UANC.L Regulatory News (UANC)

Urban&Civic plc

("Urban&Civic", the "Company" or the "Group")

RESULTS FOR THE SIX MONTHS TO 31 MARCH 2020

MASTER DEVELOPER WORKING THROUGH THE PANDEMIC

Urban&Civic plc (LSE: UANC) announces its unaudited results for the six months to 31 March 2020.

In reaction to market conditions arising from pandemic -

Financial highlights -

Operational highlights -

Commenting on the results, Nigel Hugill, Chief Executive, said:

"Actions speak louder than words. This is the first time that the Urban&Civic Master Developer Model has been tested under stress. Prevailing uncertainties are providing exceptional opportunities to enlarge our strategic portfolio, with minimal acquisition risk. We have secured land holdings for two potential new settlements in the last fortnight. Government backing on projects in delivery has been terrific in enabling us prudently to maintain and accelerate spend. As the housebuilders rebuild output, the reasonable presumption is that capital lite, serviced plots will be at the top of their want list. Whatever the behavioural changes from this awful pandemic, it is hard to see well-planned housing with gardens, good connections, great schools, decent broadband and guaranteed access to green spaces being disadvantaged. Witness four new licences and land sales signed since March."

For further information, please contact:

A presentation for analysts and investors will be held as a live webcast at 9.30am today and the presentation will be available at www.urbanandcivic.com or via the following link: https://webcasting.brrmedia.co.uk/broadcast/5ed7692de9f4830247c9a151 and presentation slides will also be available to download.

Alternatively, details for the live dial-in facility are as follows:

Participants: Tel: +44 (0)330 336 9125

Passcode: 7236035

Chief executive's statement

Summary

Urban&Civic was established in the teeth of the last recession. Our Master Developer model was designed to sustain through economic cycles. The immensely challenging coronavirus environment is reflected in our first ever fall in net asset value. Up to the end of February, the Group was on track to meet or exceed guidance on plot realisations for the current year. That has obviously been superseded but mostly as a deferral, rather than actual loss, of revenues. Our valuers, CBRE, also made a precautionary move on discount rates with a corresponding reduction in current valuations and increase in the large site discount. Adding that back, EPRA NAV + large site discount was almost unchanged on March 2019. That feels about right. Having regard for the delay in cash receipts, a decision in relation to the payment of the interim dividend is being postponed until the current financial year end.

On the other hand, disruptions in the land market combined with our platform advantage as preeminent Master Developer are providing singular opportunities. Discretionary spend has been curtailed with absolute priority afforded to maintained infrastructure investment and new project acquisitions. Two new strategic projects with the potential for 10,000 new homes have been contracted in the last fortnight. In addition, Catesby has settled terms on 6 further land promotions prospectively totalling 1000 units. There is continuing housebuilder demand for our serviced parcels. Four new licences or land sales across three different strategic sites, together aggregating 594 plots, split between new and existing customers, have been contracted since March, with two signed in the past three weeks. There are clear indications that our model is particularly attractive to housebuilders in the current climate enabling them to accelerate build-out, whilst limiting their capital commitments.

Assets and receipts

The headline EPRA net asset value as at 31 March 2020 was £487.8 million, or 335.1p per share. EPRA triple net assets were also down at £463.3 million, or 318.3p per share. Depending upon the measure, the reductions were in the range 6.2 - 7.5 per cent against those at 30 September 2019, or 1.3 - 1.9 per cent as against 31 March 2019. In contrast, the large site discount rose relative to the year end figure to the equivalent of 145p per share. EPRA NAV + large site discount at 31 March 2020 amounted to 480.1p per share, compared with 495.3p per share six months previous.

Revenues, including the Group share of joint ventures and associates were up slightly at £47.6 million, compared with £47.3 million for the first half of last year. Profit before tax was down at £0.2 million (2018/19 interim: £5.1 million) with the entirety of the difference accounted for by the reduction in value of investment assets. In providing guidance as to plot realisations and proceeds last November, the expectation was for cash receipts in FY 2019/20, including joint ventures pro rata, of the order of £60 million. The revised full year figure is £35 million, of which approximately £20 million was received in the first half.

