Urban Logistics Regulatory News (SHED)

Urban Logistics REIT plc

("Urban Logistics" or the "Company")

Interim results for the six months ended 30 September 2018

Strong underlying performance

Urban Logistics, (AIM: SHED) the specialist UK industrial and logistics REIT, issues its interim financial results for the half year ended 30 September 2018.

Investment activity

Midlands-focussed portfolio with sustainable income and growth

Post period highlights

Dividends

Nigel Rich, Chairman, commented:

"We remain confident that our high quality, well located industrial and logistics assets will continue to deliver attractive total returns to shareholders.

"We will seek to acquire further assets in line with our strategy, which we will expect to fund mainly through equity raising and bank debt."

- Ends -

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About Urban Logistics REIT

Urban Logistics REIT plc is a property investment company, quoted on the AIM market of the London Stock Exchange, (AIM: SHED).

The Company has been established to invest in UK-based industrial and logistics properties with the objective of generating attractive dividends and capital returns for its shareholders. Its investment strategy focuses on strategically located smaller single let industrial and logistics properties servicing high-quality tenants. Investment returns will be generated by an experienced management team focusing on quality stock selection and active asset management.

A number of structural and commercial factors currently support the attractive opportunity in the last mile/regional industrial and logistics real estate sub-sectors targeted by the Company, including: strong occupier demand, (driven by the growth of e-commerce and investment by retailers in their associated supply chain) and a decline in the supply of smaller sized lettable space in industrial and logistics real estate across the UK.

Chairman's statement

Overview

The Company, which was renamed Urban Logistics REIT plc in April, continues to build a property portfolio that offers secure income from good quality, predominantly logistics, tenants, with the prospect of an attractive total return through asset management initiatives undertaken by the Manager.

In April we raised £20.4 million via a market placement which was used together with bank financing to acquire £36.0 million of logistics assets from LondonMetric. The acquisition was completed in September. This portfolio offers significant opportunities to improve returns through active asset management.

We now own a portfolio of 34 properties valued at £173.8 million. The Company's market capitalisation stands at just over £100 million.

The portfolio

At 30 September 2018, the portfolio was 98.9% occupied with a WAULT of 5 years. A number of lease events took place during the period which increased rents or lengthened tenure, and in some instances both. These actions all helped to improve the value of our properties. Contracted rent at 30 September 2018 increased to £10.7 million compared with £5.6 million last year. One property in Bedford was sold in April, at a capital profit of £1.2 million, representing an IRR of 55.8%.

Since the period end, the Group disposed of one property in Leeds for a total consideration of £3.4 million, representing a profit on cost of £0.5 million or 17.3%. On 7 November 2018, the Group exchanged contracts to acquire the freehold of a property located in Bedford for a net consideration of £12.0 million, after sale of some development land. The acquisition is being financed from the Group's cash resources, proceeds from the disposal of the property in Leeds post period-end, as well as debt finance from its club facility with Santander and Barclays.

Financial results

Turning to our results for the interim period ended 30 September 2018, rental income has increased to £4.9 million compared with £1.5 million at 30 September 2017. EPRA earnings are up from £0.2 million to £2.6 million, with EPRA earnings per share increasing from 0.50 pence to 3.13 pence. The increases reflect rents being received in the current period from properties purchased in the previous financial year and the Company's asset management initiatives.

Assets under management increased from £131.9 million to £173.8 million which reflects an increase of 6.6% in the value of existing assets plus the value of the new assets acquired.

The Loan to Value ("LTV") at 30 September 2018 was 37.1%, similar to 31 March 2018, and within our target range of 35-40%.

Dividend

The Company has declared a fourth interim dividend of 0.02 pence per Ordinary Share in respect of the financial year ended 31 March 2018 and a first interim dividend of 2.98 pence per Ordinary Share in respect of the financial year ended 31 March 2019. The total dividend of 3.00 pence per Ordinary Share will be paid as a property income distribution (PID) on 14 December 2018 to shareholders on the register at the close of business on 30 November 2018. The ex-dividend date will be 29 November 2018.

