RNS announcement

Notes to the consolidated financial statements
For the year ended 31 March 2019

1. General information

Warehouse REIT plc (the 'Company') is a closed-ended Real Estate Investment Trust ("REIT") incorporated in England and Wales on 24 July 2017. The Company began trading on 20 September 2017. The registered office of the Company is located at Beaufort House, 51 New North Road, Exeter EX4 4EP. The Company's shares are admitted to trading on AIM, a market operated by the London Stock Exchange.

2. Basis of preparation

The financial information set out in these financial statements does not constitute the Company's statutory accounts for the year ended 31 March 2019, but is derived from those accounts.  Statutory accounts for 2019 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.  The auditors have reported on those accounts; their report was unqualified, did not draw to attention any matters by way of emphasis of matter without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

The statutory accounts are for the year from 1 April 2018 to 31 March 2019. Comparative figures are for the previous accounting period from 1 August 2017 to 31 March 2018.

The Directors have made an assessment of the Group's ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for the foreseeable future, for a period of not less than 12 months from the date of this report. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. It is noted that whilst there are net current liabilities of £33,000, there is £8 million headroom readily available under the RCF. Therefore, the financial statements have been prepared on the going concern basis.

2.1 Changes to accounting standards and interpretations

The following new standards and amendments to existing standards have been published and approved by the European Union. The Company has applied the following standards from 1 April 2018, with the year ended 31 March 2019 being the first year end reported under the standards.

·     IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018). In July 2014, the IASB published a final version of IFRS 9 which replaces IAS 39 Financial Instruments: Recognition and Measurement. The IFRS 9 requirements represent a change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables.

Trade and other receivables

Under IFRS 9 there is no change to the classification and measurement of trade and other receivables, however there is a requirement to carry out an ongoing assessment of expected credit losses using a general portfolio approach.  The Group has made an assessment of expected credit losses at each period end, using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument.  Any adjustment is recognised in the income statement as an impairment gain or loss. Whilst an increase to the bad debt provision is anticipated, following the adoption of IFRS 9, it is expected to be insignificant in the context of the Group financial statements.

Interest rate derivatives

IFRS 9 requires that all derivative financial instruments are recognised at fair value in the statement of financial position.  Changes in fair value are recognised in the income statement where hedge accounting is not applied.

·      IFRS 15 Revenue from Contracts with Customers.   IFRS 15 establishes a new framework for revenue recognition and replaces all existing standards and interpretations. IFRS 15 does not apply to lease contracts within the scope of IAS 17 Leases or, from its date of application, IFRS 16 Leases. This standard will not have any material impact on the Group's financial statements as presented for the current year as the majority of the Group's revenue consists of rental income from its investment properties which is outside the scope of IFRS 15.

·      IFRS 7 Financial Instruments: Disclosures - amendments regarding additional hedge accounting disclosures (applies when IFRS 9 is applied). The changes did not have a material impact on the consolidated financial statements of the Group as hedge accounting is not applied.

·      Amendments to IAS 40 Transfers of Investment Property - there is no material impact on the consolidated financial statements of the Group.

·      IFRIC 22 Foreign Currency Transactions and Advance Consideration - there is no impact on the consolidated financial statements of the Group.

·      Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions - there is no impact on the consolidated financial statements of the Group.

·      Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - there is no impact on the consolidated financial statements of the Group.

The following new standards and amendments to existing standards have been published and approved by the EU, and are mandatory

for the Group's accounting periods beginning after 1 April 2019 or later periods.

·      IFRS 16 Leases. In January 2016, the IASB published the final version of IFRS 16 Leases. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leasing arrangements.  The Group has decided against early adoption of IFRS 16 Leases. The right of use finance lease asset relating to head leases will be required to be measured at fair value under IFRS 16, however, the difference from the IAS 17 carrying value is expected to be insignificant in the context of the Group financial statements.

·      Annual improvements to IFRS 2015 -2017 Cycle: amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs.

