Harworth Gp Regulatory News (HWG)

HARWORTH GROUP PLC

UNAUDITED INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2020

 RESILIENT PORTFOLIO, OPERATIONAL STRENGTH AND EXPOSURE TO STRUCTURALLY SUPPORTED BEDS & SHEDS SECTORS PROVIDES STRONG PLATFORM FOR CONTINUED PROGRESS

Harworth Group plc ("Harworth" or the "Group"), a leading regenerator of land and property for development and investment, announces its interim results for the half year ended 30 June 2020.

Harworth's Chief Executive, Owen Michaelson, said:

"Whilst Harworth has not been immune to the effect of COVID-19, the business is weathering the pandemic well. We have had an active first nine months, remaining at full operational strength throughout. The independent valuation as at 30 June resulted in a limited c.4.75% decline in portfolio value following the delivery of key management milestones and the Group remains well positioned for the future. Given our demonstrated financial and operational resilience and our long-term confidence in our business model, we are returning to paying dividends with an interim dividend per share of 0.334p, a 10% increase on our 2019 interim dividend.

"The Group's purpose of delivering sustainable places for people to live and work remains as relevant as ever to support the UK's economic recovery. Demand for residential and commercial land in the "beds and sheds" sectors, which have demonstrated their resilience during this unprecedented period, remains strong in the North of England and Midlands. This is further reflected in our sales in the first half being achieved at or above 2019 book value.

"Our income portfolio continues to drive value growth whilst covering the operating costs of the business and we have continued to add to this with the acquisition of two high yielding income-producing properties in the period and on-site commercial development. This predominantly industrial portfolio has also performed dependably with c.95% of income collected for March and June quarters. 

"The Government's priority to 'build build build' and to level up the national economy in support of the regions, backed by sensible proposed planning reforms and significant regional infrastructure investment, remains an important underpin. This together with the strength of our balance sheet and diverse portfolio provides a solid platform for future growth whilst also affording significant flexibility to take advantage of strategic land or income-generating opportunities in the regions.

"With over 70% of all budgeted sales for 2020 completed or agreed, financial headroom today of £63.3m in place to take advantage of market opportunities, a substantial well-positioned pipeline of major developments and strategic land, and a resilient income portfolio, I will be handing Harworth over to my successor Lynda Shillaw in excellent health."

Footnote:

(1) Harworth discloses both statutory and alternative performance measures. A full description and reconciliation of the alternative performance measures is set out in Note 2 to the condensed consolidated interim financial statements 

(2) EPRA Net Disposal Value ("EPRA NDV")

-ENDS-

Enquiries: 

Results Presentation

Harworth will be holding a presentation for analysts and investors starting at 09.00am today. A live webcast will also be available which can be accessed via the following link:

https://webcasting.brrmedia.co.uk/broadcast/5f6a276983507b593b46d4df

There will also be a conference call facility available. The dial-in details are as follows:

ABOUT HARWORTH GROUP PLC

Listed on the premium segment of the main market, Harworth Group plc (LSE: HWG) is a leading regenerator of land and property for development and investment which owns, develops and manages a portfolio of approximately 18,000 acres of land on around 100 sites located throughout the North of England and Midlands. The Group specialises in the regeneration of large, complex sites, in particular former industrial sites, into new residential developments and employment areas (harworthgroup.com).

This announcement contains certain forward-looking statements which, by their nature, involve risk, uncertainties and assumptions because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward looking statements. Any forward-looking statements made by or on behalf of the Group are made in good faith based on current expectations and beliefs and on the information available at the time the statement is made. No representation or warranty is given in relation to these forward-looking statements, including as to their completeness or accuracy or the basis on which they were prepared, and undue reliance should not be placed on them. The Group does not undertake to revise or update any forward-looking statement contained in this announcement to reflect any changes in its expectations with regard thereto or any new information or changes in events, conditions or circumstances on which any such statement is based, save as required by law and regulations. Nothing in this announcement should be construed as a profit forecast.

Operational Review

OVERVIEW

This has been a six months like no other for global industry, but I am pleased with how resilient the business and our staff have been in both minimising COVID-19's potential effects and in continuing to deliver key milestones across our sites in the North of England and the Midlands. Whilst our results for the half year reflect within valuations the disruption of COVID-19 and market sentiment, our hard work progressing sites, working with tenants, and asset managing our land and property portfolio has minimised the impact. This places us in a strong position moving forwards. EPRA NDV per share as at 30 June 2020 stood at 148.6p (H1 2019: 147.3p, FY 2019 155.6p), delivering a total return (EPRA NDV (reduction)/growth plus dividends per share) over the last twelve months of 1.1% (H1 2019: 13.3%).

Naturally our organisational focus has been, and remains, on ensuring that the business trades successfully through this unprecedented period. Health and safety of our staff has been paramount throughout. The underlying strength of the business has meant that no staff have needed to be furloughed and all have successfully adapted to our revised way of working and are now on an established rota system in our principal regional offices. Infrastructure and remediation works continued uninterrupted on all seven of our development sites where sales have been agreed, with no sales falling away as a result of the pandemic. We also successfully supported our housebuilders returning to site following a four to six week development pause at the height of the pandemic, with reported demand for homes on our developments now ahead of their equivalent 2019 levels.

