INDUSTRIALS REIT LIMITED

(Registered in Guernsey with registration number 64865)

LSE share code: MLI    JSE share code: MLI

ISIN:  GG00BFWMR296

2 December 2022

SOLID HALF YEAR RESULTS UNDERPINNED BY STRONG rental demand

Industrials REIT Limited ('Industrials REIT' or the 'Company' and together with its subsidiaries, the 'Group'), the specialist UK multi-let industrial ('MLI') property company, announces results for the six months to 30 September 2022.

Commenting on the results Paul Arenson, CEO of Industrials REIT, said: "Strong occupier demand has continued to drive substantial rental uplifts across our UK MLI portfolio over the first half of the year. Our assets remain highly affordable and continue to attract an increasingly diverse range of businesses and now comprise over 1,500 separate occupiers. In this period, the average passing rent increased by a record 29% on new lettings and lease renewals. Our Industrials Hive platform continues to deliver efficiencies. The Group is well positioned to weather pressure on valuations and rising debt costs, given that our group LTV remains low at 26.5% and Group debt is 90% hedged. We anticipate that the current macroeconomic headwinds will see the investment market go through a period of repricing and we look forward to being able to capitalise on opportunities once the operating environment stabilises."

MLI Operational Highlights: Strong demand delivers record rental growth/uplifts

-      Demand for MLI space outstripping supply with the average passing rent increasing by 29% on new lettings and lease renewals in the period, the highest growth rate achieved to date

-       Eight consecutive quarters of 20% average growth in rent at lease renewal or upon new letting now recorded

-       Industrials Hive, our operating platform, delivered operational efficiencies across leasing, invoicing, and asset management and is a critical tool which will enable scale opportunities

-       4.0% growth in like-for-like annual passing rent after adjusting for one particular rent-free which expired in November 2022 (2021: 5.0%)

-       12.3% increase in like-for-like annual ERV (2021: 5.1%) demonstrating the further potential for future rental growth

-       Industrials.co.uk website users up 9.0% on a 12-month rolling basis

-       197 letting transactions completed (2021: 119), with average lease incentives given now less than 1 month rent-free on an average

4.5 year lease

-       Further 49 leasing transactions on 187,627 sq ft of space completed in October and November 2022, demonstrating the depth of demand for MLI space (2021: 43 transactions)

-       Occupancy of 92.8% reduced marginally (31 March 2022: 93.6%) as a result of proactive steps taken to forfeit and replace non-performing Covid-era tenancies

Financial Highlights: Solid results and a robust balance sheet

-       Declared a covered interim dividend of 3.50 pence per share, up 3.7% on the prior year interim dividend of 3.375p per share

-       Diluted IFRS loss per share of 7.18 pence (2021: 13.34 pence profit) driven by like-for-like portfolio valuation decline of 4.5% (2021: 9.8% increase)

-       2.6% growth in adjusted EPS to 3.54 pence (2021: 3.45 pence)

-      Diluted IFRS net asset value per share of £1.66 (31 March 2022: £1.76³) and a 7.4% decrease in EPRA NTA per share to £1.62 (31 March 2022: £1.75³)

-       Portfolio value decreased 4.3% to £656.5 million (31 March 2022: £685.8 million), reflecting yield softening in the period

-       Low LTV of 26.5% with no refinancing until 2025

-       90% of Group debt at fixed rates or hedged against rising interest rates until November 2024 (excluding the care homes joint venture which is in a sale process)

-       Total accounting return of -5.4% for the six-month period (2021: 9.8%)

^1. See note 5 for reconciliation to IFRS earnings per share.

^2. Adjusted for sales and acquisitions in period.

^3. See note 6 for reconciliation to IFRS NAV per share. The IFRS NAV per share and EPRA NTA per share at 31 March 2022 were reported as £1.78 and £1.77 respectively.  As a result of a correction to the number of dilutive shares, these metrics were amended to

£1.76 and £1.75 per share respectively and disclosed in an RNS statement issued on 16 August 2022. Accordingly, although the financial statements have not been restated due to materiality, all future reference to 31 March 2022 NAV metrics in this report will reflect the amended amounts.

^4. Loan-to-value is the ratio of total borrowings, less unrestricted cash, to the Group's aggregate market value of properties.

^5. Total Accounting Return is the change in EPRA NTA per share plus dividends paid, expressed as a percentage of EPRA NTA per share at the beginning of the period.  As disclosed in an RNS statement issued on 16 August 2022 this metric has been amended from 25.0% reported at year end.

For further information:

Hugh Jonathan

Vicki Paine

Richard Sunderland

Richard Gotla

Neel Bose

Industrialsreit@fticonsulting.com

About Industrials REIT Limited:

Industrials REIT is a UK REIT with a primary listing on the London Stock Exchange and a secondary listing on the Johannesburg Stock Exchange. The objective of the Company is to deliver a combination of sustainable growing income and growth in value to its investors. Industrials REIT focuses on owning and operating a diversified portfolio of UK purpose built multi-let industrial (MLI) estates across the UK. The Company aspires to be the leading MLI business in the UK. For further information, go to www.industrialsreit.com.