Timing differences consequent upon Covid-19

The shortfall against second half receipts mostly represents delayed timings. The eventual quantum is unlikely to be much altered. £10 million of the difference relates to delayed housing completions, including first occupations at Wintringham, a good proportion of which are on house sales that are either reserved or exchanged. In any event, receipts are underpinned by minimum commitments from the housebuilders averaging approximately 85 per cent of estimated sales value, with the remainder payable once houses are sold. Half of the remaining anticipated receipts were conditional on detailed planning approvals that will now go past September 2020 due to the delays in local planning departments moving online. An anticipated land sale of 360 plots at Houlton, Rugby has been restructured and split into two parcels, at least one of which is expected to complete in the second half.

All housebuilders have now returned to site and have stated universally that the priority will be to complete the existing sales pipeline. The level of reported cancellations remains low. Moreover, unlike our housebuilding partners, the contracted receipts to Urban&Civic require no further material capital investment.

The value of minimum receipts at times of stress

Minimum payments to which the housebuilders commit as a condition of our licences afford considerable land value protection under the Master Developer model. Our percentage participation in the realised value of individual house sales varies between contracts but is typically around one-third of the net purchase price. We share an element of downside price risk with our customers but this is collared by the minimum receivable on each plot. The position is correspondingly defensive. As at 31 March 2020, the minimum contracted share of future land receipts continued to exceed £100 million, representing 3.1x future annual minimum sales.

The proportion of percentage participations accounted for by minimums has been bid up progressively. The early 2016/17 contracts contained minimums which proved to be between 60 - 70 per cent of actual proceeds received from our participations. In more recent years, this has risen to 85 - 100 per cent. Most of the contracts are Retail Price Index linked. As illustration, minimum payments underpin approaching 90 per cent of the proceeds from estimated sales over the next two years, based on our revised pricing expectations and including existing exchanges. The obligations over the next two years are spread across ten housebuilders, with a very heavy weighting towards those commanding 4- and 5-star ratings. The security position under our licence arrangements is also much stronger than a conventional land creditor. Urban&Civic retain our charge over plots being built out to the point of sale to the homeowner, when housebuilder WIP is at its highest. As of April 2020, housebuilders on our strategic sites had almost 1,000 homes in the course of construction.

Around half of contracted minimum receipts are due from listed housebuilders, with a further 20 per cent from substantial private housebuilders who have made payments already, most recently in February 2020, arising from late starts. The model is not untested.

Strategic site plot carrying values and large site discount

31 March 2020 carrying values of housing plots net of servicing costs plots were £28,600 at Alconbury; £18,900 at Houlton; £27,300 at Wintringham; £13,400 at Priors Hall; £16,000 at Waterbeach and £6,600 at Newark. Those valuations are after the large site discount for scale or wholesale disposal and were appraised on house prices of market units at £300psf at Alconbury, £280psf at Rugby, £300psf at Wintringham, £235psf at Priors Hall, £380psf at Waterbeach and £220psf at Newark respectively.

The large site discount affords a further level of defensiveness against the actual quantum of future receipts. The calculation is made only on consented sites, once infrastructure spend has commenced, and represents the difference between the current open market of a typical retail parcel of 150 housing plots as appraised (often on the basis of our own sales evidence) and the estimated discount for bulk or wholesale disposal to establish the carrying value in the Group statutory accounts. On average, we would expect to receive around twice book via a licence sale. The contracted minimum receipts represent 1.7x weighted average March 2020 carrying values.

The average net of inflation discount rate used by CBRE in the 31 March 2020 valuation was increased by 0.25 per cent to 6.5 per cent. The consequences of that move are significant. Three quarters of the reported reduction in gross assets compared with last September came from the higher discount rates applied to the strategic land portfolio, which accounts for approximately 85 per cent of total property assets. The comparison between the current open market retail valuation of standard parcels and the wholesale figure included in our reported EPRA NAV amounted to a highest ever large site discount of £212 million, or 43 per cent of EPRA NAV at 31 March 2020.

The reasonable assumption is for the discount rate to narrow in more normal market conditions.

