Urban Logistics Regulatory News (SHED)

Pacific Industrial & Logistics REIT plc

("Pacific Industrial & Logistics," the "Company" or the "Group")

Interim results for the six months ended 30 September 2017

Strong underlying performance during transformational period

Pacific Industrial & Logistics REIT plc, (AIM: PILR) the specialist UK industrial and logistics REIT, issues its interim financial results for the half year ended 30 September 2017.

*Adjusted EPS reflects earnings from underlying operating business adjusting for the LTIP charge

Transformational period

Portfolio metrics reflect sustainable income and growth

Post period highlights

Outlook

Dividends

Nigel Rich, Chairman, commented:

"We have continued to make good progress assembling a high-quality portfolio of industrial and logistics assets, accelerated by our recent placing which significantly increased the scale of the business. Having acquired a portfolio of nine industrial and logistics assets during the period, all of which have the potential to achieve strong income and capital returns for the Group, we are also in an advanced stage of negotiations to acquire further properties from our pipeline of opportunities.

"Our focus is on the 'last mile' needs of a diverse tenant base, especially those responding to the opportunities of e-commerce and supply chain development. This in turn creates opportunities to enhance shareholder returns through careful asset selection and our asset management initiatives."

- Ends -

For further information contact: 

About Pacific Industrial & Logistics REIT

Pacific Industrial & Logistics REIT plc is a property investment company, quoted on the AIM market of the London Stock Exchange, (AIM: PILR).

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 lettable space in industrial and logistics real estate across the UK (being more than one third lower than the most recent peak of 2009).

Acquisitions are targeted in the 6.5-7.5% net initial yield bracket, with affordable underlying rents in the region of £4.50-£5.50 per sq ft, on an overall LTV of 35-40% and a significant margin over financing costs, thus presenting attractive income, capital growth and total return opportunities.

Chairman's statement

We have made good progress implementing our strategy of focusing on industrial and logistics assets in the 'last mile' of the supply chain, serving a diverse and high-quality tenant base. The first half of this financial year has been a transformational period for the Company, during which it deployed a substantial proportion of its capital growing its portfolio; raising additional equity of £53m which increased its market capitalisation by over 200% and further diversified its shareholder base.

In our sub-sector of the real estate market, we continue to believe in the relative attractions of our focus on modern urban logistics assets which benefit from structural growth and display highly defensive characteristics; including, high occupancy and security of income, which provide the opportunity for rental growth.

As the government continues to navigate Britain's uncertain passage through the Brexit process, investors are naturally drawn to companies that can offer asset-backed income. The Company continues to construct a portfolio that offers secure income from good quality tenants, with the prospect of an attractive total return through asset management initiatives.

Investment activity

The Company acquired a portfolio of nine logistics assets for £45.5m on 28 September 2017. The acquisition was sourced off-market at a net initial yield of 7.3% and was in line with the Company's investment strategy.

Since the financial period end, a logistics asset has been acquired in Leeds for a total consideration of £2.8m and a property in Bedford has been sold from our portfolio for a total consideration of £5.8m, representing a strong return for the Group that is 64% above cost when purchased at IPO, 19% above book value at 31 March 2017 and represents an IRR of approximately 43%. With the balance of the August 2017 fundraising remaining to be deployed, together with available bank facility debt, the Company is at an advanced stage of acquiring a portfolio of assets from its pipeline. In addition, further acquisition opportunities are in the execution phase.

Financial results

The Group's financial performance from the underlying portfolio for the period was positive, with net rental income totalling £1.5m. Profit, pre-interest and LTIP charge and gain on the fair value of investment properties, was £1.1m. The EPRA NAV per share at 30 September 2017 was 116.12 pence.

The period under review has seen a significant equity raise which has increased the market capitalisation of the business. Whilst positive for the Group in the medium term, this in turn has diluted earnings for the financial period, compared to the prior year, in the short term.

At the half year, the enlarged portfolio of properties was valued at £93.45m, with the portfolio in place at 1 April 2017 increasing in value by 7.5% over the six-month period, driven principally by active asset management rather than yield compression.

The Group has a debt facility with Santander totalling £50m, of which £18.4m was drawn at year end - further amounts are to be drawn down against new assets to be acquired in due course. This facility has a term of three years. The loan to value (LTV) at 30 September 2017 was 19.7% which will increase as further acquisitions are made by the Group. In the medium term the Group's target LTV is 35-40%. The term facility is in the course of being re-negotiated with Santander to accommodate a longer term of five years and improvement in margin.

