RNS announcement

22 May 2018

Warehouse REIT plc

(the 'Company' or 'Warehouse REIT')

PRELIMINARY ANNUAL RESULTS ANNOUNCEMENT FOR THE PERIOD 20 SEPTEMBER 2017 TO 31 MARCH 2018*

Deployment of IPO proceeds ahead of schedule acquiring high quality urban warehouse portfolio with significant reversionary potential

Warehouse REIT, the AIM-listed specialist warehouse investor, today announces its audited preliminary results for the period ended 31 March 2018.

Financial highlights

Profit before tax and loan break fees - £8.5 million

Profit before tax - £8.4 million

IFRS Earnings per share - 5.0 pence

EPRA earnings per share - 1.9 pence

Dividends per share for the period - 2.5 pence

As at 31 March 2018

Portfolio valuation - £291.0 million

IFRS Net asset value ("NAV") per share - 102.1 pence

EPRA NAV per share - 102.1 pence

EPRA net initial yield - 6.2%

Passing rent - £20.4 million, contracted rent £21.3m

Weighted average unexpired lease term ("WAULT") to expiry - 4.1 years

Loan to value ("LTV") - 40.5%

Operational highlights

IPO proceeds deployed at net initial yield ahead of business plan target of 7.0%

·     Oversubscribed IPO on 20 September 2017 raised net proceeds of £146.8 million and resulted in a high-quality share register

·     Co-investment by management of our Investment Manager, Tilstone Partners Limited ("TPL"), of £16.0 million resulted in net assets at IPO of £162.1 million

·     On Admission to AIM, completed the acquisition of the seed portfolio of 27 freehold and long-leasehold assets for £108.9 million, reflecting a 7.0% net initial yield

·      Increased five-year loan facilities of £135.0 million on reduced terms

·     Since IPO, invested a further £170.1 million in 65 UK warehouse estates, totalling 2.7 million sq ft and let to a diverse range of occupiers

·      Seed portfolio valuation up 8.5% to £118.1 million and ERV up 3.4% to £9.7 million

·      Capital expenditure committed in the period since IPO totalled £1.3m

·      Target dividend for year ending 31 March 2019 increased from 5.5 pence per share to 6.0 pence per share**

Strong letting activity driving total return outperformance

·      27 new lettings completed since IPO, generating annual rent of £0.8 million, 7.3% ahead of March 2018 estimated rental value ("ERV")

o  of the above, 17 were new lettings of vacant space in the seed portfolio, generating annual rent of £0.6 million, 15.6% ahead of ERV at IPO

o  eight lease renewals achieved in the seed portfolio, securing a continuation of £0.6 million of income, representing a 10.7% increase in headline rent for these units

o  four new lettings across 54,790 sq ft of vacant space currently under offer on the seed portfolio, for a combined rent of £0.3 million per annum, 2.1% ahead of March 2018 ERVs

o  notice received to exercise a lease break from four tenants in the seed portfolio, representing combined passing rents of £0.1 million per annum, allowing the ability to increase rents by 14.0%

·     Portfolio occupancy of 93.1% and WAULT of 4.1 years (2.8 years to break) at 31 March 2018, after acquiring the Industrial Multi Property Trust ("IMPT") portfolio for £116.0 million on 26 March 2018, which had occupancy of 92.3% and a WAULT to expiry of 3.9 years

·     Of the 18 lease renewals outstanding as at acquisition of the seed portfolio, 67% of tenants renewed at rents 8.2% higher than ERV.  Of the units which became vacant, 67% were immediately re-let at rents 13% higher than ERV

Diverse occupier demand, favourable demand supply dynamics and structural shifts towards e-commerce underpinning sector strength

·      Limited market supply, as capital values in the sector remain well below replacement cost, making it uneconomic to develop new space

·      Market forecasts for industrial rental growth predicted to average 3.5% per annum to 2022, significantly ahead of other real estate sectors

Neil Kirton, Chairman of Warehouse REIT, commented:

"We are pleased to be reporting our maiden financial results from a position of considerable strength, following our oversubscribed IPO in September. Leveraging our proprietary adviser relationships and the strength and market knowledge of the growing team has allowed us to be highly selective in acquiring a mixture of individual assets and portfolios that fit with our investment strategy, offering the potential for long-term income and capital growth.