The pandemic has also shown the importance of our investment portfolio in supporting the business with regular income and value-add opportunities whilst demonstrating our skill as an asset manager in supporting our tenants. With c.95% of all income collected across the first half of the year, our investment portfolio provides resilience in our valuations and crucially continues to cover business overheads and banking interest payments, allowing the business to concentrate on continuing to drive maximum value from the underlying portfolio and on sourcing new land and property opportunities.

Over the second half of the year we are continuing to complete agreed sales and, with both infrastructure and development works accelerated over the summer months, drive value gains prior to the year-end. Transactional evidence from the first half continues to demonstrate the popularity of our products and that our core purpose of transforming land and property into sustainable places where people want to live and work is of increasing relevance in supporting the UK's economic recovery.

GROWING AND REFINING THE LAND AND PROPERTY PORTFOLIO

Capital Growth

We made one strategic land acquisition in the North West in the period, a 15.6 acre principally brownfield site for which a 140 plot outline planning application will shortly be made to Bolton Council. In addition, we signed a Planning Promotion Agreement for a major new residential development in the West Midlands that could deliver up to 1,298 plots in the medium-term.

Income-producing property

Two income-producing acquisitions were made in June 2020 for a total of £11.3m plus acquisition costs, reflecting a blended Net Initial Yield of 10.0%, progressing the Group's strategy to grow the breadth and depth of its income portfolio. Further information is provided within the 'Growing the Investment Portfolio' section.

Continued sell-down of our non-core portfolio

We continue to refine the portfolio further to ensure management time is spent on those projects with the highest value-add potential. Nine sites totalling 899 acres were sold in H1, with the majority of these sites being in the North East with little development potential.

PREPARING LAND TO CREATE NEW COMMUNITIES AS MASTER DEVELOPER

The planning system has adapted well to the challenge of COVID-19, with virtual planning committees now in force across English local authorities to determine applications. This approach was taken in determining two of the Group's key applications in Q2:

Ø Planning consent was secured for a 53-acre site at Woodville by South Derbyshire District Council. A 300 plot PPA site is now being brought forward with a third-party landowner and we are presently undertaking initial infrastructure works ahead of a future sale.

Ø Planning consent was also secured after the period end for Phases 2 and 3 of our Gateway 36 development in Barnsley which will provide a further 1.1m sq. ft of employment space close to Junction 36 of the M1. The 95-acre scheme could deliver up to 2,410 new jobs for Yorkshire, with both phases suitable for light and general industrial use as well as storage and distribution.

Further progress has continued to be tempered by planning headwinds on a small handful of sites. This includes our Gascoigne Interchange site in Selby, North Yorkshire which is now being re-planned in the medium-term around its existing rail connection and 375m sidings, with the intention of promoting the site for rail testing, storage or distribution. In addition, despite receiving a resolution to grant planning consent from Bolton Council in January 2020 for 1.1m sq. ft of commercial space at our Wingates development, this application was called-in by the Secretary of State for Communities & Local Government as part of a review of five non-competing employment applications across the North West. Our part of this Examination in Public will take place by the end of 2020.

As at 30 June 2020, planning applications for c2.4m sq. ft of commercial space and 2,391 residential plots were in the planning system awaiting determination, including the application on the former Ironbridge Power Station for 1,000 homes, employment space and a range of leisure and supporting uses.

DELIVERING SERVICED PLOTS FOR NEW HOMES AND INDUSTRIAL SPACES

Infrastructure works continued unabated on seven major development sites to support our planned sales and direct development programme, with three major sales being achieved during the period. Total property sales were £30.8m, all were achieved at or above book value:

Ø In April, we sold 19.5 acres of industrial land at our Skelton Grange site in Leeds to Wheelabrator Technologies for a total consideration of £13.0m, well in excess of its 31 December 2019 book value. Wheelabrator will now construct a facility that by 2023 will convert residual residential, commercial and industrial waste into renewable baseload energy that will power the equivalent of around 89,000 homes

Ø In June we disposed of Plot C1, a 2.2 acre plot at Logistics North in Bolton, to A&F Forecourts Ltd at a price above book value

Ø Also in June, we sold the first phase of residential land at Hugglescote Grange, Coalville, totalling 16.0 acres, to Redrow in line with its 31 December 2019 book value. This was our first deal with Redrow although they now represent the 16th housebuilder to which we have sold engineered land over the past six years. Redrow will deliver 204 3 to 4-bedroom homes, setting the tone for the wider 2,016 plot development

As at the beginning of October, over 70% of all budgeted sales for 2020 have been completed or agreed, reinforcing the underlying strength of appeal of our land product to purchasers of residential and commercial land.

All of this activity meant that as at 30 June 2020, the Group's owned and managed strategic land portfolio now stands at its largest size since relisting: 30,132 potential residential plots (10,074 plots consented) and 25.4m sq. ft of potential industrial space (8.2m sq. ft of space consented), providing a pipeline for significant value generation into the longer-term.

GROWING THE INVESTMENT PORTFOLIO

Our investment portfolio continues to make a significant contribution to profits and value gains and provides the recurring income needed to cover our overhead and bank interest costs. Annualised income from the portfolio now totals £17.2m per annum (FY 2019: £15.0m) from our Business Space portfolio and from acting as landlord on our Natural Resources schemes, including renewable energy uses.