Dividends

The Board has declared a third interim dividend for the financial year ended 31 March 2017 of 0.23 pence per share and an interim dividend relating to the half year ended 30 September 2017 of 1.00 pence per ordinary share. These will be paid as property income distributions (PIDs) on or around 22 December 2017 to shareholders on the register at the close of business on 1 December 2017. The ex-dividend date will be 30 November 2017.

Management agreement

In August 2017, and in conjunction with the capital raise, the terms of the management agreement with Pacific Capital Partners Limited were amended. With effect from 17 August 2017, a new management fee of 0.95 per cent. per annum of the Group's EPRA NAV, payable quarterly in arrears was put in place. The existing LTIP was also amended at that time, with the performance over the period from IPO to 13 July 2017 crystallised, such that there is now an EPRA NAV element to the calculation and the annualised hurdle has been increased from 8% to 9%.

Outlook

The Board believes that the Manager has delivered an encouraging performance since IPO in April 2016 based on its active asset management, with rent reviews and lease renegotiations driving rental and capital growth. The Board believes that by consolidating a quality regional and urban logistics portfolio across established logistics regions and adjacent to cities across the Midlands, the Group will offer investors exposure to a sector that provides yield and attractive returns. As the funds raised during the period are invested in properties, this should benefit the second half of the financial year and shareholders will see this impact come through for the full financial year.

As companies operating in business-to-consumer and business-to-business markets drive demand for strategically located supply chain assets, the urban logistics 'last mile' real estate asset class remains appealing. We see strong drivers of rental growth remaining in the logistics market due to the imbalance between occupational supply, increase of land prices and build costs and continuing demand for distribution space.

We are confident that we are assembling a portfolio of properties that will generate good returns for shareholders in the foreseeable future.

Nigel Rich CBE, Chairman

Manager's report

The urban logistics sub-sector of the UK real estate market is attracting investor interest due to the general shortage of higher yielding, liquid assets. The sub-sector's underlying fundamentals remain strong in the face of the Brexit process, as consumer and business-facing companies continue to migrate online, increasing sales by 16% to £133 billion in 2016 and forecast to grow a further 14% in 2017, (Source: CoStar). Demand for regional warehouse space remains high and supply is constrained, driving rental growth. For example, MSCI figures show logistics assets in Leeds and Birmingham witnessed rental growth of over 7.5% in the 12 months to Q2/17.

As occupiers increase their use of smart technology, for example transport automation and robotics, warehouse occupiers will need to find locations close to city centres as same day delivery becomes ever more important. The rise of same-day delivery across the UK in particular has led to an increase in smaller distribution warehouses that are closer to the customer. Our focus is on single-let sites, rather than multi-let, as we believe in the attractions of minimal service charges, efficiency of operation, (compared to those of large multi-let sites) and a more stream-lined approach to asset management led initiatives.

The Group will continue exploiting the significant opportunity in this sub-sector of the UK industrial and logistics market due to strong tenant demand, limited stock and current lack of speculative development. Through the Manager's access, track record and experience, we are well-placed to continue sourcing attractive new acquisition and asset management opportunities, whilst remaining disciplined in our investment approach.

Portfolio update: investment and valuation growth

CBRE independently valued the portfolio at the period end in accordance with the RICS Valuation - Professional Standards, (the 'Red Book'). The portfolio's market value was £93.4 million, compared with the assets' combined purchase price of £83.2 million, excluding purchaser costs. This represents an increase of £10.2 million or 12.3%, 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.

The Group acquired a further nine assets during the period, such that at the period end the portfolio comprised:

* Excluding purchaser costs

1. Void from 24 March 2017.

2. Void from 1 June 2017 - rent guarantee in place until 31 December 2017.

3. Void from 28 September 2017 - rent guarantee in place until 27 September 2019.

The Group's acquisitions have proven to be quality investments, providing a diverse mixture of tenancies and asset management opportunities, which have the potential to provide both income growth and capital appreciation.

At the period end, the average size of the portfolio's properties was 61,124 sq ft with a weighted average unexpired lease term of 5.4 years, (4.4 years at 31 March 2017).

Portfolio highlights

During the period, a number of initiatives were undertaken to improve the portfolio's valuation. Select highlights include:

P W Gates, Bedford

The property is located to the north west of Bedford, within the Elms Farm Industrial Estate. It is a 59,607 sq ft logistics unit that sits c.1.0 miles from the A421. It is a well maintained and configured warehouse with a good covenant.

During the period, the Manager introduced a new tenant at £6.29 sq. ft. on a 10-year lease with a 5-year break. The previous rent was £6.00 sq ft with a 3-year unexpired lease term.

Features: annual passing rent - £375,050; size - 59,607 sq ft; rent - £6.29 per sq ft; tenure - freehold.