"Whilst the sector is currently benefitting from yield compression, our near-term focus is to deliver on the value enhancing asset management initiatives we have identified across the portfolio, further reducing the vacancy level and realising some of the reversionary potential, enabling us to increase our 2019 dividend target to 6.0 pence."

Andrew Bird, Managing Director of the Investment Manager, Tilstone Partners Limited, added:

"The UK multi-let warehouse sector continues to offer investors an attractive total return profile, with strong demand for well-located, good quality assets from both traditional industrial and manufacturing businesses, as well as major retailers and third-party logistics occupiers. This has been driven by the substantial growth of e-commerce activity, underpinned by changing consumer habits, a trend that is forecast to continue shaping the sector over the next five years."

* Warehouse REIT plc was successfully admitted to trading on AIM on 20 September 2017 when it commenced operations. These results are for the accounting period from 1 August 2017 to 31 March 2018, and represent the trading results of the Group from 20 September 2017.

** this is a target not a profit forecast and there can be no assurances that it will be met

Enquiries:

Warehouse REIT plc                                                                      via FTI Consulting

Further information on Warehouse REIT is available on its website:

http://www.warehousereitplc.co.uk

Notes to editors:             

Warehouse REIT announced the results of its IPO on 20 September 2017, having raised gross proceeds of £150.0 million (£146.8 million net) to invest in a diversified portfolio of UK warehouse assets located in urban areas. Since then, it has invested a further £170.1 million in 65 UK warehouse estates, totalling 2.7 million sq ft.

Occupier demand for urban warehouse space is increasing as the structural growth in e-commerce has driven the rise in internet shopping and investment by retailers in the "last mile" delivery sector. The urban warehouse sector offers one of, if not the highest, initial yield of all UK property sectors.

The Company is an alternative investment fund ("AIF") for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD") and as such is required to have an investment manager who is duly authorised to undertake the role of an alternative investment fund manager. The Investment Manager is currently G10 Capital Limited, whose role will pass to Tilstone Partners Limited ("TPL"), on receipt of FCA approval. 

Forward-looking Statements

Certain information contained in these preliminary results may constitute forward looking information. This information relates to future events or occurrences or the Company's future performance. All information other than information of historical fact is forward looking information. The use of any of the words "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "should", "believe", "predict" and "potential" and similar expressions are intended to identify forward looking information. This information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information. No assurance can be given that this information will prove to be correct and such forward looking information included in this announcement should not be relied upon. Forward-looking information speaks only as of the date of this announcement.

The forward-looking information included in this announcement is expressly qualified by this cautionary statement and is made as of the date of this announcement. The Company and its Group does not undertake any obligation to publicly update or revise any forward-looking information except as required by applicable securities laws.  

Chairman's statement

Dear fellow shareholder

Warehouse REIT plc has made a strong start to life as a public company and I am pleased to present the Group's first consolidated results for the period to 31 March 2018.

Overview

This was a period of considerable activity. We gave much thought to the timing of our IPO and, together with our advisors, worked extremely hard during the late summer to deliver this, resulting in an over-subscribed issue, with the shares admitted to trading on AIM on 20 September 2017. The Company's share register comprises high-quality domestic and international fund managers, including wealth managers, hedge funds and long-only investors, showing the broad appeal of our investment proposition.

The cornerstone of this proposition is that by carefully acquiring and managing urban or 'last-mile' industrial warehouse assets, in strategic locations and bought at prices well below replacement value, we can create a robust and growing income stream for our shareholders. On Admission, we acquired a portfolio of 27 assets, valued at £108.9 million. This portfolio had been assembled by our investment manager, TPL, during the preceding years. This initial portfolio contains some assets which we believe would now attract meaningful premiums to their current values.

TPL has subsequently reviewed approximately £1.1 billion of assets on the Group's behalf and its analytical rigour has enabled us to rapidly add to the portfolio, in line with our investment policy. In total, the Group has bought a further £170.1 million of assets, with the largest transaction completing in the final week of March. The portfolio provides opportunities to let vacant space and increase rents, as well as to reconfigure and generate increased value from a number of interesting sites.

We financed this significant activity by investing all of the equity raised at IPO, substantially ahead of schedule, and by successfully enlarging our debt facilities with HSBC, as described below.

