Half-year Report

10 September 2019

Regional REIT Limited

("Regional REIT", the "Group" or the "Company")

Half Year Results for the Six Months Ended 30 June 2019

Strongly positioned for further growth

Regional REIT Limited (LSE: RGL), the regional real estate investment specialist, focused on building a diverse portfolio of income producing regional UK core and core plus office and industrial property assets, today announces its half year results for the six months ended 30 June 2019.

Financial highlights:

·; Total shareholder return of 40.8% since IPO; representing 9.8% annualised returns for shareholders

·; 17.0% increase in Operating profit before changes on property assets to £20.6m (H1 2018: £17.6m)

·; Rental income, excluding recoverable service charge income, largely unchanged at £29.9m (H1 2018: £30.6m) reflecting the lower number of assets held in the portfolio during the period

·; EPRA Earnings, excluding performance fee, increased 1.4% to £14.2m (H1 2018: £14.0m)

·; EPRA adjusted EPS of 3.8p (H1 2018: 3.8p)

·; Net LTV maintained within c.40% target, at 39.9%

·; Group weighted average cost of debt reduced to 3.5% (2018: 3.8%) and the weight average debt to maturity extended to 7.8yrs (2018: 6.4yrs); with £30.2m of undrawn firepower

·; Cash £53.8m (2018: £104.8m) following the £39.9m ZDP repayment Jan 2019

·; 2.7% increase in total H1 dividend to 3.8p (H1 2018: 3.7p); in line with progressive dividend target of 8.25p per share for FY 2019

Operational highlights - Asset Management Initiatives continue to be executed driving income and capital returns

·; Good level of transactional activity achieved with £20.0m (before costs) invested in acquiring Norfolk House, Birmingham and £19.7m (net costs) received from further strategic disposals

·; Disposal of Aspect Court, Sheffield for £8.8m 24.8% above 31 Dec 2018 valuation, and the sale of Tokenspire Business Park, Beverley for £11.1m reflecting a 30.6% uplift to the acquisition price.

·; Group portfolio totalled 149 properties (H1 2018: 151); comprising 1,178 units (H1 2018: 1,294) and servicing 828 tenants (H1 2018: 950)

·; Regional office and industrial property assets represent 92.5% of the Group portfolio by value; 78.2% in office and 14.3% in industrial

·; The WAULT on the portfolio has increased to 5.5 years (H1 2018: 5.3 years)

·; EPRA Occupancy rate remained stable at 87.5% (2018: 89.4%); on an EPRA like for like basis 87.1% (2018: 89.2%)

Post period end

·; Successful equity raise of £62.5m, exceeding £50.0m target, achieved in July 2019; strengthening corporate foundations and long-term prospects

·; Successful letting of c. £1.27m p.a. of space in Nottingham, Chatham, Preston, Lincoln, Leeds, and Manchester

·; Substantial portfolio acquisition made in August 2019. Purchase of six regional office assets for £25.9m with a net initial yield of 8.87%

·; 800 Aztec West, Bristol all 73,292 sq. ft. now fully let, with Edvance SAS agreeing a lease for the entire second floor for a period of nine years at a rent of c.£224,000pa for previously vacant space

·; Kilmarnock, Ayrshire, £2.5m industrial estate acquisition in September, comprising 34,000 sq. ft., 100% occupied, with a NIY 15.2% and 6.7years WAULT

Stephen Inglis, CEO of London & Scottish Property Investment Management Limited, the Asset Manager of Regional REIT Limited commented: "It has been a very active and successful period for the Group as we continue to strengthen our corporate foundations and portfolio composition to take advantage of the considerable and growing opportunities that we are seeing in our markets.

Our strategic approach to intensive asset management of a deliberately diverse portfolio across the UK regions underpins our confidence of being able to maintain sector leading returns for shareholders."

A meeting for investors and analysts will be held at 10.00am (London time, BST) on Tuesday, 10 September 2019 at the offices of Buchanan Communications. If you would like to attend the meeting please contact the Buchanan team on +44 (0) 207 466 5000 or regional@buchanan.uk.com.

The presentation slides for the meeting will shortly be available to download from the Investors section of the Group's website at www.regionalreit.com.

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation that came into effect on 3 July 2016.

Enquiries:

About Regional REIT

Regional REIT Limited ("Regional REIT" or the "Company") and its subsidiaries (the "Group") is a United Kingdom ("UK") based real estate investment trust that launched in November 2015. It is managed by London & Scottish Property Investment Management Limited ("LSPIM"), the Asset Manager, and Toscafund Asset Management LLP ("Toscafund"), the Investment Manager.

Regional REIT's commercial property portfolio is comprised wholly of income producing UK assets and comprises, predominantly, offices and industrial units located in the regional centres outside of the M25 motorway. The portfolio is highly diversified, with 149 properties, 1,178 units and 828 tenants as at 30 June 2019, with a valuation of £721.7m.

Regional REIT pursues its investment objective by investing in, actively managing and disposing of regional core and core plus property assets. It aims to deliver an attractive total return to its Shareholders, targeting greater than 10% per annum, with a strong focus on income supported by additional capital growth prospects.

The Company's shares were admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange on 6 November 2015. For more information, please visit the Group's website at www.regionalreit.com.

Cautionary Statement

This document has been prepared solely to provide additional information to Shareholders to assess the Group's performance in relation to its operations and growth potential. The document should not be relied upon by any other party or for any other reason. Any forward-looking statements made in this document are done so by the Directors in good faith based on the information available to them up to the time of their approval of this document. However, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

LEI: 549300D8G4NKLRIKBX73 

Regional REIT Limited

Regional REIT Limited (the "Company") and its subsidiaries1 (together the "Group") is a UK-listed real estate investment trust ("REIT"), which pursues its investment objective by investing in, actively managing and disposing of regional Core Property and Core Plus Property assets. The commercial property portfolio is comprised wholly of UK assets and comprises, predominantly, offices and industrial units located in the regional centres outside of the M25 motorway.