Operating and financial review

Overview

During the first half of the year the Company delivered adjusted earnings of 3.54p per share and we declared a covered interim dividend of 3.50p per share, an increase of 0.7% on the final dividend of 3.475p per share declared in June 2022.  We experienced record levels of letting activity over the first six months of the year with strong demand from a depth of occupiers delivering continued rental growth throughout the period and into the second half.   This income growth helped mitigate the impact of softening yields on property valuations, which decreased by 4.5% on a like-for-like basis to £656.5 million (31 March 2022: £685.8 million).  Against the economic turbulence which has continued to emerge over the period, our balance sheet remains strong and our proactive and prudent approach to debt management is evidenced by a low LTV of 26.5% and a low average cost of borrowing of 2.52%. Furthermore, 90% of debt is hedged against rising interest rates until November 2024 (excluding the care homes joint venture which is in a sale process).     

Record lettings and increasing rental levels

Despite the economic backdrop, we continued to experience strong demand from an increasingly diverse range of occupiers during the first half.  This led to a period of record letting activity with an increase in the average passing rent of 29% on the aggregate of all new lettings and lease renewals. We have now experienced eight successive quarters of 20% uplift in this measure, a level that is important as it allows us to deliver on our target annual rental growth of 4%-5%, given our average lease length of approximately 4.5 years.

The six-month period saw us complete 64 new lettings and 133 lease renewals across a total of 690,930 sq ft generating £4.7 million of new rental income.  This high level of operational activity has been supported by efficiencies driven through the Industrials Hive platform ('the Hive') which is discussed in more detail below.  The average rental incentive given is now below one month, with 65% of leases contracted through our short-form digital 'Smart Lease' and just under 80% of leases signed including at least a 3% annual uplift in rent through the term of the lease.  This inclusion results in ratchets in revenue throughout the lease, rather than just at lease expiry or rent review.

During the past six months, we have let or renewed a number of our biggest units, meaning that on 30 September 2022 we had several large units enjoying rent free periods. Like-for-like annual passing rents were up 4.0% when adjusted for our largest rent-free period, in Ashby-de-la-Zouch, which expired in November 2022.  The like-for-like rental growth metric was reduced by a small decrease in occupancy to 92.8%, down from the year end level of 93.6%. This followed a strategic decision to actively forfeit and replace non-performing tenancies from the Covid-era, with strong demand captured via the Hive allowing us to replace these occupiers with new customers with more sustainable business models, whilst also benefitting from reletting at higher rents.

Rent collection rates are returning to normalised levels of c.98%, with 91% of rents due for the period ended 30 September 2022 collected by 28 November 2022 and 97% of rents due for the financial year ended 31 March 2022. With rent typically accounting for 1% and 3% of customer turnover, we believe that rents remain affordable and rental growth can sustainably be absorbed by our customers. 

Industrials Hive driving future efficiency

The Hive has advanced considerably over the period with our new finance and operations system (Microsoft Dynamics) going live at the start of the financial year.  This was followed in October by the conclusion of the in-housing of facilities management so that all key operational roles are now internally resourced.  As a result, we are now vertically integrated across leasing, transaction management, billing, facilities management, banking and credit control, which brings opportunities for enhanced operational efficiency and complete control of the customer relationship.

Our most longstanding internalised feature of the Hive has been within our leasing function, where we have seen continued improvements in

efficiency.  As at 30 September 2022, Industrials.co.uk website users were up 9.0% on a 12-month rolling basis as a result of continuous improvements to advertising via social media, optimised search terms, and enhanced user experience when navigating the site.  As a result, our enquiry-to-lead qualification conversion rates improved further to 12% on a rolling 12-month basis, with 83% of qualified leads going on to take a viewing of which 26% resulted in a new letting.

The Hive also delivers the people and processes to create 'the Industrials way' of doing things.  This differentiates how Industrials manages its MLI estates and how we interact with and service our customers.  We pride ourselves on being responsive and communicative and consider a customer first approach critical to success.  We maintain a firm but fair approach to all customer interactions and our decision making is data led, allowing us to be both nimble and systematic.  Each customer also has a dedicated customer engagement manager who acts as a proactive link for resolving issues and capturing opportunities. 

The Hive is a critical tool which will enable us to scale our business. When market conditions allow, we believe that we will be well placed to absorb and manage additional properties/portfolios at a reducing cost, whether these be our own or on behalf of 3^rd parties in a joint venture arrangement. 