The Manager

Our Manager, Pacific Capital Partners Limited, led in respect of the property activities, by Richard Moffitt and Christopher Turner, has been very successful in finding properties which meet our objectives. To ensure the continuity of the relationship, in July the Independent Directors, including myself, agreed an extension of the management contract to April 2024. All other key terms of the agreement remain unchanged.

Outlook

Earnings in the second half of the year will benefit from the rents received on the LondonMetric portfolio. We remain confident that in the longer term our high quality, well located industrial and logistics assets will continue to deliver attractive total returns to shareholders.

We will also, through our Manager, seek to acquire further assets in line with our strategy, which we will expect to fund mainly through equity raising and bank debt.

Nigel Rich CBE, Chairman

Manager's Report

We continue to focus on the urban logistics sub-sector of the UK property market, concentrating on a part of the market that delivers essential products to UK businesses and consumers. Our portfolio houses companies who deal with everyday items such as pharmaceuticals, ambient and frozen food, building supplies and general merchandise but, importantly, not fashion goods.

We have been consistently saying from IPO that we are experiencing a structural change in how we all go about procuring goods, with e-commerce driving a requirement for more efficient supply chains at the same time as the consumer market grows. The market suggests that online retail in the UK might well represent over one-third of total retail sales by 2040, currently this is 18% per ONS, August 2018.

Omnichannel retail in particular drives high expectations among consumers, including strong differentiation, fast deliveries and easy returns, consequently forcing retailers and third-party logistics to improve their supply chains, especially for "last mile" deliveries.

It is not in the "super shed" market where the demand for space is greatest. The most significant "space race" going forward is set to be focused around urban locations. Radius Data Exchange shows that units of approximately 45,000 sq ft have been taken up with greater intensity recently; growing from 54% to 61% of overall letting activity this year.

Better supply chains will facilitate a decisive competitive advantage for retailers who possess or control them, with further benefits from moving to a vertically integrated model. To a large extent we believe large-scale operators have developed their supply chains and it is now the last mile(s) where the funding needs to be committed.

Traditional locations for logistics - alongside motorways and on urban boundaries - will not be enough to cover city demands for last mile deliveries and reverse logistics. Therefore, more logistics facilities will be needed close to city centres. We foresee an increasing growth of demand for logistics hubs or consolidation centres to service big cities across the UK.

Whilst there are a number of near-term risks, including continued Brexit uncertainty and retailer CVAs and administrations, we remain optimistic about the future of available space given occupier interest in long-term infrastructure investment in logistics real estate and wider real estate supply constraints.

The market

Investor interest remains strong in the logistics sub-sector of the UK real estate market, with investment yields coming in materially due to the record levels of take-up seen so far in 2018. This interest is driven by structural changes and e-commerce as well as modern technology, with the driver of this demand remaining the online retail sector which at 5.6 million sq ft represents 32% of overall take-up (to June 2018). Including third party logistics providers, take-up was 54% in aggregate and these two represent the strongest market shares. In 2017 this total was 41% (Source: CBRE Logistics Property Perspective H1 2018).

H1 2018 has seen more take-up than the whole of 2017 (17.42 million sq ft vs. 17.26 million sq ft) despite the backdrop of some weaker economic data filtering through on the retail side of the UK economy. There is approximately 19 month's second-hand supply across the UK with the south-west seeing minimal availability, which in turn is pushing tenants out across the Midlands in search of space. This record H1 for logistics sits against an average annual 10 year take-up figure of 19.9 million sq ft. The second half of 2018 remains promising with some large and interesting deals pushing annual take-up close or even above 2016's record level of 29.4 million sq ft.

Regionally, the East Midlands saw the strongest take-up in H1 2018, accounting for almost 40% of total take-up - this is where our portfolio of properties is centred. The shift is predominantly driven by improved infrastructure and availability of labour, which is at a lower cost relative to the UK as a whole.

New build space remains on trend for occupiers with "design and build" in particular driving take-up due to the increasingly complex requirements of occupiers. Speculative building is returning for the first time in almost a decade. There are currently 43 schemes under construction across the UK with most located towards the south-east; however, these tend to be larger lot sizes meaning those in our size bracket (less than 200,000 sq ft) are still under supplied.