Dividends and total return

At the time of the IPO, we committed to quarterly dividends that would begin after the period to 31 December 2017. We were therefore pleased to pay our first dividend of 1.0 pence per share on 9 March for the period from Admission to 31 December 2017. We have declared an interim dividend of 1.5 pence per share, for the quarter to 31 March 2018. This will be paid on 6 July 2018 to shareholders on the register at 8 June 2018. Both these dividends are in line with our targets set at IPO.

Our target total return is at least 10% per annum, from a combination of dividends and NAV growth. The total return for the period was 4.6%, or 12.8% on an annualised basis and after adjusting for the costs of the IPO. As the business has performed ahead of expectations we have increased the target dividend for the year ending 31 March 2019 to 6.0 pence per share from 5.5 pence per share as set out in the prospectus.  We will continue to review dividend payments as the year progresses.

Investment management

The Company has an Investment Management Agreement with TPL, which is responsible for portfolio and risk management and for monitoring the Group's assets. TPL has full discretionary authority over asset acquisitions and disposals, subject to criteria laid down by the Board. The Agreement provides for a fee of 1.1% of NAV, up to a NAV of £500 million (and 0.9% thereafter), to be paid quarterly in arrears and with no performance fees.

TPL's founders are Simon Hope, Paul Makin and Andrew Bird. They are all well-known, highly experienced and skilled individuals in the real estate sector, and their extensive networks of contacts and asset management capabilities are already proving invaluable. Since the IPO, TPL has further strengthened its team, including recruiting a number of experienced asset managers and TPL anticipates making further hires during the course of the coming year. TPL's relationship with Savills, which provides a number of property related services to the Group, has been particularly beneficial.

Financial results

Our financial performance for the period exceeded the expectations set at IPO. The NAV per share at 31 March 2018 was 102.1 pence, reflecting both a 4.3% uplift in the value of the portfolio against acquisition cost and the expenses incurred in the IPO.

The Group's annual rent roll at the period end was £21.3 million and the portfolio's estimated rental value ("ERV") was £23.8 million, demonstrating the opportunity to drive income from these assets over the coming years.

At the period end, the Group had £124.5 million of debt and a LTV ratio of 40.5%, slightly ahead of our longer-term target of 30-40% but below the limit in our investment policy of 50% and the covenant of 55%. The Group's facilities total £135.0 million and comprise a £105.0 million revolving credit facility ("RCF") (extended during the period from £35.0 million, on reduced terms), and a £30.0 million term loan.

Outlook

The warehouse sector continues to perform strongly and we believe the growth drivers are structural rather than cyclical. Market expectations are for rents to rise by 3.5% per annum, for all industrial assets between 2018 and 2022, according to RealFor, but our expectation is that rental growth will be stronger still in the part of the market we are focused on, driven by a significant supply demand imbalance and there are good prospects to outperform market expectation through active asset management.  We see no sign of any change in these favourable dynamics but remain alert to the potential for geopolitical or financial events to affect sentiment.  

Our priorities for the coming year are to integrate the acquisitions, complete lease renewals with tenants in the IMPT portfolio who were holding over, and continue to increase occupancy across the entire portfolio. Whilst we expect further yield compression across the sector, there remain opportunities to invest at attractive yields. We are confident in our investment case and our ability to achieve our target returns.

The Directors all own shares in the Company and together the Board and TPL management team hold around 11% of the equity. This means we are fully aligned with the interests of our fellow shareholders. I have been delighted with the entrepreneurial spirit and openness, and with the intensity of effort displayed by everyone involved with the Company during such a busy and successful first period. We are ambitious and excited about the future and I look forward to reporting on our progress.

Neil Kirton
Chairman
21 May 2018

Our strategy and objectives

Our strategy

Our strategy is to create value through a top-down approach to investment, followed by hands-on asset management with best-in-class processes. We believe the key to outperformance is stock selection, which includes:

In addition, before we make an investment decision, we consider the level, quality and diversity of existing income from the assets, and the current supply and demand for space in the local market. In implementing this strategy, we follow the investment policy described below.

Investment policy

Our policy is to invest in a diversified portfolio of urban warehouse assets in the UK. We can acquire properties either directly or through corporate structures, or in joint ventures or other share ownership or co-investment arrangements. We look for investments where there is the potential to add value through active asset management.