·      Amendments to IFRS 9 Prepayment features with negative compensation

·      IFRIC 23 Uncertainty over Income Tax Treatments

·      Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures

·      Annual Improvements to IFRS Standards 2015-2017 Cycle    

·      Amendments to IAS 19 Plan Amendment, Curtailment or Settlement

The Group does not expect the adoption of new accounting standards issued but not yet effective to have a significant impact on its financial statements. 

2.2 Significant accounting judgements and estimates

The preparation of these financial statements in accordance with IFRS requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. 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 in the future.

Judgements

In the course of preparing the financial statements, no judgements have been made in the process of applying the Group's accounting policies, other than those involving estimations, that have had a significant effect on the amounts recognised in the financial statements.

Estimates

In the process of applying the Group's accounting policies, the Investment Advisor has made the following estimates which have the most significant risk of material change to the carrying value of assets recognised in the consolidated financial statements:

a) Valuation of property

The valuations of the Group's investment property are at fair value as determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards January 2017 (incorporating the International Valuation Standards) and in accordance with IFRS 13. The key estimates made by the valuer are the ERV and equivalent yields of each investment property.  See notes 13 and 24 for further details.

2.3 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are stated in the notes to the financial statements.

a) Basis of consolidation

The Company does not meet the definition of an investment entity and therefore does not qualify for the consolidation exemption under IFRS 10. The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 March 2019. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtained control, and will continue to be consolidated until the date that such control ceases. An investor controls an investee when the investor is exposed, or has rights to variable returns, from its involvement with the investee and has the ability to affect those returns through its power over the investee. In preparing these financial statements, intra-group balances, transactions and unrealised gains or losses have been eliminated in full. All subsidiaries have the same year end as the Company. Uniform accounting policies are adopted in the financial statements for like transactions and events in similar circumstances.

b) Functional and presentation currency

The overall objective of the Group is to generate returns in Pound Sterling and the Group's performance is evaluated in Pound Sterling. Therefore, the Directors consider Pound Sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and have therefore adopted it as the functional and presentation currency.

c) Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment of business, being the investment and provision of UK urban warehouses.

d) Derivative financial instruments

Derivative financial instruments, comprising interest rate caps for interest rate risk management purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Company would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Company and its counterparties.  Premiums payable under such arrangements are initially capitalised into the statement of financial position.

3. Revenue

Accounting policy

Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease term and is included in gross rental income in the Group statement of comprehensive income. Initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis as the lease income. Rental income is invoiced in advance and for all rental income that relates to a future period, this is deferred and appears with current liabilities on the Group statement of financial position.

For leases which contain fixed or minimum uplifts, the rental income arising from such uplifts is recognised on a straight-line basis over the lease term.

Tenant lease incentives are recognised as an adjustment of rental revenue on a straight-line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.

Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Group statement of comprehensive income when the right to receive them arises.

4. Property operating and administration expenses

Accounting policy

All property operating expenses and administration expenses are charged to the consolidated statement of comprehensive income and are accounted for on an accruals basis.

5. Directors' remuneration

A summary of the Directors' emoluments, including the disclosures required by the Companies Act 2006, is set out in the Directors' remuneration report. The Group had no employees in either period.

6. Auditor's remuneration

The Group reviews the scope and nature of all proposed non-audit services before engagement, to ensure that the independence and objectivity of the Auditor are safeguarded. Audit fees are comprised of the following items:

Non-audit fees are comprised of the following:

The costs relating to the services provided during the IPO have been included as share issue costs and included in the share premium account. All other costs are included in the consolidated statement of comprehensive income.

Subsequent to the year end, a fee of £95,000 was also incurred by the Auditor for reporting accountant services in connection with the prospectus issued by the Company on 12 March 2019.  This will be included as share issues costs in the share premium account.

7. Finance income

Accounting policy

Interest income is recognised on an effective interest rate basis and shown within the Group statement of comprehensive income as finance income.

