Real Est.cred Regulatory News (RECI)

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

CONDENSED CONSOLIDATED INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2013

(UNAUDITED)

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

Chairman's Statement

Real Estate Credit Investments PCC Limited ("the Company") enters the second half of the financial year in a strong position to take further advantage of the current investment opportunities in real estate debt. The Real Estate Credit Investments Core ("RECI") bond and loan portfolios have performed well and generated a profit of £3.9m in the first half financial year.

The successful placing in November 2013 of £50 million of new RECI ordinary shares is an endorsement, by the market, of the investment manager's track record and ability to generate strong performance from investing along the spectrum of real estate debt markets. Based on investments made to date, and the existing loan pipeline, the investment manager anticipates that it should have the new capital invested within six months, at yields that will support the increased target dividend.

RECI will use the proceeds of the placing to make new investments that develop and diversify the core portfolio of bonds and loans. As many banks continue to restrict their real estate lending, RECI, in partnership with other funds managed by the investment manager, is well-placed to grow its investment pipeline. RECI grew its loan portfolio to 42 per cent of GAV from 25 per cent of GAV in the three months to 30 September 2013. We expect loans to form the majority of investments over the months ahead.

The placing also brought shareholders additional advantages: It reduced the level of leverage resulting from outstanding preference shares; it increased the free float and should, hence, enhance the liquidity of RECI ordinary shares; and it spreads the fixed running costs over a wider ordinary shareholder base.

Raising target dividend

On 16th October, the Board declared a dividend of 3.4 pence per share on RECI ordinary shares for the period 1 July 2013 to 30 September 2013, and to cover the period from 1st October 2013 to the date of admission of the new shares. The Directors intend to announce a full quarter's dividend for the quarter ended 31 December alongside the IMS scheduled to be announced in February 2014.

The Board will thereafter increase its target annualised dividend yield, to a minimum of 7 per cent of the placing price of £1.522 per share, up from the previous target of 6 per cent of NAV. This increase reflects its confidence in RECI's ability to continue delivering strong returns from real estate debt investments combined with the reduction in the expenses per ordinary share resulting from the placing

RECI first half net gains of £3.9 million

During the half-year ended 30 September 2013, RECI reported a net gain of £3.9 million compared to a net gain of £9.4 million in the first half of 2012/13. Operating income (excluding the effects of fair value movements) for the six months to 30 September 2013 was £6.8 million versus £6.5 million for the equivalent period in the previous year, boosted by the higher yield on the loans now held.

Net asset value ("NAV") as at 30 September 2013 rose to £1.56 per RECI ordinary share, from £1.50 as at 31 March 2013.

Both the bond and loan portfolios made significant contributions to returns. The bond portfolio has delivered positive returns in the first half, outperforming the closest comparable index - the Itraxx Europe Main high yield bond index - in terms of fair value gains in five of the six months to 30 September 2013.

The loan portfolio was significantly expanded during the second quarter and into the third quarter without compromising the projected risk-adjusted returns. In the first half RECI invested in two new loans backed by German multi-family property and a third loan secured against commercial properties in London, making total loan commitments for a maximum of £12.5 million. The average yield on the total loan portfolio is currently 12.1%.

The loan secured against London commercial property was a landmark deal for RECI, representing the first time it has underwritten, along with other funds of the investment manager, a whole loan, rather than the mezzanine element alone. Underwriting a whole loan increases RECI's ability to win deals, enabling it, subject to the syndication of the senior debt element, to retain a higher yielding mezzanine loan on more attractive terms.

Outlook and Strategy

The Board remains confident of RECI's ability to continue to deliver superior risk-adjusted total returns, thanks to the investment manager's pipeline and access to new investments and the benefits of the Company's enhanced scale.

Even at a time of low economic growth, the Board believes that selective Western European real estate assets display attractive fundamental characteristics at this stage of the property cycle, based on improving tenant demand, lack of alternative new build space and liquidity resulting from diversified investor appetite. These are attractive assets against which to lend.

