying notes form an integral part of these consolidated financial statements.

Financial Statements

Consolidated Statement of Financial Position

as at 31 December 2021

These consolidated financial statements were approved and authorised for issue by the Board of Directors on 23 March 2022, and signed on its

behalf by:

Chairman Director

Year ended 31 December 2021

Share capital

Retained

earnings

Translation

reserves

Total Equity

Balance at 1 January 2021 408,031,544 18,369,871 296,092 426,697,507

Share buy backs (591,533) - - (591,533)

Dividends paid - (23,512,398) - (23,512,398)

Operating profit for the year - 19,292,919 - 19,292,919

Other comprehensive income:

Other comprehensive income for the year

- - (329,895)

Balance at 31 December 2021 407,440,011 14,150,392 (33,803) 421,556,600

The accompanying notes form an integral part of these consolidated financial statements.

Financial Statements

Consolidated Statement of Changes in Equity

for the year ended 31 December 2021

Year ended 31 December 2020

Share capital

Retained

earnings

Translation

reserves

Total Equity

Balance at 1 January 2020 411,205,161 15,286,245 63,675 426,555,081

Share buy backs (3,173,617) - - (3,173,617)

Dividends paid - (26,824,860) - (26,824,860)

Operating profit for the year - 29,908,486 - 29,908,486

Other comprehensive income:

Other comprehensive income for the year

- - 232,417 232,417

Balance at 31 December 2020 408,031,544 18,369,871 296,092 426,697,507

(329,895)

Financial Statements

Consolidated Statement of Cash Flows

for the year ended 31 December 2021

(1)

Net of arrangement fees of £1,125,342 (2020: £780,584) withheld.

The accompanying notes form an integral part of these consolidated financial statements.

1 January 2021 to

31 December 2021

1 January 2020 to

31 December 2020

Operating activities:

Operating profit for the year before tax 19,393,371 29,990,439

Adjustments:

Net interest income (28,382,742) (29,052,521)

Net changes in fair value of financial assets at fair value through profit or loss - (1,097,722)

(Increase) / decrease in prepayments and receivables (20,558) 11,841

Increase / (decrease) in trade and other payables 132,570 (159,467)

Net unrealised (gains) / losses on foreign exchange derivatives (12,373,339) 7,676,819

Net foreign exchange losses / (gains) 15,488,570 (12,848,644)

Credit facility interest 236,071 558,323

Credit facility amortisation of fees 449,744 387,448

Credit facility commitment fees 844,694 762,074

Currency translation difference 2,722,148 (463,709)

Corporate taxes paid (87,724) (151,052)

(1,597,195) (4,386,171)

Loans advanced

(1)

(90,597,307) (98,731,281)

Loan repayments 103,474,780 59,619,767

Credit linked note repayments - 21,773,000

Origination fees paid (300,456) (577,233)

Interest, commitment and exit fee income from loans advanced 26,682,663 28,256,205

Interest received on Credit Linked Notes - 1,210,333

Net cash inflow from operating activities 37,662,485 7,164,620

Cash flows from financing activities

Shares buy backs (677,120) (3,088,030)

Dividends paid (23,512,398) (26,824,860)

Proceeds under credit facility 63,800,000 41,985,860

Repayments under credit facility (75,128,132) (52,067,717)

Credit facility interest paid (262,221) (492,331)

Credit facility commitment fees paid (647,799) (616,146)

Net cash outflow from financing activities (36,427,670) (41,103,224)

Net increase / (decrease) in cash and cash equivalents 1,234,815 (33,938,604)

Cash and cash equivalents at the start of the year 2,939,408 36,793,674

Net foreign exchange (losses) / gains on cash and cash equivalents (1,179,866) 84,338

Cash and cash equivalents at the end of the year 2,994,357 2,939,408

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

1. GENERAL INFORMATION

Starwood European Real Estate Finance Limited (the “Company”)

was incorporated with limited liability in Guernsey under the

Companies (Guernsey) Law, 2008, as amended, on 9 November

2012 with registered number 55836, and has been authorised

by the Guernsey Financial Services Commission (the “GFSC”) as

registered closed-ended investment scheme. The registered office

and principal place of business of the Company is 1, Royal Plaza,

Royal Avenue, St Peter Port, Guernsey, Channel Islands, GY1 2HL.

On 12 December 2012, the Company announced the results of its

IPO, which raised net proceeds of £223.9 million. The Company’s

Ordinary Shares were admitted to the premium segment of the UK

Listing Authority’s Official List and to trading on the Main Market of

the London Stock Exchange as part of its IPO which completed on

17 December 2012. Further issues took place in March 2013, April

2013, July 2015, September 2015, August 2016 and May 2019.

On 10 August 2020, the Company announced the appointment of

Jefferies International Limited as buy-back agent to effect share

buy backs on behalf of the Company. During the year ended 31

December 2021, the Company repurchased 660,000 (2020:

3,648,125) Ordinary Shares at an average price of 89.54 pence

(2020: 86.9 pence) per share. As at 31 December 2021, the

Company had repurchased 4,308,125 (2020: 3,648,125). These

Ordinary Shares are held in treasury.

The consolidated financial statements comprise the financial

statements of the Company, Starfin Public Holdco 1 Limited

(“Holdco 1”), Starfin Public Holdco 2 Limited (“Holdco 2”), Starfin

Lux S.à.r.l (“Luxco”), Starfin Lux 3 S.à.r.l (“Luxco 3”) and Starfin

Lux 4 S.à.r.l (“Luxco 4”) (together, the “Group”) as at 31

December 2021.

The Company’s investment objective is to provide its shareholders

with regular dividends and an attractive total return while limiting

downside risk, through the origination, execution, acquisition and

servicing of a diversified portfolio of real estate debt investments

(including debt instruments) in the UK and wide European Union’s

internal market. To pursue its investment objective, the Company,

through the Holdco 1 and Holdco 2 (the “Holdcos”), invests in the

Luxco, Luxco 3 and Luxco 4 (the “Luxcos”) through both equity

and profit participation instruments or other funding instruments.

The Luxcos then grant or acquire loans (or other debt instruments)

to borrowers in accordance with the Group’s investment policy.

The Group expects all of its investments to be debt obligations of

corporate entities domiciled or with significant operations in the UK

and wider European Union’s internal market.

The Company has appointed Starwood European Finance Partners

Limited as the Investment Manager (the “Investment Manager”),

a company incorporated in Guernsey and regulated by the GFSC.

The Investment Manager has appointed Starwood Capital Europe

Advisers, LLP (the “Investment Adviser”), an English limited liability

partnership authorised and regulated by the Financial Conduct

Authority (the “FCA”), to provide investment advice pursuant to

an Investment Advisory Agreement. The administration of the

Company is delegated to Apex Fund and Corporate Services

(Guernsey) Limited (the “Administrator”).

2. BASIS OF PREPARATION AND PRINCIPAL

ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of

these financial statements are set out below. These policies

have been consistently applied to the years presented, unless

otherwise stated.

a) Going Concern

Note 17 includes the Group’s objectives, policies and processes

for managing its capital, its financial risk management objectives,

details of financial instruments and exposure to credit risk and

liquidity risk. The Directors have undertaken a rigorous review

of the Group’s ability to continue as a going concern including

assessing the possible impact of the Covid-19 pandemic on the

Group’s portfolio, reviewing the ongoing cash flows and the level

of cash balances and available liquidity facilities. The Board have

also taken into consideration forecasts of future cash flows and

the possibility of a Realisation Offer being made or, failing that,

the Realisation Vote being put to the shareholders (the details of

which are set out in the Report of the Directors and below).

After making enquiries of the Investment Manager and the

Administrator and reviewing the viability model prepared by the

Investment Adviser, the Directors have a reasonable expectation

that the Group has adequate resources to continue in operational

existence for at least one year from the date the consolidated

financial statements were signed. Accordingly, the Directors

continue to adopt a going concern basis in preparing these

consolidated financial statements.

In addition to a going concern statement, the Directors have

undertaken a longer term viability assessment of the Group,

including the impact of Covid-19, the results of which can be

found in the Strategic Report. A range of scenarios have been

evaluated as part of this analysis. The worst case scenario

evaluated was an interest payment default on all Stage 2 loans,

and simultaneously the repayment of the loan principal is not

received until 12 months after their maturity dates. In this

scenario the Group is still able to meet its liabilities as the fall

due although the dividend would need to be reduced to reflect

the reduced cash received.

As noted in the Report of the Directors, if the Ordinary Shares

trade at an average discount to Net Asset Value per Share of

five per cent or more during the six month period ending 31

December 2022, the Directors, at their discretion, may put

forward a Realisation Offer to Shareholders. If valid realisation

requests exceed 75 per cent of the Ordinary Shares in issue,

the Directors will, in their absolute discretion, consider whether

it is appropriate to put forward alternative proposals which

may include the reorganisation or winding up of the Company.

Subject to the discount triggered realisation mechanism not

being activated, the Directors will exercise their discretion to put

forward a Realisation Vote to shareholders by no later than 28

February 2023. Should the Realisation Vote be passed by the

requisite majority, a Realisation Offer will then be made to the

shareholders. If either: (i) more than 75 per cent of the Ordinary

Shares then in issue were elected for realisation; or (ii) the NAV

of the Company following the realisation would be less than

£100 million; or (iii) the number of Ordinary Shares of any class

in public hands falls below 25 per cent, the Directors, at their

discretion, have the right to propose a resolution to wind up or

reconstruct the Company.

There is a material uncertainty as to the outcome of the

Realisation Offer and the Realisation Vote, and subsequently

the Realisation Offer if the Realisation Vote is passed, that

may cast substantial doubt on the Group’s ability to continue

as a going concern. As a result of the strong fundamentals

supporting the Company’s investment strategy, robust

operating metrics displayed by the Company which include a

consistent dividend yield and stable NAV, combined with the

strong financial position of the Company, the Directors believe

there is a compelling rationale for shareholders to vote against

a Realisation Offer and Realisation Vote and that the Company

will continuing as constituted.

b) Statement of compliance

The Company has prepared its consolidated financial

statements in accordance with The Companies (Guernsey)

Law, 2008 (as amended) and International Financial

Reporting Standards (“IFRS”), which comprise standards

and interpretations approved by the International Accounting

Standards Boards (“IASB”) together with the interpretations of

the IFRS Interpretations Committee (“IFRIC”) as approved by the

International Accounting Standards Committee (“IASC”) which

remain in effect and were adopted by the European Union. The

Directors of the Company have taken the exemption in Section

244 of The Companies (Guernsey) Law, 2008 (as amended)

and have therefore elected to only prepare consolidated and not

separate financial statements for the year.