1 Regional REIT Limited is the parent Company of a number of subsidiaries which together comprise a group within the definition of The Companies (Guernsey) Law 2008, as amended (the "Law") and the International Financial Reporting Standard ("IFRS") 10, 'Consolidated Financial Statements', as issued by the International Accounting Standards Board ("IASB") and as adopted by the European Union ("EU"). Unless otherwise stated, the text of this Half-Yearly Report does not distinguish between the activities of the Company and those of its subsidiaries.

HIGHLIGHTS

As at 30 June 2019

Total Shareholder Return since IPO* 40.8%

 * 6 November 2015

EPRA NAV per Share - diluted 114.3p

Dividend per Share 3.8p

CHAIRMAN'S STATEMENT

I am pleased to report that the Company has delivered solid underlying earnings for the six months to 30 June 2019. During the period, the Group generated EPRA earnings, excluding any performance fee, of £14.2m (six months to 30 June 2018: £14.0m), or 3.8 pence per share ("pps") (six months to 30 June 2018: 3.8pps). We have declared a total dividend for the period of 3.80pps, which represents a 2.7% increase on the prior year.

In the six months to 30 June 2019, the Group acquired one property for an aggregate value of £20.0m (before costs) and disposed of properties for an aggregate value of £19.7m (net of costs).

The Group undertook one asset acquisition in the period. Norfolk House, located in the centre of Birmingham, was purchased for £20.0m, with a net initial yield of 7.9%. The location, coupled with multiple tenants, the largest being HMRC, complement the Group's diversified portfolio approach. Capital expenditure for the period amounted to £3.9m.

We continue to intensively asset manage the portfolio, by executing individual asset management initiatives to unlock each property's potential.

During the period, there were two noteworthy disposals, both in June 2019; firstly, the sale of Aspect Court, Sheffield, for £8.8m, reflecting a 24.8% uplift against the December 2018 valuation; and secondly, the disposal of Tokenspire Business Park, Beverley, for £11.1m, reflecting a 30.6% uplift against the acquisition price.

Net borrowings as at 30 June 2019 amounted to 39.9% of gross investment in properties. During the period, £39.9m was repaid by the Group to the Zero Dividend Preference Shareholders on 9 January 2019, and two refinancings were completed in June 2019 amounting to £121.0m, resulting in the weighted average cost of debt reducing from 3.8% at 31 December 2018 to 3.5% as at 30 June 2019, with weighted average debt to maturity extended to 7.8 years, and 73% of the debt fixed and the balance hedged. The Group continues to target a net borrowings ratio of approximately 40%.

In June 2019, we announced a proposed £50.0m equity raise to take advantage of the growing near-term pipeline of opportunities in the investment market, which was oversubscribed and upsized. The results of the equity raise are set out in the Subsequent Events section.

Despite the political and economic backdrop remaining uncertain, we are confident that the actions taken over the preceding years have resulted in a strengthened balance sheet and a diversified portfolio and, which is well positioned to minimise any risks as events unfold.

Market Environment

At £20.0bn, investment volumes in the first half of 2019 were 29% below the same period in 2018 and 26% below average. This was attributed to the continued uncertainty caused by the six-month extension to the Brexit deadline, which has now been extended until the end of October 2019. However, there is evidence that the UK regions performed better than London in Q2 2019. Despite investment volumes for single assets in the UK regions falling 25% below the five-year quarterly average at £3.7 bn in Q2 2019, London volumes dropped to the lowest level since Q4 2011 at £4.0 bn - 37% below the five-year average.

Research from CBRE indicates that regional offices have outperformed in comparison to central London offices, delivering superior returns of 10.8% in the 12 months ending July 2019 in comparison to central London office returns of 4.9% - a trend that has been witnessed over the last three years.

Given the overarching backdrop of the Brexit negotiations, the Board remains supportive of the Asset Manager's vigilant and opportunistic approach to acquisitions and disposals whilst continuing to grow the rental income and responding to the needs of our tenants.

Dividends

Dividend are the major component of the total return. The Company declared an increased total dividend of 3.80p for the period ended 30 June 2019, comprising of two quarterly dividends of 1.90pps each.

In the absence of unforeseen circumstances, it remains the Board's intention to pursue a progressive dividend policy and continue to pay quarterly dividends, with a full year 2019 dividend target of 8.25pps.

Performance

The total return performance since listing on 6 November 2015 has amounted to 40.8%, with an annualised total return of 9.8% to 30 June 2019.

Subsequent Events

Following the announcement on 24 June 2019 regarding a proposed £50.0m equity capital raise at 106.5pps, the Company was delighted to announce on 19 July 2019 the successful raise of £62.5m, which was in excess of the Group's targeted fundraising size.

On 14 August 2019, the Company announced successful lettings amounting to c.£1.27m per annum, which represented a major uplift in income for the Group as all of these nine properties, with the exception of one property, were vacant prior to these lettings.

On 21 August 2019, the Company announced the acquisition of a substantial portfolio of six offices located in Birmingham, Bristol, Cardiff, Chester, Glasgow and Manchester for £25.9m, with a net initial yield of 8.87%. This significant acquisition demonstrates clearly that there is no shortage of opportunities for Regional REIT.

Outlook

The outlook for the Group is positive. The deliberately highly-diversified portfolio by region, tenant, and sector underpins our confidence of being able to maintain the quarterly dividends to our Shareholders. Whilst we can expect political and economic turbulence over the short term, we remain convinced of the ability of the long-term asset management initiatives to grow income streams and provide further opportunities for capital value enhancement.

Kevin McGrath

Chairman

9 September 2019

ASSET AND INVESTMENT MANAGERS' REPORT

"This represents another period of robust performance for Regional REIT as we continue to deliver a strong income stream for our Shareholders supported by opportunities for capital growth. In the current market conditions, the UK regions continue to outperform the London commercial property market with superior capital returns over the last three years. Strong occupational demand remains for the UK regional commercial markets while a lack of availability continues to drive rental growth.