We continue to remain persuaded by the attractions of this real estate sub-sector and suggest that logistics warehouses will continue to evolve to cater for rising end customer expectations. Whilst yields remain tight we expect to see rental growth pressures remain.

Through our access, track record and experience, we are well-placed to continue sourcing attractive new opportunities and have a strong pipeline of similar product to our current portfolio. 

Financial commentary

The interim financial period to 30 September 2018 was a busy one for the Group with a focus on both asset management and investment activity.

The results demonstrate some significant achievements and how our strategy of adding scale whilst focusing on investment returns, continues to bear fruit. We expect the results to continue to improve as the Group scales and undertakes its asset management initiatives.

Investment activity

The Group acquired six assets during the period following the April 2018 capital raise, the entire portfolio comprising the properties in the table below as at 30 September 2018. These have proven to be quality logistics investments, with a good geographical spread and diverse tenancies. The new properties present a variety of asset management opportunities, which have the potential to drive both income growth and capital appreciation.

The average size of the properties in the portfolio at 30 September 2018 was 64,994 sq ft. The weighted average unexpired lease term at the same date was five years, at 31 March 2018 this was also five years

1. Void from 24 March 2017

2. Void from 28 September 2017 - rental guarantee in place until September 2019

3. Sold post period end

* Excluding purchase costs

Valuation and portfolio growth

CBRE independently valued the portfolio at 30 September 2018, in accordance with the RICS Valuation - Professional Standards. The portfolio's market value was £173.8 million, compared with the assets' combined purchase price of £152.2 million, excluding purchaser costs. This represents an increase of £21.7 million or 14.2%, when compared to the purchase prices. The valuation increase reflects our focus on asset management and buying well-located sites. It also highlights our success in sourcing off-market deals at attractive prices for the Group.

Like-for-like across the interim financial period, property values increased by 6.6%, supporting our growth conviction.

Current Portfolio Analysis

The Group has invested in 34 assets, currently comprising 35 tenants as at 30 September 2018. Examples of asset management initiatives during the year:

1. OTC Direct, Leigh

Annual passing rent - £510,000, Size (sq ft) - 103,268

Rent per sq ft - £4.94, Tenure - Freehold

This unit comprises a large distribution warehouse with an adjoining office building, both of which have been recently fully refurbished. The site includes a 52.5m yard with 360-degree circulation and is close to Manchester City Centre with excellent links to the M6, M60, M61 and M62 motorways.

During the period, we introduced OTC Direct as a new tenant on a 10-year lease with a five-year break and upwards-only rent review, increasing the book value of the site by £0.7 million or 10% on a like-for-like basis from 31 March 2018.

2. Price's Candles, Bedford

Annual passing rent - £265,000, Size (sq ft) - 44,195

Rent per sq ft - £6.00, Tenure - Freehold

This is a well configured warehouse with two bays and a trade counter. It is located in an established commercial location, with good access and circulation.

The property was sold on 6 April 2018 for £3.2 million, representing a capital profit of approximately £1.2 million and, taken with the income returns to the Group, reflects an IRR on equity invested of 55.8%. 

3. Komori / Pharmacy2u, Leeds

Annual passing rent - £215,925, Size (sq ft) - 41,420

Rent per sq ft - £5.21 (blended), Tenure - Freehold

This is a well configured warehouse in an established strategic location, with good access and circulation. The site was acquired in November 2017.

The property consists of two units which in total represent 41,420 sq ft of logistics space.

As well as securing rental increases, the lease terms on both units were extended by five years in September 2018.

The site was subsequently sold post period end, for a 17% profit on cost, as no further asset management initiatives were available and an attractive price was offered by the purchaser.

4. Strata Products, Chesterfield

Annual passing rent - £432,204, Size (sq ft) - 108,873

Rent per sq ft - £3.97, Tenure - Freehold

This is a recently refurbished, temperature-controlled warehouse with low site cover in an established location, with good access to main arterial routes and full circulation.