Winit UK, Bardon

This is an established facility in a leading distribution location close to the M1 motorway. It is a modern unit with three bays and minimum eaves height of 10 meters.

During the period, a tenant break option was removed and there has been an improvement in expected reversion.

Features: annual passing rent - £356,000; size - 73,791 sq ft; rent - £4.82 per sq ft; tenure - freehold

BSS Group, Northampton

This is a well configured warehouse with two bays and a trade counter. It is located in an established commercial location in the heart of Northampton, an area that has witnessed strong rental growth this year.

During the period, a rent review was settled at an increase of 11% to the annual passing rent.

Features: annual passing rent - £71,500; size - 13,633 sq ft; rent - £5.24 per sq ft; tenure - freehold

Financial results

Operating profit for the period was £3.3 million. There were two principal drivers of this positive performance. The first was the portfolio's strong rental income, following successful rent reviews and lease extensions which at the period end equated to a running yield of 6.7%. 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, (excluding the LTIP charge) and other costs of running the Group, were £0.4 million, equivalent to 0.5% of the portfolio's market value at 30 September 2017. EPRA cost ratio, including vacancy costs, was 28.6% for the period - with the vacancy rate a low 1.9% at period end.

Investment activity

After the period end, the Manager purchased a logistics asset at Victoria Road, Seacroft, Leeds for a total consideration of £2.8 million. The purchase price represents a net initial yield of 6.8% and the site has a rent of £5.00 per sq ft, with reversionary potential. It comprises a modern 41,494 sq ft logistics warehouse which is let to Komori UK Limited and Pharmacy2u Limited on leases through to 2020 and 2022 respectively. Both have outstanding rent reviews. We note that this site recently won best 'New Facility' at The Logistics Awards 2017, which recognises operational excellence among companies within the logistics and supply chain sectors.

Also after the period end, the Company completed the sale of a site located at Hammond Road, Bedford, for a total consideration of £5.8 million, representing a net initial yield of 6.0%. The disposal follows the recent letting of the property on a 10-year lease to P W Gates (mentioned above) and the total consideration is a 64% gain on the asset's cost when purchased at the time of the Company's April 2016 IPO, representing an IRR of approximately 43% and a 19% premium to book value as at 31 March 2017.

The focus of the Manager will be to continue acquiring attractive assets with the potential for rental growth in light of the current market dynamic of diminishing supply and increasing occupier demand.

The Company intends to deploy the proceeds of the disposal together with the remaining equity from the recent fundraising and its available debt funding resources back into its high-quality pipeline of industrial and logistics opportunities. These include a portfolio of assets which is being held under an exclusivity arrangement with due diligence well progressed and a number of other suitable portfolios and assets that meet the Company's investment criteria.

Market overview

The industrial and logistics market in the UK continues to see resilient occupier demand outweighing available supply. Under-investment in the sector is due to substantial barriers to entry, including: the cost of replacement; availability of land; planning constraints and letting risk. These factors create a supply constraint of quality industrial and logistics assets across the UK.

Strong occupier demand, owing to the growth in e-commerce and investment by retailers and suppliers in e-fulfilment supply chain capability, also means that there is sustained low void across strategic locations with good links to transport infrastructure.

During 2017 we have seen total return potential supported by structural growth and strong ongoing rental growth prospects. The sharp fall in sterling following the EU referendum should continue to support exports and the manufacturing sector, with e-commerce growth also expected to provide strong cyclical and structural support.

The logistics market's total return in H1/17 was 5.0%, an improvement on H1/16 (4.4%) and H2/16 (4.1%) (Source: CBRE). This improvement is driven by stronger capital growth with stable rental growth over the period, although we expect this to pick-up and be reflected over the full calendar year.

A wider range of facilities will underpin the sector's future transformation, notably XXL warehouses, (with several floors) and urban logistics centres, where we are focused. Speculative development remains subdued as occupiers shift to purpose-built factories and development finance remains limited in the current economic climate.

Market outlook

The Board and the Manager believe that this sub-sector of the real estate market continues to show resilience in the context of wider economic and political uncertainty.

Underlying market conditions remain favourable for UK business and we see ongoing activity across our diverse occupier base of SMEs, logistics firms and larger companies. 

The UK continues to be one of the fastest-growing adopters of online retail and there is a requirement for tenants to develop their e-fulfilment capability accordingly. As such, strategic regions across the UK are experiencing year-on-year improvements in leasing activity. In the longer-term, demand for sites will fluctuate with economic drivers including: the value of sterling; manufacturing and production exports; domestic consumption; and Brexit. However, the UK has relatively high barriers to entry, (compared to other European markets) with respect to planning and development, so we expect sustainable growth for the foreseeable future.