Regional REIT has capitalised on these attractive market conditions by announcing an equity fundraise which was completed post-period end. We were pleased that the demand for these new shares was such that the fundraise was over-subscribed at £62.5m, a significant endorsement of our investment strategy from existing and new investors.

The continuing success of our intensive asset management initiatives was effectively demonstrated by two major disposals during the period, at a valuation 24.8% above the December 2018 valuation and 30.6% above the acquisition price, respectively. In addition, we continue to witness a robust level of letting activity across the portfolio to a large and diversified register of valued, high-quality corporate tenants". Stephen Inglis, CEO of London & Scottish Property Investment Management, the Asset Manager of Regional REIT Limited.

Highlights from the first six months in 2019

·; Lease renewals during the first six months of 2019 achieved an uplift in gross rental roll of 19.5%.

·; Improved both WAULT (to first break) and WAULT (to expiry) by 2.1%, to 3.5 years and 5.5 years, respectively.

·; Average rent by let sq. ft. increased by 2.6% from £9.40 per sq. ft. in December 2018 to £9.64 per sq. ft. in June 2019.

·; Completed 39 new lettings in the first six months of 2019, totalling 239,751 sq. ft.; when fully occupied, these will provide a gross rental income of c.£1.6m.

·; Capital value per sq. ft. increased by 4.3% from £96.64 per sq. ft. in December 2018 to £100.82 per sq. ft.

·; Disposals during the first half of 2019 totalled £19.7m (net of costs) achieving an average uplift against December 2018 valuation of 12.2%.

The first six months of 2019 have been active for the Group. Our continued success in managing our large and diverse portfolio of assets are demonstrated by delivering positive growth in terms of new lettings, lease renewals and average rent. Going forward, we believe we are well positioned to not only weather the current political and economic uncertainty, but also maximise the growth potential of our assets and capitalise on the strong presence we have in the regional markets. As always, the asset manager will continue to identify value in the market with a focus on income.

Investment Activity in the UK Commercial Property Market

In 2018, investment in UK commercial property reached £61.6bn. As a result of investor caution, however, this was followed by a progressive slowdown in the general level of investment activity during the first half of 2019. This was attributed to the continued uncertainty caused by the six-month extension to the Brexit deadline, which has now been extended until the end of October 2019. The most recent data from Lambert Smith Hampton ("LSH")1 , shows that investment in UK commercial property slowed to the lowest quarterly figure over the last six years at £8.8bn in Q2 2019, 22% below Q1 2019 volumes and 40% below the five-year quarterly average. Consequently, this resulted in weak overall investment in the first half of 2019 relative to trend. At £20.0bn, volumes in the first half of 2019 were 29% below the same period in 2018 and 26% below average. 

1 Lambert Smith Hampton, Q2 2019, UKIT.

There has been a considerable decrease in investment levels throughout the UK due to investors delaying decision making until the UK's future with Europe becomes clearer. However, there is evidence that the UK regions performed better than London in Q2 2019. Data from LSH shows that despite investment volumes for single assets in the UK regions falling 25% below the five-year quarterly average at £3.7 bn in Q2 2019, London volumes dropped to the lowest level since Q4 2011 to £4.0bn - 37% below the five-year average. Research from CoStar indicates that, despite investment in most regions remaining below average, the East Midlands and North East bucked this trend with Q2 2019 investment volumes 72% and 16%, respectively, above the five-year quarterly average.

Overseas investment in the UK property markets fell to £4.1 bn in Q2 2019, 39% below the level recorded in Q1 2019 and 35% below the same quarter in 2018, according to data from CoStar2. Lower level of capital inflows from international investors is in line with the overall reduction in UK commercial property investment. Although 2018 was a record year for capital inflows from South Korea and Singapore, investment from both countries was 70% lower in Q2 2019 than the previous 12 months, which contributed to the sharp decline in Far East investment as well as slowing investment volumes from China and Hong Kong due to restrictions on capital outflows. Conversely, North American investors became net buyers in Q2 2019 with net investment of £2bn - the highest figure recorded since Q1 2015. 

2 CoStar, Q2 2019, UK Commercial Property Investment Review.

Research from CBRE indicates that regional offices have outperformed in comparison to central London offices, delivering superior returns of 10.8% in the 12 months ended July 2019 in comparison to central London office returns of 4.9% - a trend that has been witnessed over the last three years.

Occupational Demand in the UK Regional Office Market

Avison Young estimates that take-up of office space across the Big Nine regional office markets3 in Q2 2019 reached 2.3 million sq. ft., 10% higher than the long-term average, bringing the half year total to 4.3 million sq. ft. - 6% above average4. Similarly, Savills research suggests that occupational demand in regional cities has continued against a backdrop of limited supply. Conversely, take-up has declined year-on-year in the London office market in the first half of 2019, with take-up down 30% in the City and 6% in the West End5.

3 Nine regional office markets mentioned by Avison Young include: Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle.

4 Avison Young, Q2 2019, The Big Nine.

5 Savills, August 2019, UK Commercial Market in Minutes.

Strong occupational demand came from the technology, media and telecoms sector, accounting for the highest proportion of take-up of all regional offices at 19% in H1 2019. Following this, 17% of total take-up in the first half of 2019 was from serviced office providers, which have taken more space in the top ten regional cities in the first six months of 2019 (over 0.7 million sq. ft.) than they did through all of 2018. Savills predicts that this trend will continue throughout the rest of 2019 and into 2020. Despite the public sector accounting for the highest proportion of tenant demand in 2018, this trend was reversed in the first half of 2019, with Avison Young research showing very low levels of take-up by the public sector as well as finance and professional services sector. According to Cushman & Wakefield, availability for regional office stock decreased to 7.7m sq. ft., the lowest level for 13 years and 35% below the 10-year quarterly average, reflecting a vacancy rate of 7.1%6.