We invest in and manage the portfolio with the aim of spreading risk. This requires us to observe the following restrictions:

In addition to the above, our investment policy supports our ability to manage our resources by investing currently unutilised cash in cash deposits and gilts and using interest rate hedges or other means of mitigating the risk of interest rate rises.

Our full investment objective and policy will be set out in the Company's Annual Report.

Our objectives

We aim to provide shareholders with an attractive level of income, together with the potential for income and capital growth.

Dividend policy

At IPO, we set out the following dividend policy, in line with the REIT requirements to distribute at least 90% of our property income:

The targeted covered dividend for the year ending 31 March 2019 has now increased to 6.0 pence per share**.

For years after 2018/19, we intend to adopt a progressive dividend policy, in line with anticipated growth in earnings, with a target dividend yield equivalent to at least 6%* based on the issue price at IPO.

* Based on the issue price at IPO of 100p

**These are targets not profit forecasts and there can be no assurances they will be met.

Total returns

Our target is to achieve a total return of at least 10% per annum, through a combination of dividends and growth in NAV.

Key performance indicators

We use the following key performance indicators ("KPIs") to monitor our performance and our progress against our strategy.

Investment Manager's report

This was a busy first period, during which the Company successfully completed its IPO, rapidly built a high-quality portfolio of urban warehouse assets and pursued asset management opportunities. This resulted in financial performance ahead of expectations at the time of the IPO.

Initial public offering

The Company raised gross proceeds of £150.0 million, through a placing and offer for subscription of 150 million ordinary shares at 100 pence each. The net proceeds of the issue were £146.8 million, which along with co-investment by management of TPL of £16.0 million resulted in net assets at IPO of £162.1 million.  The Company's shares were admitted to trading on AIM on 20 September 2017.

Investment activity

The transactions completed during the period were as follows:

20 September 2017

Assets acquired: Seed portfolio
Purchase price: £108.9 million
Net initial yield: 7.0%
Floor area (sq ft): 1.7 million

The seed portfolio was assembled by TPL over the period from August 2013 and comprises 27 freehold and long-leasehold assets, located throughout the UK. The seed portfolio had 129 tenants on acquisition, including strong covenants such as Boots, Amazon, Asda and Selco Trade Centres. The seed portfolio had annual net rent of £8.1 million and an ERV of £9.4 million, showing strong potential for income growth.

28 September 2017

Assets acquired: Four multi-let industrial estates
Purchase price: £26.3 million
Net initial yield: 7.5%
Floor area (sq ft): 603,000

The assets acquired were pipeline assets, at an advanced stage of negotiation at the time of the IPO. Two of the estates are in the North West, with one each in the South East and Midlands. All are either in urban areas or on strategic infrastructure links. The average passing rent of £3.50 per sq ft offers the potential for long-term rental growth.

29 September 2017

Asset acquired: Six-acre site in Banbury, Oxfordshire
Purchase price: £0.8 million

The site is adjacent to the Group's Tramway Industrial Estate, with the enlarged 13-acre strategic holding providing medium to long-term mixed-use redevelopment options.

24 November 2017

Assets acquired: Three industrial units in Stone, Staffordshire
Purchase price: £3.7 million
Net initial yield: 7.3%
Floor area (sq ft): 57,500

The units are located close to the M6. The site has low density of 24% and average passing rents of £5.09 per sq ft. Fixed uplifts in one of the leases will increase the passing rent by 16% over the next four years.

24 November 2017

Assets acquired: Multi-let trade counters in Carlisle, Cumbria
Purchase price: £0.8 million
Net initial yield: 8.3%
Floor area (sq ft): 13,800

The site is adjacent to a 12,000 sq ft unit already owned by the Group, providing the opportunity to enhance access to both, and has significant reversionary potential.

15 December 2017

Asset acquired: Warehouse in Plymouth, Devon
Purchase price: £4.3 million
Net initial yield: 7.4%
Floor area (sq ft): 66,000

The property sits on a 3.9 acre site within the established Parkway Industrial Estate. It offers good reversionary potential, while the accessible location and its adjacency to higher-value retail warehouse uses providing longer-term development opportunities.