Homes England

The objectives and priorities of Urban&Civic as Master Developer run parallel with those of Homes England. The business was founded on the simple demographic proposition that it was not possible to meet housing need in South East England without a significantly greater contribution from large sites. This certainty was underpinned by conviction that strategic projects can make a contribution to the environment and sense of community that infill sites never can. This has been amply demonstrated by our residents pulling together over the past three months.

The interrelationship with national policy is reflected in continued Government backing to accelerate delivery. Two new project loans were signed at the onset of lockdown in March. The first was a £60.7 million infrastructure facility at Waterbeach from Homes England; near 11 years on our normal terms with interest accrued and payable only out of realised sales proceeds. The second was a £35.6 million repayable grant from the Department for Education to fund the early construction of a new secondary school at Houlton. The advance is to our joint venture company and will be returned in line with existing section 106 obligations, with final repayment date projected to be beyond 20 years.

Total facilities (including undrawn amounts) from Homes England, Local Authorities and the Department for Education across the five strategic sites in delivery aggregate £351 million, of which our pro rata share amounts to £258 million. There are no Group covenants attaching to those loans.

Urban&Civic currently has available £136.4 million of undrawn facilities on a look-through basis. 74 per cent of total facilities (drawn and undrawn) are without recourse to the Group.

Trading developments including two new strategic acquisitions

Demand for serviced land parcels on our strategic sites continues: two new licences were signed in March 2020 at Wintringham and Houlton, another in June at Houlton, coupled with a recent land sale at Corby. Together the transactions aggregate 594 new plots: one existing and three new customers. The terms were in line with pre-Covid-19 expectations.

We are intent on using the interlude to enlarge holdings within our core target areas and have entered into legal agreements on two new projects of potentially regional significance in the past fortnight. The more advanced is at Tempsford in Central Bedfordshire. Options have been taken over more than 2,100 acres in a highly strategic location midway between Cambridge and Milton Keynes identified as a prospective development node within the Oxford to Cambridge arc. The land is accessible directly from the A428, which is being upgraded to provide a dual carriage way link between the adjoining A1 and the upgraded A14 with a committed budget of £1 billion. The now identified East West Rail preferred route corridor intersects with the East Coast Main Line across the site. The entire land is included within an area cited recently as a development corporation candidate by MHCLG.

Separately, we have entered into option arrangements on a substantial landholding within commuting distance to Cambridge. Our preliminary assessments are that the two combined could accommodate in excess of 10,000 new homes. The underlying interests remain subject to planning and the entry costs are modest, allowing us to build future positions for low initial capital outlay and managed acquisition risk. 

Catesby

Catesby pre-tax profits for the first half amounted to £4.4 million after overheads. EPRA uplifts on new consents added £2.5 million. Netting out EPRA reversals on disposals and tax meant that there was no material change in net assets. The current moratorium on land acquisitions announced by several listed housebuilders and the procedural chaos in many planning authorities caused by the inability to conduct public meetings is likely to restrict immediate performance. The base case is for no further disposals until 2021, although the signs already are that may prove overly pessimistic. Several competitors, notably those carrying bank debt, are having to retrench. In contrast, Catesby is continuing to build pipeline with terms settled on 6 new land promotions prospectively totalling 1000 new homes. Again, entry premiums are low and the percentage participations somewhat better than we have seen for some time. The number of residences being promoted by Catesby will soon exceed 15,000. 

Post balance sheet realisations

The sale has been completed of the key worker housing for Papworth Hospital at Waterbeach for £18.625 million, which is above business plan. The cost of conversion of two modern barracks blocks was funded by Urban&Civic. Proceeds from realisation were returned to the Group under the waterfall arrangements and cleared all advanced amounts relating to the consented 6,500 new homes, including planning costs and accrued project management charges. Initial Phase 1 marketing is proceeding well to both housebuilders and build to rent investors, notwithstanding the current logistical complications in undertaking viewings.