(i) Standards and amendments to existing standards

effective 1 January 2021

Certain new accounting standards and interpretations have

been published that are effective 1 January 2021 and have

not been applied in preparing these consolidated financial

statements. These standards are not expected to have a

material impact on the Group in the current or future reporting

periods and on foreseeable future transactions.

(ii) New standards, amendments and interpretations

effective after 1 January 2021 and have not been early

adopted

A number of new standards, amendments to standards and

interpretations are effective for annual periods beginning after 1

January 2021 and have not been early adopted in preparing the

Group’s consolidated financial statements. None of these are

expected to have a material effect on the consolidated financial

statements of the Group.

c) Basis of preparation

These consolidated financial statements have been prepared on

a going concern basis and under the historical cost convention

as modified by the revaluation of certain assets and liabilities to

fair value.

Critical accounting judgements and key sources of

estimation uncertainty

The preparation of financial statements in conformity with IFRS

requires the use of certain critical accounting estimates. It

also requires the Board of Directors to exercise its judgement

in the process of applying the Group’s accounting policies. The

areas involving a higher degree of judgement or complexity, or

areas where assumptions and estimates are significant to the

consolidated financial statements relate to:

(i) Critical accounting estimates and assumptions

• Models used for loans accounted at amortised cost use

assumptions and estimates regarding the receipt and timing

of scheduled and unscheduled payments of loans advanced.

Changes in these assumptions and estimates could impact

liquidity risk and the interest income (see note 17).

• The measurement of both the initial and ongoing expected

credit loss (“ECL”) allowance for financial assets measured at

amortised cost is an area that requires the use of significant

assumptions about credit behavior such as likelihood of

borrowers defaulting and the resulting losses (see note 2(h)).

(ii) Critical accounting judgements

• The functional currency of each the Company and its

subsidiary undertakings, which is considered by the Directors

to be Euro for Luxco 3 and Sterling for the Company and all

other subsidiaries (see notes 2(e) and 2(k)).

Subsidiary

undertakings

Date of

Control

Ownership

Country of

Establishment

Principal

place of

business

Starfin Lux

S.à.r.l

30/11/12 100 Luxembourg Luxembourg

Starfin Public

Holdco 1

Limited

11/09/17 100 Guernsey Guernsey

Starfin Public

Holdco 2

Limited

11/09/17 100 Guernsey Guernsey

Starfin Lux 3

S.à.r.l

19/09/17 100 Luxembourg Luxembourg

Starfin Lux 4

S.à.r.l

11/12/17 100 Luxembourg Luxembourg

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

• The operating segments, of which the Directors are currently of

the opinion that the Company and its subsidiaries are engaged

in a single segment of business, being the provision of a

diversified portfolio of real estate backed loans (see note 2(f)).

• A number of significant judgements are also required in

applying the accounting requirements for measuring ECL,

such as determining the criteria for significant increase in

credit risk, choosing the appropriate model and assumptions

for the measurement of ECL, determining the probabilities of

default and loss given default (see note 2(h)).

d) Basis of consolidation

The consolidated financial statements incorporate the financial

statements of the Company and entities controlled by the

Company (its subsidiary undertakings) made up to the end of the

reporting period. Control is achieved where the Company has the

power to govern the financial and operating policies of an investee

entity so as to obtain benefits directly from its activities. The

existence and effect of potential voting rights that are currently

exercisable or convertible are considered when assessing whether

the Company controls another entity. The Company also assesses

existence of control where it does not have more than 50

percent of the voting power but is able to govern the financial and

operating policies by virtue of de-facto control.

Subsidiary undertakings are fully consolidated from the date

on which control is transferred to the Group. They are

de-consolidated from the date that control ceases.

The Group applies the acquisition method to account for

business combinations.

Acquisition-related costs are expensed as incurred. No

consideration, other than for the par value of any share capital

or capital contributions, has been paid in respect of the

acquisition of subsidiary undertakings. The Company acquired

the subsidiaries at the time of their initial establishment and

hence they had no net assets at the date of the acquisition.

Intercompany transactions, balances, income and expenses

on transactions between Group companies are eliminated on

consolidation. Profits and losses resulting from intercompany

transactions that are recognised in assets are also eliminated.

e) Functional and presentation currency

Items included in the financial statements of each of the Group’s

entities are measured using the currency of the primary economic

environment in which the entity operates (the “functional

currency”). Therefore, the Directors have considered in assessing

the functional currency of each of the Group’s entities:

• the share capital of all members of the Group is denominated in

Sterling except for Luxco 3 share capital which is denominated

in Euro;

• the dividends are paid in Sterling;

• Euro non-investment transactions represent only a small

proportion of transactions in the Luxembourg entities; and

• proportion of non-Sterling investments in each portfolio of

Luxembourg entities.

The functional and presentation currency of each Group

entity is Sterling, apart from Luxco 3 for which the functional

currency is Euro. Luxco 3 holds loans and investments in Euro

currencies. The Directors have also adopted Sterling as the

Group’s presentation currency (as the Group holds a significant

proportion of its assets in the UK, although this may vary from

time to time, capital was raised in Sterling, Group expenses are

primarily incurred in Sterling and performance is measured in

Sterling) and, therefore, the consolidated financial statements

for the Group are presented in Sterling.

f) Segment reporting

Operating segments are reported in a manner consistent with

the internal reporting provided to the chief operating decision-

maker. The chief operating decision-maker, who is responsible

for allocating resources and assessing performance of the

operating segments, has been identified as the Board, as the

Board makes strategic decisions. The Directors, after having

considered the way in which internal reporting is provided to

them, are of the opinion that the Company and its subsidiaries

are engaged in a single segment of business, being the provision

of a diversified portfolio of real estate backed loans. Equally,

based on the internal reporting provided, the Directors do not

analyse the portfolio based on geographical segments.

g) Financial assets and liabilities

Classification and subsequent measurement

The Group classifies its financial assets into the following

measurement categories: at amortised cost, at fair value

through profit or loss and at fair value through other

comprehensive income. The classification depends on

the purpose for which the financial assets were acquired.

Management determines the classification of its financial assets

at initial recognition.

Financial assets measured at amortised cost

A financial asset is measured at amortised cost if both of the

following conditions are met: (a) the financial asset is held within

a business model whose objective is to hold financial assets in

order to collect contractual cash flows and (b) the contractual

terms of the financial asset give rise on specified dates to

cash flows that are solely payments of principal and interest

on the principal amount outstanding. The carrying amount of

these assets is adjusted by any ECL allowance recognised and

measured as described in note 2(h). Interest income from these

financial assets is included in “Income from loans advanced”

using the effective interest rate method.

Financial assets at fair value through other

comprehensive income

A financial asset is measured at fair value through other

comprehensive income if both of the following conditions are

met: (a) the financial asset is held within a business model whose

objective is achieved by both collecting contractual cash flows

and selling financial assets and (b) the contractual terms of the

financial asset give rise on specified dates to cash flows that are

solely payments of principal and interest on the principal amount

outstanding. Movements in the carrying amount are taken

through other comprehensive income, except for the recognition

of impairment gains and losses, interest revenue and foreign

exchange gains and losses on the instrument’s amortised cost

which are recognised in profit or loss.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial

instruments that (a) either designated in this category upon initial

recognition or subsequently or (b) not classified in any of the other

categories. Financial assets at fair value through profit or loss are

carried in the statement of financial position at fair value with net

changes in fair value recognised in the Consolidated Statement of

Comprehensive Income. This category includes currency forward

contracts. Gains or losses on currency forward contracts are

recognised within “net foreign exchange (losses) / gains”.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss are carried in

the statement of financial position at fair value with net changes

in fair value recognised in profit or loss. These comprise currency

forward contracts which represent contractual obligations to

purchase domestic currency and sell foreign currency on a

future date.

Financial liabilities measured at amortised cost

Financial liabilities that are not classified through profit or loss,

including bank loans, are measured at amortised cost.

Recognition and measurement

Regular purchases and sales of financial assets are recognised on

the trade date, the date on which the Group commits to purchase

or sell the asset. Financial assets not carried at fair value through

profit or loss are initially recognised at fair value plus transaction

costs. Financial assets carried at fair value through profit or

loss are initially recognised at fair value, and transaction costs

are expensed in the Consolidated Statement of Comprehensive

Income. Financial assets at fair value through profit or loss

and financial assets at fair value through other comprehensive

income are subsequently carried at fair value. Financial assets at

amortised cost are subsequently measured using the effective

interest method and are subject to impairment using the ECL

model. Gains and losses are recognised in profit or loss when the

asset is derecognised, modified or impaired.

Derecognition

Financial assets are derecognised when the rights to receive

cash flows from the investments have expired or have been

transferred and the Group has transferred substantially all risks

and rewards of ownership.

Financial liabilities are derecognised when they are extinguished,

that is, when the obligation specified in the contract is

discharged or cancelled or expires.

Amortised cost and effective interest rate

The amortised cost is the amount at which the financial asset

or financial liability is measured at initial recognition minus the

principal repayments, plus or minus the cumulative amortisation

using the effective interest method of any difference between

that initial amount and the maturity amount and, for financial

assets, adjusted for any loss allowance.

The effective interest rate is the rate that exactly discounts

estimated future cash payments or receipts through the

expected life of financial assets or financial liability to the

gross carrying amount of a financial asset (i.e., its amortised

cost before any loss allowance) or to the amortised cost of a

financial liability. The calculation does not consider expected

credit losses and includes transaction costs and all fees paid or

received that are integral to the effective interest rate.

Fair value estimation

The fair value of financial assets, which comprise derivatives

not designated as hedges, are valued based on the difference

between the agreed price of selling or buying the financial

instruments on a future date and the price quoted on the year

end date for selling or buying the same or similar financial

instruments.

h) Expected credit loss measurement

The Group follows a three-stage model for impairment

based on changes in credit quality since initial recognition as

summarised below:

• A financial instrument that is not credit-impaired on initial

recognition is classified as Stage 1 and has its credit risk

continuously monitored by the Group. The ECL is measured

over a 12 month period of time.

• If a significant increase in credit risk since initial recognition

or the previous reporting period is identified, the financial

instrument is moved to Stage 2 but is not yet deemed to be

credit-impaired. The ECL is measured on a lifetime basis.

• If the financial instrument is credit-impaired, it is then moved

to Stage 3. The ECL is measured on a lifetime basis.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

The Group’s financial assets at amortised cost were all classified

within Stage 1 at inception for the following reasons:

• All loans are the subject of very detailed underwriting,

including the testing of resilience to aggressive downside

scenarios with respect to the loan specifics, the market and

general macro-economic changes, and therefore the Group

considers that value of losses given default (“LGD”) currently

have a nil value for all loans;

• Loans have very robust covenants in place which trigger as

an early warning (long before there would be any indicators

of significant increase in credit risk) and this enables the

Investment Adviser to become highly involved in the execution

of business plans to avoid ECL;

• Loans have strong security packages and many are amortising

with relatively short terms which further reduces the risk; and

• All loans have significant loan-to-value headroom which further

mitigates the risk of ECL.