21 December 2017

Assets acquired: Seven-asset industrial portfolio in North West England
Purchase price: £18.3 million
Net initial yield: 7.0%
Floor area (sq ft): 326,254

The portfolio comprises a diverse mix of asset types in the Northern Powerhouse region, with attractive locations and excellent motorway connections. The average unit size is 15,000 sq ft. There is significant reversionary potential and possible planning for 24,000 sq ft of additional space.

26 March 2018

Assets acquired: UK multi-let urban warehouse portfolio
Purchase price: £116.0 million
Net initial yield: 7.0%
Floor area (sq ft): 1.7 million

The IMPT portfolio comprises 51 warehouse properties, with more than 500 leasable units and 382 tenants at the time of purchase. The majority of the assets are in the Midlands and South of England, giving the Group a more even spread of locations across the UK. Approximately 93% of the floor area is light industrial property, with 7% representing other workspace and offices. The assets are in established commercial locations, close to urban centres, major motorways or trunk roads. The contracted rent roll is c £8.5 million at an average of £5.66 per sq ft, with passing rents totalling £8.3 million. The occupancy rate of 92%, when the transaction exchanged, provides scope for value creation through asset management.

Portfolio analysis

As a result of the acquisitions described above, at 31 March 2018 the Group had invested £278.9 million and assembled a portfolio covering 4.4 million sq ft. The investment was focused primarily on warehouse storage and distribution space, with the remainder split between light manufacture and assembly, retail and trade uses.

At the period end, the contracted rent roll was £21.3 million, resulting in a net initial yield of 6.8%. This compares with an ERV of £23.8 million and a reversionary yield of 7.7%, showing the strong reversionary potential in the portfolio. The ERV assumes that a unit is re-let in its current condition and does not take account of the potential to increase rents through refurbishment, repositioning or change in permitted planning use. The table above demonstrates the higher rents earned for units converted to trade counter or retail warehouse use.

The seed portfolio acquired at IPO had an occupancy of 91.7%, reflecting the Group's targeting of assets with the potential for asset management. By the period end, this had increased to 92.4%, reflecting 17 new lettings and 8 lease renewals, which is described in the following section, and was ahead of the expectation at the time of the IPO.

However, the acquisition of the IMPT portfolio on 26 March 2018 affected both occupancy and WAULT at the period end. The IMPT portfolio had an occupancy level of 92.3% on acquisition and a large number of tenants holding over lease renewals until the transaction completed. Excluding the impact of the IMPT acquisition, occupancy of the remainder of the portfolio was 92.9% and the WAULT was 4.3 years, with 3.2 years to first break.

More information about the portfolio will be set out in the Company's Annual Report.

Asset management

Although the Group has only owned much of the portfolio for a short time, it has already demonstrated its ability to add value through asset management.

During the period, the Group spent and committed £1.3 million on capital expenditure, in line with its target of investing 0.75% of gross asset value each year.  This capital expenditure helped the Group to complete 27 new lettings of previously vacant space, generating annual rent of £0.8 million, which was 7.3% ahead of ERV. Since the period end, the Group has completed a further 4 new lettings at annual rents 5.4% ahead of ERV.

Lease expiries in the period had total passing rent of £1.1 million. The Group retained 79% of these tenants with 43% signing new leases and 57% continuing to hold over.  These new leases secured an average rental increase of 4.6% or 1.9% above ERV.

Of the 31 leases with a break in the period, only 10% of these vacated.

The Group's property at Queenslie Industrial Estate, Glasgow, includes 16 acres of potential development sites, suitable for a range of occupiers. The Group has created a masterplan and implemented a planning strategy for higher value uses. The outline planning application submitted to Glasgow City Council has been positively received by local stakeholders and more recently has overcome critical policy issues.  TPL continues to believe that the application will be favourably determined.

Financial review

Performance

The Group delivered a strong financial performance during the period, which was ahead of expectations at the time of the IPO.

Revenue for the period was £6.6 million. The Group's outsourcing model gives it low-cost access to the expertise of TPL, Savills and other key service providers. Operating costs were £2.4 million. This included the Group's running costs (primarily the management fee, audit, company secretarial, other professional fees and the Directors' fees), and property related costs, including legal expenses, void costs and repairs.

Net financing costs, which are the interest costs associated with the Group's RCF and term loan, amounted to £1.0 million in the period, or £0.8 million excluding exceptional items.