6 Cushman & Wakefield, Q2 2019, United Kingdom Office Market Snapshot.

The most recent research from Cushman & Wakefield suggests that a limited development pipeline will most likely put pressure on supply and vacancy rates. It is estimated that approximately 5.4 million sq. ft. of office space is currently under construction in the Big Nine regional markets, with Manchester, Birmingham and Glasgow accounting for 29%, 21% and 18%, respectively. Although the supply of office stock is likely to increase, 50% of office buildings currently under construction are already pre-let.

Moreover, from the remaining available speculative space, approximately 67% of this space is in two markets only - Manchester and Birmingham. Therefore, there is likely to remain a shortage of office stock, with Cushman & Wakefield highlighting that the vacancy rate for new and refurbished stock in the regions is only 1.3%, which has driven pre-let activity.

Rental Growth in the UK Regional Office Market

A lack of availability in the Big Nine regional markets has put upward pressure on headline rents, which has led to an increase of 4.8% in city centre net effective rents over the last 12 months7. 

7 Avison Young, Q2 2019, The Big Nine.

The CBRE Monthly Index shows that rental value growth for the rest of UK office markets in the 12 months ended July 2019 was 1.1%. Colliers International expects regional CBDs to experience further rental growth but anticipate that rent in London markets will remain broadly unchanged8.  

8 Colliers International, June 2019, United Kingdom Property Snapshot.

Regional REIT's Office Assets

EPRA occupancy of the Group's regional offices decreased to 85.8% (31 December 2018: 88.2%). A like-for-like comparison of the Group's regional offices' EPRA occupancy, 30 June 2019 versus 31 December 2018, shows that occupancy decreased to 85.2% (31 December 2018: 88.1%). This reduction in occupancy can largely be attributed to two properties becoming vacant: Brennan House, Farnborough (29,707 sq. ft.) and Niceday House, Meridian Park, Andover (34,262 sq. ft.).

·; Brennan House, Farnborough - We were ahead of business plan when we took the opportunity to do a contract-led letting to Fluor Limited. Unfortunately, Fluor exercised a valid break notice as their contract was not extended. Brennan House presents well and we are exploring opportunity to carry out works to upgrade the building. We are actively marketing and have some interest. We are hopeful of an early letting.

·; Niceday House, Andover - As expected, the tenant vacated at expiry. Following this, a dilapidations settlement has been agreed and we are now looking at options for change of use to residential.

WAULT to first break was 3.0 years (31 December 2018: 3.0 years); like-for-like WAULT to first break increased to 3.1 years (31 December 2018: 3.0 years).

Occupier Demand in the UK Industrial Market

Cushman & Wakefield estimate that take-up in H1 2019 totalled 15.9 million sq. ft., 14% lower than the same period in 2018, but marginally higher than the 10-year average of 15.7 million sq. ft.9 Take-up in Q1 2019 was 39% lower than the same quarter in 2018 at 7.1 million sq. ft. However, demand increased in Q2 2019, reaching 8.8 million sq. ft., up 24% on Q1 2019 figures and 16.7% higher than the same period in 2018. In total, there were 66 lettings10 that took place in Q2 2019, the highest quarterly figure since Q1 2015, however, the average deal size was lower with fewer large deals taking place.

9 Cushman & Wakefield, Q2 2019, United Kingdom Industrial Market Snapshot.

10 Lettings of 50,000 sq. ft. and over.

Occupier demand within the industrial market continues to be highly driven by e-commerce, manufacturing and logistics companies, according to Avison Young11. JLL predicts that an increase in online food shopping will boost demand around certain cities as warehouses will be used for fulfilment rather than stores12. Research from Cushman & Wakefield suggests that for 2019, there is approximately 6.9 million sq. ft. of space under construction, 17% above the five-year average.

11 Avison Young, Summer 2019, Economic & Property Market Review.

12 JLL, 2019, UK Property Predictions.

Industrial Rental Growth Continues

Research by Cushman & Wakefield illustrates that competition for standard industrial space led to rental growth during the first half of 2019. The research compared data from the monthly MSCI Index for June 2019, which showed rental growth of 3.2% for the 12 months to the end of June 2019, indicating that rental growth has slowed in comparison to rental growth previously reported of 4.6% in the 12 months to December 2018. Colliers International estimate that further rental growth in the industrial market during 2019 is likely13.

13 Colliers International, June 2019 United Kingdom Property Snapshot.

The Investment Property Forum UK ("IPF") Consensus Forecast, May 2019, anticipates rental growth in the industrial sector of 3.0% in 2019, providing evidence of sustained growth. Additionally, the IPF UK Consensus Forecast predicts 2.2% and 1.8% average rental growth rates respectively for 2020 and 2021. In comparison, the IPF UK Consensus Forecast predicts that the All Property average annual rental value growth will retract in 2019 by 0.2%.

Regional REIT's Industrial Assets

EPRA occupancy of the Group's industrial sites increased to 96.0% (31 December 2018: 94.5%). A like-for-like comparison of the Group's regional offices' EPRA occupancy, 30 June 2019 versus 31 December 2018, shows that occupancy increased to 96.0% (31 December 2018: 93.0%). WAULT to first break was 5.9 years (31 December 2018: 5.4 years); like-for-like WAULT to first break was unchanged at 5.9 years (31 December 2018: 5.9 years).

Property Portfolio

As at 30 June 2019, the Group's property portfolio was valued at £721.7m (30 June 2018: £758.7m; 31 December 2018: £718.4m), with a gross rental income of £57.8m (30 June 2018: £61.3m; 31 December 2018: £59.7m), and an EPRA occupancy rate of 87.5% (31 December 2018: 89.4%). On a like-for-like basis, 30 June 2019 versus 31 December 2018, EPRA occupancy was 87.1% (31 December 2018: 89.2%).

In the six months to 30 June 2019, the investment property portfolio value increased by £3.3m to £721.7m, after transactions and capital expenditure, which in the Company's opinion is yet to be fully captured in the valuation. This is despite the retail sector decreasing by circa £7.6m.