Our strategy remains to use our in-house asset management abilities to maximise capital values and rental income, with further growth coming from the purchase of high yielding investments with clear asset management potential and the direct development of industrial space on our principal employment developments.

Existing Portfolio

Our predominantly industrial tenant base within our Investment Portfolio has coped well during the pandemic. Our Income Generation team has engaged fully with our tenants in line with the Government code of practice to allow them to trade through, including moving them to monthly payments where necessary. c.95% of rent was collected for the March and June quarters.

This was supported by 22 new and renewed lettings being agreed during the period, including Esterform agreeing a ten-year extension of its lease at its Sherburn-in-Elmet factory to August 2040, with passing rent increasing from £0.7m to £1.1m from August 2020. Following all of this activity, vacant space within the entire Investment Portfolio has further reduced to 3.7% (FY 2019: 6.2%) with a WAULT of 13.2 years (FY 2019: 13.5 years).

New Acquisitions

Our two income-producing acquisitions in the first half represented a continuation of the Group's track record of acquiring high-yielding assets with further asset management potential:

Ø Thorns Road Industrial Estate near Dudley was purchased for £10.1m plus acquisition costs, reflecting a Net Initial Yield of 10.2% and a Reversionary Yield of 12.8%. Close to both Dudley and Stourbridge town centres and less than ten miles from Birmingham City Centre, the 20.5-acre site comprises three fully let industrial units totalling c. 360,000 sq. ft. Leases agreed with key West Midlands manufacturers Xandor Automotive and Sunrise Medical will generate a passing rent of £1.1m per annum. The acquisition also includes 4.2 acres of open storage land, providing further asset management potential

Ø We also purchased a Short Term Operating Reserve (STOR) facility in Gloucester for £1.2m, reflecting a Net Initial Yield of 8.3%. The facility, which sits on 1.3 acres of land on Bristol Road to the south of Gloucester town centre, is let to UK Capacity Reserve Ltd (Sembcorp Energy UK Ltd) on a lease expiring in 2040

Direct Development

All of Harworth's three direct development programmes are on-track, including the practical completion of the UK Atomic Energy's (UKAEA) new 22,300 sq. ft nuclear fusion research facility at the Advanced Manufacturing Park in Rotherham. The UKAEA has taken a 20-year lease on the unit and will work with the University of Sheffield's Nuclear Advanced Manufacturing Research Centre to develop and test technologies for fusion materials and components.

Given the present strength of the industrial market in the regions and low vacancy rate within our portfolio, we have also made the decision to build a speculative industrial unit on the last remaining vacant plot at Logistics North to form part of our future investment portfolio. Construction of the 50,800 sq. ft unit will commence in November and will be practically complete by the Summer of 2021. We will consider other direct development opportunities on our commercial development sites providing they satisfy three management tests: customer demand; funding and covenants; and risks and projected returns.

Our purpose is more relevant than ever

Ultimately, we believe that the importance and role of master developers like ourselves has been strengthened in the past six months, driven by changing expectations as to what people want from their places of living and working. This is also matched by our residential and industrial markets remaining resilient, supported by a continued undersupply of new homes in the UK and the further growth of e-tailing. The underlying strength of these markets and the wider market opportunities that we believe will be generated as a result of the pandemic, underpin our intent to make further acquisitions over the next 12 months.

Following the launch of the 'Harworth Way' in the publication of our Annual Report & Financial Statements in June, further progress has been made to develop further the Group's ESG Strategy. This documents the actions the business will take against our five principal themes to address major social, economic and environmental trends to create value for our stakeholders and the business and the updated ESG strategy will be formally launched early in the new year.

Our people are the core of the business

The hard work and dedication of our teams has remained absolutely steadfast throughout this period and I thank them all for their drive, dedication and skill in continuing the effective transformation of land and property. All initial posts within our core regions are now filled, alongside the recruitment in March of Richard Bousfield as our new Director of Income to drive the growth of our Investment Portfolio. Health and safety of our staff has been paramount throughout and with no staff furloughed at any point , the Group remains at optimal operational strength to drive management actions across the business.

Outlook

Our fundamental objective remains to deliver long-term market-leading returns for our shareholders. Whilst there is uncertainty ahead for the UK economy, we believe that the actions we have taken over the last six months have placed us in a strong position for the future.

Despite the pandemic, the core strength of the "beds and sheds" markets in our regions remains. Our sites persist in their popularity, backed by their strong locations close to principal infrastructure and the quality of the land and property that we offer. The stability of the regional markets in which we operate is underpinned by comparatively low prices, a continuing lack of consented and engineered land for housing given the continued chronic under-delivery of new housing stock, and the need for industrial land to support the acceleration of e-tailing post-pandemic.

Utilising our significant financial headroom, we will continue to focus on purchasing major brownfield and potential urban extension sites in sustainable locations alongside income-producing properties with clear asset management opportunities and long-term strategic land potential. The latter also supports increasing the resilience of our Investment Portfolio as a key strategic defensive measure regardless of how the wider market performs.