The Group incurred the following exceptional costs during the period, as disclosed in the IPO prospectus:

·      IPO-related expenses totalling £3.2 million; and

·      a termination fee of £167,000, relating to the refinancing of the Group's debt facilities.

The Group recognised a gain of £5.2 million on the revaluation of its investment properties at the period end. This contributed to profit before tax and exceptional loan break fees of £8.5 million and statutory profit before tax of £8.4 million. As a REIT, the Group's profits and gains from its property investment business are exempt from corporation tax, and the corporation tax charge for the period was therefore £nil.

Earnings per share ("EPS") under IFRS were 5.0 pence. EPRA EPS was 1.9 pence.

Dividends

The Company declared the following dividends in relation to the period:

·     1.0 pence per share in relation to the period from IPO to 31 December 2017, which was paid on 9 March 2018. 0.78 pence of this dividend was paid as a Property Income Distribution ("PID") and 0.22 pence was non-PID.

·     1.5 pence per share, in relation to the three months to 31 March 2018. This dividend will be paid on 6 July 2018, to shareholders on the register at 8 June 2018. 1.15 pence of this dividend will be paid as a PID and 0.35 pence will be non-PID.

Total dividends in respect of the period were therefore 2.5 pence per share, in line with the target set out in the prospectus.

The cash cost of the total dividend is £4.2 million.

Valuation and net asset value

The portfolio was independently valued as at 31 March 2018, in accordance with the RICS Valuation Global Standards (the "Red Book"). CBRE valued the IMPT portfolio, with Gerald Eve valuing the remainder of the Group's assets.

The total portfolio was valued at £291.0 million, representing an uplift of £12.1 million or 4.3% against the asset's aggregate purchase price. The EPRA net initial yield was 6.2%.

The valuation resulted in a NAV at 31 March 2018 of 102.1 pence per share, which represents good progress against the issue price of 100 pence, after accounting for the costs associated with the IPO and acquisitions.

Debt financing and hedging

On 27 November 2017, the Company announced that in line with the IPO prospectus, it had secured new and enlarged facilities totalling £65.0 million with HSBC, to fund acquisitions. These facilities replaced £44.3 million of existing facilities with HSBC, which were secured against the seed portfolio.

The increased facilities comprised:

·      a £30.0 million, five-year term loan facility, at an interest rate of 2.25% above Libor; and

·      a £35.0 million five-year RCF, at an interest rate of 2.4% above Libor.

On 5 February 2018, the Company announced the acquisition of the IMPT portfolio, which was partially funded by further increases to the Company's debt facilities. HSBC increased the RCF by £70 million to £105.0 million, at a reduced coupon of 2.25% above Libor.

At the period end, the term loan was fully drawn and the Group had drawn down £94.5 million against the RCF, resulting in total debt at that date of £124.5 million and headroom within the facilities of £10.5 million. The Group's LTV ratio at 31 March 2018 was 40.5%, well within the 50% limit prescribed by the investment policy.

The Group is developing its hedging strategy and had no hedging in place during the period.

Alternative Investment Fund Manager ("AIFM")

G10 Capital Limited ("G10"), part of the Lawson Conner Group, has been the Company's AIFM since Admission. TPL provides advisory services to G10 and the Company, and will continue to do so until it is authorised by the Financial Conduct Authority ("FCA") to act as an AIFM, which is expected during the coming year, at which point TPL will become the Company's AIFM.

Tilstone Partners Limited
21 May 2018

Risk management and principal risks

Risk management process

Successful risk management is fundamental to the successful delivery of our strategy. 

We deliver our formal approach to risk management by applying our risk framework. This sets out the mechanisms by which the Board identifies, evaluates and monitors its principal risks and the effectiveness of the controls in place to mitigate them. This includes:

·     the Board's approval of a detailed corporate risk register, which identifies and evaluates significant business, financial, operational, compliance and reputational risks; and

·     the review of assurance and information about the management of those risks, from both contracted service providers and independent sources.

The Board determines the level of risk it will accept in achieving our business objectives. We have no appetite for risk in relation to regulatory compliance or the health, safety and welfare of our tenants and the wider community in which we work. We have a moderate appetite for risk in relation to activities which drive revenues and increase financial returns for our investors.