There were 149 properties (30 June 2018: 151; 31 December 2018: 150), in the portfolio, with 1,178 units (30 June 2018: 1,294; 31 December 2018: 1,192) and 828 tenants (30 June 2018: 950; 31 December 2018: 874). If the portfolio was fully occupied at Cushman & Wakefield's view of market rents, the rental income would be £71.4m per annum (30 June 2018: £73.4m; 31 December 2018: £70.0m).

As at 30 June 2019, the net initial yield on the portfolio was 6.1% (30 June 2018: 6.4%; 31 December 2018: 6.5%), the equivalent yield was 8.3% (30 June 2018: 8.3%; 31 December 2018: 8.2%) and the reversionary yield was 9.0% (30 June 2018: 9.0%; 31 December 2018: 8.8%).

A full list of the Company's properties in its portfolio can be found on the Company's website at https://www.regionalreit.com/portfolio.

Property Portfolio by Sector

Tables may not sum due to rounding.

Top 15 Investments (by market value) as at 30 June 2019

Top 15 Tenants (by share of rental income) as at 30 June 2019

Property Portfolio Sector and Region by Valuation and Income

By Valuation

As at 30 June 2019, 78.2% (30 June 2018: 70.3%; 31 December 2018: 76.1%) of the portfolio by market value was Offices and 14.3% (30 June 2018: 21.0%; 31 December 2018: 15.5%) was Industrial. The balance was made up of Retail 6.0% and Other 1.5% (30 June 2018: 8.7%; 31 December 2018: 8.5%). By UK region, as at 30 June 2019, Scotland represented 17.5% (30 June 2018: 21.9%; 31 December 2018: 18.0%) of the portfolio and England 79.8% (30 June 2018: 75.3%; 31 December 2018: 79.3%); the balance of 2.7% (30 June 2018: 2.8%; 31 December 2018: 2.7%) was in Wales. In England, the largest regions were the South East, the Midlands and the North East.

By Income

As at 30 June 2019, 77.7% (30 June 2018: 70.6%; 31 December 2018: 77.3%) of the portfolio by income was Offices and 12.8% (30 June 2018: 20.0%; 31 December 2018: 13.2%) was Industrial. The balance was made up of Retail 8.0% and Other 1.4% (30 June 2018: 9.5%; 31 December 2018: 9.5%). By UK region, as at 30 June 2019, Scotland represented 19.8% (30 June 2018: 24.6%; 31 December 2018: 20.1%) of the portfolio and England 77.5% (30 June 2018: 72.8%; 31 December 2018: 77.2%); the balance of 2.8% was in Wales (30 June 2018: 2.6%; 31 December 2018: 2.7%). In England, the largest regions were the South East, the Midlands and the North East.

Lease Expiry Profile

The WAULT on the portfolio is 5.5 years (30 June 2018: 5.3 years; 31 December 2018: 5.4 years); WAULT to first break is 3.5 years (30 June 2018: 3.5 years; 31 December 2018: 3.4 years). As at 30 June 2019, 12.0% (30 June 2018: 13.5%; 31 December 2018: 10.1%) of income was from leases which will expire within one year, 5.3% (30 June 2018: 7.0%; 31 December 2018: 4.4%) between one and two years, 35.4% (30 June 2018: 32.8%; 31 December 2018: 34.0%) between two and five years and 47.4% (30 June 2018: 46.6%; 31 December 2018: 51.6%) after five years.

Tenants by Standard Industrial Classification

As at 30 June 2019, 13.0% of income was from tenants in the Administrative and Support Service Activities sector (30 June 2018: 8.7%; 31 December 2018: 10.4%), 12.7% from the Professional, Scientific and Technical activities sector (30 June 2018: 9.8%; 31 December 2018: 11.5%), 10.1% from the Public sector (30 June 2018: 8.5%; 31 December 2018: 9.6%), 9.3% from the Wholesale and Retail Trade sector (30 June 2018: 12.7%; 31 December 2018: 10.1%), and 9.0% from the Information and Communication sector (30 June 2018: 9.1%; 31December 2018: 8.8%). The remaining exposure is broadly spread.

No tenant represents more than 3% of the Group's contracted rent roll as at 30 June 2019, the largest being 2.8%.

Stephen Inglis

London & Scottish Property Investment Management Limited

Asset Manager

9 September 2019  

Net Asset Value

Between 1 January 2019 and 30 June 2019, the EPRA Net Asset Value ("NAV") of the Group decreased to £426.2m from £430.5m as at 31 December 2018, which equates to a decrease in diluted NAV of 1.2pps to 114.3pps (30 June 2018: 113.6pps; 31 December 2018: 115.5pps). This is after the declaration of dividends in the period amounting to 4.4pps.

The EPRA NAV decrease of circa £4.2m since 31 December 2018 is predominately a result of the revaluation of investment properties held at 30 June 2019 amounting to a reduction of £2.9m, after capital expenditure amounting to £3.9m, the amount of which is yet to be fully captured in the valuations.

The investment property portfolio valuation as at 30 June 2019 totalled £721.7m (30 June 2018: £758.7m; 31 December 2018: £718.4m). The minimal increase since the December 2018 year end is a reflection of the £20.0m (before costs) acquisition which was offset by the property disposals and the aforementioned downward revaluation.

The below table sets out the acquisitions, disposals and capital expenditure for the respective periods:

The EPRA NAV is reconciled in the table below.

Condensed Consolidated Statement of Comprehensive Income

Operating profit before gains and losses on property assets, and other investments for the six months ended 30 June 2019, amounted to £20.6m (six months to 30 June 2018: £17.6m). Profit after finance items and before taxation was £10.7m (six months to 30 June 2018: £45.3m). The six months to 30 June 2019 included a full rent roll for properties held as at 31 December 2018, plus the partial rent roll for properties acquired and disposed of during the period. Realised gain on disposal of investment properties amounted to £1.7m (30 June 2018: £7.2m). The change in the fair value of investment properties amounted to a loss of £2.9m (six months to 30 June 2018: gain of £27.9m).

Rental income amounted to £29.9m, excluding recoverable service charge income (six months to 30 June 2018: £30.6m). The decrease was primarily the result of a reduced investment property portfolio being held over the six-month period.