A resilient business well positioned for future growth

The six-month period has seen further significant changes in the macro-economic environment with increasing interest rates, high inflation, and economic and political uncertainty.  Against this backdrop, the occupational market in the industrial sector has remained resilient, but the investment market has come under pressure with yields beginning to move out.  Accordingly, we took an active decision to pause investment activity and over the reporting period we acquired only £9 million of MLI assets, lower than our previous target of £25 million per quarter on average. 

The weakening investment market, combined with higher interest rates, led us to take the strategic decision not to draw down on the £27 million loan facility which we signed in May 2022.  Asset pricing has not yet found its projected level, which, combined with high interest costs, means that debt does not enhance returns as it has done previously. Drawing expensive debt speculatively whilst the market settles was deemed unnecessary when we already benefit from an undrawn £25 million revolving credit facility, although refinancing existing facilities to include currently unsecured assets remains an option in the future.

Investment valuation yields are expected to continue to rise resulting in further reductions in valuations.  However, we carry confidence into the second half of the year due to the quality of our estates, continued rental growth driven by a strong occupier market, a low group LTV of 26.5%, and unrestricted cash balances at 30 September 2022 of £21.7 million.

This hiatus in investment activity also provides an unexpected period in which we can focus on consolidating operational efficiencies in the platform. Accordingly, when we do re-enter the investment market, we expect that we will have greater operational strength to capitalise on opportunities.

Making a difference to ESG

We are committed to our environmental, social and governance responsibilities.  As well as being important sources of employment and wealth creation in their local communities, MLI assets are inherently geared towards sustainability with long lifespans. This is because of their low levels of obsolescence and ongoing capital expenditure, which materially reduce their lifetime embodied carbon emissions. We continue to focus on improvement works to enhance EPC compliance where regulations are tightening over the coming years.  By April 2023, all buildings in England and Wales must have a minimum of an E EPC rating and by 2027 units will need to have a minimum EPC rating of C to be relet.  We are very much on target to reach the 2023 requirement with approximately 99.4% of our portfolio achieving a rating of E or better.

We have various refurbishment options available to continue to improve the portfolio's EPC ratings.  One of the most effective methods is to install LED lighting and remove old and inefficient heating equipment, which is both cost efficient and likely to improve the EPC rating by two grades.  Furthermore, our portfolio benefits from only limited amounts of solar energy installations, but we see this as a significant future revenue stream and impactful method for improving the energy performance certification of the entire portfolio.  As a result, we remain confident that meeting future energy performance requirements and our own aspirations for reducing our carbon emissions is highly achievable across the portfolio.

We have recently completed an exercise to identify our carbon footprint together with its constituent parts in terms of scope 1, 2 and 3 GHG (Greenhouse Gas) emissions.  As would be expected, 99.3% of emissions come from downstream scope 3 activities, namely from our suppliers and customer related activity on our estates.  We are working proactively with our sustainability partner to create a carbon reduction target under the SBTi (Science Based Targets initiative) framework and identify pathways for achieving this.  We continue to incorporate sustainable business practises into our operations, taking advantage of the opportunities that arise whilst managing emerging risks. We look forward to providing an update on this important area when we report our annual results in June 2023.

We held our first employee engagement sessions for the current financial year under the direction of our designated non-executive director for employee engagement, Patsy Watson. We chose to consult with employees on wellbeing. We asked for feedback on our current employment practices and discussed various proposed initiatives, formal and informal, put forward by employees and aimed at improving their work/life balance and reducing stress and anxiety. We were pleased to hear that all employees felt supported by their managers and that they generally appreciated the culture of openness and transparency promoted by the Board. We look forward to introducing some of the proposed initiatives discussed in the new calendar year and will report further on these in our 2023 annual report.

We have also been busy supporting our charity partner of the year, The Wellspring.  The Wellspring helps the people of Stockport (where one of our offices is located) who are homeless or at risk of losing their home and aims to tackle the complex and individual challenges that face them.  In October, several of our Stockport team took part in the Wellspring's annual sponsored sleepout and raised over £3,000, which the Company will match under our matched-giving policy. We will continue our fundraising activities, which in these challenging times are ever more important, and look forward to raising more funds and raising the profile of this worthwhile charity.

Financial review

Earnings

For the six months to 30 September 2022, the basic loss attributable to ordinary shareholders was £21.3 million (2021: £38.8 million profit), equating to a loss of 7.18 pence per share on a diluted IFRS EPS basis (2021: 13.34 pence profit). This was driven by the fair value decrease on investment properties of £36.4 million (2021: £30.6 million increase).  The valuation decrease reflects 33bps of outward yield shift, although the impact of this was lessened by the continued income growth experienced by the MLI portfolio, as shown by average rental uplifts on lease renewal or new letting rising to new highs of 29% in the period.  The IFRS result also includes a significant fair value gain from interest rate hedges of £5.8 million (2021: £0.3 million) highlighting the increase in interest rates and volatility in interest rate forward curves over the period. 