The Audit Committee carried out a detailed review of our risk management framework process, corporate risks and principal risks, together with actions taken and relevant mitigating controls, prior to advising the Board. The Board then carried out its own assessment and approved the list of principal risks.

Further information about our internal control and risk management procedures will be set out in the corporate governance statement in our Annual Report. Our principal financial risks, our policies for managing them and our policy and practice with regard to financial instruments are summarised in note 25 to the financial statements.

Principal risks

A principal risk is a risk that is considered material to the Group's development, performance, position or future prospects. 

The principal risks are captured in the corporate risk register and are reviewed by the Board and Audit Committee during their regular meetings. This includes reviewing:

·      any substantial changes to principal risks, including new or emerging risks;

·      material changes to control frameworks in place;

·      changes in risk scores;

·      changes in tolerance to risk;

·      any significant risk incidents arising; and

·      progress with any additional mitigating actions which have been agreed.

The Board, through the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Group, together with a review of any new risks which may have arisen during the period, including those that would threaten our business model, future performance, solvency or liquidity.

The table below summarises our exposure to our principal risks.

Business Risks

Operational Risks

Compliance Risks

Financial Risks

Going concern and viability statement

Going concern

The Board monitors the Group's ability to continue as a going concern.  Specifically, at quarterly Board meetings the Board reviews summaries of the Group's liquidity position and compliance with loan covenants, as well as forecast financial performance and cashflows.

Based on this information, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in business for a period of at least 12 months from the date of approval of the annual report and financial statements.  They therefore have adopted the going concern basis in the preparation of the annual report and financial statements.

Assessment of viability

In accordance with the AIC Code of Corporate Governance, the Directors have assessed the Group's prospects over a period greater than the 12 months considered by the going concern provision.

The Directors have conducted their assessment over a three-year period to March 2021, allowing a reasonable level of accuracy given typical lease terms and the cyclical nature of the UK property market. 

The principal risks detailed above summarise the matters that could prevent the Group from delivering its strategy. The Board seeks to ensure that risks are kept to a minimum at all times and, where appropriate, the potential impact of such risks is modelled within their viability assessment.

The nature of the Group's business as the owner of a diverse portfolio of UK warehouses, principally located close to urban centres or major highways and let to a wide variety of tenants, reduces the impact of adverse changes in the general economic environment or market conditions, particularly as the properties are typically flexible spaces adaptable to changes in occupational demands.

The Directors' assessment takes into account forecast cash flows, debt maturity and renewal prospects, forecast covenant compliance, dividend cover and REIT compliance. The model is then stress tested for severe but plausible scenarios, individually and in aggregate, along with consideration for potential mitigating factors. The key sensitivities applied to the model are a downturn in economic outlook and restricted availability of finance, specifically:

·      increased tenant churn; 

·      increased void periods following break or expiry;

·      decreased rental income; and

·      increased interest rates.

Current debt and associated covenants are summarised in note 16, with no covenant breaches during the period.

Viability statement

Having considered the forecast cash flows, covenant compliance and the impact of sensitivities in combination, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

On behalf of the Board

Neil Kirton
Chairman
21 May 2018

STATEMENT OF DIRECTORS' RESPONSIBILITIES

in respect of the annual report and financial statements

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable UK law and International Financial Reporting Standards ("IFRS") as adopted by the European Union.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with IFRS. Under company law, the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group for that year.

In preparing the financial statements, the Directors are required to:

·      select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, and apply them consistently;

·     present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·     provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

·     state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and

·     make judgements and estimates that are reasonable and prudent.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a strategic report, Directors' report, Directors' remuneration report and corporate governance statement that comply with that law and those regulations, and for ensuring that the annual report includes information required by the AIM Rules and (where applicable) the Disclosure Guidance and Transparency Rules of the UKLA.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the UK covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

We confirm that to the best of our knowledge:

·      the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company (and Group as a whole); and

·      the Chairman's Statement and the Investment Manager's Report include a fair review of the development and performance of the business and the position of the Company (and Group as a whole), together with a description of the principal risks and uncertainties that it faces.

The Directors consider that the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the Board

Neil Kirton

Chairman

21 May 2018

Consolidated statement of comprehensive income

For the period ended 31 March 2018