Currently, more than 80% of the rental income is collected within 28 days of the due date and bad debts in the period were £0.4m (six months to 30 June 2018: £0.3m).

The EPRA cost ratio, including direct vacancy costs, was 31.3% (six months to 30 June 2018: 41.8%), adjusting for ground rent. The decrease in the cost ratio is ostensibly due to a nil performance fee being accrued in the six months to 30 June 2019 (six months to 30 June 2018: £4.2m).

The EPRA cost ratio, excluding direct vacancy costs and the performance fee, was 20.1% (six months to 30 June 2018: 18.2%).

Non-recoverable property costs, excluding recoverable service charge income and other similar costs, amounted to £3.9m (six months to 30 June 2018: £3.7m), whilst the gross rental income decreased to £57.8m (30 June 2018: £61.3m).

Finance expense amounted to £6.9m (six months to 30 June 2018: £7.7m.).

The Company is a member of the Association of Investment Companies ("AIC"). In accordance with the AIC Code of Corporate Governance, the ongoing charges for the period ended 30 June 2019 were 4.4% (30 June 2018: 4.3%). The total return to Shareholders from 6 November 2015 (date of IPO) to 30 June 2019 was 40.8% (30 June 2018: 32.0%), an annualised rate of 9.8% (30 June 2018: 11.0%).

Dividend

In relation to the period from 1 January 2019 to 30 June 2019, the Company declared dividends totalling 3.8pps (six months to 30 June 2018: 3.7pps). Since the end of the period, the Company has declared a dividend for the second quarter of 2019 of 1.9pps.

Debt Financing and Gearing

Borrowings comprise third-party bank debt which is secured over properties owned by the Group and repayable over the next 5-to-10 years, with a weighted average maturity of 7.8 years (30 June 2018: 5.4 years; 31 December 2018: 6.4 years).

The Group's borrowing facilities are with The Royal Bank of Scotland, Scottish Widows Ltd & Aviva Investors Real Estate Finance, Scottish Widows Ltd and Santander UK. During the period, properties have been sold, resulting in debt repayment where debt substitution was not possible. Total bank borrowing as at 30 June 2019 amounted to £291.6m (30 June 2018: £353.4m; 31 December 2018: £290.5m) (before unamortised debt issuance costs). During the period, the £39.9m zero dividend preference shares ("ZDP") were fully repaid on 9 January 2019. In addition, a new £66.0m 10-year facility was agreed with Santander, refinancing the existing £44.0m facility; and a new £55.0m five-year facility was agreed with the Royal Bank of Scotland which refinanced the existing £26.5m facility with The Royal Bank of Scotland and the £19.0m facility with HSBC. The new Royal Bank of Scotland and Santander UK facilities have not been fully drawn as at 30 June 2019.

As at 30 June 2019, the Group's cash and cash equivalent balances amounted to £53.8m (30 June 2018: £79.5m; 31 December 2018: £104.8m), which includes the disposal proceeds.

The Group's net loan-to-value ratio stands at 39.9% (30 June 2018: 41.2%; 31 December 2018: 38.3%) before unamortised costs. The Board will continue to manage the net loan-to-value to the Group's long-term target of 40%, with a maximum limit of 50%.

 Debt Profile and Loan-to-Value Ratios as at 30 June 2019

Table may not sum due to rounding.

The Managers' continue to monitor the borrowing requirements of the Group. As at 30 June 2019, the Group had substantial headroom against its borrowing covenants.

The net gearing ratio, net debt to ordinary Shareholders' equity (diluted), of the Group was 67.9% as at 30 June 2019 (30 June 2018: 73.7%; 31 December 2018: 64.1%).

Interest cover stands, including amortised costs, at 3.0 times (30 June 2018: 2.3 times; 31 December 2018: 2.3 times), and 3.0 times excluding the ZDPs (30 June 2018: 2.8 times; 31 December 2018: 2.7 times). The ZDPs were fully repaid on 9 January 2019.

Hedging

The Group applies an interest rate hedging strategy that is aligned to the property management strategy and aims to mitigate interest rate volatility on at least 90% of the debt exposure.

Tax

The Group entered the UK REIT regime on 7 November 2016 and all of the Group's UK rental operations became exempt from UK corporation tax from that date. The exemption remains subject to the Group's continuing compliance with the UK REIT rules.

Subsequent Events after the Reporting Period

There were a number of transactions post the half year, which are set out in the Chairman's Statement and note 22.

Adam Dickinson

Toscafund Asset Management LLP

Investment Manager

9 September 2019 

DIRECTORS' STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties the Group faces are summarised below and described in detail on pages 49 to 52 of the 2018 Annual Report, which is available on the Group's website at www.regionalreit.com - Annual Report 2018. These are also set out in the Company's recent prospectus issued on 24 June 2019. The Audit Committee, which assists the Board with its responsibilities for managing risk, considers that there have been no substantial changes to these principal risks.

Strategic risk

Investment decisions could result in lower dividend income and capital returns to our Shareholders.

Valuation risk

The valuation of the Group's portfolio, undertaken by the external valuer, Cushman & Wakefield, could impact the Group's profitability and net assets.

Economic and political risk

The macro-health of the UK economy could impact on borrowing and hedging costs, demand by tenants for suitable properties and the quality of the tenants.

Funding risk

The Group may not be able to secure further debt on acceptable terms, which could impinge upon investment opportunities and the ability to grow the Group. Bank reference rates maybe set to rise accompanying higher inflation.

Tenant risk

Type and concentration of tenants could result in a lower rental income. A higher concentration of lease term maturity and/or break options, could result in a more volatile rental income.

Financial and tax change risk

Changes to UK financial legislation and the tax regime could result in lower rental income.

Operational risk

Business disruption could result in lower rental income.

Accounting, legal and regulatory risk

Changes to accounting, legal and regulatory legislation could affect the Board's ability to achieve the investment objectives and provide favourable returns to our Shareholders.