8. Finance expenses

Accounting policy

Any finance costs that are separately identifiable and directly attributable to a liability which takes a period of time to complete are amortised as part of the cost of the liability. All other finance costs are expensed in the period in which they occur. Finance costs consist of interest and other costs that an entity incurs in connection with bank and other borrowings. Fair value movements on derivatives are recorded in finance expenses.

9. Taxation

Corporation tax has arisen as follows:

Reconciliation of tax charge to profit before tax:

Accounting policy

Corporation tax is recognised in the consolidated statement of comprehensive income except where, in certain circumstances, corporation tax may be recognised in other comprehensive income.

As a REIT, the Group is exempt from corporation tax on the profits and gains from its property rental business, provided it continues to meet certain conditions as per REIT regulations.

Non-qualifying profits and gains of the Group continue to be subject to corporation tax. Therefore, current tax is the expected tax payable on the non-qualifying taxable income for the period, if applicable, using tax rates enacted or substantively enacted at the balance sheet date.

10. Operating leases

Operating lease commitments - as lessor

The Group has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of up to 39 years.

Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2019 are as follows:

11. Dividends 

As a REIT, the Group is required to pay PIDs equal to at least 90% of the property rental business profits of the Group.

Accounting policy

Dividends due to the Company's shareholders are recognised when they become payable.

12. Earnings per share

Basic EPS is calculated by dividing profit for the period attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares during the period. As there are no dilutive instruments in issue, basic and diluted EPS are identical.

13. UK investment property

Accounting policy

Investment property comprises property held to earn rental income or for capital appreciation, or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred, if the recognition criteria are met.

Subsequent to initial recognition, investment property is stated at fair value (see note 24). Gains or losses arising from changes in the fair values are included in the consolidated statement of comprehensive income in the period in which they arise under IAS 40 Investment Property.

Investment properties cease to be recognised when they have been disposed of or withdrawn permanently from use and no future economic benefit is expected.  Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset.

14. Cash and cash equivalents

Accounting policy

Cash and cash equivalents comprise cash at bank and short-term deposits with banks and other financial institutions, with an initial maturity of three months or less.

15. Trade and other receivables

Accounting policy

Rent and other receivables are recognised at their original invoiced value and become due based on the terms of the underlying lease.

The Group carry out an assessment of expected credit losses at each period end, using the simplified approach, where a lifetime expected loss allowance is recognised over the expected life of the financial instrument.  Adjustments are recognised in the income statement as an impairment gain or loss.

16. Interest rate derivatives

To mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Group entered into interest rate derivatives.  The instruments have a combined notional value of £60.0 million with £30.0 million at a strike rate of 1.50% and a termination date of 21 November 2022 and £30.0 million at a strike rate of 1.75% and a termination date of 21 November 2023.

Accounting policy

Derivative financial instruments, comprising interest rate derivatives for mitigating interest rate risks, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Group would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Group and its counterparties.  Premiums payable under such arrangements are initially capitalised into the statement of financial position.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.  Changes in fair value of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.

17. Interest-bearing loans and borrowings

The Group has a five-year RCF of £105.0 million at a coupon of 2.25% above LIBOR and a £30.0 million fixed-term loan on the same terms. As at 31 March 2019, £8.0 million (31 March 2018: £10.5 million) remained undrawn. Both credit facilities are secured on all properties within the portfolio and expire on 30 November 2022.

The debt facilities include loan to value and interest cover covenants that are measured at a Group level. The Group has complied with all covenants throughout the financial period.  

The Gross method is representative of the sum of the Group's positions after deducting cash balances.  The Commitment method is representative of the sum of the Group's positions without deducting cash balances.

Accounting policy

Loans and borrowings are initially recognised at the proceeds received net of directly attributable transaction costs. Loans and borrowings are subsequently measured at amortised cost with interest charged to the consolidated statement of comprehensive income at the effective interest rate, and shown within finance costs. Transaction costs are spread over the term of loan.