Target market

Yields on target investment sites in the £3 - £10 million range remain approximately 1.0% higher than those of larger lots over £10 million as investors and larger real estate investment trusts are typically focused on larger lot sizes. Smaller lots trade at a discount to more institutional grade assets due to the reduced weight of money targeting this stock. The Manager is focused on maintaining and building existing tenant relationships with a view to extending the Group's reputation as a leader in the smaller lot size logistics market.

Supply

Supply levels for logistics properties peaked in 2009 following a period of speculative development in the run-up to the economic downturn. Following strong occupational demand over recent years, there is now a significant shortage and supply levels appear to be stabilising, having risen in recent years.

Whilst there have been recent steps towards the speculative development of smaller floorplate buildings, this has yet to result in availability matching the requirement for take-up across the UK. Indeed, supply is focussing more on second-hand space with new and early marketed space, (units within six months of practical completion) contracting (Source: CBRE Logistics Report H1 2017 - The Property Perspective). Supply remains low by historical standards and there remains a lack of land allocated for warehouse development, particularly across the Midlands where interest and enquiries are being registered on schemes that have yet to secure planning permission. There remain very few large strategic sites across the Midlands that are in a position to quickly move forward and meet demand. We also note that since the EU referendum there has been a reduction in speculative commitments by developers whilst good quality demand has held up.

The logistics sector will also be impacted by the introduction of the Minimum Energy Efficiency Standard (MEES) regulations from April 2018 which will prevent 'substandard' property, where an EPC falls below the minimum standard of an E banding, from being let.

Demand

Demand for smaller lot size warehouses has been strong in recent years, the underlying drivers being a lack of new building availability and high replacement cost. The Manager will continue to focus on purchasing sites below replacement cost.

We note that online retail accounted for a third of all take-up during H1/17 and was the most acquisitive sector, taking greater space than traditional grocery chains and other retailers.

Another significant feature of demand is the emergence of new locations, traditionally seen as secondary. These have come to the fore due to the limited supply in many prime areas around London. For example, in the South East the lack of supply has led to occupiers considering alternative locations elsewhere - with the South West and West Midlands achieving take-up well above long-run averages.

Acquisitions

Investment volumes remain high and the sector is undeniably popular. The sector's superior returns in 2016 allied to projected rental growth prospects have proven highly attractive to both existing and new entrants. With alternative assets generally providing low returns there is continued search for yield and growth. With the pricing gap between logistics property and 10-year gilt yields remaining as wide as it has been since 2010, we are well positioned to continue to achieve our target returns for our investors. 

Richard Moffitt

17 November 2017

Independent Review Report to Pacific Industrial & Logistics REIT plc

1. Introduction

We have been engaged by the Pacific Industrial & Logistics REIT plc ("the Company") to review the condensed set of financial statements in the interim report for the six months ended 30 September 2017 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.

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.

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 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.

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 2017 is not prepared, in all material respects, in accordance with the requirements of the AIM rules.

Nexia Smith & Williamson

Statutory Auditor

Chartered Accountants

25 Moorgate

London

EC2R 6AY

17 November 2017

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

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 2018. 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 company operates.

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 interim financial statements.

Statutory accounts

Financial information contained in this document foes not constitute statutory accounts within the meaning of section 434 of Companies Act 2006 (the "Act"). The statutory accounts for the year ended 31 March 2017 have been filed with the Registrar of Companies. The report of the auditors on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.

The financial information for the six months ended 30 September 2017 and the period ended 30 September 2016 is unaudited.

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 acquires subsidiaries 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 long-term investment plan.

Details of the Group's long-term incentive plan can be found in note 8.

Fair value of investment property

The market value of investment property is determined by real estate valuation experts, 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 valuation experts use recognised valuation techniques and the principles of IFRS 13.

The valuations have been prepared in accordance with RICS Valuation - Professional Standards January 2017 (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 accounting policies applied by the Group in this interim report are the same as those applied by the Group in the consolidated financial statements for the year ended 31 March 2017. These accounting policies are set out below:

Basis of consolidation

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

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 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.

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.

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.

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. Finance expense

6. Taxation

As a REIT, the Group is exempt from corporation tax on the profits and gains from its property investment business, provided it continues to meet certain conditions as per REIT regulations. For the period ending 30 September 2017, the Group did not have any non-qualifying profits and accordingly there is no tax charge in the period. Any non-qualifying profits and gains however will continue to be subject to corporation tax.

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.