Environmental and energy efficiency standards

Changes to the environment could impact upon the operations of the Group; changes to the Energy Performance Rating requirement to let or sell a building could impact upon the profitability of the Group.

The United Kingdom's vote to secede from the European Union

Following the majority vote, on 23 June 2016, to end the UK's membership of the European Union, there is a risk that property valuations may be impacted while this period of uncertainty continue to be negotiated.

INTERIM MANAGEMENT REPORT AND DIRECTORS' RESPONSIBILITY STATEMENT

Interim Management Report

The important events that have occurred during the period under review, the principal risks and uncertainties and the key factors influencing the financial statements for the remaining six months of the year are set out in the Chairman's Statement and the Asset and Investment Managers' Report.

The principal risks and uncertainties faced by the Group are substantially unchanged since the date of the Annual Report and Accounts for the year ended 31 December 2018 and are summarised above.

The condensed consolidated financial statements for the period from 1 January 2019 to 30 June 2019 are unaudited and do not constitute annual statutory accounts for the purposes of the Law.

Going Concern

The financial statements continue to be prepared on a going concern basis. The Directors have reviewed areas of potential financial risk and cash flow forecasts. No material uncertainties have been detected which would influence the Group's ability to continue as a going concern for a period of not less than 12 months. Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

Responsibility Statement of the Directors in respect of the Half-Yearly Report

In accordance with Disclosure Guidance and Transparency Rule 4.2.10R we, the Directors of the Company (whose names are listed in full at the end of this report), confirm that to the best of their knowledge:

a) the condensed set of consolidated financial statements has been prepared in accordance with International Accounting Standard (IAS) 34, "Interim Financial Reporting", as adopted by the European Union, as required by Disclosure Guidance and Transparency Rule DTR 4.2.4R, and gives a true and fair view of the assets, liabilities, financial position and profit of the Group;

b) this Half-Yearly Report includes a fair review, required under DTR 4.2.7R, of the important events that have occurred during the first six months of the financial year, their impact on the condensed set of consolidated financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

c) this Half-Yearly Report includes a fair review, required under DTR 4.2.8R, of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position and or performance of the Group during that period; and any changes in the related party transaction described in the last Annual Report that could do so.

This Half-Yearly Report was approved and authorised for issue by the Board of Directors on 9 September 2019 and the above responsibility statement was signed on its behalf by Mr Kevin McGrath, Chairman.

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2019

Total comprehensive income arises from continuing operations.

The notes below are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statement of Financial Position

As at 30 June 2019

The notes below are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2019

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2018

Condensed Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

The notes below are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statement of Cash Flows

For the six months ended 30 June 2019

The notes below are an integral part of these condensed consolidated financial statements.

Notes to the Condensed Consolidated Financial Statements

For the six months ended 30 June 2019

1. Corporate information

The condensed consolidated financial statements of the Group for the six months ended 30 June 2019 comprise the results of the Company and its subsidiaries (together constituting the "Group") and were approved by the Board and authorised for issue on 9 September 2019.

The Company is a company limited by shares incorporated in Guernsey under The Companies (Guernsey) Law, 2008, as amended (the "Law"). The Company's Ordinary Shares are admitted to, and, traded on the Official List of the London Stock Exchange ("LSE").

The Company was incorporated on 22 June 2015 and is registered with the Guernsey Financial Services Commission as a Registered Closed-Ended Collective Investment Scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Schemes Rules 2015.

The Company did not begin trading until 6 November 2015 when the shares were admitted to trading on the LSE.

The nature of the Group's operations and its principal activities are set out in the Chairman's Statement.

The address of the registered office is: Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey, GY2 4LH.

2. Basis of preparation

The condensed consolidated financial statements for the six months ended 30 June 2019 have been prepared on a going concern basis in accordance with the Disclosure Guidance and Transparency Rules of the FCA and with IAS 34, Interim Financial Reporting, as adopted by the European Union.

The condensed consolidated financial statements have been prepared on a historical cost basis, as modified for the Group's investment properties and certain financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The condensed consolidated interim financial information should be read in conjunction with the Group's audited financial statements for the year ended 31 December 2018, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU.

2.1 Comparative period

The comparative financial information presented herein for the six months ended 30 June 2018 and year ended 31 December 2018 do not constitute full statutory accounts within the meaning of the Law. The Group's Annual Report and Accounts for the year ended 31 December 2018 were delivered to the Guernsey Financial Services Commission. The Group's independent Auditor's report on those Accounts was unqualified and did not include references to any matters to which the Auditors drew attention by way of emphasis without qualifying their report.

2.2 Functional and presentation currency

The consolidated financial information is presented in Pounds Sterling which is also the Group's functional currency, and all values are rounded to the nearest thousand (£'000s) pounds, except where otherwise indicated.

2.3 Going concern

The Directors have carefully considered areas of potential financial risk and have reviewed cash flow forecasts. No material uncertainties have been detected which would influence the Group's ability to continue as a going concern for a period of no less than 12 months. The Directors have satisfied themselves that the Group has adequate financial resources to continue in operational existence for the foreseeable future.

Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

2.4 Business combinations

At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. For an acquisition of a business where an integrated set of activities are acquired in addition to the property, the Group accounts for the acquisition as a business combination under IFRS 3 Business Combinations.

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 the 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.

3. Significant accounting judgements, estimates and assumptions

The preparation of the condensed consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

3.1. Critical accounting estimates and assumptions

The principal estimates that may be material to the carrying amount of assets and liabilities are as follows:

3.1.1 Valuation of investment property

The fair value of investment property, which has a carrying value at the reporting date of £721,695,000 (30 June 2018: £758,653,000; 31 December 2018: £718,375,000) is determined, by independent property 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. Properties have been valued on an individual basis. The valuation experts use recognised valuation techniques applying the principles of both IAS 40 Investment Property and IFRS 13 Fair Value Measurement.

The valuations have been prepared in accordance with the Royal Institution of Chartered Surveyors ("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 valuers in estimating the fair value of investment property are set out in note 13.