The site was let during the period to Strata Products for five years and supports the tenant's national distribution operation. 

Financial results

EPRA earnings for the period were £2.6 million, or 3.13 pence per share. There were two principal drivers of this positive performance. The first was a full run rate for most properties across the portfolio, excluding those recently acquired, and their strong rental income. The second was the successful asset management undertaken during the period which was in line with our investment policy and undertaken across a number of sites, with further initiatives available to the Manager.

Administrative and other expenses, which include the Manager's fee and other costs of running the Group, were £0.8 million. The EPRA cost ratio, excluding vacancy costs, was 17.9% for the period - with the vacancy rate low at 1.1% at period end.

The Company has seen strong NAV growth over the period, up 5.5% from 122.49 pence at 31 March 2018 to 129.21 pence per share at 30 September 2018. Now the Company is fully invested we expect earnings and capital growth to continue on a positive trajectory.

Financing and hedging

As at 30 September 2018, the Group had a senior debt facility with Santander and Barclays totalling £64.4 million which is 70% hedged. This facility has a term of five years and reflects a LTV of 37.1%. In the medium term the Group's target LTV is 35-40%. Net financing costs were £0.9 million for the interim period.

Investment activity

Acquisitions and disposals across the interim period include:

Acquisition

During the period two portfolios of assets were acquired from LondonMetric. A total of six logistics assets were purchased for £36.0 million in July and September 2018. The acquisition was sourced off-market at a net initial yield of 5.9%. The portfolio's logistics occupiers include DHL Supply Chain, NNR, Encon and Hillary's Blinds. The assets are close to established regional transport hubs in urban or last-mile locations where there is strong occupier demand.

Post period end, on 7 November 2018, the Group exchanged contracts to acquire the freehold of a property located in Bedford for a total consideration of £17.0 million. As part of the acquisition, the Group is simultaneously selling a plot of development land for £5.0 million to a local developer. The acquisition is being financed from the Group's cash resources, proceeds from the disposal of the property in Leeds post period end, as well as debt finance from its club facility with Santander and Barclays.

Disposal

The Company completed the sale of a site located at Hudson Road, Bedford. The sale completed on 5 April 2018 for £3.2 million, representing a capital profit of approximately £1.2 million on the Company's equity investment of £0.9 million in April 2016. Taken together with the income returns generated during the Company's ownership this sale price represents an IRR on equity invested of 55.8%.

As noted above, post period end, on 8 October 2018, a site was sold in Leeds for £3.4 million. This represented a 17% profit on cost. The sale followed agreement of outstanding rent reviews and lease extensions.

Outlook

The Board and the Manager believe that the industrial & logistics sector of the property market continues to show strength. The sector's superior returns over recent months, allied to projected rental growth prospects, have proven highly attractive to both existing and new entrants.

Key geographic regions across the UK are seeing improvements year-on-year in leasing activity. With 4 million sq ft of industrial space (Source: Gerald Eve Q2 2018) under offer we are optimistic that the market may well exceed 2016's record take-up. Whilst there may be further localised yield compression, over the medium-term returns will be supported by income and rental growth.

Our focus will be to continue acquiring attractive assets and implementing asset management initiatives with a focus on rental growth in light of the current market dynamic of diminishing supply and increasing occupier demand, positioning us well to continue to achieve our target returns for investors.

Richard Moffitt

Independent Review Report to Urban Logistics REIT plc

1. Introduction

We have been engaged by Urban Logistics REIT plc (the "Company") to review the condensed set of financial statements in the interim report for the six months ended 30 September 2018 which comprise the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Cash Flow Statement and the Condensed Consolidated Statement of Changes in Equity and related explanatory notes.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information in the condensed set of financial statements.

2. Directors' responsibility

The interim report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim report in accordance with AIM Rule 18.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRS as adopted by the European Union. It is the responsibility of the Directors to ensure that the condensed set of financial statements included in this interim report have been prepared on a basis consistent with that which will be adopted in the Group's annual financial statements.