Net rental income was £18.7 million, an increase of 24% on the comparative period of £15.1 million.  The increase was driven by a 21% rise in rental income to £20.0 million (2021: £16.6 million), due mainly to the larger MLI portfolio but also reflecting like-for-like rental growth of 4.0%, when adjusted for our largest rent free, in Ashby-de-la-Zouch, which expired in November 2022 (2021: 5.0%). Net provision for bad debts of £1.1 million was made in the period reflecting a prudent approach to current provisioning due to continued macro-economic pressures and uncertainty. This compares with just £0.3 million for the same period last year, when the Group released provisions made through the worst of the COVID trading period. The total provision at 30 September 2022 for expected credit losses stood at £4.3 million (31 March 2022: £3.5 million).

Operating expenses for the half year were £6.6 million (2021: £5.6 million). The additional £1.0 million was driven by a £0.4 million increase in staff remuneration costs as employee numbers rose to 59 at 30 September 2022 (2021: 44) mostly due to the insourcing of our facilities management function; the commencement of the amortisation charge associated with our finance and operating platform of £0.4 million (the £3.9 million intangible asset will be amortised over five years); and an increase in IT costs of £0.3 million as product licences and managed service and support contracts commenced following the go-live of our platform at the start of April 2022.

Finance costs were £2.7 million for the half year, increasing from £2.0 million a year earlier. The increase was driven by higher average debt in the period, together with higher interest rates and the commitment fee associated with the £25 million revolving credit facility, which was undrawn at 30 September 2022.  The Group all-in contracted weighted average cost of debt was 2.52% at the period end (31 March 2022: 2.16%), reflecting increased interest rates over the full period and the purchase of an interest rate swap in May 2022. Debt and hedging are discussed later in this report.

Adjusted earnings, after adding back costs and amortisation associated with the finance and operating platform implementation, were

£10.5 million (2021: £10.0 million), reflecting an adjusted EPS of 3.54 pence (2021: 3.45 pence).  EPRA earnings per share were 3.39 pence (2021: 3.33 pence).  A reconciliation of the IFRS loss to EPRA earnings and adjusted earnings can be seen in note 5 to the financial statements.

The EPRA cost ratio (including direct vacancy costs) includes all administrative and operating expenses in the IFRS statements (including share of joint ventures) and for the period ended 30 September 2022 was 39.2% (2021: 38.7%).

Dividends

The Company declared an interim dividend of 3.50 pence per share (2021: 3.375 pence per share), an increase on the final dividend declared in June 2022 of 3.475 pence per share. The dividend is fully covered by adjusted earnings of 3.54 pence per share. The directors intend to offer shareholders the option to receive all or part of their dividend entitlement by way of a scrip issue of Industrials REIT ordinary shares or in cash. A further announcement informing shareholders of the salient dates and tax treatment will be released in due course.

In respect of this dividend, given the Company's share price which stands at a discount relative to net asset value, the directors will consider matching any scrip scheme take up through the buyback of shares to mitigate the dilutive effect that would otherwise occur from the issuance of Industrials REIT treasury shares.

Net asset value

The IFRS diluted NAV per share was £1.66 at 30 September 2022 (31 March 2022: £1.76). The decrease of 5.7% is driven by the like-for-like property valuation decrease of 4.5%, or £30.5 million. At period end, the portfolio of 103 MLI properties was valued at £623.4 million (31 March 2022: £653.5 million), representing 95.0% of the total portfolio.

EPRA NTA per share at 30 September 2022 was £1.62, representing a 7.4% decrease on the EPRA NTA per share of £1.75 at 31 March 2022. A reconciliation of this change is shown in note 6 to the accounts. The decrease in NTA since 31 March 2022, combined with the dividend paid of 3.475 pence, resulted in a total accounting return for the six-month period of -5.4% (2021: 9.8%).

Portfolio valuation

Including the Group's share of joint ventures, Industrials REIT's investment properties were valued at £656.5 million at 30 September 2022

(31 March 2022: £685.8 million). On a like-for-like basis, excluding the impact of additions and disposals in the period, the valuation of the portfolio since 31 March 2022 decreased by 4.5%.

United Kingdom MLI portfolio

The UK MLI portfolio was independently valued at £623.4 million. On a like-for-like basis valuations decreased by £30.4 million, or -4.7%, over the valuation at 31 March 2022. We calculate that yield softening over the period accounts for -5.4% of like-for-like change with income growth in the period offsetting this by 0.7%.  Whilst cap rates are broadly expected to move out further in the immediate future, we expect the MLI asset class to demonstrate its resilience.  Demand for MLI space continues to outstrip supply and we anticipate continued rental growth will have a dampening effect on further yield shift, and hence valuations.

In terms of investment activity, in July 2022 we disposed of Rose Kiln Court in Reading for £5.9 million.  The Reading property was a non-core asset comprising 31,000 sq ft of hybrid office/industrial accommodation and the disposal proceeds were recycled into MLI opportunities.  Accordingly, we acquired a further £8.5 million of MLI (net of purchase costs).  All of the completed acquisitions were additional terraces/units on or adjacent to existing holdings.