The Investment Manager continues to see attractive opportunities in real estate bonds, both Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS). The Investment Manager constantly monitors the secondary market for RMBS and CMBS trading at attractive valuations and is also well placed to secure RECI's participation in occasional primary issues of bonds at attractive yields. RECI will invest in bonds on a long term basis where the returns are comparable with those achievable in the loans market. In addition it will take shorter term positions in lower yielding bonds (still offering materially better returns than that provided by cash) pending the redeployment of capital in loans with projected double-digit returns.

The Board expects the dislocation between supply and demand in commercial real estate loans to continue for the foreseeable future, with many established commercial banks retreating from or reducing lending as they work through legacy loan books, reduce loan to deposit ratios and increase their capital buffers to comply with new regulatory requirements.

While the extent of the dislocation and refinancing requirements are substantial, the Company, alongside the investment manager, will maintain a rigorous approach to loan underwriting and a focus on risk adjusted returns. The market leading position of the investment manager and the strength and depth of its origination, underwriting and syndication capability delivers superior deal flow, from which RECI will be able to successfully grow and diversify its investment portfolio.

The Board therefore looks forward to deploying the newly raised capital in the coming months to deliver the targeted returns to shareholders and, over the longer term, to further enhance the quality, profitability and scale of the Company.

Tom Chandos, Chairman

13 November 2013

Investment Manager's Report

Loans grow to 52% of investment portfolio as at 15 November 2013; yielding 11.3%

RECI has significantly expanded its loan portfolio during the second quarter and into the third quarter, while continuing to provide attractive risk adjusted returns. The average yield on the loan portfolio is currently 11.3%.

RECI has invested in the UK and German real estate loan markets which, even in a low growth environment, offer solid underlying tenant demand, a liquid investment market and a shortage of competing debt capital. In the first half the Company invested in two new loans backed by German multi-family property (one of these loans was disclosed in the 31 March 2013 Results Announcement) and another loan secured against commercial properties in London. The total loan commitments are for a maximum of £27.8 million. Subsequent to the quarter end RECI invested in a further 2 loans, which had total loan commitments of £16.4 million.

German multi-family loan

RECI made a €9.0 million senior loan commitment with an expected return in excess of 10%. The proceeds of the loan will be used by the sponsor to purchase and refurbish a portfolio of multi-family properties in West Germany. The first drawdown was for €3.0 million. The initial LTV on the loan is 42% increasing to 65% over the life of the loan as the borrower draws down on the loan to make the refurbishments. The loan is attractive given its high yield, low exit LTV and the extensive track record of the sponsor.

London serviced office property loan

In August, the Company made a £15 million loan secured against 10 West End and City serviced office properties managed by Executive Office Group. This is the first time Cheyne Capital has underwritten a whole loan. The loan has an LTV of 68% and a single digit return. Cheyne intends to syndicate the senior portion of the whole loan. Subsequent to the syndication, the Company will retain a mezzanine loan with a solid double digit return. The syndication process is well advanced and should be completed in the near term.

Underwriting a whole loan helps both RECI and the borrower. It significantly increases RECI's ability to win the mandate because some borrowers tend to prefer a whole loan solution to smooth a deal's progress. After syndication, the Company will retain the mezzanine loan with typically a higher yield than had the mezzanine loan been originated using a traditional senior / mezzanine loan structure.

£11.9 million of new loans since 30 September

Since the quarter end, the Company has made two new loan investments with total commitments of £16.4 million. The Company has advanced £11.9 million against these commitments. The average yield on the loans is 10%.

Whole loan for retail park

The largest loan of £10.8 million is a whole loan with 65% LTV against a popular retail park near London. The sponsor has successfully managed the property since 2003, and has a strong record of asset management. Over the next six months, RECI will syndicate the senior portion of the loan and retain a mezzanine loan with an expected double-digit return.

Student accommodation development

The second loan is a senior loan secured against a property in Bristol with a yield in excess of 10%. The initial drawdown on the loan is £1.1 million with a total commitment of £5.6 million. The loan to gross development value when the project is completed is approximately 60%. The borrower is using the proceeds of the loan to buy an existing office tower and convert this to a 400+ bed student accommodation. The sponsor has a strong track record of developing student housing portfolios and successfully manages several sites. Bristol is a long-standing university town with a significant demand for good quality student accommodation.