3. Our responsibility

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

4. 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 Financial Reporting Council for use in the United Kingdom.

A review of interim financial information consists of making enquiries, 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 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.

5. Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report for the six months ended 30 September 2018 is not prepared, in all material respects, in accordance with the requirements of the AIM rules.

6. Use of our report

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the AIM Rule 18. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this 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 the conclusions we have reached.

Nexia Smith & Williamson

Statutory Auditor

Chartered Accountants

25 Moorgate

London

EC2R 6AY

14 November 2018

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Cash Flow Statement

Condensed Consolidated Statement of Changes in Equity

Notes to the Interim Financial Statements

1. Corporate information

Urban Logistics REIT plc, previously Pacific Industrial & Logistics REIT plc, (the "Company") and its subsidiaries (the "Group") carry on the business of property lettings throughout the United Kingdom. The Company is a public limited company incorporated and domiciled in England and Wales and listed on the AIM Market of the London Stock Exchange. The registered office address is 124 Sloane Street, London, SW1X 9BW.

2. Basis of preparation

The interim financial information in this report has been prepared using accounting policies consistent with IFRS as adopted by the European Union. IFRS is subject to amendment and interpretation by the International Accounting Standards Board (IASB) on the IFRS Interpretations Committee and there is an ongoing process of review and endorsement by the European Commission. The financial information has been prepared on the basis of IFRS that the Directors expect to be adopted by the European Union and applicable as at 31 March 2019. The Group has chosen not to adopt IAS 34 "Interim Financial Statements" in preparing the interim financial information.

The Group's financial information has been prepared on a historical cost basis, except for investment property and derivative interest rate caps which have been measured at fair value.

The functional currency of the Group is considered to be pounds sterling as this is the currency of the primary environment in which the Group operates.

Non-statutory financial statements

Financial information contained in this document does not constitute statutory accounts for the year ended 31 March 2018 within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for the year ending 31 March 2018 have been delivered to the Registrar of Companies. The audit report was unqualified and did not contain a statement under Section 498 of the Companies Act 2006 nor did it include references to any matters to which the auditor drew attention by way of emphasis.

Going concern

The Directors have reviewed the current and projected financial position of the Group, making reasonable assumptions about future trading performance. As part of the review, the Group has considered its cash balances, its debt maturity profile, including undrawn facilities, and the long-term nature of the tenant leases.

On the basis of this review, and after making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and financial statements.

Standards in issue and effective from 1 April 2018

IFRS 9: Financial Instruments

IFRS 9 introduces a new expected credit losses model, replacing the previous incurred loss impairment model. At 30 September 2018, the Group's financial assets, as defined by IFRS 9, consisted primarily of trade and other receivables and interest rate derivatives. There has been no impact on the Group's accounting for financial assets, with trade and other receivables being measured at amortised cost and interest rate derivatives as fair value through profit or loss. Financial liabilities will also continue to be measured at amortised cost.

IFRS 15: Revenue from contracts with customers

The standard does not apply to revenue derived from leases, which at 30 September 2018 accounted for 100% of revenue generated by the Group.

Standards issued but not yet effective:

The Group has not yet applied the following new and revised IFRSs that have been issued but are not yet effective:

§ IFRS 16 "Leases" will be effective for the year ending March 2020 onwards.

The Directors do not anticipate that the adoption of this standard and subsequent interpretation will have a material impact on the Group's financial statements in the period of initial application, other than on presentation and disclosure.

3. Significant accounting judgements, estimates and assumptions

The preparation of the financial statements in conformity with the generally accepted accounting practices requires management to make estimates and judgements that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the statement of financial position date and the reported amounts of revenue and expenses during the reporting period.

Business combinations

The Group has acquired companies that own real estate. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property.

Where such acquisitions are not judged to be the acquisition of a business, they are not treated as business combinations. Rather the cost to acquire the corporate entity is allocated between identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred tax arises.

Long-term incentive plan

In determining the fair value of the long-term incentive plan and the related charge to the Statement of Comprehensive Income, the Group makes assumptions about future events and market conditions. In particular, judgement must be formed as to the likely number of shares that will vest, and the fair value of each award granted.