We strongly welcome Government support aimed at rebalancing the UK economy. Significant further financial investments in brownfield land, road and rail infrastructure and regional devolution will ultimately support making our regions more economically competitive and help to realise the significant latent value in our underlying portfolio.

I am very confident that Harworth remains well positioned for long-term growth to capitalise on the opportunities created by the renewed political focus on the Midlands and the North of England. I will be handing the business over to Lynda Shillaw in a fundamentally strong position when she succeeds me as Chief Executive on the 1st of November. I would like to thank everyone who has been on the journey with me over the last ten years. It is a credit to the entire team that we have delivered what Harworth is today.

Owen Michaelson

Chief Executive Officer

6 October 2020

Financial Review

Overview

Alongside the solid operational activity, the first half year financial performance was broadly in line with our original projections at the start of 2020 before the impact of COVID-19 on the valuation of our land and property portfolio.

Sales of serviced land and income from rent, royalties and fees resulted in Group revenue of £23.7m (H1 2019: £58.6m). Whilst this is lower than in 2019, this is reflective of scheduled activity on sites and a higher than normal level of development property disposal activity in the prior period. With the onset of the pandemic, capital spend was prioritised on sites with agreed sales in place, whilst no sales fell away as a result of the COVID-19 pandemic.

The Group's profit excluding value gains increased to £2.4m (H1 2019: £2.0m) demonstrating a continued strong rent collection on a portfolio bolstered by new acquisitions in 2019 and a promote fee at Logistics North, off-setting the impact of the ongoing winding down of income from coal fines.

Whilst our Business Space and Natural Resources portfolio grew in value, the impairment of our development properties resulted in an operating loss for the period to 30 June 2020 of £(3.7)m (H1 2019: operating profit £13.3m) and meant that we recorded a loss after tax for the half year of £(5.1)m (H1 2019: £15.0m profit). Basic earnings per share for the half year were therefore (1.6)p (H1 2019: 4.7p).

Over the six months, net asset value fell to £458.1m (FY 2019: £463.8m). With EPRA adjustments for development property valuations included, EPRA NDV at 30 June 2020 was £478.7m (FY 2019: £500.5m) representing a per share reduction of 4.5% to 148.6p (FY 2019: 155.6p). This resulted in a total return (EPRA NDV (reduction)/growth plus dividends per share) of (4.5)% (H1 2019: 1.9%).

Following the onset of COVID-19, the recommendation for the 0.7 pence per share final 2019 dividend was withdrawn in April. Since that point, housebuilders have returned to all of our major development sites and are making good progress, whilst appetite for new industrial development is strong. The Board has, therefore, determined that it is appropriate for an interim dividend to be paid of 0.334p (H1 2019: 0.30p) per share, an increase of 10%. The Board also remains committed to considering, at the time of the final 2020 dividend, an increased payment for 2020 to reflect the cancellation of the 2019 full-year dividend.

The Group's revolving credit facility was increased by £30.0m in May 2020 to £130.0m and the Group has continued to exercise a prudent and disciplined approach to financing. The Group remains well capitalised and as at 30 June 2020 had substantial available liquidity of £67.5m (FY 2019 £35.8m). In light of the COVID-19 pandemic and changes in the property market, an independent valuation of the full land and property portfolio has been completed. This showed a reduction in value across the portfolio of c.4.75%, reflecting market conditions as at 30 June 2020 and demonstrating the strength of the diversified property portfolio and management actions taken to date. The valuation contains a market uncertainty clause in line with guidance from RICS as at the date of the valuation. Based on this revised valuation, the closing net loan to portfolio value was 12.4% (FY 2019: 12.1%), at the lower end of our net LTV target range. This means that we have headroom at 30 June 2020 to withstand a further fall of over 50% in values before we reach our tightest LTV covenant, whilst our interest cover covenants could withstand a downside scenario of a material loss of rental income.

Presentation of financial information

We find that as our property portfolio includes development properties and joint venture arrangements, Alternative Performance Measures ("APMs") can provide valuable insight into our business alongside the statutory amounts. In particular, revaluation gains on development properties are not recognised in the Statutory Income Statement and Balance Sheet. The APMs set out to show measures which include movements in development property revaluations, assets held for sale, overages and joint ventures, and also the profitability of the business excluding value gains. We believe that these APMs assist in providing stakeholders with additional useful disclosure on the underlying trends, performance and position of the Group.

Our key APMs are:

· Total return - the movement in EPRA NDV plus dividends per share paid in the year expressed as a percentage of opening EPRA NDV per share

· EPRA NDV per share - EPRA NDV divided by the number of shares in issue less shares held by the Employee Benefit Trust

· Value gains - this is the realised profits from the sales of properties and unrealised profits from property value movements including joint ventures and the mark to market movement on development properties, assets held for sale and overages

· Profit excluding value gains - property net rental, royalty and fee income, net of running costs of the business which represents the underlying profitability of the business not reliant on property value gains or profits from the sales of development properties

· Net loan to portfolio value - Group debt net of cash held expressed as a percentage of portfolio value

A full description of all non-statutory measures and reconciliations between all the statutory and non-statutory measures are given in Note 2 to the condensed consolidated interim financial statements.