Loan Portfolio Summary as at 15 November 2013

Top 10 Investment Portfolio Exposures3 as at 15 November 2013

Market Value £78.0 millionWA Original LTV4 62.9%WA Cheyne Current LTV4 63.3%WA Effective Yield5 10.3%

Real estate bond portfolio outperforms market

RECI recorded mark to market ("MTM") gains of £1.0 million on the real estate bond portfolio for the quarter ended 30 September 2013. This compared with MTM gains of £0.2 million for the quarter ended 30 June 2013. The bond portfolio outperformed the Itraxx Europe Main index in terms of fair value gains in five of the six months to 30 September 2013.

In the past financial year the Company has not incurred any credit losses on any of its bond investments.

Bond repayments

The Company received bond repayments of approximately £6.8 million throughout the quarter, equal to approximately 10.1% of the average portfolio value over the period.

Reinvesting bond sale proceeds

RECI was a net seller of bonds during the quarter ended 30 September 2013, using proceeds to increase allocations to its loan portfolio. The Company made net sales of £12.1 million versus net sales of £2.5 million in the previous quarter.

Positive returns from new investments

RECI continues to make new bond investments. The weighted average expected yield to maturity of new investments in the quarter ended 30 September 2013 was 9.5% and RECI purchased the bonds at an average price of 92% of par. As at 15 November 2013, the weighted average price of these investments had increased to 98% of par.

Portfolio value

As at 30 September 2013, the portfolio of 67 bonds was valued at £58.3 million, with a nominal face value of £78.9 million6. The average purchase price across the portfolio was 78% of par and assets had an average expected yield to maturity of 13.9% based on the purchase price. Due to the increase in bond prices over the past year, the weighted average expected yield to maturity of the bond portfolio at market prices as at 30 September 2013 was 9.6% with a weighted average life of 5.4 years.

Bond purchases and sales since 30 September 2013 - minimising negative carry

The Company will continue to invest cash surpluses in bonds to minimise the negative carry from high cash deposits. To this end, between 1 October 2013 and 15 November 2013, the Company invested £0.6 million at an average price of 87% of par and a weighted average expected yield-to-maturity of 4.1%. RECI also sold £6.4 million of bonds during this period at an average price of 104% of par versus an average purchase price of 95% of par. As at 15 November 2013, the portfolio consisted of 64 bonds with a fair value of £51.1 million and a nominal face value of £71.2 million7. The weighted average expected yield to maturity of the bond portfolio at market prices as at 15 November was 9.1%.

Real Estate Bond Portfolio Breakdown

Breakdown of RECI's bond portfolio as at 30 June 2013 and 30 September 2013 by jurisdiction (by reference to underlying assets)

30 June 2013

30 September 2013

Values may not sum to 100% due to rounding differences

Monthly Bond Performance Summary as at 15 November 2013

Asset Class Distribution of Bond Portfolio by Fair Value as at 15 November 2013

Values may not sum to 100% due to rounding differences

Outlook for new investments

RECI is in a strong position to step up its pursuit of investment opportunities in real estate debt, with loans playing an increasing role in delivering results and improving NAV.

The investment management team expects to be able to invest the majority of the proceeds of its recent placing within six months. We expect loans to be contributing a majority of income by the end of that period. Subsequent to the deal announcement on 16 October 2013, the Company completed 2 loans with total commitments of £16.4 million. Given current market conditions, we expect 75% of the new capital will be allocated to loan investments.

Even at a time of low economic growth, RECI believes that the fundamentals of Western European real estate remain strong thanks to solid tenant demand, good liquidity and a shortage of debt capital.

The retreat of banks from real estate lending continues to fuel supply of new lending opportunities and RECI continues to benefit from Cheyne's position as one of Europe's largest real estate finance platforms. Cheyne has an attractive loan pipeline of which RECI is allocated a pro-rata portion of each loan. In loans, RECI believes that mezzanine debt offers the optimal combination of high returns and debt covenants.

While the managers seek out new loan investments, proceeds from the funds raised will be invested in the RMBS and CMBS markets. We will rotate out of these bonds as new investment opportunities arise.

We expect strong bond performance to continue for the remainder of 2013, driven by yield compression. The manager remains well placed to participate in new issue bonds at attractive yields.