The fair value is determined using a valuation model which is dependent on a number of assumptions of the Group's future dividend policy and the future volatility in the price of the Group's shares. Such assumptions are based on publicly available information and reflects market expectation. Different assumptions about these factors to those made by the Group could materially affect the reported value of the long-term investment plan.

Fair value of investment property

The fair value of investment property is market value as determined on a half-yearly basis, to be the estimated amount for which a property should exchange on the date of the valuation in an arm's length transaction. Each property has been valued on an individual basis. The valuers use recognised valuation techniques and the principles of IFRS 13. The valuations have been prepared in accordance with RICS Valuation - Professional Standards UK January 2014 (revised April 2015) (the "Red Book"). Factors reflected include current market conditions, annual rentals, lease lengths and location. The significant methods and assumptions used by the valuers in estimating the fair value of investment property are set out in note 10.

4. Principal accounting policies

The principal accounting policies applied in the preparation of these interim financial statements are set out below. These policies, which are also applicable to the financial statements of the Company, have been consistently applied to all the years presented.

Basis of consolidation

The financial statements consolidate the accounts of the Company and all subsidiary undertakings drawn up to the same year end.

Business combinations

The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. At the Group level, acquisition costs are recognised in the Statement of Comprehensive income as incurred.

The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date.

Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiary entities are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date on which control ceases. In respect of subsidiaries, inter-Company transactions and unrealised gains on intra-Group transactions are eliminated on consolidation.

The financial information of the subsidiaries is prepared for the same reporting periods as the parent company, using consistent accounting policies.

Investment in subsidiaries

Investments in subsidiaries are stated at cost less any provision for permanent diminution in value. Realised gains and losses are dealt with through the Statement of Comprehensive Income. A review for impairment is carried out if events or changes in circumstances indicate that the carrying amount may not be recoverable, in which case an impairment provision is recognised and charged to the Statement of Comprehensive Income.

Borrowing costs

Borrowing costs in relation to interest charges on bank borrowings are expensed in the period to which they relate. Fees incurred in relation to the arrangement of bank borrowings are capitalised and expensed on a straight-line basis over the term of the loan.

Segmental reporting

IFRS 8 requires operating segments to be identified on the basis of internal reports that are regularly reported to the chief operating decision maker to allocate resources to the segments and to assess their performance. Following the strategic review, the Directors consider there to be only one reportable segment, being the investment in the United Kingdom of medium size industrial warehouses.

Investment properties

Investment properties comprises completed property that is held to earn rentals or for capital appreciation or both.

Investment properties are initially recognised at cost including transactions costs. Transaction costs include transfer taxes and professional fees for legal services. Subsequent to initial recognition investment properties are carried at fair value, as determined by real estate valuation experts. Gains or losses arising from change in fair value is recognised in the Statement of Comprehensive Income in the period in which they arise.

On disposal of an investment property, the difference between the disposal proceeds and the carrying amount is recognised in the Statement of Comprehensive Income.

Financial instruments

Financial assets and financial liabilities are recognised in the Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.

Financial assets

Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, using the effective interest rate method.

A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment terms will not be collected. The amount of any provision is recognised in the Statement of Comprehensive Income.

Cash and cash equivalents are recognised initially at fair value and subsequently measured at amortised cost. Cash and cash equivalents comprise cash in hand, deposits held with banks and other short-term, highly liquid investments with original maturities of three months or less.

Financial liabilities

Financial liabilities, equity instruments and warrant instruments issued by the Group are classified in accordance with the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost using the effective interest rate method.

Derivative financial instruments

Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at cost and are subsequently measured at fair value being the estimated amount that the Group would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Group and its counterparties. The gain or loss at each fair value measurement date is recognised in the Statement of Comprehensive Income. Premiums payable under such arrangements are initially capitalised into the statement of financial position, subsequently they are remeasured and held at their fair values.

Hedge accounting has not been applied in these financial statements.

Revenue recognition

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duties.

Rental income from operating leases on properties owned by the Company is accounted for on a straight-line basis over the term on the lease. Rental income excludes service charges and other costs directly recoverable from tenants.