Share of joint venture

The final non-MLI assets held in our portfolio, four German care homes held in joint venture, were independently valued at €37.6 million.  This reflects a decrease of €1.5 million, or 3.8%, from the 31 March 2022 valuation. However, due to weaker Sterling at the period end when compared with 31 March 2022, the Sterling valuation remained broadly unchanged at £33.0 million (31 March 2022: £33.1 million).  In line with the Directors' objective to dispose of the care home investment as soon as is practicable, the interest in the joint venture is disclosed as a current asset in the statement of financial position.

Debt and hedging

Total Group borrowings at 30 September 2022 were £196.9 million against £196.2 million as at 31 March 2022.  There were no new borrowings in the period and the slight variance relates to amortisation and foreign exchange movements on the joint venture debt.  The Group loan to value ratio at 30 September 2022 was 26.5% (31 March 2022: 25.6%). The small increase reflects the valuation decrease seen in the period, offset marginally by a small increase in unrestricted cash to £23.0 million (31 March 2022: £20.7 million).

The £25 million revolving credit facility provided by NatWest and signed in May 2022 was not utilised in the period and remains undrawn.  The facility expires in November 2025 and has a commitment fee of 1.13% and a margin of 2.25%.

Looking at the MLI debt of £180.4 million which is across three separate facilities, the weighted average debt maturity stood at 3.7 years at 30 September 2022 compared with 4.2 years at 31 March 2022. The first contractual loan maturity is not until February 2025 and comprises £49.9 million of debt with Lloyds with whom we are in discussions to agree a two-year extension option.  The second facility of £64.0 million is with NatWest and has an initial maturity in November 2025 with two additional one-year extension options available to the Group.  Our longest dated debt of £66.5 million with Reassure matures in December 2027.  Accordingly, we are looking to mitigate all refinance risk until 2027, taking weighted average debt maturity to approximately 5 years.  Incorporating extensions is cost effective and will provide both flexibility and further stability in the current uncertain economic environment.  The MLI all-in contracted weighted average cost of debt was 2.58% (based on SONIA at 2.19%) compared with 2.19% at 31 March 2022, reflecting the changing interest rate environment over the period.

As at 30 September 2022, 90% (31 March 2022: 76%) of total Group borrowings were subject to fixed interest rates or protected by interest rate derivatives in the form of caps or swaps.  The increase in our hedged position reflects the purchase of an interest rate swap in May 2022 on £27 million of debt at a rate of 2.206%, expiring in November 2025.  With our Group interest commitments hedged at 90%, we are well protected against further rises in interest rates and a 1% rise in rates would increase the weighted average cost of debt by 0.10%. 

Industrials REIT continues to enjoy strong covenant headroom.  Across the three MLI loan facilities, our LTV covenant requirements allow for a reduction in values of approximately 50% and interest cover ratio covenants have sufficient cover to cope with an average reduction in net rents of 67%. Against a backdrop of increasing interest rates, recessionary pressures and softening yields, our prudent debt management leaves us well placed to weather the headwinds.

Subsequent events

Since the period end, a further 49 leasing transactions completed over 187,627 sq ft of space (2021: 43 transactions).  The transactions included 79,401 sq ft of lettings on previously vacant space, with 108,226 sq ft of lease renewals.  Demand for MLI space remains strong, with the number of qualified leads registered in November 2022 at an all-time high.

Prospects

We have had a successful first half with solid earnings, continued occupier demand and rental growth.  Our balance sheet remains strong with low Group leverage of 26.5%, no refinancings until 2025, and 90% of our interest rate exposure hedged.  Our platform is bedding down nicely, and now that we are fully vertically integrated, we are starting to realise the efficiencies that the Hive will deliver.  We continue to proactively manage our estate and the platform on which it is managed. 

Whilst there are undoubtedly challenges to face in the immediate future, we are well placed from both an operational and financial perspective.  Against this backdrop, we expect to deliver a total full year dividend of not less than that declared last year. 

The future continues to hold significant opportunities for our business.  We believe that the investment market will go through a period of repricing and look forward to being able to capitalise on opportunities once the operating environment stabilises.  We are also exploring joint venture and third-party management opportunities where we can add value from both our direct experience and our platform.  We are focused on maximising rental growth, enhancing operational excellence, scaling the portfolio when the time is right, and look forward to delivering value and growth opportunities for all our stakeholders.

Principal risks and uncertainties

The principal risks and uncertainties facing the Company are described in the 2022 Annual Report on pages 52 to 57. The Board has continued its regular review of risks during the period, including robust assessments of those risks deemed most material to the Company and its business which are recorded as principal risks, and the consideration of any emerging risks. The Board considers that the principal risks detailed in the 2022 Annual Report remain largely unchanged, although some have evolved as a result of economic uncertainty in the UK. Certain risks have also evolved as a result of the continuous development of the Hive and the in-housing of the facilities management function. The Board's views on these risks are summarised below.