18. Finance lease obligations

The following table analyses the present value of minimum lease payments under non-cancellable finance leases using an average discount rate of 6.91% for each of the following periods:

The following table analyses the minimum lease payments under non-cancellable finance leases for each of the following periods:

The fair value of the Group's lease obligations is estimated to be equal to its carrying value.

Accounting policy

Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities. Finance leases are subsequently measured at amortised cost.

19. Current liabilities - other payables and accrued expenses, deferred income and provisions

The property and acquisition provision comprises costs associated with the terminated acquisition and one-off costs associated with the default of a tenant at Deeside who entered into administration.

Accounting policy

Trade and other payables are initially recognised at fair value and subsequently held at amortised cost.

Deferred income is rental income received in advance during the accounting period. The income is deferred and is unwound to revenue on a straight-line basis over the period in which it is earned.

20. Share capital

Share capital is the nominal amount of the Company's ordinary shares in issue.

The share capital comprises one class of ordinary shares. At general meetings of the Company, ordinary shareholders are entitled to one vote on a show of hands and on a poll, have one vote for every share held. There are no restrictions on the size of a shareholding or the transfer of shares, except for the UK REIT restrictions.

The redeemable ordinary shares of £1 each in the capital of the Company were redeemed by the Company immediately upon Admission on 20 September 2017 in consideration of the payment of a sum equal to the amount received by the Company in payment of the amount due on the redeemable ordinary shares. In all other respects, the rights of the redeemable ordinary shares were the same as, and ranked pari passu with, the ordinary shares. The redeemable ordinary shares were 25% paid up during their existence (£12,500).

21. Share premium

Share premium represents the excess over nominal value of the fair value of the consideration received for equity shares,
net of direct issue costs.

22. Capital and reserves

Capital reduction reserve

Capital reduction reserve comprises the following amounts:

Retained earnings

Retained earnings represent the profits of the Group less dividends paid from revenue profits to date. It should be noted that unrealised gains on the revaluation of investment properties contained within this reserve are not distributable until any gains crystallise on the sale of the investment property.

Retained earnings comprise the following cumulative amounts:

23. Net asset value per share

Basic NAV per share amounts are calculated by dividing net assets attributable to ordinary equity holders of the Company in the statement of financial position by the number of ordinary shares outstanding at the end of the period. As there are no dilutive instruments in issue, basic and diluted NAV per share are identical.  

24. Fair value

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following methods and assumptions were used to estimate the fair values.

The fair value of cash and short-term deposits, trade receivables, trade payables and other current liabilities approximate their carrying amounts due to the short-term maturities of these instruments.

Interest-bearing loans and borrowings are disclosed at amortised cost. The carrying value of the loans and borrowings approximate their fair value due to the contractual terms and conditions of the loan. The loans are at a variable interest rate of 2.25% above LIBOR.

Six-monthly valuations of investment property are performed by CBRE, accredited external valuers with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued. The valuations are the ultimate responsibility of the Directors, however, who appraise these six monthly.

The valuation of the Group's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards January 2017 (incorporating the International Valuation Standards).

The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams), the capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property and discount rates applicable to those assets.

The fair value of the interest rate contracts is recorded in the statement of financial position and is determined by JC Rathbone Associates Limited, an independent expert, by forming an expectation that interest rates will exceed strike rates and discounting these future cash flows at the prevailing market rates as at the year end.

The following tables show an analysis of the fair values of investment properties and interest rate derivatives recognised in the statement of financial position by level of the fair value hierarchy¹:

1.    Explanation of the fair value hierarchy:

·        Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

·        Level 2 - use of a model with inputs (other than quoted prices included in Level 1) that are directly or indirectly observable market data; and

·        Level 3 - use of a model with inputs that are not based on observable market data.

Sensitivity analysis to significant changes in unobservable inputs within the valuation of investment properties

The following table analyses:

·     the fair value measurements at the end of the reporting period;

·     a description of the valuation techniques applied;

·     the inputs used in the fair value measurement, including the ranges of rent charged to different units within the same building; and

·     for Level 3 fair value measurements, quantitative information about significant unobservable inputs used in the fair value measurement.