During the year ended 31 December 2021, three loans with

a value of £59,031,888 (2020: six loans with a value of

£150,331,450 (one of which was fully repaid in 2021)) remain

classified as Stage 2 and the remaining loans are classified as

Stage 1. The loans classified as Stage 2 are predominantly in

the retail and hospitality sectors (but not all hospitality loans are

in Stage 2). The main reason for moving the loans to Stage 2

in the second quarter of 2020 was expected income covenant

breaches due to the disruption from Covid-19. Following loan

amendments agreed with borrowers, no income breaches

have occurred. Although these loans have been classified as

Stage 2 loans, no expected credit loss has been recognised at

31 December 2021 (2020: £nil) as although the credit risk has

increased for these loans, the Group does not anticipate realising

a loss in the event of a default. For further information, see the

Investment Manager’s report. The paragraph below describes

how the Group determines when a significant increase in credit

risk has occurred, such that a loan would move from Stage 1

to Stage 2. No loans have been moved to Stage 2 or to Stage 3

during 2021.

The Group considers that for prepayments and capitalised cost,

the ECL is by default nil as these are non-monetary items with no

credit risks. For trade and other receivables, the Group applies

the simplified approach which requires expected lifetime losses to

be recognised from initial recognition of the receivables.

Significant increase in credit risk - Stage 2

The Group uses both quantitative and qualitative criteria which

is monitored no less than quarterly in order to assess whether

an increase in credit risk has occurred. Increased credit risk

would be considered if, for example, all or a combination of the

following has occurred:

• underlying income performance is at a greater than 10 per

cent variance to the underwritten loan metrics;

• Loan to Value is greater than 75-80 per cent;

• Loan to Value or income covenant test results are at a

variance of greater than 5-10% of loan default covenant level

(note that loan default covenant levels are set tightly to ensure

that an early cure is required by the borrower should they

breach which usually involves decreasing the loan amount

until covenant tests are passed);

• late payments have occurred and not been cured within 3

days;

• loan maturity date is within six months and the borrower has

not presented an achievable refinance or repayment plan;

• covenant and performance milestones criteria under the loan

have required more than two waivers;

• increased credit risk has been identified on tenants

representing greater than 25 per cent of underlying asset

income;

• income rollover / tenant break options exist such that a lease

up of more than 30 per cent of underlying property will be

required within 12 months in order to meet loan covenants

and interest payments; and

• borrower management team quality has adversely changed.

Default and credit-impaired assets - Stage 3

Non-performing financial assets would be classified with Stage

3, which is fully aligned with the definition of credit- impaired,

when one or more of the following has occurred:

• the borrower is in breach of all financial covenants;

• the borrower is in significant financial difficulty; and

• it is becoming probable that the borrower will enter

bankruptcy.

An instrument is considered to have been cured, that is no

longer in default, when it no longer meets any of the default

criteria for a sufficient period of time (which is determined by

reference to the default).

Write-off policy

The Group writes off financial assets, in whole or in part, when it

has exhausted all practically recovery efforts and has concluded

there is no reasonable expectation of recovery. Indicators that

there is no reasonable expectation of recovery include:

• ceasing enforcement activity; and

• where the Group’s recovery method is foreclosing on collateral

and the value of the collateral is such that there is no

reasonable expectation of recovering in full.

Sensitivity analysis

The most significant period-end assumptions used for the

ECL estimates are the LGD and probability of default (“PD”) as

described above.

The default probabilities are based on initial loan-to-value (“LTV”)

headroom which the Investment Adviser believes to be a good

predictor of the PD, in accordance with recent market studies

of European commercial real estate loans.

In measuring the LGD for this sensitivity analysis, the loans

advanced have been assessed on a collective basis as they

possess similar covenants and security package characteristics.

The selected LGD of 0.30% is based on the aggregate losses

of all AAA rated notes issued in Europe from 1995 to 2020

(totalling €174 billions), according to recent market studies

of European commercial real estate loans. AAA rated notes

are considered the most representative of the Group’s loan

portfolio due to the nature of the loans. The Investment Adviser

considers this to be a reasonable estimate for loss given default.

As explained on Note 2 (b)(i), the year-end ECL are nil. Set

out in the table below is the sensitivity to the ECL as at 31

December 2021 and 31 December 2020 that could result

from reasonable possible changes in the LTV and LGD actual

assumptions used for calculation of ECL as at the respective

year-end. On an individual loan basis, the LTV was increased

by 25%, and a new PD determined, which was multiplied by a

constant LGD of 0.30% for all loans and the loan exposure as at

each year-end. All other variables are held constant.

Reasonable

possible shift

(absolute value)

31 December

2021 ECL

31 December

2020 ECL

LTV +25% (2020: +25%)

264,231 304,219

LGD +0.3% (2020: +0.3%)

k) Foreign currency translation

Transactions and balances

Foreign currency transactions are translated into the functional

currency using the exchange rates prevailing at the dates of the

transactions or valuation where items are re-measured. Foreign

exchange gains and losses resulting from the settlement of such

transactions and from the translation at year-end exchange

rates of monetary assets and liabilities denominated in foreign

currencies are recognised in the Consolidated Statement of

Comprehensive Income. Foreign exchange gains and losses

that relate to loans advanced, borrowings and cash and cash

equivalents and all other foreign exchange gains and losses are

presented in the Consolidated Statement of Comprehensive

Income within “net foreign exchange(losses) / gains”.

Group companies

The results and financial position of all the Group entities that

have a functional currency different from the presentation

currency of the Group are translated into the presentation

currency of the Group as follows:

i. assets and liabilities for each Statement of Financial Position

presented are translated at the closing rate at the end of the

reporting period;

ii. income and expenses for each Statement of Comprehensive

Income are translated at average exchange rates (unless this

average is not a reasonable approximation of the cumulative

effect of the rates prevailing on the transaction dates, in

which case income and expenses are translated at the rate

on the dates of the transactions);

iii. share capital is translated at historical cost (translated using

the exchange rates at the transaction date); and

iv. all resulting exchange differences are recognised in other

comprehensive income.

The cumulative amount of translation exchange differences is

presented in a separate component of equity until disposal of

the entity. Luxco 3 has Euro as its functional currency.

l) Interest income

Interest income on financial assets within Stage 1 and 2 is

recognised by applying the effective interest rate to the gross

carrying amount of financial assets. For financial assets that

are classified within Stage 3, interest revenue is calculated by

applying the effective interest rate to their amortised cost (that

is net of ECL provision). Interest income on non-performing

financial assets at amortised cost is recognised to the extent

the Group expects to recover the interest receivable.

Interest on cash and cash equivalents is recognised at

amortised cost basis.

Change in ECL allowance (+)

i) Cash and cash equivalents

In the Consolidated Statement of Cash Flows, cash and cash

equivalents includes cash in hand, deposits held at call with

banks and other short-term highly liquid investments with

original maturities of three months or less.

j) Share capital

Ordinary Shares are classified as equity. Incremental costs

directly attributable to the issue of new Ordinary Shares are

shown in equity as a deduction, net of tax, from the proceeds.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

m) Origination, exit and loan arrangement fees

Origination fees paid to the Investment Manager and exit and

direct loan arrangement fees received will be recognised using the

effective interest rate method under loans advanced and amortised

over the lifetime of the related financial asset through income from

loans advanced in the Consolidated Statement of Comprehensive

Income. Syndication costs are recognised in the Consolidated

Statement of Comprehensive Income when incurred.

n) Expenses

All other expenses are included in the Consolidated Statement

of Comprehensive Income on an accruals basis.

o) Taxation

The Company is a tax-exempt Guernsey limited liability company

as it is domiciled and registered for taxation purposes in

Guernsey where it pays an annual exempt status fee under The

Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 (as

amended). Accordingly, no provision for Guernsey tax is made.

The Holdcos are exempted for Guernsey tax purposes, and

therefore no provision for taxes has been made.

The Luxcos are subject to the applicable general tax regulations

in Luxembourg and taxation is provided based on the results for

the year (see note 20).

p) Other receivables

Trade and other receivables are amounts due in the ordinary

course of business. They are classified as assets. Trade and

other receivables are recognised initially at fair value and

subsequently measured at amortised cost using the effective

interest method, less allowance for ECL.

q) Other payables

Trade and other payables are obligations to pay for services that

have been acquired in the ordinary course of business. They are

classified as liabilities. Trade and other payables are recognised

initially at fair value and subsequently measured at amortised

cost using the effective interest rate method.

r) Dividend distributions

Dividend distributions to the Company’s shareholders are recognised

as a liability in the Company’s financial statements in the period in

which the dividends are declared by the Board of Directors.

s) Offsetting financial assets and liabilities

Financial assets and liabilities are offset and the net amount reported

on the Consolidated Statement of Financial Position when there is a

legally enforceable right to offset the recognised amounts and there

is an intention to settle on a net basis or realise the asset and settle

the liability simultaneously.

t) Financial liabilities at amortised cost

Financial liabilities at amortised cost, including bank loans are

initially recognised at fair value and subsequently measured at

amortised cost using the effective interest method. Financial

liabilities are derecognised when the contractual obligation is

discharged, cancelled or expires.

u) Capitalised expenses on credit facilities

Expenses in connection with the process of originating,

prolongation, or restructuring of a credit facility, such as

application and underwriting fees, are capitalised and

subsequently amortised over the period of the relevant credit

facility in the Consolidated Statement of Comprehensive Income

within “credit facility interest”.

3. MATERIAL AGREEMENTS

a) Investment management agreement

The Company and the Investment Manager have entered into an

investment management agreement, dated 28 November 2012

(the “Investment Management Agreement”), (which was amended

on 7 March 2014, 14 May 2014, 7 September 2015 and 6 October

2017) pursuant to which the Investment Manager has been given

overall responsibility for the discretionary management of the

Company’s assets in accordance with the Company’s investment

objectives and policy.

The Investment Manager is entitled to a management fee which

is calculated and accrued monthly at a rate equivalent to 0.75

per cent per annum of NAV. In calculating such fee, there shall

be excluded from the NAV attributable to the Ordinary Shares

the uninvested portion of the cash proceeds of any new issue of

Shares (or C Shares) until at least 90 per cent of such proceeds

are invested in accordance with the Company’s investment policy

(or deployed to repay borrowings under any credit facility of

the Group or other liabilities of the Group) for the first time. The

management fee is payable quarterly in arrears.