European Residual Income Investments (ERII)

It is the Company's objective, to the extent practicable, to liquidate the ERII portfolio and return cash to shareholders. Dividends from ERII will be payable to ERII's shareholders when the asset coverage ratio (the Preference Share Cover Test) is satisfied. For the period ended 30 September 2013 the Preference Share Cover Test was 2.62, above the threshold of 2.39. As a result, the Company is declaring a dividend of 4.8 cents per ERII Ordinary Share, returning €0.7 million to investors. In September 2013 ERII returned €2.4 million to investors in return for 3.2 million shares via a mandatory redemption. The table below shows figures as at 30 September 2013 compared to 30 June 2012.

Investment Portfolio

Overview

ERII reported cash flows for the quarter ended 30 September 2013 of €0.9 million, compared to €0.7 million in the previous quarter and net write downs of €0.7 million. The majority of write downs were in the European Mortgage Portfolio.

European Mortgage Portfolio

The European Mortgage Portfolio generated €0.2 million of cash flows for the quarter ended 30 September 2013, compared to €0.1 million in the previous quarter. Net write-downs in the portfolio totalled €0.8 million.

SME Portfolio

The fair value of Smart 06-1 has remained at €1.1 million. Cash flows for Smart 06-1 in the quarter ended 30 September 2013 totalled €0.1 million, unchanged from the previous quarter.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £0.6 million in the quarter ended 30 September 2013 compared to £0.4 million in the previous quarter. Net write downs in the portfolio were less than £0.1 million.

Cheyne Capital Management (UK) LLP

8 November 2013

Director's Responsibility Statement

We confirm to the best of our knowledge:

a) the condensed unaudited consolidated interim financial report has been prepared in accordance with IAS 34 "Interim Financial Reporting";

b) the interim management report (contained in the Chairman's Statement and Investment Manager's report) includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and a description of principal risks and uncertainties for the remaining six months of the year); and

c) the interim management report (contained in the Chairman's Statement and Investment Manager's report) includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

Director Director

26 November 2013 26 November 2013

Independent review report to Real Estate Credit Investments PCC Limited

We have been engaged by Real Estate Credit Investments PCC Limited (the "Company") to review the condensed unaudited consolidated financial statements in the half-yearly interim financial report for the six months ended 30 September 2013 which comprises the Unaudited Consolidated Statement of Comprehensive Income, the Unaudited Consolidated Statement of Financial Position, the Unaudited Consolidated Statement of Changes in Equity and the Unaudited Consolidated Statement of Cash Flows and related Notes 1 to 18. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed unaudited consolidated financial statements.

This report is made solely to the Company's members in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdoms' Financial Services Authority.

As disclosed in Note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. The condensed unaudited consolidated financial statements included in this interim financial report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed unaudited consolidated financial statements in the interim financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

continued on next page

Emphasis of matter - Fair value of investments held in the European Residual Income Investments Cell

In forming our review conclusion on the interim financial report, we have considered the policies adopted by the Directors for fair valuing the Group's investments and adequacy of the disclosure in Note 2 in respect of the valuation of investments held in the European Residual Income Investments Cell. In accordance with these policies and the requirements of International Accounting Standard 39 "Financial Instruments: Recognition and Measurement", the Directors have estimated the fair value of the investments held in the European Residual Income Investments Cell at EUR 9,994,261 as at 30 September 2013.

As described in Note 2 of the consolidated interim financial report, the residual income positions held in the European Residual Income Investments Cell are illiquid. As a result of this the fair value estimates of these investments included in the interim financial report are subject to material uncertainty. Different assumptions will impact the measurement of these investments which may have an effect on the interim financial report. It is not possible to quantify the potential effects of the resolution of this material uncertainty.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed unaudited consolidated financial statements in the interim financial report for the six months ended 30 September 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as issued by the International Accounting Standards Board and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Deloitte LLP

Chartered Accountants

Guernsey, Channel Islands

26 November 2013

Unaudited Consolidated Statement of Comprehensive Income

For the period from 1 April 2013 to 30 September 2013

All items in the above statement are derived from continuing operations.

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Unaudited Consolidated Statement of Comprehensive Income

For the period from 1 April 2012 to 30 September 2012

All items in the above statement are derived from continuing operations.