3.1.2 Fair valuation of interest rate derivatives

In accordance with IFRS 9 Financial Instruments, the Group values its interest rate derivatives at fair value. The fair values are estimated by the loan counterparty with a revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair values including estimates of future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate. The carrying value of the derivatives at the reporting date was £1,773,000 (30 June 2018: £434,000; 31 December 2018: £337,000).

3.1.3 Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. The carrying value of the goodwill at the reporting date was £836,000 (30 June 2018; £1,393,000; 31 December 2018: £1,115,000).

3.2. Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the condensed consolidated financial statements:

3.2.1 Operating lease contracts - the Group as lessor

The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments, that it retains all of the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

3.2.2 Performance fee

The Asset Manager and the Investment Manager are each entitled to 50% of the performance fee. The fee is calculated at a rate of 15% of the total shareholder return in excess of the hurdle rate of 8% per annum for the relevant performance period. Total shareholder return for any performance period consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share declared in the performance period.

A performance fee is only payable in respect of a performance period where the EPRA NAV per Ordinary Share exceeds the highwater mark which is equal to the greater of the highest year-end EPRA NAV per Ordinary Share in any previous performance period or the placing price (100p per Ordinary Share). The performance fee was calculated initially on 31 December 2018 and will be calculated annually thereafter.

In the period to date, the Group has not met the criteria for a performance fee. However, future circumstances may dictate that a performance fee is ultimately due. Further details are disclosed in note 21.

3.3 Consolidation of entities in which the Group holds less than 50%

Management considered that up until 9 November 2018, the Group had de facto control of View Castle Limited (previously known as Credential Investment Holdings Limited) and its 27 subsidiaries (the "Credential Sub Group") by virtue of the amended and restated Call Option Agreement dated 3 November 2015. Following a restructure of the Credential Sub Group, the majority of properties held within the Credential Sub Group were transferred into two new SPVs with two additional properties to be transferred into these SPVs at a later date. A new call option was entered into dated 9 November 2018 with View Castle Limited and five of its subsidiaries (the "View Castle Group"). As per the previous amended and restated Call Option Agreement, under this new option the Group may acquire any of the properties held by the View Castle Group for a fixed nominal consideration. Despite having no equity holding, the Group controls the View Castle Group as the Option Agreement means that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group, through its power to control.

4. Summary of significant accounting policies

The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the year ended 31 December 2018 and are expected to be consistently applied for the current year ending 31 December 2019. The changes to the condensed consolidated financial statements arising from accounting standards effective for the first time are noted below:

IFRS 16, 'Leases', is effective for accounting periods beginning on or after 1 January 2019. Under IFRS 16, most leased assets are capitalised as "right-to-use assets" by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to make future lease payments.

The Group has a number of operating leases concerning the long-term lease of land associated with its long leasehold investment properties. At 30 June 2019, there was £50,120,000 ground rent committed under these leases (31 December 2018: £50,614,000) and the annual charge for ground rent for the period for the period ended 30 June 2019 was £618,000 (31 December 2018: £618,000).

Under IFRS 16, the Group recognises the right-to-use asset in the Consolidated Statement of Financial Position and this is amortised over the life of the lease. Amortisation is recognised in the Consolidated Statement of Comprehensive Income. In addition, a financial liability is recognised in the Consolidated Statement of Financial Position which is valued at the present value of future lease payments using the Group's incremental borrowing rate. Lease payments (also known as ground rent) which were previously recognised within non-recoverable property costs, now upon payment, reduce the financial liability. The value of the financial liability is revalued at each reporting date and any change to the value of the financial liability is recognised in finance costs.

IFRS 16 has been applied from 1 January 2019 and the modified retrospective approach to measure the right to use asset at the same value as the financial liability has been taken and comparatives have not been restated. At 1 January 2019, a right-to-use asset and the financial liability of £16,094,000 and £16,094,000 respectively were recognised.

The right-to-use asset and the financial liability were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 January 2019. The incremental borrowing rate used to determine the right to use asset has been determined with consideration for the rate at which the Group would pay to borrow for an asset of similar value to the right of use asset. The Group considers this to be equivalent to the Group's weighted average cost of debt being 3.5%.

At 30 June 2019: the financial liability was adjusted for the interest as the lease liability is carried at fair value. with amounts recognised within finance costs for movements on the finance liability; and the right to use asset was amortised with the amortisation cost charged to the Consolidated Statement of Comprehensive Income. At Under IFRS 16, comparative information is not required to be restated.

The table below illustrates the accounting treatment presented in the financial statements:

5. Rental income

As disclosed in the Annual Report, income arising from expenses recharged to tenants is now recognised in net rental income as the Directors consider that the Group acts as principal in this respect. Comparative figures for the six months ended 30 June 2018 have been updated for the grossing up of recoverable service charge income and expenditure.

6. Property costs

Non-recoverable property costs represent direct operating expenses which arise on investment properties generating rental income.

As disclosed in the Annual Report, income arising from expenses recharged to tenants is now recognised in net rental income as the Directors consider that the Group acts as principal in this respect. Comparative figures for the six months ended 30 June 2018 have been updated for the grossing up of recoverable service charge income and expenditure.

7. Administrative and other expenses

During the period, the remuneration of the Directors increased by 5%, effective from 1 April 2019.

8. Finance income

9. Finance expense

10. Taxation

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from corporation tax. Gains on UK properties are also exempt from tax, provided that they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK corporation tax.

Income tax and deferred tax above arise on entities which form part of the Group's condensed consolidated accounts but do not form part of the REIT group.

Due to the Group's REIT status and its intention to continue meeting the conditions required to obtain approval in the foreseeable future, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments held by entities within the REIT group. No deferred tax asset has been recognised in respect of losses carried forward due to unpredictability of future taxable profits.

11. Earnings per share

Earnings per share ("EPS") amounts are calculated by dividing profits for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As there were dilutive instruments outstanding, both basic and diluted EPS are disclosed below.

Dilutive instruments at 30 June 2018 relate to the partial settlement of the performance fee by the issue of Ordinary Shares. Please see note 21.

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