In addition, the Investment Manager is entitled to an asset

origination fee of 0.75 per cent of the value of all new loan

investments made or acquired by the Group (see note 22). The

asset origination fee to be paid by the Group is expected to be paid

upon receipt by the Group of loan arrangement fees received on

the deployment of the Group’s funds.

The Investment Management Agreement is terminable by either

the Investment Manager or the Company giving to the other

not less than 12 months’ written notice. The Company is also

able to terminate the appointment of the Investment Manager

in the event of a change of control of the Investment Manager.

A change of control shall be deemed to occur where a person

acquires a direct or indirect interest in the Investment Manager,

which is calculated by reference to 15 per cent or more of

the voting rights. In addition the Investment Management

Agreement can be terminated by the Company for any failure

to act in good faith with the due skill, care and diligence which

would reasonably be expected from an experienced manager

in the sector and to exercise appropriate prudence in the

management of the Group’s portfolio.

Pursuant to the Investment Management Agreement’s

provisions, a performance fee would apply from 1 January

2018. The amount of such Performance Fee is 20 per cent of

the excess (if any) of the returns generated by the Group over

the Hurdle Total Return (described below). The measurement

period over which the Performance Fee is calculated is two

years, with the payment of any performance fee earned being

made at the end of each such two year period.

The Hurdle Total Return will be achieved when the NAV of the

Company at the end of the two year period, plus the total of all

dividends declared and paid to Ordinary Shareholders in that

two year period, is equal to the NAV of the Company at the

start of each two year measurement period, as increased by 8

per cent per annum, on a simple interest basis (but excluding

performance fees accrued and deemed as a creditor on the

balance sheet at the start of the two year measurement

period). No performance fee will be payable in relation to

performance that recoups previous losses (if any).

To the extent that the Company makes further issues of

Ordinary Shares and/or repurchases or redeems Ordinary

Shares, the Hurdle Total Return will be adjusted accordingly,

by reference to the issue proceeds of such further issues and

dividends declared subsequent to such issues. Other corporate

actions will also be reflected as appropriate in the calculation of

the Hurdle Total Return.

The Investment Manager has appointed Starwood Capital

Europe Advisers, LLP (the “Investment Adviser”), an English

limited liability partnership authorised and regulated by the

FCA, to provide investment advice pursuant to an Investment

Advisory Agreement.

b) Administration agreement

The Company has engaged the services of Apex Fund and

Corporate Services (Guernsey) Limited (the “Administrator”)

to act as Administrator and Company Secretary. Under the

terms of the service agreement dated 25 September 2018,

the Administrator is entitled to a fee of no less than £225,000

per annum for Guernsey registered companies of the Group,

€96,000 for Luxembourg registered subsidiaries and further

amounts as may be agreed in relation to any additional services

provided by the Administrator. The Administrator is, in addition,

entitled to recover third party expenses and disbursements.

c) Registrar’s agreement

The Company and Computershare Investor Services (Guernsey)

Limited (the “Registrar”) entered into a Registrar agreement

dated 28 November 2012, pursuant to which the Company

appointed the Registrar to act as Registrar of the Company for

a minimum annual fee payable by the Company of £7,500 in

respect of basic registration.

d) Brokerage agreement

On 19 June 2020, Jefferies Group LLC (“Jefferies”) was

appointed to act as Broker. Jefferies is entitled to receive a fee

of £50,000 per annum plus expenses. The previous brokerage

agreement with Stifel Nicolaus Europe Limited was terminated

on the same date.

e) Licence agreement

The Company and Starwood Capital Group Management,

LLC (the “Licensor”) have entered into a trade mark

licence agreement dated 28 November 2012 (the “Licence

Agreement”), pursuant to which the Licensor has agreed to

grant to the Company a royalty-free, non-exclusive worldwide

licence for the use of the “Starwood” name for the purposes of

the Company’s business.

Under the terms of the Licence Agreement, it may be

terminated by the Licensor; (i) if the Investment Management

Agreement or any other similar agreement between the

Company and the Investment Manager (or either of their

respective affiliates) is terminated for any reason whatsoever

or expires; (ii) if the Company suffers an insolvency event or

breaches any court order relating to the Licence Agreement; or

(iii) upon two months’ written notice without cause.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

31 December

2021

31 December

2020

Directors’ emoluments 190,212 150,833

Other expenses 5,198 1,731

195,410 152,564

4. DIRECTORS’ FEES

f) Hedging agreements

The Company and Lloyds Bank plc entered into an international

forward exchange master agreement dated 5 April 2013 and

on 7 February 2014, the Company entered into a Professional

Client Agreement with Goldman Sachs, pursuant to which the

parties can enter into foreign exchange transactions with the

intention of hedging against fluctuations in the exchange rate

between Sterling and other currencies. Both agreements are

governed by the laws of England and Wales.

g) Revolving credit facility

Under its investment policy, the Company is limited to

borrowing an amount equivalent to a maximum of 30 per cent

of its NAV at the time of drawdown, of which a maximum of

20 per cent can be longer term borrowings. In calculating the

Company’s borrowings for this purpose, any liabilities incurred

under the Company’s foreign exchange hedging arrangements

shall be disregarded.

On 4 December 2014, the Company entered into a £50 million

revolving credit facility with Lloyds Bank plc (the “Lloyds

Facility”) which is intended for short-term liquidity. This facility

was amended and extended on 7 January 2022. The current

maturity date is 5 May 2023. The facility is secured by a pledge

over the bank accounts of the Company, its interests in Holdco

1 and the intercompany funding provided by the Company to

Holdco 1. Holdco 1 also acts as guarantor of the facility and has

pledged its bank accounts as collateral. The undertakings and

events of default are customary for a transaction of this nature.

On 18 December 2017, the Group entered into a separate £64

million secured borrowing facility with Morgan Stanley (the

“MS Facility”). This facility was amended and extended on 14

November 2019. The current maturity date is 14 November

2024 and the borrowing facility was increased to £76 million.

The debt can be drawn in respect of underlying loans which are

eligible under the facility. Certain loans will not be eligible, for

example mezzanine loans and loans above 75 per cent loan to

value. It is secured by a customary security package of bank

account pledges, intercompany receivables security, share

security over the two borrower entities (Luxco 3 and Luxco

4) and their shares. The MS Facility does not have recourse

to the Company. The undertakings and events of default are

customary for a facility of this nature.

Other non-audit services of £14,661 expensed in the Consolidated Statement of Comprehensive Income for the year ended 31 December 2020

relate to tax services and other disbursements. From 15 March 2020, these services are now impermissible in accordance with the latest FRC

Ethical Standard and the Board had appointed an alternative service provider as a result.

The following table discloses the audit and non-audit fees paid to the auditors for audit and non-audit services and their associated network

firms for non-audit services, where and as applicable.

5. AUDIT AND NONAUDIT FEES

31 December 2021

31 December 2020

Audit and non-audit fees expensed in the Consolidated Statement

of Comprehensive Income

Audit of company 120,800 119,300

Audit of subsidiaries 84,756 70,342

Total audit 205,556 189,642

Audit related assurance services (Interim review) 23,831 23,083

Total assurance services 23,831 23,083

Non-audit services not covered above - 14,661

Total non-audit services 23,831 37,744

Total fees expensed 229,387 227,386

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

6. NET FOREIGN EXCHANGE GAINS / LOSSES

31 December 2021

31 December 2020

Loans advanced gains - realised 153,504 647,000

Loans advanced losses - realised (1,929,067) (1,134,619)

Forward contracts gains - realised 1,998,286 1,131,404

Forward contracts losses - realised (330,105) (328,698)

Other gains - realised 328,245 1,229

Other losses - realised (49,430) (422,347)

171,433 (106,031)

Loans advanced gains - unrealised - 13,776,618

Loans advanced losses - unrealised (15,588,146) -

Forward contracts gains - unrealised 13,707,768 397,778

Forward contracts losses - unrealised (1,334,429) (8,074,598)

(3,214,807) 6,099,798

(3,043,374) 5,993,767

7. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE

The calculation of basic earnings per Ordinary Share is based on the operating profit of

£19,292,919 (2020: £29,908,486) and on the weighted average number of Ordinary

Shares in issue during the year of 408,939,505 (2020: 412,469,890) Ordinary Shares.

The calculation of NAV per Ordinary Share is based on a NAV of £421,556,600 (2020:

£426,697,507) and the actual number of Ordinary Shares in issue at 31 December 2021

of 408,911,273 (2020: 409,571,273).

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

9. OTHER RECEIVABLES AND PREPAYMENTS

31 December 2021

31 December 2020

Prepayments 37,439 17,094

Investment proceeds receivable 213 -

37,652 17,094

8. CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise the following:

31 December 2021

31 December 2020

Cash at bank 2,994,357 2,939,408

2,994,357 2,939,408

Cash and cash equivalents comprises cash held by the Group and short-term deposits held with

various banking institutions with original maturities of three months or less. The carrying amount

of these assets approximates their fair value. For further information and the associated risks

refer to note 17.

10. LOANS ADVANCED

The Group’s accounting policy on the measurement of financial assets is discussed in note 2(g).

31 December 2021

31 December 2020

Europe

Mixed Portfolio, Europe 21,789,309 30,007,911

Germany

Logistics Portfolio 4,958,050 5,909,892

Ireland

Hotel, Dublin 50,842,327 54,730,169

Office Portfolio 26,570,048 31,753,439

Mixed Use, Dublin 5,108,054 3,112,893

Spain

Three Shopping Centres 30,171,573 33,367,582

Office, Madrid 15,595,042 16,792,398

Shopping Centre 14,736,977 15,653,661

Office Portfolio 9,845,168 19,375,687

Hotel - 47,379,721

Hotel & Residential 49,922,112 49,914,595

Hotel, Scotland 42,390,350 10,497,593

Hotels, United Kingdom 30,016,910 -

Hospitals 25,364,814 25,362,367

Hotel, Oxford 21,579,756 16,705,485

Life Science, UK 19,620,908 -

Office, London 14,156,850 13,368,457

Hotel, North Berwick 14,123,338 26,727,408

Hotel & Office, Northern Ireland 12,719,727 -

Office, Scotland 5,121,199 4,894,738

Residential, London - 25,124,499

Logistics Portfolio - 11,981,154

414,632,512 442,659,649

No element of loans advanced are past due or impaired. For further information and the

associated risks see the Investment Manager’s Report.