Build to rent

Residential construction is programmed to commence at Waterbeach in 2021. Given the location, three miles from Cambridge Science Park with direct cycle routes, the development is planned to include build to rent from the outset. The priority on our other sites had been to establish brand identification and location through owner occupation. Those foundations having now been established, discussions are taking place with build to rent operators and investors across all Urban&Civic strategic sites in delivery. This may also incorporate modular construction. After extensive research and due diligence, we have agreed in principle to run a pilot construction programme with Top Hat as our modular provider at Houlton. Build to rent affords considerable potential to increase absorption rates without cutting across core private sales. Modular construction is better suited to the demands of that particular market. We are also exploring cost effective methods of delivering build to rent using more traditional means. We see the two delivery routes as providing more design flexibility and being complementary. Should purchases prove slow to recover post Covid-19, institutional rentals could compensate for any weakened demand for owner occupation.

Dividend

Have regard for cash receipts being pushed back, the Board has elected to postpone a decision in relation to the payment of dividends. All discretionary expenditure has also been curtailed. The absolute priorities are to take advantage of current market conditions to add prudently to our portfolio of strategic assets and Catesby promotions, whilst maintaining infrastructure investment for future delivery.

The Board is acutely conscious of the balance in making dividend payments to shareholders and will reappraise the position at the current financial year end. No application has been made under the Government's Coronavirus Large Business Interruption Loan scheme.

Outlook

The consensus expectation amongst analysts and valuers appears to be for the UK housing market to suffer a 12 month period of hibernation. The real imponderable is what all this means for housing demand, in our case in areas of good historic affordability. Recent monthly price statistics cannot be taken as fully reliable but almost certainly point to a low level of overall housing transactions for the rest of the year. Hibernation supports our approach of strong backbone backed by continued Homes England investment. If anything, enforced saving through and coming out of lockdown helps housing deposit accumulation. Working from home determines the merits of having more space in which to live. Structurally low interest rates and the drop in petrol prices will go straight to net disposable income in Middle England for those that remain in work. The sheer impracticalities of viewing occupied properties may favour new builds, particularly where no onward chain is involved. There is the spectre of job insecurity and higher unemployment but our strategic projects provide immediate build to rent options. Plus, we can expect enormous political pushback if the additional debt burden from the pandemic were to be shouldered by young new house buying households.

As lockdown preoccupations abate, we will see new Government policies to promote a green economic recovery. The Real Estate sector has a big role to play. ESG considerations are baked into our Master Developer model without the need for material incremental spend. Clear demonstration of the resulting positive environmental and social impacts will remain one of our absolute priorities.

Conclusion

Urban&Civic is well set to perform in an economic downturn. The Group has contracted minimums representing 3.1x future annual sales without further material capital outlay. We would only lose real ground if housing demand fails to recover over the next three years, not in the second half of the current reporting year. That absence in demand recovery would also have to include new housing to rent. Accordingly, we have kept up school construction and civils preparation ready for the next set of licences. The listed majors have mostly suspended land acquisitions but as they look to start rebuilding output, we can expect that capital-lite, serviced plots will be at the top of their want list. Four new agreements since March with predominantly private housebuilders provide good support to that conclusion.

Whatever the behavioural changes and eventual outcomes to this pandemic, it is hard to see them as being bad for well-planned, countryside facing developments with good transport connections, great schools, decent broadband and guaranteed access to green spaces. ESG attributes may have taken something of a back seat while investors try to figure out what is going on in the world but look set to return stronger when attention switches to building a greener and more resilient future. The result for us would be a powerful alignment of government, investor and house-buyer interests. The current land market dislocations work in our favour. The housebuilders will seek to preserve immediate margin, whereas we will look to acquire for the future. Additional pipeline developments beyond the two further strategic projects contracted in the past fortnight are anticipated.

Nigel Hugill

Chief Executive

10th June 2020

Financial review

Introduction

I would like to start by highlighting the immediate and principal impacts that Coronavirus has had on the Group.

During the two weeks or so preceding the Government's lockdown on 23 March, sales completions and reservations at our sites understandably fell as visitor numbers slowed. Housebuilders ultimately closed their sales offices making reservations and completions more challenging.

These events principally affected the Group in two ways. Firstly, the Group's independent valuers (CBRE) reduced their valuations at the half year due to market uncertainties, and secondly receipts under our licence agreements slowed.