Harworth discloses some APMs which are European Public Real Estate Association ("EPRA") measures as these are a set of standard disclosures for the property industry and thus aid comparability for our real estate investors and analysts. Following the release of new best practice recommendations by EPRA, we have replaced the reporting of EPRA NNNAV with EPRA Net Disposal Value (EPRA NDV) within these results. We believe that this measure continues to be the most appropriate measure to explain our business. The new EPRA APMs and previous APMs and have been reported in Note 2 for comparison purposes.

Our financial reporting is aligned to our business units of Income Generation and Capital Growth with items which are not directly allocated to specific business activities, held centrally and presented separately.

Income Statement(1)

Notes: (1) There are some minor differences on some totals due to roundings

Revenues in H1 2020 were £23.7m (H1 2019: £58.6m), split between revenue from Income Generation of £9.9m (H1 2019: £11.9m) and revenue from Capital Growth of £13.8m (H1 2019: £46.7m). The disposal of land and development properties includes the sale of the first plots at Hugglescote Grange. Revenues have fallen but H1 2019 saw an unusually high level of sales, including a significant sale at Swadlincote, with H1 2020 reflecting a more normal level of activity.

Income Generation (Business Space, Natural Resources and Operations) revenue mainly comprises property rental and royalty income together with some sales of coal fines. Revenue in H1 2020 is lower as a result of the ongoing trend of reduced sales of coal fines, mitigated in part by increased rental income from property acquisitions and asset management. The core of our recurring income is from rental and royalty income from Business Space and Natural Resources which increased on an annualised basis from £15.0m to £17.2m in the period.

Cost of sales comprises the inventory cost of development property sales and the operating costs of the Income Generation business. Cost of sales decreased to £26.6m (H1 2019: £40.0m) of which £11.3m related to the inventory cost of development property sales (H1 2019: £36.7m) and £12.9m relates to an increase in the net realisable value provision on development properties (H1 2019: £1.0m decrease).

Other gains comprises the profit on sale of investment properties, assets held for sale and overages of £5.5m (H1 2019: £1.2m) which includes the sale of part of the site at Skelton Grange and £0.4m (H1 2019: £nil) net increase in the fair value of investment properties and assets held for sale.

Joint venture profits of £1.6m (H1 2019: £6.4m) were largely a result of an increase in the value of the Gateway 45 Leeds site. Value (losses)/gains on a non-statutory basis are set out below.

Non-statutory value (losses)/gains(1)

Value (losses)/gains are made up of profit on sale, revaluation gains/(losses) on investment properties (including joint ventures), and revaluation gains/(losses) on development properties, assets held for sale and overages:

Notes: (1) A full description and reconciliation of the alternative performance measures in the above table is included in note 2 to the condensed consolidated interim financial statements

Profit on sale of £4.7m (H1 2019: £4.7m) reflect sales above book value particularly across Capital Growth sites.

An independent valuation of the land and property portfolio was completed as at 30 June 2020 by BNP Paribas and Savills (H1 2019: Directors' valuation). This has resulted in revaluation losses of £27.9m (H1 2019: £6.4m gains). The principal revaluation gains and losses across the divisions reflected the following in this period:

· Major Developments - whilst management actions continued to move sites forwards and provide key valuation support, national residential market sentiment, particularly relating to short-term certainty on timing and prudent profit assumptions reduced valuations as at 30 June. However, Gross Development Value for our major developments remained almost entirely unaffected with no general increase in costs and continued evidence of plot sales;

· Strategic Land - increased by profit on sale and valuation uplift at Skelton offset by the tempering of values reflecting planning delays including at Gascoigne Interchange;

· Business Space - good letting progress achieved across our portfolio including the lease re-gear at Moxon Way and an increase in valuation at Nu-Farm reflecting a high quality covenant on a long term lease;

· Natural Resources - valuation uplifts as a result of asset management initiatives; and

· Agricultural Land - small reductions across a handful of assets.

The net realisable value provision as at 30 June 2020 was £19.8m (FY 2019: £6.9m) and held across nine development properties. This provision has been made to reduce the value of these development properties from their deemed cost (the fair value at which they were transferred from investment property to development property) to their net realisable value at 30 June 2020. The transfer from investment to development property takes place once planning is secured and development with a view to sale has commenced.

In the first half of 2020, the Group had revaluation losses of £27.9m (H1 2019 £6.4m gains) comprising;

Cash and sales

The Group made property sales(1) of £30.8m in H1 2020 (H1 2019: £53.3m) achieving profits on sales of £4.7m (H1 2019: £4.7m). The sales were split between those of residential serviced plots at £10.2m (H1 2019: £45.6m), commercial land at £14.0m (H1 2019: £2.9m) and other, mainly mature, income-generating sites and agricultural land including those in the North East, at £6.6m (H1 2019: £4.8m).

Cash proceeds from sales in the period were £42.0m (H1 2019: £29.0m) as shown in the table below:

Notes: (1) A full description and reconciliation of the alternative performance measures is included in Note 2 to the condensed consolidated interim financial statements

Tax

The income statement charge for taxation for the period was £1.5m (H1 2019: £3.5m) which comprised a current year tax charge of £0.2m (H1 2019: £2.2m) and a deferred tax charge of £1.3m (H1 2019: £1.3m).

The current tax charge resulted primarily from profits from the sale of development properties, investment property and assets held for sale offset by the impairment of some development properties.