Significant increases/decreases in the ERV (per sq ft per annum) and rental growth per annum in isolation would result in a significantly higher/lower fair value measurement. Significant increases/decreases in the long-term vacancy rate and discount rate (and exit yield) in isolation would result in a significantly higher/lower fair value measurement.

Generally, a change in the assumption made for the ERV (per sq ft per annum) is accompanied by:

·     a similar change in the rent growth per annum and discount rate (and exit yield); and

·     an opposite change in the long-term vacancy rate.

The table below sets out a sensitivity analysis for each of the key sources of estimation uncertainty with the resulting increase/(decrease) in the fair value of investment property at 31 March 2019:

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to £11,229,000 (31 March 2018: £5,173,000) and are presented in the consolidated statement of comprehensive income in line item 'fair value gains on investment properties'.

All gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at the end of the reporting period.

The carrying amount of the Group's assets and liabilities is considered to be the same as their fair value.

25. Financial risk management objectives and policies

The Group's principal financial liabilities are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition of the Group's property portfolio. The Group has trade and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

The Group is exposed to market risk, interest rate risk, credit risk and liquidity risk. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk

Market risk is the risk that future values of investments in property and related investments will fluctuate due to changes in market prices. The total exposure at the statement of financial position date is £307,385,000, and to manage this risk, the Group diversifies its portfolio across a number of assets. The Group's investment policy is to invest in UK-located warehouse assets. The Group will invest and manage its portfolio with an objective of spreading risk and, in doing so, will maintain the following investment restrictions:

·     the Group will only invest, directly or indirectly, in warehouse assets located in the UK;

·     no individual warehouse property will represent more than 20% of the last published GAV of the Group at the time of investment;

·     the Group will target a portfolio with no one tenant accounting for more than 10% of the gross contracted rents of the Group at the time of purchase. In any event, no more than 20% of the gross assets of the Group will be exposed to the creditworthiness of any one tenant at the time of purchase;

·     the portfolio will be diversified by location across the UK with a focus on areas with strong underlying investment fundamentals; and

·     the Group will not invest more than 10% of its gross assets in other listed closed-ended investment funds.

Interest rate risk

Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates.  The Group's exposure to the risk of changes in market interest rates relates to its variable rate bank loans.  In order to address interest rate risk, the Group has entered into interest rate cap instruments, details of which are set out in note 16.

Credit risk

Credit risk is the risk that a counterparty or tenant will cause a financial loss to the Group by failing to meet a commitment it has entered into with the Group.

All cash deposits are placed with approved counterparties, The Royal Bank of Scotland International Limited and HSBC Bank plc.

In respect of property investments, in the event of a default by a tenant, the Group will suffer a shortfall and additional costs concerning re-letting of the property. The Investment Manager monitors the tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.

The following table analyses the Group's exposure to credit risk:

Liquidity risk

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Exposure to liquidity risk arises because of the possibility that the Group could be required to pay its liabilities earlier than expected. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank deposits and loans.

The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:

26. Subsidiaries

1.    Indirect subsidiaries.

2.    Registered office: Beaufort House, 51 New North Road, Exeter EX4 4EP.

3.    Registered office: IOMA House, Hope Street, Douglas, Isle of Man IM1 1AP.

The principal activity of all the subsidiaries relates to property investment.

Accounting policy

Where property is acquired, via corporate acquisitions or otherwise, management considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business.

Where such acquisitions are not judged to be an 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 on their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Otherwise, acquisitions are accounted for as business combinations.

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree.

For each business combination, the acquirer measures the non-controlling interest in the acquiree at fair value of the proportionate share of the acquiree's identifiable net assets. Acquisition costs (except for costs of issue of debt or equity) are expensed in accordance with IFRS 3 Business Combinations.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

Contingent consideration is deemed to be equity or a liability in accordance with IAS 32. If the contingent consideration is classified as equity, it is not re-measured and its subsequent settlement shall be accounted for within equity. If the contingent consideration is classified as a liability, subsequent changes to the fair value are recognised either in profit or loss or as a change to other comprehensive income.