Economic outlook and political risk

High inflation, rising interest rates, the cost-of-living crisis and the threat of a prolonged recession directly impact asset yields and valuations, our cost-base and ability to raise capital and grow our portfolio. They may also indirectly impact the Company via its customers. The Board is continuously reviewing the risk environment, and, with this in mind, the Company has paused its investment activities (although will consider opportunities as they arise), taken steps to maintain a low LTV ratio, reduced interest rate exposure by increasing hedging, not drawn down on an available loan facility, and maintained appropriate cash balances.

Availability and cost of funding

Directly linked to the above risk, this is closely monitored by the Board. The inability to raise adequate funding in the form of equity or debt finance impacts the ability of the Company to deliver on its MLI acquisition targets and scale its business. This risk has increased over the period; however, the Board considers that it should not materially impact the Company's business in the medium to long term. The Board is also actively investigating other growth options as explained in the Prospects section of this report.

Poor performance of the Hive and excessive reliance on the technology platform

The Hive presents multiple opportunities and has already shown its ability to increase efficiencies and operational performance. However, it is accompanied by an increased risk to operations if it does not perform and has resulted in increased reliance on technology partners. It is also crucial that our new ERP system, including enhancements made to support the newly in-housed facilities management team, delivers on its objectives. The Board is confident that adequate controls exist to mitigate these risks and is closely monitoring implementation and performance in these areas.

Information security and cyber threat

This risk increases as our reliance on, and use of, technology increases. Significant emphasis is being placed on this risk by the Board with appropriate investment made by our technology team in continuously improving our controls and resilience to the ever-increasing external threats.

Major health and safety incident at an MLI site

The Board is closely monitoring compliance with health and safety requirements following the in-housing of the facilities management function and is confident that the Company is taking all relevant steps to mitigate the risks of incidents.

All other principal risks included in the 2022 Annual Report have remained stable in the period under review.

Statement of directors' responsibilities

Statement of going concern

At the date of approving these condensed consolidated interim financial statements, the Group has positive operating cash flow forecasts and positive net assets. Management have carefully assessed the impact of the market uncertainties on the Group's net assets, liquidity and ability to continue as a going concern for the foreseeable future.

A look-forward period of 18 months to March 2024 was used by management to assess the going concern basis. Management tested the base-case forecast by considering the downward impact of the macroeconomic environment on collection rates, vacancy rate, inflation, interest rates and loan covenant sensitivity assumptions on the cashflow model. Further disclosure is provided in note 1 of the condensed consolidated interim financial statements. The test concluded that even in this scenario the Group would have positive liquid assets and be able to meet its obligations as they fall due.

In light of this review and the liquid assets held by the Group, management are satisfied that the Group has access to adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of these condensed consolidated financial statements.

The directors believe that it is therefore appropriate to prepare the accounts on a going concern basis.

Statement of directors' responsibilities in respect of the interim report

The directors confirm that to the best of their knowledge:

i.     the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

ii.    the operating and financial review together with the statement of principal risks and uncertainties above include a fair review of the information required by the Disclosure Guidance and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year, a description of principal risks and uncertainties for the remaining six months of the year, and their impact on the condensed set of consolidated interim financial statements; and

iii.   the operating and financial review together with the condensed set of consolidated interim financial statements include a fair review of the information required by DTR 4.2.8R, being 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 or performance of the Group during that period, and any changes in the related party transactions described in the last annual report that could do so.

The financial statements are published on the Company's website, www.industrialsreit.com. A list of the current directors of Industrials REIT can be found on the Company's website. Legislation in Guernsey governing the preparation and dissemination of the interim financial statements may differ from legislation in other jurisdictions.

Approved by the board on 1 December 2022:

Paul Arenson

Chief Executive Officer

James Beaumont

Chief Financial Officer

Independent review report to Industrials REIT Limited

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2022 is not prepared, in all material respects, in accordance with International Accounting Standard 34, the Johannesburg Stock Exchange Listing Requirements and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2022 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and the related explanatory notes.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", the Johannesburg Stock Exchange Listing Requirements, the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and the Johannesburg Stock Exchange Listing Requirements.

In preparing the half-yearly financial report, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and the Johannesburg Stock Exchange Listings Requirements and for no other purpose.  No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants

London, UK

1 December 2022

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Condensed consolidated statement of

comprehensive income

For the 6 months to 30 September 2022

The comparatives have been restated to reflect the change in classification of current year discontinued operations to enable an effective like-for-like comparison.

Condensed consolidated statement of

financial position

As at 30 September 2022

Condensed consolidated statement of

changes in equity

For the 6 months to 30 September 2022

Consolidated statement of cash flows

For the 6 months to 30 September 2022

 Funds totalling £10.9 million were restricted at 30 September 2022 (2021: £5.1 million).