The movement in deferred tax from 31 December 2019 mainly arises due to the increase in the corporation tax rate from 17% to 19% which was substantively enacted on 17 March 2020.

 At 30 June 2020, the Group had deferred tax liabilities of £17.8m (FY 2019: £15.6m) which largely related to unrealised gains on investment properties and recognised deferred tax assets of £8.6m (FY 2019: £7.8m). The net deferred tax liability was £9.2m (FY 2019: £7.8m).

Basic earnings per share and Dividends

Basic earnings per share for 12 months fell to (1.6)p (FY 2019: 7.9p) reflecting the reduction in the valuation of the land and property portfolio as at 30 June 2020.

The recommendation for the 0.7 pence per share final 2019 dividend was withdrawn in April. Since that point, housebuilders have returned to all of our major development sites and are making good progress, whilst appetite for new industrial development is strong. The Board, therefore, has determined that it is appropriate for an interim dividend to be paid of 0.334p (H1 2019: 0.30p) per share, an increase of 10%. The Board also remains committed to considering, at the time of the final 2020 dividend, an increased payment for 2020 to reflect the cancellation of the 2019 full-year dividend.

Property categorisation

Until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should therefore be held as investment property. We categorise properties and land that have received planning permission and where development with a view to sale has commenced as development properties. Property categorisation is reviewed as at 30 June and 31 December each year.

As at 30 June 2020, the balance sheet value of all development sites was £188.2m (FY 2019: £202.1m) and the valuation (based on valuations by BNP Paribas and Savills plc) was £209.9m, reflecting a £21.7m cumulative uplift in value since they were classified as development properties. In order to highlight the market value of development properties, and overages, and to be consistent with our investment properties, we are using EPRA NDV, which includes the market value of development properties, assets held for sale and overages less notional deferred tax, as our primary net assets metric.

Net asset value

(1) Properties include investment properties, development properties, assets held for sale, occupied properties and investment in joint ventures

(2) A full description and reconciliation of the alternative performance measures in the above table is included in Note 2 to the condensed consolidated interim financial statements

EPRA NDV is £478.7m which includes the mark to market on the value of the development properties, assets held for sale and overages. The total portfolio value as at 30 June 2020 was £560.4m(1), a decrease of £24.9m from 31 December 2019 (£585.3m). The increase in share of profits from joint ventures has resulted in investments in joint ventures increasing to £34.4m (FY 2019: £33.1m).

Trade and other receivables include deferred consideration on sales as set out above. At 30 June 2020, there was £29.4m (FY 2019: £40.6m) deferred consideration of which £8.6m (FY 2019: £12.8m) is due after more than one year.

The table below sets out our top ten sites by value, which represent 45% of the total value of all our properties, showing the total acres and split by their categorisation, currently consented residential plots and commercial space:

Financing strategy

As has been consistently stated, Harworth's financing strategy is to be prudently geared, with the Income Generation portfolio providing a recurring income source to service debt facilities. We believe this gives the Group a number of advantages:

Harworth's financing strategy continues to target a net loan-to-value of 10% to 15% and entails the Group seeking as a principle to maintain its cash flows in balance by funding infrastructure spend and investment in acquisitions through disposal proceeds.

Debt facilities

The Group benefits from a £130m Revolving Credit Facility ("RCF") with RBS and Santander, expiring in February 2023. The facility was increased by £30m to £130m in May 2020. The Group also uses, as part of our funding, infrastructure financing, provided by public bodies to promote the development of major sites.

The Group had borrowings and loans of £76.8m at 30 June 2020 (FY 2019: £82.7m), being the RCF (net of capitalised loan fees) of £69.7m (FY 2019: £75.8m) and infrastructure loans (net of capitalised loan fees) of £7.1m (FY 2019: £6.9m). The Group's cash at 30 June 2020 was £7.5m (FY 2019: £11.8m). The resulting net debt was £69.2m (FY 2019: £70.9m).

With the increase in RCF limit, the margin on the RCF was increased by 0.15%. The weighted average cost of debt, using 30 June 2020 balances and rates, was 3.3% with a 0.9% non-utilisation fee on undrawn RCF amounts (FY 2019: 3.1% with a 0.8% non-utilisation fee on undrawn RCF amounts).

The Group's hedging strategy is to have roughly half its debt at a fixed rate and half exposed to floating rates. The Group currently has a £45m fixed rate interest swap at an all-in cost of 1.2% (including fees) on top of the existing margin paid under the RCF. The interest rate swap is hedge accounted with any unrealised movements going through reserves to the extent that the hedge is effective.

As at 30 June 2020, the Group's gross loan to portfolio value was 13.7% (FY 2019: 14.1%) and net loan to portfolio value was 12.4% (FY 2019: 12.1%). If gearing is just assessed against the value of the core income portfolio, this equates to a gross loan to core income portfolio value of 37.8% (FY 2019: 41.2%) and a net loan to core income portfolio value of 34.1% (FY 2019: 35.3%). As at 30 June 2020 the portfolio could withstand a further fall of values of over 50% before reaching the tightest LTV covenant and our interest cover covenants could withstand a downside scenario of a material loss of rental income.

Undrawn facilities under the RCF were £60.0m providing substantial drawdown headroom on entering H2 2020.