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Unaudited Consolidated Statement of Financial Position

As at 30 September 2013

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements. These financial statements were approved by the Board of Directors on 26 November 2013.

Signed on behalf of the Board of Directors by:

Director Director

Audited Consolidated Statement of Financial Position

As at 31 March 2013

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Unaudited Consolidated Statement of Changes in Equity

For the period from 1 April 2012 to 30 September 2013

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Unaudited Consolidated Statement of Cash Flows

For the period from 1 April 2013 to 30 September 2013

* The Group made sales of GBP 99,946,524 and purchases of GBP 98,528,795 during the period ended 30 September 2013 (including purchases and sales of financial derivative instruments and principal paydowns/payups).

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Unaudited Consolidated Statement of Cash Flows

For the period from 1 April 2012 to 30 September 2012

* The Group made sales of GBP 43,416,357 and purchases of GBP 44,623,369 during the period ended 30 September 2012 (including purchases and sales of financial derivative instruments and principal paydowns/payups).

The accompanying notes form an integral part of the condensed unaudited consolidated financial statements.

Notes to the Condensed Unaudited Consolidated Financial Statements

For the six months ended 30 September 2013

1. General information

Real Estate Credit Investments PCC Limited (the "Company") was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005.

"Group" is defined as the Company and Trebuchet Finance Limited. The Company holds a participation note in Trebuchet Finance Limited, a SPE over which the Company is exposed to the majority of its benefits and business risks. Trebuchet Finance Limited is consolidated in the financial statements of the Group under SIC 12, Consolidation - Special Purpose Entities.

The Company is an authorised closed-ended protected cell company, being a cellular company governed by the Companies (Guernsey) Law 2008, comprising a core segment (the "Core" or "RECI") and a cell segment (the "Cell" or "ERII Cell") each of which has its own portfolio of assets, investments objective and sub-section of the Company's Investment Policy.

The investment policy of the Company is sub-divided into an investment policy for the Core and an investment policy for the Cell. This is to reflect the fact that the Investment Manager is responsible for managing two discrete pools of assets, one, represented by the Core, into which Ordinary Shareholders are invested and one, represented by the Cell, into which Cell Shareholders are invested.

The investment objective for the Core is to invest primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments"). The Real Estate Debt Investments may take different forms but will be likely to be: (i) securitised tranches of secured real estate related debt securities, for example, RMBS and CMBS (together "MBS"); and (ii) secured real estate loans, debentures or any other form of debt instrument.

The investment objective of the Cell is to pay to Cell Shareholders the Net Cell Proceeds and to provide Cell Shareholders with exposure to an amortising portfolio of Residual Income Positions. The Directors currently intend that the Company pays distributions to the Cell Shareholders from the Net Cell Proceeds when it is able and appropriate to do so and intend that the Company sells the Residual Income Positions during the life of the Cell if deemed appropriate.

The Core Ordinary Shares reflect the performance of the Core's real estate debt strategy. The Core Ordinary Shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc (ticker RECI). The Core Ordinary Shares offer investors a levered exposure to a portfolio of real estate credit investments and aim to pay a quarterly dividend. Such leverage is provided by the Core Preference Shares which confer the right to a preferential cumulative preference dividend (which is an amount in Sterling equal to 8 per cent per annum of the Preference Share Notional Value) payable quarterly on each Payment Date. The Core Preference Shares are currently listed on the standard segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc (ticker RECP).

The real estate debt investment strategy of the Core focuses on secured residential and commercial debt in the UK and Western Europe. In making these investments the Company uses the expertise and knowledge of its investment manager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), an investment management firm authorised and regulated by the UK Financial Conduct Authority. The Company has adopted a long term strategic approach to investing and focuses on identifying value.

1. General information (continued)

The Cell Ordinary Shares trade on the Specialist Fund Market of the London Stock Exchange plc (ticker ERII). Dividends or distributions will only be paid by the Cell to the extent that the asset cover ratio (the Preference Share Cover Test) for the Core Preference Shares is satisfied. The Cell holds Residual Income Positions, which are legacy assets of an investment policy which is no longer pursued by the Group. The Company intends to hold the Residual Income Positions until maturity or prior to maturity if the Investment Manager so decides for reasons including, but not limited to, the price offered being sufficiently attractive or the credit view of the underlying assets changing. The Directors may, at their discretion, return cash to Cell Shareholders by dividends or other distribution. The Directors may also, at their discretion, effect a mandatory redemption of Cell Shares as a means of returning capital to the Cell Shareholders.