Lease incentives are amortised on a straight-line basis over the term of the lease.

Leases

Leases where substantially all of the risks and rewards of ownership are transferred to the lessee are classified as finance leases. All others are deemed operating leases. Property interests held under operating leases which meet the definition of investment properties are carried, as such, at fair value with the related lease treated as a finance lease.

Long-term incentive plan

There is a long-term incentive plan ("LTIP") in place whereby Pacific Industrial LLP, an affiliate of Pacific Capital Partners Limited (the "Manager") has subscribed for B Ordinary Shares and C Ordinary Shares issued in Pacific Industrial & Logistics Limited, a subsidiary of Urban Logistics REIT plc (the "Company"). Under the terms of the LTIP, the Company is obliged to acquire the B Ordinary Shares and C Ordinary Shares in Pacific Industrial & Logistics Limited, in return for services provided by Pacific Industrial LLP, subject to certain conditions.

The fair value of the LTIP is calculated at the grant date using the Monte Carlo Model. The resulting cost is charged to the Statement of Comprehensive Income over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.

Taxation

Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the period end date, and any adjustment to tax payable in respect of previous years.

Dividends

Dividends on equity shares are recognised when they become legally payable. In the case of interim dividends, this is when paid. In the case of final dividends, this is when approved by the shareholders at the Annual General Meeting.

5. Revenue

The Group is involved in UK property ownership and letting and is considered to operate in a single geographical and business segment. The total revenue of the Group for the year was derived from its principal activity, being that of property lettings.

For the interim period to 30 September 2018, no single tenant accounted for more than 10% of the Group's gross rental income.

6. Finance expense

7. Earnings per share

The calculation of the basic earnings per share ("EPS") was based on the profit attributable to Ordinary Shareholders divided by the weighted average number of Ordinary Shares outstanding during the period, in accordance with IAS 33.

At 30 September 2018, the Company has 2,067,036 warrant shares in issue. Each warrant holder has the right to subscribe for new Ordinary Shares on the basis of one new Ordinary Share for each warrant held at a strike price of 97.0 pence per Ordinary Share.

8. Long-term incentive plan

The Company has a LTIP, accounted for as an equity settled share-based payment. At 30 September 2018, Pacific Industrial LLP, an affiliate of Pacific Capital Partners Limited, has subscribed for 1,000 B Ordinary Shares of £0.01 each and 1,000 C Ordinary Shares of £0.01 each issued in Pacific Industrial & Logistics Limited, a subsidiary of the Company.

The LTIP has an EPRA NAV element and a share price element and will be assessed on: i) 30 September 2020 (the "First Calculation Date") and ii) 30 September2023 (the "Second Calculation Date"). The EPRA NAV element will be 10 per cent. of the excess of the EPRA NAV per Ordinary Share return, including dividends, over an annualised 9 per cent. hurdle, multiplied by the number of Ordinary Shares in issue at the relevant calculation date. The share price element will be 10 per cent. of the excess of the share price return, including dividends, over an annualised 9 per cent. hurdle, multiplied by the number of Ordinary Shares in issue at the relevant calculation date.

At the First Calculation Date, the share price element and the EPRA NAV element hurdle will be calculated by reference to the Placing Price of 115.0 pence.

At the Second Calculation Date, if a payment has been made at the First Calculation Date under either element, the hurdle for that element at the Second Calculation Date will be re-set to be based on the prevailing EPRA NAV per Ordinary Share/share price as at the First Calculation Date (as applicable). If no payment is made under an element at the First Calculation Date, then the hurdle for that element will continue to be calculated by reference to the Placing Price of 115.0 pence.

The LTIP will be paid in shares or, at the Board's discretion, in cash.

9. Dividends

The Company has declared a fourth interim dividend of 0.02 pence per Ordinary Share in respect of the financial year ended 31 March 2018 and a first interim dividend of 2.98 pence per Ordinary Share in respect of the financial year ended 31 March 2019. The total dividend of 3.00 pence per Ordinary Share will be paid on 14 December 2018.