Kitty Patmore

Chief Financial Officer

6 October 2020

Principal risks and uncertainties

A detailed explanation of the principal risks and uncertainties affecting the Group, and the steps it takes to mitigate these risks, can be found on pages 29 to 37 of the Annual Report and Financial Statements for the year ended 31 December 2019 (ARA 2019), available at harworthgroup.com/investors.

The Group Risk Register (GRR) remains the principal tool used by the Board and Management Board to monitor the risk profile of the business and the measures in place at an operational level for mitigating and managing risk. The Group's principal risks and uncertainties are grouped into nine categories: Delivery, Legal and Regulatory, People, Finance, Environment, Social, Governance, Markets and Politics. These risks and uncertainties are expected to remain relevant for the Group for the remaining six months of the financial year.

In the ARA 2019 we presented the "business as usual" risk profile of the business prior to the onset of the COVID-19 pandemic but with an overlay showing its temporary impact. That overlay reflected a GRR review by the Management Board and Board at the onset of the pandemic. Unsurprisingly, it reflected a temporary, but in some cases marked increase across approximately half of our risks in the Delivery, People, Finance, Governance, Markets and Politics categories. Those increases were set out on page 36 of the ARA 2019, alongside examples of the mitigation measures we have implemented in response to the pandemic (page 37).

Since publication of the ARA 2019, we have re-opened our three principal offices on a phased basis, with "COVID-19 Secure" measures in place to ensure the health and safety of all employees and external visitors. We have continued increased communication and contact with key stakeholders, customers, suppliers and partners. This has included enhanced communication and support for employees during both the remote working and return to the office phases. On-site delivery has largely continued throughout the "lockdown" period with social distancing measures in place. The extension and amendment in May 2020 of the Revolving Credit Facility has provided greater capital and cashflow flexibility, rent collections have remained robust to date and an independent "desktop" valuation has now given clarity on valuation movements.

A further review of the GRR was undertaken by the Management Board and Board in July, the output from which is shown in the table below.

Of the risks considered to be heightened by the onset of COVID-19 (shown on page 36 of the ARA 2019), all have reduced save for: D3 (Project Delivery), F6 (Insurance) and G26 (Investors), which remain unchanged. Save for these three risks, where the table above appears to show no movement in risk status, there has been a small decrease in risk score but within the same risk status banding. In many cases, whilst heightened risks have reduced, they have not yet returned to a "business as usual" risk profile. 

Culture (PP22) was not reflected as a heightened risk in the ARA 2019 but its risk status has now increased in the GRR, reflecting that the prolonged impact of CV19 makes preservation and promotion of our collaborative culture more challenging.

All risks are expected to remain unchanged or decrease over the next 6 months, save for the residential property market (M2) risk, which is forecast to increase, reflecting the anticipated impact of rising unemployment on the housing market.

We continue to monitor very closely the markets in which we operate and the risks profile of our business, being particularly mindful of not only the ongoing impact of COVID-19, but also the progress and likely outcome of trade negotiations between the UK and European Union (EU) as we approach the end of the transitional arrangements agreed with the EU. Whilst Harworth is not immune to the uncertainty created by the macro-economic and political backdrop, its likely impact is mitigated by the positive long-term fundamentals and trends in our core markets.

Consolidated income statement

The notes on pages 23 to 44 are an integral part of these condensed consolidated interim financial statements.

All activities in the current period/year are derived from continuing operations

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in shareholders' equity

Consolidated statement of cash flows

Notes to the condensed consolidated interim financial statements

for the six months ended 30 June 2020 

1. Basis of preparation of the condensed consolidated interim financial statements

General information

Harworth Group plc (the "Company") is a company limited by shares, incorporated and domiciled in the UK (England). The address of its registered office is Advantage House, Poplar Way, Catcliffe, Rotherham, South Yorkshire, S60 5TR.

The Company is a listed public company on the London Stock Exchange.

The condensed consolidated interim financial statements for the six months ended 30 June 2020 comprise the Company and its subsidiaries (together referred to as the "Group").

These condensed consolidated interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group financial statements for the year ended 31 December 2019 were approved by the Board of Directors on 4 June 2020 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed consolidated interim financial statements have not been audited or reviewed.

The condensed consolidated interim financial statements for the period ended 30 June 2020 were approved by the Board on 29 September 2020.

Basis of preparation

These condensed consolidated interim financial statements for the six months ended 30 June 2020 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34 'Interim Financial Reporting' as adopted by the European Union ("EU"). The condensed consolidated interim financial statements should be read in conjunction with the Group financial statements for the year ended 31 December 2019 which have been prepared in accordance with IFRSs as adopted by the EU.

Going-concern basis

These condensed consolidated interim financial statements are prepared on the basis that the Group is a going concern. In assessing going concern and determining whether there are material uncertainties, the Directors consider the Group's business activities, together with factors that are likely to affect its future development and position.

A review of the Group's cashflows, solvency, liquidity positions and borrowing facilities has taken place alongside a review of progress against the five-year strategic plan projections. The strategic plan projections have been updated to reflect management actions in response to COVID-19 including prioritising capital spend on sites with agreed sales and the reduction of discretionary overhead expenditure where possible. In addition, sales of strategic and non-core land have continued as expected and new lettings have been secured on properties. This aligns with our existing strategy to manage cashflows to fund our development spend and acquisition activity.