Although this slowdown of receipts did not significantly impact the period under review it will make achievement of our previous guidance for the full financial year unlikely.

Residential sales equivalent to 382 plots were made in the interim period generating £20.1 million of cash for the Group. This total is up 9.8 per cent over the comparable period and, although it represents only 33.5 per cent of the £60 million annual cash generation target, this was in line with our expectations as these targets were skewed towards increased second half performance - reflecting the progress of pipeline transactions at the forecast date and the expectation that Wintringham would start generating income from the third quarter this year.

Although a fully functioning market is of course preferable for all, the Group's cashflows are protected to an extent through its £107.7 million of forward contracted sales (up from £101.7 million at 30 September 2019). These forward contracts specify minimum annual sums which the housebuilders are required to pay whether houses are built or not. Although each contract is assessed on a 12-month look-back basis, meaning that the minimum sums will be receivable at different times, in the aggregate they are worth the equivalent of £34.9 million per annum to the Group (30 September 2019: £30.7 million) over 3.1 years.

In addition to reducing completions, the increased market uncertainty and consequently lower CBRE valuations have caused EPRA metrics to fall around 7 per cent across all measures at the half year. If, however, the large site discount (which represents the aggregated difference between the bulk land values ascribed by CBRE's strategic site valuations and the current retail prices being achieved on smaller parcel sales) is added to the EPRA NAV per share measure, this fall reduces to 3.1 per cent (see the Key Performance Indicator Table below).

Key Performance Indicators

The Group's Key Performance Indicators for the six months to 31 March 2020 remain consistent with those detailed in the Strategic Report section of the 2019 Annual Report and Accounts:

1. Includes 239 of actual plot completions and land sales equivalent to 143 plots (Alconbury: 4; Rugby: 65; Newark: 64; Wintringham: 10).

2. Actual plot completions include 55 plots at Alconbury (six months ended 31 March 2019: 60; year ended 30 September 2019: 144); 93 at Rugby (six months ended 31 March 2019: 62; year ended 30 September 2019: 155); 35 at Newark (six months ended 31 March 2019: 63; year ended 30 September 2019: 87); 18 plots from new contracts at Priors Hall and 38 plots from pre-acquisition contracts at Priors Hall (six months ended 31 March 2019: 180; year ended 30 September 2019: 279).

3. Represents Urban&Civic's (U&C's) share of cash generated by strategic site plot completions.

4. EPRA NNNAV per share + large site discount per share (net of tax) equates to 435.8p (31 March 2019: 435.0p; 30 September 2019: 448.9p). The tax allowance was calculated by applying a tax rate of 19 per cent to the gross large site discount.

5. Large site discount represents the difference between the unserviced land values ascribed by CBRE strategic site valuations (which consider site scale and build-out duration among other matters) and the current retail prices being achieved on smaller parcel sales.

Although currently in an exceptional period of disruption, we maintain that EPRA NAV metrics and TSR remain the most reliable and therefore most appropriate principal measures by which to assess business performance, particularly when considering value growth.

In order to underpin the EPRA metrics, we engage CBRE Limited (independent valuers) to provide Red Book valuations for all our consented strategic land sites (as well as other assets). Having highlighted the reliability of EPRA metrics, at this half year, in common with the vast majority of 31 March valuations, CBRE's valuation report carries material uncertainty wording that states they are attaching less weight to previous market evidence for comparison purposes when forming opinions of value and that a higher degree of caution should be exercised when considering these valuations.

The basis for selecting our other KPI's is set out in the 2019 Annual Report.

Net Asset Value - EPRA and IFRS

Presented below is a non-statutory analysis explaining the movements in EPRA NAV in the last six months and comparable periods.

1. Comprises deficits on the revaluation of investment properties (£4.8 million) and trading property write downs (£2.0 million; £0.7 million of which relate to joint ventures). 31 March 2019 comparable comprises £1.0 million of investment property revaluation surpluses. 30 September 2019 comparable comprises £5.8 million of investment property revaluation surpluses and trading property write downs of £0.7 million.