1 Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB'). These unaudited condensed consolidated interim financial statements for the six months ended 30 September 2022 have been prepared in accordance with IAS 34 'Interim Financial Reporting', the JSE Listings Requirements, the Disclosure and Transparency Rules of the UK's FCA, applicable Guernsey law and the financial reporting pronouncements issued by the Financial Reporting Standards Council of South Africa (the 'FRSC Pronouncements').

These condensed consolidated interim financial statements have been reviewed, not audited. The auditor's review opinion is included in this report.

These condensed consolidated financial statements have been prepared by, and are the responsibility of, the Directors of Industrials REIT.

The condensed consolidated financial statements are presented in GBP (Pounds Sterling).

With the exception of the equity adjustments below, the accounting policies and methods of computation are consistent with those applied in the preparation of the annual financial statements for the year ended 31 March 2022, which were audited and reported on by the Group's external auditor. The consolidated annual financial statements for the year ended 31 March 2022 are available on the Company's website: Industrialsreit.com.

These condensed consolidated interim financial statements reflect the same operating segments at 31 March 2022. The Directors have classified the Guernsey, Germany (retail properties) and Switzerland operating segments as discontinued operations in these condensed consolidated interim financial statements in accordance with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations. At 30 September 2021, the German (care homes) segment was reported as a discontinued operation. In the current period this segment is being reported as a continuing operation. Accordingly, prior periods in the statement of comprehensive income, statement of cash flows and operating segments note (note 2) have been restated to show the German (care homes) segment as continuing operations. Further details can be found in note 10 - Assets held for sale and discontinued operations.

Treasury shares

The equity reserve account combines the activities of the Company's treasury shares, including the issue of scrip dividend shares, repurchase of share capital, and equity-settled share-based payments. Where share capital is repurchased into Treasury, the amount of the consideration paid, including directly attributable costs, is recognised as a debit in the Equity Reserve.

Previously, distributions out of Treasury were recorded at the scrip dividend reference price, for scrip dividends, or the grant date fair value for equity-settled share-based payments. Under the prior treatment, the Treasury account balance would never clear to nil once all treasury shares are distributed. IFRS and Guernsey company law are silent on the treatment of treasury share accounting, the Company has therefore developed its own accounting policy based upon UK company law.

The new accounting policy states, where the proceeds from scrip dividends settled from Treasury exceed the purchase price paid by the Company the excess is treated as capital and transferred to the share premium account. Where proceeds are less than the purchase price paid by the Company, the balance will be transferred to retained earnings.

All treasury share distributions will be determined on a weighted average price basis.

This change in accounting policy change has been enacted in the current financial period with retrospective effect from 1 April 2021 and has had the following effect on the financial statements:

Depreciation and amortisation

Depreciation and amortisation are charges to the statement of comprehensive income that allocate an assets' cost across its expected useful life. The Company uses the straight-line method to record depreciation and amortisation.

Depreciation and amortisation are recognised from when the asset is first installed and ready for use. In the case of the Industrials Hive intangible asset, amortisation began on 1 April 2022 over a five-year useful life.

Leasehold improvements and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment

losses. Historical cost is the original purchase price, plus costs to bring the asset to a working condition for its intended use.

Going concern

At the date of signing these condensed consolidated financial statements, the Group has positive operating cash flow forecasts and positive net assets. Management have carefully assessed the impact of market uncertainties on the Group's net assets, liquidity and ability to continue as a going concern for the foreseeable future.

A look-forward period of 18 months to March 2024 has been used to assess the going concern basis. Management stress tested the Company's ability to continue as a going concern by considering the downward impact of the macroeconomic environment on collection rates, vacancy rate, inflation, interest rates and loan covenant sensitivity assumptions on the cashflow model. In this scenario analysis:

The test concluded that even in this scenario the Group would have positive liquid assets and be able to meet its obligations as they fall due.

Debt refinancing and sensitivities to loan covenants were assessed in detail, as well as the Company's REIT obligations. Despite the

disruption to the economy, management do not expect the risk of default to have increased. The projections indicate that the Group will remain within the limits and not breach covenants. In addition, the Group maintains strong relationships with its facility providers and currently has significant headroom for both interest cover and LTV loan covenants. Notwithstanding this assumption, the Group would have cash resources available, even after considering the respective downside scenarios above, to be utilised to cure covenant breaches if they crystallise and should the lenders take a hard stance. It is further worth noting that the loans are not cross- collateralised and accordingly if certain banks do act aggressively, the Group would continue to operate with the remaining portfolio of assets if any foreclosure events were to arise.

In light of this review and the significant liquid assets, management are satisfied that the Group has access to adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of these condensed consolidated financial statements.

The directors believe that it is therefore appropriate to prepare the accounts on a going concern basis.