10. Investment properties

In accordance with IAS 40 "Investment Property", investment property is carried at its fair value as determined by an external valuer. This valuation has been conducted by CBRE and has been prepared as at 31 March 2018, in accordance with the RICS valuation - Professional Standards UK January 2017 (revised April 2015) (the "Red Book").

The valuations have been prepared in accordance with those recommended by the International Valuation Standards Committee and are consistent with the principles in IFRS 13.

Total rental income for the interim period recognised in the Condensed Consolidated Statement of Comprehensive Income amounted to £4.9 million (H1 Sep 17: £1.5 million).

11. Bank borrowings and reconciliation of liabilities to cash flows from financing activities

On 7 September 2018, the Group, Santander UK plc and Barclays Bank plc entered into a facility agreement pursuant to which Santander UK plc and Barclays Bank plc have agreed to provide the Group with a loan facility of £64.4 million for a term of five years.

12. Interest rate derivatives

The Group has used interest rate swaps to mitigate exposure to interest rate risk. The total fair value of these contracts are recorded in the statement of financial position. The interest rate derivatives are marked to market by the relevant counterparty banks on a quarterly basis in accordance with IFRS 9. Any movement in the fair value of the interest rate derivatives are taken to finance costs in the Statement of Comprehensive Income.

13. Share capital

On 26 April 2018, the Company raised £20.4 million through the issue of 17,071,130 Ordinary Shares at an issue price of 119.50 pence per share.

On 1 May 2018, 521,964 warrant shares were redeemed for an issue price of 97.0 pence per share.

On 12 September 2018, 373,000 warrant shares were redeemed for an issue price of 97.0 pence per share.

At 30 September 2018, there were 2,067,036 warrant shares in issue. Each warrant holder has the right to subscribe for Ordinary Shares on the basis of one new Ordinary Share for each warrant held at a strike price of 97.00 pence per Ordinary Share.

14. Share premium

Share premium relates to amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised.

15. Related party transactions

The terms and conditions of the Investment Management Agreement are described in the Management Engagement Committee Report. During the interim period, the amount paid for services provided by Pacific Capital Partners Limited (the "Manager") totalled £0.50 million.

Long-term incentive plan

Under the terms of the Company's long-term incentive plan, at 30 September 2018 Pacific Industrial LLP, an affiliate of Pacific Capital Partners Limited, has subscribed for shares in Pacific Industrial & Logistics Limited, a subsidiary of Urban Logistics REIT plc. Further details have been provided in note 8.

Acquisition of investment properties

During the interim period, the Group incurred fees totalling £408,240 from M1 Agency LLP, a partnership in Richard Moffitt is a member. These fees were incurred in the acquisition of investment properties, sale of one investment property and one re-letting.

For the transactions listed above, Richard Moffitt's benefit is derived from the profit allocation he receives from M1 Agency LLP as a member and not from the transaction.

The Board, with the assistance of the Manager, and excluding Richard Moffitt, review and approve each fee payable to M1 Agency LLP, and ensure the fees are in line with market rates and on standard commercial property terms.

16. Net asset value per share

Basic NAV per share is calculated by dividing net assets in the Consolidated Statement of Financial Position attributable to Ordinary Shareholders by the number of Ordinary shares at the end of the period.

Net assets have been calculated as follows:

17. Post balance sheet events

On 8 October 2018, the Group completed on the sale of logistics assets at Victoria Road, Seacroft, Leeds for a consideration of £3.4 million. This represented a 17.3% profit on purchase price (excluding acquisition costs).

On 7 November 2018, the Group exchanged contracts to acquire the freehold of a site located in Bedford for net consideration of £12.0 million. The acquisition is being financed from the Company's cash resources, proceeds from the disposal of the site in Leeds post period end, as well as debt finance from its club facility with Santander and Barclays.

Supplementary Information

i. EPRA performance measures summary

ii. Income statement

iii. Balance sheet

iv. EPRA net initial yield and 'topped up' net initial yield

v. EPRA vacancy rate

vi. EPRA cost ratio