2. Total classified as property revaluations for the purposes of the below EPRA NNNAV growth commentary.

3. Comprises profits from trading and residential property sales (£9.4 million) and construction contracts (£1.1 million), whether earned by subsidiaries or joint ventures, as well as unwinding discounts applied to long-term residential property sales debtors (£2.7 million) and surpluses on revaluation of overage elements that were acquired with the Priors Hall asset (£0.1 million).

4. Total classified as profit on property sales for the purposes of the below EPRA NNNAV growth commentary.

From the table above it can be noted that property revaluations (identified by a superscript 2.) accounted for (24.5)p of the Group's (25.2)p EPRA NAV contraction, while overheads, dividends and the dilutive effect of share options have netted a further (5.7)p from EPRA NAV. Profits on property sales contributed a positive 4.6p (identified by a superscript 4.).

A more detailed reconciliation between IFRS, EPRA NAV and EPRA NNNAV is provided in note 18.

Total shareholder return

Having hit an all-time high share price of 375p per share on 19 February, the price fell back to 208p per share by 31 March - meaning U&C shares have fallen 116p per share or 35.8 per cent since 30 September 2019. Combined with the payment of a 2.5p final dividend, this has resulted in total shareholder return being minus 35.0 per cent.

Total NAV return, which substitutes movements in EPRA NNNAV for movements in share prices when compared to shareholder return calculations, is minus 5.5 per cent over the six months to 31 March 2020.

Consolidated statement of comprehensive income

Gross profit and loss/profit after tax (including the Group's share of joint ventures) have fallen £2.3 million and £4.7 million respectively. These decreases are predominantly due to downward property revaluations (as set out in the table below).

1. Comprises profits from trading and residential property sales (£9.4 million; £1.7 million of which relate to join ventures) and construction contracts (£1.1 million).

2. Total classified as profit on trading and investment property sales in the EPRA movement table above.

3. Recurring project management fees comprise £0.9 million of the total (31 March 2019: £1.0 million; 30 September 2019: £2.1 million) and are earned through recharging administrative expenses to joint venture partners where Group employees are engaged in joint venture activities.

4. Total classified as revaluation of investment properties and write downs of trading properties in the EPRA movement table above.

Gross profit

Gross profit is down £2.3 million on last year (to £10.2 million including £0.9 million generated by joint ventures) reflecting

increased trading profits (up £1.1 million to £10.5 million), greater trading property write downs (up £2.0 million), reduced non-recurring fees (down £0.9 million) and lower profits from hotel operations (down £0.5 million).

Of the £10.5 million of profits from trading property sales, residential profits at Alconbury, Newark and Priors Hall accounted for £2.2 million, £1.7 million was earned in respect of Urban&Civic's share of residential profits at Rugby and Wintringham, £5.2 million was generated by Catesby land promotion sales, £1.1 million came from Europa Way residential parcel sales and £0.3 million was accounted for by non-core property disposals.

Consistent with prior periods, residential profits include profits from the Group's strategic site licence arrangements.

Due to the complexity of these licence arrangements from an accounting perspective, it is worth noting that profit under licences are predominantly recognised in two places in the income statement, although often at different points in time. In the first instance, we will typically recognise the full cost of sale together with the total minimum amounts due under a licence arrangement when the land has been transferred to the housebuilder (usually on contract completion). This minimum sum is discounted and recorded through the gross profit line together with an estimate of the overages that the Group expects to collect from the housebuilder when the homes are ultimately sold. This overage sum is also discounted, due to the length of time it takes to earn that overage, and it is only recognised if we do not believe there is a high probability that it will reverse due to market conditions prior to collection.

At each subsequent reporting period our estimates will be compared with what has taken place and adjustments made.

The second place where you might consider that 'residential profits' are recorded is through the finance income line. This is where the discount applied to the long-term minimums and overage debtors unwind; through either the passage of time or upon receipt of the licence proceeds, minimum sum and/or overage.

In the six months to 31 March 2020, £2.2 million of residential profits (associated with overages at Alconbury Weald, Newark and Priors Hall) were recognised through gross profit with a further £1.8 million of discount unwinding (in respect of minimum and overage receivables) being recognised in finance income.