27. Capital management

The Group's capital is represented by share capital, reserves and borrowings.

The primary objective of the Group's capital management is to ensure that it remains within its quantitative banking covenants and maintains a strong credit rating. The Group's capital policies are as follows:

·     the Group will keep sufficient cash for working capital purposes with excess cash, should there be any, deposited at the best interest rate available whilst maintaining flexibility to fund the Group's investment programme;

·     borrowings will be managed in accordance with the loan agreements and covenants will be tested quarterly and reported to the Directors. Additionally, quarterly lender reporting will be undertaken in line with the loan agreement; and

·     new borrowings are subject to Director approval. Such borrowings will support the Group's investment programme but will be subject to a maximum 50% loan to value. The intention is to maintain borrowings at a loan to value ratio of between 30% and 40%.

During the period, the Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreement.

28. Related party transactions

Directors

The Directors (all Non-Executive Directors) of the Company and its subsidiaries are considered to be the key management personnel of the Group. Directors' remuneration for the period totalled £110,000 (31 March 2018: £54,000) and at 31 March 2019, a balance of £nil (31 March 2018: £nil) was outstanding. Further information is given in note 5 and in the Directors' remuneration report in the Annual Report.

Investment Advisor

The Company is party to an Investment Management Agreement with the Investment Advisor, pursuant to which the Company has appointed the Investment Advisor to provide investment management services relating to the respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction by the Board of Directors.

For its services to the Company, the Investment Advisor receives an annual fee at the rate of 1.1% of the NAV of the Company.

During the year, the Group incurred £1,888,000 (31 March 2018: £792,000) in respect of investment management fees. As at 31 March 2019, £465,000 (31 March 2018: £409,000) was outstanding.

Subsidiaries

As at 31 March 2019, the Company owned a 100% controlling stake in Tilstone Holdings Limited, Tilstone Warehouse Holdco Limited, Tilstone Industrial Warehouse Limited, Tilstone Retail Warehouse Limited, Tilstone Industrial Limited, Tilstone Retail Limited, Tilstone Trade Limited, Tilstone Basingstoke Limited, Tilstone Glasgow Limited, Quantum North Limited, CHIP (One) Limited, CHIP (Two) Limited, CHIP (Three) Limited, CHIP (Four) Limited, CHIP (Five) Limited, CHIP (Ipswich) One Limited and CHIP (Ipswich) Two Limited.

29. Ultimate controlling party

It is the view of the Directors that there is no ultimate controlling party.

30. Post balance sheet event

On 2 April 2019, the Company raised gross proceeds of £76.5 million through a placing, open offer and offer for subscription. In total, the Company issued 74,254,043 new ordinary shares at 103.0 pence each.

A fourth interim dividend in respect of the year ended 31 March 2019 of 1.5 pence per share will be payable on 28 June 2019 to shareholders on the register on 31 May 2019. 

Unaudited supplementary notes not part of the consolidated financial information

For the year ended 31 March 2019

⁶Ground rent expenses included within administration expenses such as depreciation of finance leases
 

Glossary
 

Adjusted earnings per share ("Adjusted EPS")

EPRA EPS adjusted to exclude non-recurring costs, divided by the weighted average number of shares in issue during the year

Admission

The admission of Warehouse REIT plc onto the London Stock Exchange on 20 September 2017

AGM

Annual General Meeting

AIC

The Association of Investment Companies

AIFM

Alternative Investment Fund Manager

AIFMD

Alternative Investment Fund Managers Directive

AIM

A market operated by the London Stock Exchange

Contracted rent

Gross annual rental income currently receivable on a property plus rent contracted from expiry of rent-free periods and uplifts agreed at the balance sheet date less any ground rents payable under head leases

EPRA

The European Public Real Estate Association, the industry body for European REITs

EPRA cost ratio

The sum of property expenses and administration expenses as a percentage of gross rental income calculated both including and excluding vacant property costs