The profit before tax for the six-month period to 30 September 2017 includes a £0.62m charge in relation to the crystallisation of the Long-Term Incentive Plan ("LTIP"). The Directors believe that a more appropriate measure to assess the underlying operating performance of the business is to add back the LTIP crystallisation charge to the EPRA earnings for the period.

8. Long-term incentive plan ("LTIP")

The Company has a Long-Term Incentive Plan ("LTIP"), accounted for as an equity settled share based payment. At 30 September 2017, Pacific Industrial LLP, an affiliate of Pacific Investments 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, as detailed.

On 13 July 2017, the A Ordinary Shares were crystallised and the resulting value was paid by way of the issue of 520,557 Ordinary Shares to Pacific Industrial LLP, an affiliate of the Manager.

Following the completion of the placement of Ordinary Shares in Pacific Industrial & Logistics REIT plc (the "Company") on 17 August 2017, the Company amended the existing LTIP adopted at the time of IPO.

The new LTIP will have 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 September 2023 (the "Second Calculation Date"). The EPRA NAV element will be 10 per cent. of the excess of the EPRA NAV per Ordinary share return 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 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 shall be calculated by reference to the Placing Price.

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 shall 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 shall continue to be calculated by reference to the Placing Price.

9. Dividends

The Board has declared a third interim dividend for the financial year ended 31 March 2017 of 0.23 pence per share and an interim dividend relating to the period ended 31 March 2018 of 1.00 pence per ordinary share. These have not been recognised in the financial statements and both will be paid on or around 22 December 2017 to shareholders on the register at the close of business on 1 December 2017. The ex-dividend date will be 30 November 2017.

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 2017, in accordance with the RICS valuation - Professional Standards January 2017 (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.

11. Business combinations

On 28 September 2017, the Group obtained sole control of Citruz Prop 4 Sarl, Citruz General Partner 2 Limited and Citruz Haverhill Limited, property investment companies incorporation in Luxembourg, England and Wales and Jersey respectively, through the acquisition of the entire issued share capital in the companies.

The table below sets out the provisional fair values to the Group in respect of this acquisition.

12. Bank borrowings

Any associated fees in arranging the bank borrowings that are unamortised as at the period end are offset against amounts drawn on the facilities as shown in the following table:

13. 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 IAS 39. Any movement in the fair value of the interest rate derivatives are taken to finance costs in the statement of comprehensive income.

14. Share capital

On 11 May 2017, 5,000 warrant shares were redeemed for an issue price of 97.0 pence per share.

On 17 August 2017, Pacific Industrial & Logistics REIT plc raised £53.0 million through the issue of 46,086,957 Ordinary shares at an issue price of 115.0 pence per share.

On 17 August 2017, 50,000 warrant shares were redeemed for an issue price of 97.0 pence per share.

On 13 July 2017, an element of the Company's long-term incentive plan crystallised and the resulting value was paid by way of the issue of 520,557 Ordinary shares on 17 August 2017.

At 30 September 2017, there were 2,962,000 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 97.0 pence per Ordinary share.

15. Share premium

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

16. Related party transactions

Transactions between the Company and its subsidiaries are in the normal course of business. Such transactions are eliminated on consolidation.

During the period, the amount approved for services provided by Pacific Capital Partners Limited (the "Manager") totalled £0.19 million. The total amount outstanding at the period end relating to the Investment Management Agreement was £0.19 million.

Acquisition of investment properties

During the period, the Group incurred fees totalling £205,000 from M1 Agency LLP, a partnership in which Richard Moffitt is a partner, in relation to the acquisition of nine investment properties. The fees charged were in line with standard commercial property terms, and have been approved by the Board (not including Richard Moffitt).

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

Share capital

The table below details the share transactions of related parties over the six-month period to 30 September 2017.

Long-term incentive plan

Under the terms of the Company's long-term incentive plan, at 30 September 2017 Pacific Industrial LLP, an affiliate of Pacific Capital Partners Limited has subscribed for shares in Pacific Industrial & Logistics Limited. Further details have been provided in note 8.

17. Net asset value per share (NAV)

Basic NAV per share is calculated by dividing net assets in the Condensed Statement of Financial Position attributable to Ordinary shareholders by the number of Ordinary shares outstanding at the end of the period. At 30 September 2017, there were 2,962,000 warrant shares in issue, that have a dilutive effect on NAV per share.

18. Subsequent events

On 10 November 2017, the Company acquired a logistics asset in Leeds for a total consideration of £2.8 million, representing a net initial yield of 6.8%.

On 16 November 2017, the Company disposed of site in Bedford for a total consideration of £5.8m, representing a net initial yield of 6.0%.

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