31 December 2021

31 December 2020

Loans advanced at the start of the year 442,659,649 390,647,516

Loans advanced 91,935,602 97,794,862

Loan repayments (103,474,780) (59,619,767)

Arrangement fees earned (1,125,342) (780,584)

Commitment fees earned (586,841) (1,215,996)

Exit fees earned (527,953) (250,772)

Origination fees for the year 300,456 546,194

Income from loans advanced 28,382,742 29,052,521

Interest payments received / accrued (25,567,309) (26,789,437)

Foreign exchange (losses) / gains (17,363,712) 13,275,112

Loans advanced at the end of the year 414,632,512 442,659,649

Loans advanced at fair value 431,658,356 459,549,015

Discount Rate

31 December 2021

Value calculated £

31 December 2021

Value increase / (decrease) £

4.9% 432,710,809 18,078,297

5.1% (Fair value) 431,658,356 17,025,843

5.4% 428,059,002 13,426,490

5.9% 423,496,872 8,864,360

6.4% 419,022,118 4,389,606

6.9% (Carrying value) 414,632,512 -

7.4% 410,325,896 (4,306,616)

7.9% 406,100,176 (8,532,336)

8.4% 401,953,326 (12,679,186)

8.9% 397,883,380 (16,749,132)

IFRS 7 requires the disclosure of the fair value of financial instruments not measured at fair

value for comparison to their carrying amounts. The fair value of loans advanced has been

determined by discounting the expected cash flows at a market rate of interest using the

discounted cash flow model. For the avoidance of doubt, the Group carries its loans advanced

at amortised cost in the consolidated financial statements, consistent with the requirement of

IFRS 9 as the Group’s intention and business model is to collect both interest and the capital

repayments thereof.

The following table sets out the sensitivity to the above reported fair value to a change in the

discount rate used in the discounted cash flow model (see the Investment Manager’s report

for more information):

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

10. LOANS ADVANCED CONTINUED

The table below reconciles the movement of the carrying value of loans advanced in the year:

Discount Rate

31 December 2020

Value calculated £

31 December 2020

Value increase / (decrease) £

4.8% 464,563,596 21,903,947

5.2% (Fair value) 459,549,015 16,889,366

5.3% 458,928,617 16,268,968

5.8% 453,401,431 10,741,782

6.3% 447,979,319 5,319,670

6.8% (Carrying value) 442,659,649 -

7.3% 437,439,862 (5,219,787)

7.8% 432,317,488 (10,342,161)

8.3% 427,290,124 (15,369,525)

8.8% 422,355,444 (20,304,205)

(1)

Euro amounts are translated at the year end exchange rate

(1)

Euro amounts are translated at the year end exchange rate

Notional contract

amount

(1)

Fair values

Total

31 December 2021

Assets

Liabilities

Foreign exchange derivatives

Currency forwards:

Lloyds Bank plc 305,663,797 14,394,963 (1,103,365) 13,291,598

Total 305,663,797 14,394,963 (1,103,365) 13,291,598

Notional contract

amount

(1)

Fair values

Total

31 December 2020

Assets

Liabilities

Foreign exchange derivatives

Currency forwards:

Lloyds Bank plc 273,442,149 3,897,550 (2,979,291) 918,259

Total 273,442,149 3,897,550 (2,979,291) 918,259

11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT

OR LOSS

Financial assets at fair value through profit or loss comprise currency forward contracts which

represent contractual obligations to purchase domestic currency and sell foreign currency on a

future date at a specified price.

The underlying instruments of currency forwards become favourable (assets) or unfavourable

(liabilities) as a result of fluctuations of foreign exchange rates relative to their terms. The

aggregate contractual or notional amount of derivative financial instruments, the extent to which

instruments are favourable or unfavourable, and thus the aggregate fair values of derivative

financial assets and liabilities, can fluctuate significantly from time to time. The foreign exchange

derivatives are subject to offsetting, enforceable master netting agreements for each counterparty.

The fair value of financial assets and liabilities at fair value through profit or loss are set out below.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

12. CREDIT FACILITIES

Under its investment policy, the Group is limited to borrowing an amount equivalent to

a maximum of 30 per cent of its NAV at the time of drawdown, of which a maximum

of 20 per cent can be longer term borrowings. In calculating the Group’s borrowings

for this purpose, any liabilities incurred under the Group’s foreign exchange hedging

arrangements shall be disregarded. The Group has two credit facilities as described in

note 3(g) of these financial statements.

As at 31 December 2021, an amount of £8,500,000 (2020: £19,500,000) was drawn

and interest of £7,997 (2020: £69,585) was payable.

The revolving credit facility capitalised costs are directly attributable costs incurred in

relation to the establishment of the credit loan facilities and an amount of £593,004

(2020: £942,748) was netted off against the loan facilities outstanding.

The Group has maintained sufficient headroom against the measures under, and is full

compliance with, all loan covenants.

The changes in liabilities arising from financing activities are shown in the table below.

31 December 2021

31 December 2020

Borrowings at the start of the year 18,626,837 28,359,047

Proceeds during the year 63,800,000 41,985,860

Repayments during the year (75,128,132) (52,067,717)

Interest expenses recognised for

the year

236,071 558,323

Interest paid during the year (262,221) (492,331)

Credit facility fees incurred - -

Credit facility amortisation of fees 563,496 387,448

Foreign exchange and translation

difference

78,942 (103,793)

Borrowings at the end of the year 7,914,993 18,626,837

31 December 2021

31 December 2020

Loan amounts payable 212,953 -

Investment management fees payable 791,344 799,584

Commitment fees payable 169,746 161,430

Audit fees payable 98,896 98,902

Share buyback payable - 85,587

Tax provision 19,742 9,713

Administration fees payable 87,815 7,771

Accrued expenses 103,470 17,079

Broker fees payable - 25,000

Directors’ fees payable 560

Legal and professional fees payable - 5,000

1,484,526 1,210,066

13. TRADE AND OTHER PAYABLES

14. COMMITMENTS

As at 31 December 2021, the Group had outstanding commitments in respect of loans

not fully drawn of £44,543,155 (2020: £49,104,643).

As at 31 December 2021, the Group has entered into forward contracts under the Hedging

Master Agreement with Lloyds Bank plc to sell €219,050,014 (2020: €302,627,550) to

receive Sterling. At the end of the reporting period, these forward contracts have a fair

value of £13,291,598 asset (2020: £918,259 asset).

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

15. SHARE CAPITAL

The share capital of the Company consists of an unlimited number of redeemable Ordinary

Shares of no par value which upon issue the Directors may classify into such classes as

they may determine. The Ordinary Shares are redeemable at the discretion of the Board.

At the year end, the Company had issued and fully paid up share capital as follows:

Rights attached to shares

The Company’s share capital is denominated in Sterling. At any general meeting of the

Company each ordinary share carries one vote. The Ordinary Shares also carry the right to

receive all income of the Company attributable to the Ordinary Shares, and to participate in

any distribution of such income made by the Company, such income shall be divided pari

passu among the holders of Ordinary Shares in proportion to the number of Ordinary Shares

held by them.

Significant share movements

1 January 2021 to 31 December 2021:

31 December 2021

Number of shares

31 December 2020

Number of shares

Ordinary Shares of no par value

Issued and fully paid

413,219,398 413,219,398

Shares held in treasury (4,308,125) (3,648,125)

Total Ordinary Shares, excluding

those in treasury

408,911,273 409,571,273

Ordinary Shares Number £

Balance at the start of the year 409,571,273 416,321,533

Shares bought back in 2021 (660,000) (591,533)

Balance at the end of the year

Issue costs since inception

408,911,273 415,730,000

(8,289,989)

Net proceeds 407,440,011

Ordinary Shares Number £

Balance at the start of the year 413,219,398 419,495,150

Shares bought back in 2020 (3,648,125) (3,173,617)

Balance at the end of the year

Issue costs since inception

409,571,273 416,321,533

(8,289,989)

Net proceeds 408,031,544

1 January 2020 to 31 December 2020:

Period to:

Dividend rate per

Share (pence)

Net dividend

paid (£)

Payment date

31 March 2021 1.375 5,622,530 4 June 2021

30 June 2021 1.375 5,622,530 3 September 2021

30 September 2021 1.375 5,622,530 3 December 2021

31 December 2021

(1)

1.375 5,622,530 25 February 2022

Period to:

Dividend rate per

Share (pence)

Net dividend

paid (£)

Payment date

31 March 2020 1.625 6,714,815 20 May 2020

30 June 2020 1.625 6,714,815 28 August 2020

30 September 2020 1.625 6,680,414 20 November 2020

31 December 2020 1.625 6,644,808 5 March 2021

16. DIVIDENDS

Dividends will be declared by the Directors and paid in compliance with the solvency

test prescribed by Guernsey law. Under Guernsey law, companies can pay dividends

in excess of accounting profit provided they satisfy the solvency test prescribed by the

Companies (Guernsey) Law, 2008. The solvency test considers whether a company is

able to pay its debts when they fall due, and whether the value of a company’s assets is

greater than its liabilities. The Group passed the solvency test for each dividend paid.

Subject to market conditions, the financial position of the Group and the investment

outlook, it is the Directors’ intention to pay quarterly dividends to shareholders (for more

information see Chairman’s Statement).

The Group paid the following dividends in respect of the year to 31 December 2021:

(1)

Declared after year end and were paid on 25 February 2022 to shareholders on the register as at 4 February 2022.

The Group paid the following dividends in respect of the year to 31 December 2020:

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

17. RISK MANAGEMENT POLICIES AND PROCEDURES

The Group through its investment in whole loans, subordinated loans, mezzanine loans,

bridge loans, loan-on-loan financings and other debt instruments is exposed to a variety of

financial risks, including market risk (including currency risk and interest rate risk), credit

risk and liquidity risk. The Group’s overall risk management programme focuses on the

unpredictability of financial markets and seeks to minimise potential adverse effects on the

Group’s financial performance.

It is the role of the Board to review and manage all risks associated with the Group,

mitigating these either directly or through the delegation of certain responsibilities to the

Audit Committee, Investment Manager and Investment Adviser.

The Board of Directors has established procedures for monitoring and controlling risk. The

Group has investment guidelines that set out its overall business strategies, its tolerance for

risk and its general risk management philosophy.

In addition, the Investment Manager monitors and measures the overall risk bearing capacity

in relation to the aggregate risk exposure across all risk types and activities. Further details

regarding these policies are set out below:

a) Market risk

Market risk includes market price risk, currency risk and interest rate risk.

i) Market price risk

If a borrower defaults on a loan and the real estate market enters a downturn it could

materially and adversely affect the value of the collateral over which loans are secured.

However, this risk is considered by the Board to constitute credit risk as it relates to the

borrower defaulting on the loan and not directly to any movements in the real estate market.

The Investment Manager moderates market risk through a careful selection of loans within

specified limits. The Group’s overall market position is monitored by the Investment Manager

and is reviewed by the Board of Directors on an ongoing basis.

ii) Currency risk

The Group, via the subsidiaries, operates across Europe and invests in loans that

are denominated in currencies other than the functional currency of the Company.