EPRA earnings

IFRS profit after tax excluding movements relating to changes in fair value of investment properties, gains/losses on property disposals, changes in fair value of financial instruments and the related tax effects

EPRA earnings per share ("EPRA EPS")

A measure of EPS on EPRA earnings designed to present underlying earnings from core operating activities based on the weighted average number of shares in issue during the year

EPRA guidelines

The EPRA Best Practices Recommendations Guidelines November 2016

EPRA NAV

The value of net assets, adjusted to include properties and other investment interests at fair value and to exclude items not expected to be realised in a long-term property business, such as the fair value of any financial derivatives and deferred taxes on property valuation surpluses

EPRA NAV per share

The NAV per share figure based on EPRA NAV divided by the number of shares outstanding at the balance sheet date

EPRA net initial yield ("EPRA NIY")

The annualised passing rent generated by the portfolio, less estimated non‑recoverable property operating expenses, expressed as a percentage of the portfolio valuation (adding notional purchaser's costs), excluding development properties

EPRA vacancy rate

Total open market rental value of vacant units divided by total open market rental value of the portfolio

EPS

Earnings per share

Equivalent yield

The weighted average rental income return expressed as a percentage of the investment property valuation, plus purchaser's costs

ERV

The estimated annual open market rental value of lettable space as assessed by the external valuer

FCA

Financial Conduct Authority

GAV

Gross asset value

Group

Warehouse REIT plc and its subsidiaries

IASB

International Accounting Standards Board

IFRS

International Financial Reporting Standards adopted by the European Union

IFRS earnings per share ("EPS")

IFRS earnings after tax for the year divided by the weighted average number of shares in issue during in the year

IFRS NAV per share

IFRS net asset value divided by the number of shares outstanding at the balance sheet date

IPO

Initial public offering

LIBOR

The basic rate of interest used in lending between banks on the London interbank market and also used as a reference for setting the interest rate on other loans

Like-for-like rental income growth

The increase in contracted rent of properties owned throughout the period under review, expressed as a percentage of the contracted rent at the start of the period, excluding properties undergoing refurbishment

Like-for-like valuation increase

The increase in the valuation of properties owned throughout the period under review, net of capital expenditure, expressed as a percentage of the valuation at the start of the period

Loan to value ratio ("LTV")

Gross debt less cash, short-term deposits and liquid investments, divided by the aggregate value of properties and investments

NAV

Net asset value

Net initial yield ("NIY")

Contracted rent on investment properties at the balance sheet date, expressed as a percentage of the investment property valuation, plus purchaser's costs

Net rental income

Gross annual rental income receivable after deduction of ground rents and other net property outgoings including void costs and net service charge expenses

Net reversionary yield ("NRY")

The anticipated yield to which the net initial yield will rise (or fall) once the rent reaches the estimated rental value

Occupancy

Total open market rental value of the units leased divided by total open market rental value of the portfolio, equivalent to one minus the ERPA vacancy rate

Passing rent

Gross annual rental income currently receivable on a property as at the balance sheet date less any ground rents payable under head leases

Property income distribution ("PID")

Profits distributed to shareholders which are subject to tax in the hands of the shareholders as property income. PIDs are usually paid net of withholding tax (except for certain types of tax-exempt shareholders). REITs also pay out normal dividends called non-PIDs

QCA

Quoted Companies Alliance

Real Estate Investment Trust ("REIT")

A listed property company which qualifies for, and has elected into, a tax regime which is exempt from corporation tax on profits from property rental income and UK capital gains on the sale of investment properties

RCF

Revolving credit facility

RPI

Retail price index

Total accounting return

The movement in EPRA NAV over a period plus dividends paid in the period, expressed as a percentage of the EPRA NAV at the start of the period

Total costs ratio

EPRA cost ratio excluding non-recurring costs calculated both including and excluding vacant property costs

Weighted average unexpired lease term ("WAULT")

Average unexpired lease term to first break or expiry across the investment portfolio weighted by contracted rent