Of the £1.7 million of joint venture residential profits (U&C's share), £0.6 million was attributable to the contractual minimums and discounted overages following the sale of a 235-plot parcel to Morris Homes at Wintringham, with a further £1.1 million of overages and other profits from Davidsons Homes, Morris Homes and Crest Nicholson agreements at Rugby. Joint ventures booked a further £0.9 million of discount unwinding (U&C's share), in respect of the overage receivables, through finance income, which has been consolidated into the Group's share of profits from joint ventures.

A breakdown of sales completions by site, with comparatives, has been included as a footnote to the KPI table above. These footnotes also set out how many of these sales completions relate to land sales as opposed to actual plot completions.

The terms minimums, overages and licences have been defined within the glossary on the last page of this interim statement.

Administrative expenses

Gross administrative costs have fallen £0.7 million to £10.2 million in the six months to 31 March 2020, largely as a result of decreased share based payment charges (following reduced EPRA and TSR performance over the last six months) and not having to incur the one off costs associated with the Group's move to the Premium Listing segment of the London Stock Exchange (which was completed last year).

We continue to capitalise overheads associated with development activity by reference to the amount of time spent by our employees on those activities. In the six months to 31 March 2020 this capitalised proportion increased to around 25 per cent compared to 20 per cent last year thereby reducing net overheads by £2.5 million.

No material benefit has been received under the Covid-19 job retention scheme, reflecting the Group's high activity levels during lockdown. A maximum of 10 employees, associated with administrative duties at the Group's offices or estate management at the strategic land sites, were furloughed at any one time. No employees remain furloughed.

Surplus on revaluation of investment properties

Investment properties now only comprise commercial buildings and commercial development land at Alconbury and a proportion of the Group's interest in Waterbeach, which could deliver both commercial buildings and residential rental properties in the future. Consequently, there are very few property revaluation movements accounted for through the income statement under IFRS.

In order to help the reader understand the value of the Group's total property portfolio, as well as reconcile the movements at both IFRS and EPRA levels, the below table has been produced.

Investment properties fell in value by £4.8 million in the period with a further £29.5 million reduction in value coming from the revaluation of retained trading properties at the EPRA level.

In addition to these movements, £6.6 million of EPRA adjustments have been reversed as properties have been disposed of or profits recognised.

Out of the total £34.3 million revaluation deficit in respect of retained properties, £12.2 million was attributable to a 4.3 per cent fall in the value of Alconbury.

Other reductions in value across our property portfolio included Rugby (U&C's share: £5.6 million), Newark (£3.9 million), Priors Hall (£3.8 million) and the Manchester commercial assets (U&C's share: £5.7 million). Catesby planning consents yielded the Group's only valuation surpluses in the period with £2.2 million being generated from achieving planning consents on three sites.

The revaluation deficits reflect the current market uncertainties and in arriving at their valuations, CBRE have increased discount rates, reduced sales rates and lowered both house price and serviced land value inflation assumptions within their discounted cashflow models. Servicing works continue across all of the Group's consented strategic sites.

As previously mentioned in the KPI section above, and in common with substantially all valuation reports at this date, the independent valuer's opinion for this half year carries a material uncertainty qualification due to the lack of market evidence at this time.

Alconbury remains the Group's most significant property asset comprising 40.5 per cent of the total property portfolio value.

Taxation expense

The tax charge as a proportion of profits has increased over recent reporting periods as historic tax losses have been utilised and changes in legislation have restricted how much of these historic tax losses can be accessed in any one period.

In the six months to 31 March 2020 the Group's tax charge totalled £1.1 million compared to a profit before taxation of £182,000. This is the result of additional deferred tax being provided for at an increased rate of 19 per cent this period, rather than the 17 per cent applied at the year end following the Government's decision not to enact the intended reduction in tax rates to 17 per cent (£561,000), and deficits on revaluation of investment properties not being a recognised deduction for tax purposes (£868,000) among other matters.

Dividend

Despite the Group's development progress at its strategic land sites the Board has elected to postpone a decision in relation to the payment of dividends due to the current market volatility, which has affected both our property portfolio values and growth in plot completions and cash generation.