Consequently, the Group is exposed to risks arising from foreign exchange rate fluctuations

in respect of these loans and other assets and liabilities which relate to currency flows from

revenues and expenses. Exposure to foreign currency risk is hedged and monitored by the

Investment Manager on an ongoing basis and is reported to the Board accordingly.

The Group and Lloyds Bank plc entered into an international forward exchange master

agreement dated 5 April 2013 and, on 7 February 2014, the Group entered into a

Professional Client Agreement with Goldman Sachs, pursuant to which the parties can

enter into foreign exchange transactions with the intention of hedging against fluctuations

in the exchange rate between Sterling and other currencies. The Group does not trade

in derivatives but holds them to hedge specific exposures and have maturities designed

to match the exposures they are hedging. The derivatives are held at fair value which

represents the replacement cost of the instruments at the reporting date and movements in

the fair value are included in the Consolidated Statement of Comprehensive Income under

net foreign exchange (losses) / gains. The Group does not adopt hedge accounting in the

financial statements. At the end of the reporting period, the Group had 134 (2020: 138)

open forward contracts.

31 December 2021

Danish Krone

Sterling

Euro

Total

Assets

Loans advanced - 192,279,327 222,353,185 414,632,512

Financial assets at fair value through profit or loss - 13,291,598 - 13,291,598

Other receivables and prepayments - 17,094 20,558 37,652

Cash and cash equivalents 101 2,858,545 135,711 2,994,357

Liabilities

Revolving credit facility - (7,914,993) - (7,914,993)

Trade and other payables - (1,375,329) (109,197) (1,484,526)

Net currency exposure 101 199,156,242 222,400,257 421,556,600

31 December 2020

Danish Krone

Sterling

Euro

Total

Assets

Loans advanced - 184,576,296 258,083,353 442,659,649

Financial assets at fair value through profit or loss - 918,259 - 918,259

Other receivables and prepayments - 17,094 - 17,094

Cash and cash equivalents 422 2,409,377 529,609 2,939,408

Liabilities

Revolving credit facility - (18,626,837) - (18,626,837)

Trade and other payables - (1,123,070) (86,996) (1,210,066)

Net currency exposure 422 168,171,119 258,525,966 426,697,507

As at 31 December 2021 the Group had the following currency exposure:

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

Currency sensitivity analysis

Should the exchange rate of the Euro against Sterling increase or decrease by 10 per cent

with all other variables held constant, the net assets of the Group at 31 December 2021

would increase or decrease by £22,240,026 (2020: £25,852,597). Should the exchange

rate of the Danish Krone against Sterling increase or decrease by 10 per cent with all other

variables held constant, the net assets of the Group at 31 December 2021 would increase

or decrease by £10 (2020: £42). These percentages have been determined based on

potential volatility and deemed reasonable by the Directors. This does not include the

impact of hedges in place which would be expected to reduce the impact.

In accordance with the Group’s policy, the Investment Manager monitors the Group’s

currency position, and the Board of Directors reviews this risk on a regular basis.

iii) Interest rate risk

Interest rate risk is the risk that the value of financial instruments and related income

from loans advanced and cash and cash equivalents will fluctuate due to changes in

market interest rates.

The majority of the Group’s financial assets are loans advanced at amortised cost,

receivables and cash and cash equivalents. The Group’s investments have some

exposure to interest rate risk but this is limited to interest earned on cash deposits and

floating interbank rate exposure for investments designated as loans advanced.

Loans advanced have been structured to include a combination of fixed and floating

interest and 76.8% (2020: 79.2%) of investments designed as loans advanced at 31

December 2021 have a floating interbank interest rate. The interest rate risk is mitigated

by the inclusion of interbank rate floors on floating rate loans, preventing interest rates

from falling below certain levels.

The following table shows the portfolio profile of the financial assets at 31 December 2021:

31 December 2021

31 December 2020

Floating rate

Loans advanced

(1)

318,642,491 347,477,400

Cash and cash equivalents 2,994,357 2,939,408

Fixed rate

Loans advanced 95,990,021 95,182,249

Total financial assets subject

to interest rate risk

417,626,869 445,599,057

(1)

Loans advanced at floating rates include loans with interbank rate floors.

31 December 2021

31 December 2020

Floating rate

Increase of 50 basis points

(1)

1,608,184 1,752,084

Decrease of 50 basis points (1,608,184) (1,752,084)

(1)

Loans advanced at floating rates include loans with interbank rate floors.

At 31 December 2021, if interest rates had changed by 50 basis points, with all other variables

remaining constant, the effect on the net profit and equity would have been as shown in the

table below:

These percentages have been determined based on potential volatility and deemed reasonable

by the Directors.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

b) Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The

Group’s main credit risk exposure is in the investment portfolio, shown as loans advancedat

amortised cost, where the Group invests in whole loans and also subordinated and

mezzanine debt which rank behind senior debt for repayment in the event that a borrower

defaults. There is a spread concentration of risk as at 31 December 2021 due to several

loans being advanced since inception. There is also credit risk in respect of other financial

assets as a portion of the Group’s assets are cash and cash equivalents or accrued interest.

The banks used to hold cash and cash equivalents have been diversified to spread the credit

risk to which the Group is exposed. The Group also has credit risk exposure in its financial

assets classified as financial assets through profit or loss which is diversified between hedge

providers in order to spread credit risk to which the Group is exposed. At year-end, the

derivative exposures were with one counterparty.

The total exposure to credit risk arises from default of the counterparty and the carrying

amounts of financial assets best represent the maximum credit risk exposure at the year-

end date. As at 31 December 2021, the maximum credit risk exposure was £430,918,680

(2020: £446,517,316).

The Investment Manager has adopted procedures to reduce credit risk exposure by

conducting credit analysis of the counterparties, their business and reputation which

is monitored on an ongoing basis. After the advancing of a loan, a dedicated debt asset

manager employed by the Investment Adviser monitors ongoing credit risk and reports to

the Investment Manager, with quarterly updates also provided to the Board. The debt asset

manager routinely stresses and analyses the profile of the Group’s underlying risk in terms

of exposure to significant tenants, performance of asset management teams and property

managers against specific milestones that are typically agreed at the time of the original

loan underwriting, forecasting headroom against covenants, reviewing market data and

forecast economic trends to benchmark borrower performance and to assist in identifying

potential future stress points. Periodic physical inspections of assets that form part of the

Group’s security are also completed in addition to monitoring the identified capital expenditure

requirements against actual borrower investment.

The Group measures credit risk and ECL using probability of default, exposure at default

and loss given default. The Directors consider both historical analysis and forward looking

information in determining any ECL. The Directors consider the loss given default to be close

to zero as all loans are the subject of very detailed underwriting, including the testing of

resilience to aggressive downside scenarios with respect to the loan specifics, the market

and general macro changes. In addition to this, all loans have very robust covenants in place,

strong security packages and significant loan-to-value headroom.

During the year ended 31 December 2021, three loans with a value of £59,031,888 (2020:

six loans with a value of £150,331,450 (one fully repaid in 2021)) remain classified as Stage

2 and the remaining loans are classified as Stage 1. The loans classified as Stage 2 are

predominantly in the retail and hospitality sectors (but not all hospitality loans are in Stage

2). The main reason for moving the loans to Stage 2 in the second quarter of 2020 was

expected income covenant breaches due to the disruption from Covid-19. Following loan

amendments agreed with borrowers, no income breaches have occurred. Although these

loans have been classified as Stage 2 loans, no expected credit loss has been recognised at

31 December 2021 (2020: £nil) as although the credit risk has increased for these loans, the

Group does not anticipate realising a loss in the event of a default.

The Group uses both quantitative and qualitative criteria for monitoring the loan

portfolio as described in note 2(h). The gross carrying amount of loan portfolio is

presented in the table below and also represents the Group’s maximum exposure to

credit risks on these assets.

A reconciliation of changes in the loss allowance was not presented as the allowance

recognised at the end of the reporting period was £nil (2020: £nil).

The Group maintains its cash and cash equivalents across various different banks to

diversify credit risk which have been all rated A1 or higher by Moody’s and this is subject

to the Group’s credit risk monitoring policies as mentioned above.

The carrying amount of cash and cash equivalents approximates their fair value.

Total as at

31 December 2021

Total as at

31 December 2020

Barclays Bank plc 2,980,544 1,275,464

ING Luxembourg, SA 12,743 1,662,925

Lloyds Bank plc 778 778

HSBC Bank plc 227 241

Royal Bank of Scotland International 65 -

Total cash and cash equivalents 2,994,357 2,939,408

Stage 1

Stage 2

Stage 3

Total as at

31 December 2021

Total as at

31 December 2020

Loans advanced 355,600,624 59,031,888 - 414,632,512 442,659,649

Gross carrying amount 355,600,624 59,031,888 - 414,632,512 442,659,649

Less ECL allowance - - - - -

Carrying amount 355,600,624 59,031,888 - 414,632,512 442,659,649

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

c) Liquidity risk

Liquidity risk is the risk that the Group will not have sufficient resources available to meet

its liabilities as they fall due. The Group’s loans advanced are illiquid and may be difficult or

impossible to realise for cash at short notice.

The Group manages its liquidity risk through short-term and long-term cash flow forecasts to

ensure it is able to meet its obligations. In addition, the Company is permitted to borrow up

to 30 per cent of NAV and has entered into revolving credit facilities of total of £126,000,000

(2020: £126,000,000) of which £8,500,000 (2020: £19,500,000) was drawn at the end of the

reporting period.

The table below shows the maturity of the Group’s non-derivative financial assets and liabilities

arising from the advancement of loans by remaining contractual maturities at the end of the

reporting date. The amounts disclosed under assets are contractual, undiscounted cash flows

and may differ from the actual cash flows received in the future as a result of early repayments:

(1)

Loan commitments are estimated forecasted drawdowns at year end.

(1)

Loan commitments are estimated forecasted drawdowns at year end.