Adoption of new and revised standards

In the current period, no new or revised standards and interpretations have been adopted. No other standards or interpretations not yet effective are expected to have a material impact on these condensed consolidated financial statements of the Group.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of condensed consolidated financial statements, in accordance with IFRS, requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group's accounting policies. Although the estimates are based on management's best knowledge of the amount, events or actions, actual results may ultimately differ from those estimates. The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period, are discussed below.

Key sources of estimation uncertainty Valuation of the property portfolio

The Group's investment properties are stated at estimated fair value, determined by directors, based on an independent external real

estate valuation expert. The valuation of the Group's property portfolio is inherently subjective due to several factors including the individual nature of each property, its location, expectation of future rentals and the discount yield applied to those cash flows.

As a result, the valuations placed on the property portfolio are subject to a degree of uncertainty and are made based on assumptions that may not prove to be accurate, particularly in years of volatility or low transaction flow in the market. The estimated market value may differ from the price at which the Group's assets could be sold at a particular time, since actual selling prices are negotiated between willing buyers and sellers. As a result, if the assumptions prove to be different, actual results of operations and realisation of net assets could differ from the estimates set forth in these financial statements, and the difference could be significant. Further details can be found in note 8.

2 Operating segments

The Group specialises in the ownership and operation of UK multi-let industrial property. Historically the investment portfolio was geographically distributed across the United Kingdom, Germany, Guernsey and Switzerland. Apart from the Group segment, each segment derives its revenue from the rental of investment properties in their respective geographical regions.

^ The German operating segment has been split between continuing and discontinued operations. Due to the expected timeframe it will take to dispose of the care homes joint venture, this cash generating operation is being disclosed as a continuing operation. All other historic German property operations have been listed as discontinued. This classification does not change the Group's strategy to dispose of its ownership interest in the care home's joint venture and will endeavour to complete the transaction as soon as is practicable.

3 Net rental income

4 Operating costs

Share-based payments of £697,000 (2021: £734,000) relate to the equity-settled incentive schemes operated by the Group. As at

30 September 2022, the Group's equity reserve held £4.2 million (31 March 2022: £3.6 million) in relation to the schemes after the exercise of options at fair value of £330,000 (2021: £156,000) during the period.

5 Earnings per ordinary share

¹ The European Public Real Estate Association Best Practices Recommendations guidelines, February 2022 ('EPRA BPR') provides guidelines for performance measures relevant to real estate companies. Their recommended reporting standards are widely applied across this market, aiming to bring consistency and transparency to the sector. The EPRA earnings measure is intended to show the level of recurring earnings from core operational activities with the purpose of highlighting the Group's underlying operating results from its property rental business and an indication of the extent to which current dividend payments are supported by earnings. The measure excludes unrealised changes in the value of investment properties, gains or losses on the disposal of properties and other items to provide additional information on the Group's underlying operational performance. The measure is considered to accurately capture the long-term strategy of the Group and is an indication of the sustainability of dividend payments.

² As described in EPRA BPR, companies wishing to make other adjustments to arrive at an underlying performance measure appropriate to their business model, should do that below 'EPRA earnings' and should use a different name for that measure. 'Adjusted EPS' is a measure that excludes items considered not to be in the ordinary course of business or other exceptional items that do not necessarily provide an accurate picture of the Group's underlying operational performance.

³ In the current period, diluted IFRS EPS' are stated at their respective IFRS EPS values due to the anti-dilutive effect an IFRS loss has on the diluted number of shares.

As at 30 September 2022, the Company held 4,258,406 treasury shares (2021: 7,989,348 and 31 March 2022: 6,520,962).

Costs associated with ERP implementation and amortisation

Industrials REIT Limited has implemented a new enterprise resource planning (ERP) platform encompassing finance and operations, and customer engagement components to help streamline and grow the business. Significant non-recurring costs were incurred, and the ERP implementation expense related to this one-off project which went live on 1 April 2022. The costs of implementing this project, as well as the associated amortisation expense, have been adjusted for as a "company-specific adjustment".

Headline earnings per share

The JSE listings conditions require the calculation of headline earnings and disclosure of a detailed reconciliation of headline earnings to the earnings numbers used in the calculation of basic earnings per share in accordance with the requirements of IAS 33 - Earnings per Share. Disclosure of headline earnings is not a requirement of IFRS.

6 Net asset value metrics per share - reconciliations and bridge

EPRA's best practice recommendations are a set of guidelines for public real estate companies which enable investors and other users of annual reports to benefit from the transparency and consistency offered by standardised reporting. EPRA recommends disclosing three measures of net asset value, namely: EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV).

Industrials REIT considers EPRA NTA to be the most relevant measure of the three EPRA NAVs to report on and will act as the key net asset value measure. The EPRA NTA metric is aligned with IFRS NAV in that it includes deferred tax liabilities with regard to properties classified as held for sale. A reconciliation of the three EPRA NAV metrics from IFRS NAV is shown in the table below.