The liabilities in relation to the Preference Shares, being both quarterly Preference Dividends and the repayment of the final capital entitlement of the Preference Shares (the "Final Capital Entitlement"), are borne by the Company. The Company has protected the ability of the Company to meet the Final Capital Entitlement through the introduction of a cover test (the "Preference Share Cover Test"). The Preference Share Cover Test is intended to prevent the erosion of the Company's asset base through the payment of dividends or other distributions from the Cell. Prior to the payment of dividends or other distributions from the Cell, the Preference Share Cover Test will need to be satisfied.

The Preference Share Cover Ratio is calculated based on the ratio of total Company assets (i.e. Total Core Assets plus Cell Assets) to the Final Capital Entitlement. The Preference Share Cover Test has been set at 2.39. The Company was not in breach of the test as at 30 September 2013 or 31 March 2013.

Notwithstanding the Company's ability to satisfy the Preference Share Cover Test, the Company will continue to fulfil its obligations towards the Preference Shareholders with respect to the distribution of Preference Dividends. Such obligations are met using the income available in the Core and, if necessary, the Core Assets themselves. Should the Core Income and Assets be insufficient to meet the Company's liabilities in respect of Preference Dividends and/or the Final Capital Entitlement when they fall due, it is intended that the Directors will call upon the income and, where such income is insufficient to satisfy such liabilities, the assets of the Cell to satisfy the liabilities (the "Inter-Cellular Arrangement").

The Group's investment management activities are managed by the Investment Manager. The Group has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and if applicable a quarterly performance-related fee on the Core. The Company and the Investment Manager have agreed that an Incentive Fee will no longer be charged on the Cell Assets.

On 16 October 2013, the Company announced it had completed a placing of New Core Shares to raise £50 million (the "Placing"). The Company intends to utilise the net proceeds from the Placing to achieve the investment objective of the Core. Arising from the Placing, a new prospectus was issued on 16 October 2013. The main changes following the issue of this new prospectus, including changes to the Investment Management Agreement and the Continuation Resolution, are detailed in Note 16 of these financial statements.

The Group has no ownership interest in the Investment Manager. State Street (Guernsey) Limited is the Administrator and provides all administration and secretarial services to the Group in this capacity.

2. Significant accounting policies

Statements of compliance

The condensed unaudited consolidated financial statements for the period ended 30 September 2013 have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board. The same accounting policies, presentation and methods of computation have been followed in these financial statements as were applied in the preparation of the Group's audited consolidated financial statements for the year ended 31 March 2013. The condensed unaudited consolidated financial statements do not contain all of the information and disclosures required in a full set of annual financial statements and should be read in conjunction with the audited consolidated financial statements of the Group for the year ended 31 March 2013, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board.

The comparative information for the year ended 31 March 2013 does not constitute Statutory Accounts as defined by Guernsey Law. A copy of the Statutory Accounts for that year has been delivered to the Shareholders. The Auditor's Report on these Financial Statements was not qualified but did include a reference to an emphasis of matter in relation to the uncertainty over the valuation of the ERII Cell's illiquid investments and did not contain a statement under section 263(2) and (3) of The Companies (Guernsey) Law, 2008.

New standards adopted

IFRS 13, "Fair Value Measurement" effective for annual periods beginning on or after 1 January 2013, improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. The Group adopted IFRS 13 with the effect from 1 April 2013.

There are no other standards, interpretations or amendments to existing standards that are not yet effective that would be expected to have a significant impact on the Fund.

Basis of preparation

The condensed unaudited consolidated financial statements of the Group are prepared on the historical cost basis as modified by the following assets and liabilities which are stated at their fair value: financial instruments held for trading and financial instruments classified or designated as at fair value through profit or loss.