31 December 2021

Up to 3 months

Between 3 and

12 months

Over 12 months

Total

Assets

Loans advanced 14,736,977 90,989,466 308,906,069 414,632,512

Liabilities and commitments

Loan commitments

(1)

(8,324,454) (15,850,277) (19,186,697) (43,361,428)

Credit facilities (7,997) (8,500,000) - (8,507,997)

Trade and other payables (1,484,526) - - (1,484,526)

4,920,000 66,639,189 289,719,372 361,278,561

31 December 2020

Up to 3 months

Between 3 and

12 months

Over 12 months

Total

Assets

Loans advanced 15,653,661 79,933,826 347,072,162 442,659,649

Liabilities and commitments

Loan commitments

(1)

(16,310,931) (25,822,395) (6,598,132) (48,731,458)

Credit facilities (69,585) (19,500,000) - (19,569,585)

Trade and other payables (1,210,066) - - (1,210,066)

(1,936,921) 34,611,431 340,474,030 373,148,540

The table below analyses the Group’s derivative financial instruments that will be settled on

a gross basis into relevant maturity groupings based on the remaining period at the end of

the reporting date. The amounts disclosed are the contractual undiscounted cash flows:

31 December 2021

Derivatives

Up to 3 months

Between 3 and

12 months

Over

12 months

Total as at

31 December 2021

Lloyds Bank plc:

Foreign exchange derivatives

Outflow

(1)

(3,104,840) (51,449,438) (129,195,826) (183,750,104)

Inflow 3,115,540 52,103,985 132,586,030 187,805,555

31 December 2020

Derivatives

Up to 3 months

Between 3 and

12 months

Over

12 months

Total as at

31 December 2020

Lloyds Bank plc:

Foreign exchange derivatives

Outflow

(1)

(3,619,250) (14,976,399) (254,846,500) (273,442,149)

Inflow 3,584,355 14,874,088 256,024,869 274,483,312

(1)

Euro amounts translated at year end exchange rate.

(1)

Euro amounts translated at year end exchange rate.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

Capital management policies and procedures

The Group’s capital management objectives are:

• To ensure that the Group will be able to continue as a going concern; and

• To maximise the income and capital return to equity shareholders through an

appropriate balance of equity capital and long-term debt.

The capital of the Company is represented by the net assets attributable to the holders

of the Company’s shares.

In accordance with the Group’s investment policy, the Group’s principal use of cash

(including the proceeds of the IPO and subsequent tap issues and placings) has

been to fund investments in the form of loans sourced by the Investment Adviser

and the Investment Manager, as well as initial expenses related to the issue, ongoing

operational expenses and payment of dividends and other distributions to shareholders in

accordance with the Company’s dividend policy.

The Board, with the assistance of the Investment Manager, monitors and reviews the

broad structure of the Company’s capital on an ongoing basis. The Company has no

imposed capital requirements.

The Company’s capital at the end of the reporting period comprises:

31 December 2021

31 December 2020

Equity

Equity share capital 407,440,011 408,031,544

Retained earnings and translation

reserve

14,116,589 18,665,963

Total capital 421,556,600 426,697,507

18. FAIR VALUE MEASUREMENT

IFRS 13 requires the Group to classify fair value measurements using a fair value

hierarchy that reflects the significance of the inputs used in making the measurements.

The fair value hierarchy has the following levels:

a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

b) Inputs other than quoted prices included within level 1 that are observable for the

asset or liability, either directly (that is, as prices) or indirectly (that is, derived from

prices including interest rates, yield curves, volatilities, prepayment rates, credit risks

and default rates) or other market corroborated inputs (level 2).

c) 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’s financial assets

and liabilities (by class) measured at fair value:

31 December 2021

Level 1

Level 2

Level 3

Total

Assets

Derivative assets - 13,291,598 - 13,291,598

Total - 13,291,598 - 13,291,598

31 December 2020

Level 1

Level 2

Level 3

Total

Assets

Derivative assets - 918,259 - 918,259

Total - 918,259 - 918,259

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

There have been no transfers between levels for the year ended 31 December 2021

(2020: nil).

The Directors were responsible for considering the methodology and assumptions used

by the Investment Adviser and for approving the fair values reported at the financial

period end.

The table below presents the movement in level 3 investments, which were the Credit

Linked Notes that were repaid in full during 2020.

31 December 2021

31 December 2020

Balance at the start of the year - 21,885,611

Cash interest received - (1,210,333)

Net gains recognised in profit or loss

(1)

- 1,097,722

Redemptions during the year - (21,773,000)

Balance at the end of the year - -

Changes in unrealised gains or losses for Level 3 assets held at year end and included in

net changes in fair value of financial assets at fair value through profit or loss

- -

(1)

The net gains for the year ended 31 December 2020 comprise of £1,097,722 interest income on CLNs.

The following table summarises within the fair value hierarchy the Group’s assets and

liabilities (by class) not measured at fair value at 31 December 2021 but for which fair

value is disclosed:

The following table summarises within the fair value hierarchy the Group’s assets and

liabilities (by class) not measured at fair value at 31 December 2020 but for which fair

value is disclosed:

For cash and cash equivalents, other receivables and prepayments, trade and other

payables and credit facilities the carrying amount is a reasonable approximation of the

fair value. The Group carries its loans advanced at amortised cost in the consolidated

financial statements. Refer to note 10 for further information.

The carrying amounts of the revolving credit facilities included in the above tables are

considered to approximate its fair values. The fair value of loans advanced have been

determined by discounting the expected cash flows using a discounted cash flow model.

For avoidance of doubt the Group carries its loans advanced at amortised cost in the

financial statements. Refer to note 10 for further information.

Cash and cash equivalents include cash at hand and fixed deposits held with banks.

Other receivables and prepayments include the contractual amounts and obligations

due to the Group and consideration for advance payments made by the Group. Credit

facilities and trade and other payables represent the contractual amounts and obligations

due by the Group for contractual payments.

31 December 2021

Level 1

Level 2

Level 3

Total fair

values

Total carrying

amount

Assets

Loans advanced - - 431,658,356 431,658,356 414,632,512

Liabilities

Credit facility - 7,914,993 - 7,914,993 7,914,993

31 December 2020

Level 1

Level 2

Level 3

Total fair

values

Total carrying

amount

Assets

Loans advanced - - 459,549,015 459,549,015 442,659,649

Liabilities

Credit facility - 18,626,837 - 18,626,837 18,626,837

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

19. CONTROLLING PARTY

In the opinion of the Directors, on the basis of shareholdings advised to them, the

Company has no immediate or ultimate controlling party.

20. TAXATION

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies)

(Guernsey) Ordinance 1989 for which it pays an annual fee of £1,200.

The Luxembourg indirect subsidiaries of the Company are subject to the applicable

tax regulations in Luxembourg. The table below analyses the tax charges incurred at

Luxembourg level:

The Luxco had no operating gains on ordinary activities before taxation and was therefore

for the year ended 31 December 2021 subject to the Luxembourg minimum corporate

income taxation at €4,815 (2020: €4,815). The Luxco 3 and Luxco 4 are subject to

Corporate Income Tax and Municipal Business Tax based on a margin calculated on an

arm’s-length principle. The effective tax rate in Luxembourg during the reporting period was

24.94% (2020: 24.94%).

31 December 2021

31 December 2020

Current tax

Tax expenses on profit of the reporting period 100,452 81,953

Tax adjustments on profit of previous periods - -

Tax refund for previous periods - -

Total current tax 100,452 81,953

21. RECONCILIATION OF IFRS TO US GAAP

To meet the requirements of Rule 206(4)-2 under the Investment Advisors Act 1940 (the

“Custody Rule”) the consolidated financial statements of the Group have also been audited

in accordance with Generally Accepted Auditing Standards applicable in the United States

(“US GAAS”). As such two independent Auditor’s reports are included on pages 47-56, one

under International Standards on Auditing as required by the Crown Dependencies Audit

Rules and the other under US GAAS. Compliance with the Custody Rule also requires a

reconciliation of the operating profit and net assets under IFRS to US GAAP.

The principal differences between IFRS and US GAAP relate to accounting for financial

assets that are carried at amortised cost. Under US GAAP the calculation of the effective

interest rate is based on contractual cash flows over the asset’s contractual life, however,

under the IFRS basis, the effective interest rate calculation is based on the estimated cash

flows over the expected life of the asset.

The Directors have assessed the operating profit and NAV of the Group under both

IFRS and US GAAP and have concluded that no material differences were identified and

therefore no reconciliation has been presented in these consolidated financial statements.

22. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party

or exercise significant influence over the other party in making financial or operational

decisions. Details on the Investment Manager and other related party transactions are

included in note 3 to the consolidated financial statements.

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

2021

Fees, expenses and other payments

Outstanding at

31 December 2021

For the year ended

31 December 2021

Directors’ fees and expenses paid

Stephen Smith

(resigned 31 December 2021)

- 50,000

John Whittle - 45,000

Shelagh Mason - 42,500

Charlotte Denton

(appointed 1 January 2021)

- 40,000

Gary Yardley

(appointed 6 September 2021)

- 12,712

Expenses paid 560 5,198

Investment Manager

Investment management fees 791,344 3,147,075

Origination fees - 300,456

Expenses - 68,107

2020

Fees, expenses and other payments

Outstanding at

31 December 2020

For the year ended

31 December 2020

Directors’ fees and expenses paid

Stephen Smith - 50,000

John Whittle - 45,000

Jonathan Bridel

(resigned 31 December 2020)

- 42,500

Shelagh Mason

(appointed 1 September 2020)

- 13,333

Expenses paid - 1,731

Investment Manager

Investment management fees 799,584 3,186,943

Origination fees - 546,194

Expenses - 68,279

The following tables summarise the transactions occurred with related parties during the

reporting period and outstanding at 31 December 2021 and 31 December 2020.

The following tables summarise the dividends paid to related parties during the reporting

period and number of Company’s shares held by related parties at 31 December 2021

and 31 December 2020.

2021

Shareholdings and

dividends paid

Dividends paid during

the year ended

31 December 2021

As at

31 December 2021

Number of shares

Starwood Property Trust Inc. 502,700 9,140,000

SCG Starfin Investor LP 125,675 2,285,000

Stephen Smith 4,341 78,929

John Whittle 1,313 23,866

Shelagh Mason 973 112,819

Charlotte Denton

(appointed 1 January 2021)

- -

Gary Yardley

(appointed 6 September 2021)

- -

Duncan MacPherson

8,333 133,333

Lorcain Egan

3,818 61,093

2020

Shareholdings and

dividends paid

Dividends paid during

the year ended

31 December 2020

As at

31 December 2020

Number of shares

Starwood Property Trust Inc. 594,100 9,140,000

SCG Starfin Investor LP 148,525 2,285,000

Shelagh Mason

(appointed 1 September 2020)

287 17,688

Stephen Smith 5,130 78,929

John Whittle 1,356 23,866

Jonathan Bridel

(resigned 31 December 2020)

771 11,866

Duncan MacPherson

8,333 133,333

Lorcain Egan

3,818 61,093

Employees at the Investment Adviser

Financial Statements

Notes to the Consolidated Financial Statements

for the year ended 31 December 2021

Loan Related party co-lenders

Hotel & Residential, UK STWD

Hotel, Spain STWD

Mixed Portfolio, Europe STWD

Office Portfolio, Spain STWD

Office Portfolio, Ireland STWD

2 Hotels, UK SEREDF I

Other

The Group continues to participate in a number of loans in which Starwood Property

Trust, Inc. (“STWD”) acted as a co‐lender. The details of these loans are shown in the

table below. The Group also acted as co-lender with Starwood European Real Estate

Debt Finance I LP (“SEREDF I”) an affiliate entity.