RBS and Santander increased the limit of the Revolving Credit Facility to £130m and provide greater flexibility in covenants until December 2021. After due consideration of the ongoing economic uncertainty, the Board took the decision to postpone the 2019 final dividend payment to continue to preserve liquidity.

A key focus of the assessment of going concern is the management of liquidity and compliance with borrowing facilities for a minimum of the next 12 months.

The Group continues to remain in a strong position to withstand any further impact, including increased development spend on sites to reflect deferred spend in 2020, with cash and bank headroom of £67.5m. The Group has no material debt maturities before 2023 and benefits from diversification across its Capital Growth and Income Generation businesses including the industrial and renewable energy property portfolio. Taking into account the revised independent valuations, the Group net loan-to-portfolio value remains low at 12.4%, within target range and with significant headroom for further falls in value.

The Income Generation portfolio has continued to generate income that covers the overheads of the business and interest from loan facilities, with rent collections for the March and June 2020 quarters being c.95%.

The longer-term impact of COVID-19 has also been considered. Balance sheet and cashflow remain resilient throughout downside scenario analysis that considers potential scenarios of a downturn in activity in 2020 and early 2021, rent collection reductions and a medium-term recovery of the economy thereafter. Even in a severe but plausible downside scenario, for at least 12 months from the date of these financial statements, the Group continues to have sufficient cash reserves, continues to operate with headroom on lending facilities and associated covenants and has additional mitigation measures that could be deployed to create further cash and covenant headroom.

Based on these considerations, together with available market information and the Directors' knowledge and experience of the Group's property portfolio and markets, the Directors confirm their belief that it is appropriate to adopt a going concern basis of accounting in the preparation for these condensed consolidated interim financial statements.

Accounting policies

The same accounting policies are followed in these condensed consolidated interim financial statements as were applied in the Group's latest audited financial statements.

Estimates and judgements

The preparation of the condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2019.

2. Alternative Performance Measures ("APMs")

Introduction

The Group has applied the December 2019 European Securities and Markets Authority ("ESMA") guidance on APMs and the November 2017 Financial Reporting Council ("FRC") corporate thematic review of APMs in these results. An APM is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS.

Overview of our use of APMs

The Directors believe that APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs assist our stakeholder users of the accounts, particularly equity and debt investors, through the comparability of information. APMs are used by the Directors and management, both internally and externally, for performance analysis, strategic planning, reporting and incentive-setting purposes.

APMs are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including peers in the real estate industry. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

The derivations of our APMs and their purpose

The primary differences between IFRS statutory amounts and the APMs that we use are as follows:

1. Capturing all sources of value creation - Under IFRS, the revaluation movement in development properties and assets held for sale which are held in inventory, is not included in the balance sheet. Also, overages are not recognised in the balance sheet until they are highly probable. These movements, which are verified by BNP Paribas and Savills (independent external property surveyors), are included within our APMs;

2. Recategorising income statement amounts - Under IFRS, the grouping of amounts, particularly within gross profit and other gains, do not clearly allow Harworth to demonstrate the value creation through its business model. In particular, the statutory grouping does not distinguish value gains (being realised profits from the sales of properties and unrealised profits from property value movements) from the ongoing profitability of the business which is less susceptible to movements in the property cycle. Finally, the Group includes profits from joint ventures within our APMs as our joint ventures conduct similar operations to Harworth, albeit in different ownership structures; and

3. Comparability with industry peers - Harworth discloses some APMs which are European Public Real Estate Association ("EPRA") measures as these are a set of standard disclosures for the property industry and thus aid comparability for our stakeholder users.

New EPRA APMs

In October 2019, EPRA published new best practice recommendations (BPR) for financial disclosures by public real estate companies. The BPR introduced three new measures of net asset value; EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV). The Group has adopted these new guidelines from 1 January 2020 and considers EPRA NDV to be the most relevant of these new measures and therefore this now acts as our primary measure of net asset value replacing EPRA NNNAV. Total return, another of our key APMs, is now calculated based upon EPRA NDV rather than EPRA NNNAV.

Our key APMs

The key APMs that the Group focuses on are as follows:

· Total return - The movement in EPRA NDV plus dividends per share paid in the year expressed as a percentage of opening EPRA NDV per share

· EPRA NDV per share -EPRA NDV divided by the number of shares in issue less shares held by the Employee Benefit Trust

· Value gains - This is the realised profits from the sales of properties and unrealised profits from property value movements including joint ventures and the mark to market movement on development properties, assets held for sale and overages

· Profit excluding value gains - Property net rental, royalty and fee income, net of running costs of the business which represents the underlying profitability of the business not reliant on property value gains or profits from the sales of development properties

· Net loan to portfolio value - Group debt net of cash held expressed as a percentage of portfolio value

Changes to APMs

The APMs have been changed for the inclusion of the new EPRA net asset value measures described above and the EPRA NDV per share growth metric has been replaced with EPRA NDV per share. Other than these changes, the Group's APMs have been defined, calculated and used on a consistent basis. The previously reported EPRA measures of net assets are also included below for comparative purposes.

1) Reconciliation to statutory measures