The functional and presentation currency of the Company and Core is GBP. The functional and presentation currency of the Cell is Euro. These functional currencies of the Core and Cell best represent the economic environment in which the Core and Cell operate. The presentation currency of the combined consolidated financial statements is GBP.

Going concern

The Directors believe it is appropriate to adopt the going concern basis in preparing the consolidated financial statements as, after due consideration and enquiries made, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Regarding the ongoing funding of the Group's Preference Shares, the Directors have taken into account the current cash balance, the forecast cash inflows and outflows from the investments and operating expenses. The Directors note the cash resources available at 30 September 2013 (£6.4m), some of which will be used to pay the proposed dividend, are sufficient to cover normal operational costs and current liabilities as they fall due for the foreseeable future. In addition, £50 million has been raised from the Placing of New Core Shares as disclosed in Note 1 and Note 16 of these financial statements.

2. Significant accounting policies (continued)

Valuation of investments

In accordance with the Group's accounting policies, the fair value of financial assets is based on quoted prices where such prices are available from a third party in a liquid market.

Mortgage Backed Securities held in the Core are valued using independent market prices (supplied by Markit).

The Core's investments in real estate loans are measured at fair value, which are linked to the value of the real estate assets the entity invests in.

The market for Residual Income Positions is illiquid and regular traded prices are generally not available for such investments. There is no active secondary market in Residual Income Positions and, further, there is no industry standard agreed methodology to value Residual Income Positions.

As quoted bid prices are unavailable, the fair value of the Residual Income Positions is estimated by reference to market information, which includes but is not limited to broker marks, prices of comparable assets, estimated fair value from the previous period updated for current period cash flows and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The Group may use all or a combination of the prices from these sources in estimating the fair value of the investments.

Any changes to assumptions surrounding the pricing models may result in changes to the fair values of the investments. Such changes in the fair value are reported in the Consolidated Statement of Comprehensive Income following the reassessment of the cash flows discounted at the current discount rate for the investment.

The fair values of financial instruments that are not traded in an active market are determined using valuation techniques (such as modelling).

3. Net gains and losses on financial assets and liabilities at fair value through profit or loss

3. Net gains and losses on financial assets and liabilities at fair value through profit or loss (continued)

4. Operating expenses

4. Operating expenses (continued)

* Negative expense due to reversal of prior period accrual.

5. Finance costs

6. Other assets

7. Dividends

7. Dividends (continued)

Under Guernsey Law, companies can pay dividends provided they satisfy the solvency test prescribed under The Companies (Guernsey) Law, 2008. The solvency test considers whether a company is able to pay its debts when they become due and whether the values of a company's assets are greater than its liabilities. The Company passed the solvency test for each dividend payment for the period ended 30 September 2013 (also for the year ended 31 March 2013 and period ended 30 September 2012).

The Preference Share Cover Test is intended to prevent the erosion of the Company's asset base through the payment of dividends or other distributions out of the Cell. Prior to the Company declaring a dividend or making a distribution (including for these purposes a redemption) to holders of Cell Shares, the Preference Share Cover Test will also need to be satisfied. The Company was not in breach of the test as at 30 September 2013, 31 March 2013 or 30 September 2012.

Preference Share Dividends

The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value. The Preference Dividend will be accrued at each valuation point and paid quarterly. Dividends owing to Preference Shareholders are shown as a Finance Cost in the Unaudited Consolidated Statement of Comprehensive Income on an effective yield basis.

8. Profit/(loss) per Ordinary Share

The calculation of the basic and diluted earnings per share is based on the following data.

There was no dilution as at 30 September 2013 or 30 September2012 as the share price was below the option price (see Note 14) on that date.

9. Share capital

The capital structure of the Company consists of Preference Shares and equity attributable to equity holders of Core and Cell Ordinary Shares, comprising issued share capital and reserves, as disclosed in the Unaudited Consolidated Statement of Financial Position. The issued share capital of the Company consists of Core Ordinary Shares, Preference Shares and Cell Ordinary Shares. The Company's capital managed as at the period end is represented by the value of the shares issued to date. The Company does not have any externally imposed capital requirements. At 30 September 2013 the Company had capital of GBP 71,567,934 (31 March 2013: GBP 73,040,367).

Authorised Share Capital

Core Ordinary Shares Issued and fully paid