23. EVENTS AFTER THE REPORTING PERIOD

Subsequent to 31 December 2021, the following amounts have been drawn under

existing commitments, up to 23 March 2022:

• £3,619,265

Subsequent to 31 December 2021, the following loan amortisation (both scheduled and

unscheduled) has been received since the year-end up to 23 March 2022:

• £614,876

No loans have been repaid in full since the year-end up to 23 March 2022.

At 23 March 2022, the amounts drawn under each of the Group’s credit facilities are:

• Morgan Stanley - £8.5 million

On 21 January 2022, the Directors declared a dividend in respect of the fourth quarter

of 1.375 pence per Ordinary Share payable on 25 February 2022 to shareholders on the

Since year end, we have noted the conflict between Ukraine and Russia. We have no

direct investment exposure to the Ukraine or Russia. We will continue to closely monitor

any potential adverse impacts on European economies, potential for various levels of

operational disruption, liquidity flows, amongst others. We note that the portfolio has

performed very robustly throughout the global coronavirus pandemic and has shown its

resiliency in relation to that unprecedented event.

Further Information

Alternative Performance Measures

In accordance with ESMA Guidelines on Alternative Performance Measures (“APMs”) the

Board has considered what APMs are included in the Annual Financial Report and Audited

Consolidated Financial Statements which require further clarification. An APM is defined as

a financial measure of historical or future financial performance, financial position, or cash

flows, other than a financial measure defined or specified in the applicable financial reporting

framework. APMs included in the financial statements, which are unaudited and outside the

scope of IFRS, are deemed to be as follows:

NAV PER ORDINARY SHARE

The NAV per Ordinary Share represents the net assets attributable to equity shareholders

divided by the number of Ordinary Shares in issue, excluding any shares held in treasury. The

NAV per Ordinary Share is published monthly. This APM relates to past performance and is

used as a comparison to the share price per Ordinary Share to assess performance. There are

no reconciling items between this calculation and the Net Asset Value shown on the balance

sheet (other than to calculate by Ordinary Share).

NAV TOTAL RETURN

The NAV total return measures the combined effect of any dividends paid, together with the

rise or fall in the NAV per Ordinary Share. This APM relates to past performance and takes into

account both capital returns and dividends paid to shareholders. Any dividends received by a

shareholder are assumed to have been reinvested in the assets of the Company at its NAV per

Ordinary Share.

SHARE PRICE TOTAL RETURN

The share price total return measures the combined effects of any dividends paid, together

with the rise or fall in the share price. This APM relates to past performance and assesses the

impact of movements in the share price on total returns to investors. Any dividends received

by a shareholder are assumed to have been reinvested in additional shares of the Company at

the time the shares were quoted ex-dividend.

NAV TO MARKET PRICE DISCOUNT / PREMIUM

The discount / premium is the amount by which the share price of the Company is lower

(discount) or higher (premium) than the NAV per Ordinary Share at the date of reporting and

relates to past performance. The discount or premium is normally expressed as a percentage

of the NAV per Ordinary Share.

INVESTED LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN

The unlevered annualised return is a calculation at the quarterly reporting date of the estimated

annual return on the portfolio at that point in time. It is calculated individually for each loan

by summing the one-off fees earned (such as up-front arrangement or exit fees charged on

repayment) and dividing these over the full contractual term of the loan, and adding this to the

annual returns. Where a loan is floating rate (partially or in whole or with floors), the returns

are based on an assumed profile for future interbank rates, but the actual rate received may be

higher or lower. The return is calculated only on amounts funded at the quarterly reporting date

and excludes committed but undrawn loans and excludes cash uninvested. The calculation also

excludes origination fees paid to the Investment Manager, which are accounted for within the

interest line in the financial statements.

An average, weighted by loan amount, is then calculated for the portfolio.

This APM gives an indication of the future performance of the portfolio (as constituted at

the reporting date). The calculation, if the portfolio remained unchanged, could be used to

estimate “income from loans advanced” in the Consolidated Statement of Comprehensive

Income if adjusted for the origination fee of 0.75 basis points amortised over the average life of

the loan. As discussed earlier in this report the figure actually realised may be different due to

the following reasons:

• In the quoted return, we amortise all one-off fees (such as arrangement and exit fees) over

the contractual life of the loan, which is currently four years for the portfolio. However, it

has been our experience that loans tend to repay after approximately 2.5 years and as such,

these fees are actually amortised over a shorter period.

• Many loans benefit from prepayment provisions, which means that if they are repaid before

the end of the protected period, additional interest or fees become due. As we quote the

return based on the contractual life of the loan these returns cannot be forecast in the return.

• The quoted return excludes the benefit of any foreign exchange gains on Euro loans. We do

not forecast this as the loans are often repaid early and the gain may be lower than this once

hedge positions are settled.

Generally speaking, the actual annualised total return is likely to be higher than the reported

return for these reasons, but this is not incorporated in the reported figure, as the benefit of

these items cannot be assumed.

PORTFOLIO LEVERED ANNUALISED TOTAL RETURN

The levered annualised total return is calculated on the same basis as the unlevered annual

return but takes into account the amount of leverage in the Group and the cost of that leverage

at current SONIA rates.

ONGOING CHARGES PERCENTAGE

Ongoing charges represents the management fee and all other operating expenses excluding

finance costs and transactions costs, expressed as a percentage of the average monthly net

asset values during the year and allows users to assess the running costs of the Group. This

is calculated in accordance with AIC guidance and relates to past performance. The charges

include the following lines items within the Consolidated Statement of Comprehensive Income:

• Investment management fees

• Administration fees

• Audit and non-audit fees

• Other expenses

• Legal and professional fees

• Directors’ fees and expenses

• Broker’s fees and expenses

• Agency fees

The calculation adds back any expenses unlikely to occur absent any loan originations or

repayments and as such, the costs associated with hedging Euro loans back to sterling have

been added back. The calculation does not include origination fees paid to the Investment

Manager; these are recognised through “Income from loans advanced”.

Further Information

Alternative Performance Measures

WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST £

These are calculations made as at the quarterly reporting date of the loan to value (“LTV”) on

each loan at the lowest and highest point in the capital stack in which the Group participates.

LTV to “Group last £” means the percentage which the total loan commitment less any

amortisation received to date (when aggregated with any other indebtedness ranking alongside

and/or senior to it) bears to the market value determined by the last formal lender valuation

received by the quarterly reporting date. LTV to “first Group £” means the starting point of the

loan to value range of the loan commitments (when aggregated with any other indebtedness

ranking senior to it). For development projects, the calculation includes the total facility

available and is calculated against the assumed market value on completion of the project.

An average, weighted by the loan amount, is then calculated for the portfolio.

This APM provides an assessment of future credit risk within the portfolio and does not directly

relate to any financial statement line items.

PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS

This is a calculation made as at the quarterly reporting date, which calculates the value of

loans, which have an element of floating rate in part, in whole and including loans with floors,

as a percentage of the total value of loans. This APM provides an assessment of potential

future volatility of the income on loans, as a large percentage of floating rate loans would mean

that income would move up or down with changes in SONIA.

AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM

The average loan term is calculated at the quarterly reporting date by calculating the average

length of each loan from initial advance to the contractual termination date. An average,

weighted by the loan amount, is then calculated for the portfolio.

The average remaining loan term is calculated at the quarterly reporting date by calculating the

average length of each loan from the quarterly reporting date to the contractual termination

date. An average, weighted by the loan amount, is then calculated for the portfolio.

This APM provides an assessment of the likely level of repayments occurring in future years

(absent any early repayments) which will need to be reinvested. In the past, the actual term

of loans has been shorter than the average contractual loan term due to early repayments

and so the level of repayments is likely to be higher than this APM would suggest. However,

this shorter actual loan term cannot be assumed as it may not occur and therefore it is not

reported as part of this APM.

100

NET CASH

Net cash is the result of the Group’s total cash and cash equivalents minus total credit facility

utilised as reported on its consolidated financial statements.

UNUSED LIQUID FACILITIES

Unused liquid facilities is the result of the Group’s total cash and cash equivalents plus the

available balance to withdraw under existing credit facilities at the reporting date.

PORTFOLIO DIVERSIFICATION

The portfolio diversification statistics are calculated by allocating each loan to the relevant

sectors and countries based on the value of the underlying assets. This is then summed for the

entire portfolio and a percentage calculated for each sector / country.

This APM provides an assessment of future risk within the portfolio due to exposure to specific

sectors or countries and does not directly relate to any financial statement line items.

Further Information

Alternative Performance Measures

Further Information

Corporate Information

Directors

Stephen Smith (Non-executive Chairman,

resigned 31 December 2021)

John Whittle (Non-executive Director)

Shelagh Mason (Non-executive Director)

Charlotte Denton (Non-executive Director,

appointed 1 January 2021)

Gary Yardley (Non-executive Director,

appointed 6 September 2021)

(all care of the registered office)

Investment Manager

Starwood European Finance

Partners Limited

1 Royal Plaza

Royal Avenue

St Peter Port

Guernsey

GY1 2HL

Solicitors to the Company

(as to English law and U.S.

securities law)

Norton Rose Fullbright LLP

3 More London Riverside

London

SE1 2AQ

United Kingdom

Registrar

Computershare Investor Services

(Guernsey) Limited

1st Floor

Tudor House

Le Bordage

St Peter Port

Guernsey

GY1 1DB

Broker

Jefferies Group LLC

100 Bishopsgate

London, EC2N 4JL

United Kingdom

Administrator, Designated Manager

and Company Secretary

Apex Fund and Corporate Services

(Guernsey) Limited

1 Royal Plaza

Royal Avenue

St Peter Port

Guernsey

GY1 2HL

Registered Office

1 Royal Plaza

Royal Avenue

St Peter Port

Guernsey

GY1 2HL

Investment Adviser

Starwood Capital Europe Advisers, LLP

2nd Floor

One Eagle Place

St. James`s

London

SW1Y 6AF

United Kingdom

Advocates to the Company

(as to Guernsey law)

Carey Olsen

PO Box 98

Carey House, Les Banques

St Peter Port

Guernsey

GY1 4HP

Independent Auditor

PricewaterhouseCoopers CI LLP

Royal Bank Place

1 Glategny Esplanade

St Peter Port

Guernsey

GY1 4ND

Principal Bankers

Barclays Private Clients International Limited

PO Box 41

Le Marchant House

St Peter Port

Guernsey

GY1 3BE

Website:

www.starwoodeuropeanfinance.com

101