The Board intends to reappraise the position at the year end.

The Group paid its 2019 final dividend of 2.5p per share (£3.6 million) in February 2020.

Consolidated balance sheet

Overview

1. Total property related interests: £677.6 million (31 March 2019: £644.2 million; 30 September 2020: £702.5 million).

Investment properties

Investment properties at 31 March 2020 amounted to £48.4 million and comprised the commercial development area at Alconbury (£39.4 million) and the proportion of the Waterbeach site that could deliver both commercial buildings and residential properties for rent (£9.0 million).

The Group's total period-end property portfolio, irrespective of balance sheet classification, was valued at £677.6 million, 95 per cent by independent valuers CBRE and 5 per cent by Directors.

Trading properties

The carrying value of trading properties increased by £2.3 million in the period to £309.3 million.

This increase was the result of capital expenditure of £14.4 million (including £10.0 million in respect of Alconbury and Priors Hall development works), capitalised overheads amounting to £2.3 million, capitalised finance costs of £1.9 million - all net of £15.0 million of disposals (including residential disposals at Alconbury and Newark of £12.3 million and £2.5 million in respect of the sale of Catesby sites) and £1.3 million of write downs (in respect of non-core properties).

Investment in joint ventures and associates

The Group's joint venture in Rugby has been included in the balance sheet at £88.7 million, which along with a half interest in the 351 apartment scheme known as Manchester New Square (£15.2 million), a one-third interest in a 400 acre (162.3 hectares) site at Wintringham Park, St. Neots (£17.9 million) and £1.8 million of other residual interests combine to form an overall Group investment in joint ventures and associates of £123.6 million.

Trade and other receivables

At the half year, non-current and current trade and other receivables (totalling £68.4 million) included acquired Priors Hall receivables (£1.2 million), discounted contractual minimum receivables (£45.4 million) and pre-completion discounted overages (£2.1 million) with Morris Homes, Redrow, Crest Nicholson and Hopkins Homes at Alconbury, Kier at Corby and Avant and Bellway at Newark. Also included is £5.1 million in respect of deferred consideration on the sale of a parcel at Newark to Countryside in the period.

Equivalent receivables (U&C's share) are owed to the Rugby joint venture by Crest Nicholson (£1.6 million) and again Morris Homes (£4.3 million) and Redrow (£12.6 million) and to the Wintringham joint venture by Cala (£6.4 million) and Morris Homes (£6.3 million).

These property receivables will be received as and when the houses to which they relate are sold, or if earlier, when the housebuilders are contractually obliged to pay minimum sums. The discounts applied to these balances will unwind through finance income over time.

Cash

Group cash balances at the period end totalled £12.7 million, down £11.7 million since last year end; largely due to property additions (£18.0 million), admin expenses (£13.9 million), loan repayments (£3.7 million) and payment of dividend (£3.6 million) exceeding sales receipts (£21.6 million) and loan drawdowns (£10.1 million).

Sales receipts comprised £8.5 million of Catesby promotion proceeds (including cost reimbursement) and £13.1 million of residential sales receipts.

Subsequent to 31 March, Urban&Civic received £18.2 million under the Development Management Agreement arrangement at Waterbeach (see post balance sheet matters note below).

Current and non-current borrowings - financial resources and capital management

In the six months to 31 March 2020 the Group has put in place £96.2 million of additional financial resources in the form of a loan from Homes England and an amortising grant from the Department for Education (DfE); which has been recorded as an 'other creditor' within joint ventures in the financial statements.

The £60.6 million loan is a ten year and nine-month Homes England infrastructure facility at Waterbeach and the interest free amortising grant from the DfE is for £35.6 million, which will be used to fund the early construction of a new secondary school at Houlton, Rugby. The DfE grant will be repaid in line with the Houlton's existing Section 106 obligations (attaching to the provision of secondary school), meaning that the final repayment date is anticipated to be mid-2042.

This additional financial resource means that the Group now benefits from £136.4 million of undrawn facilities on a look-through basis (U&C's share £111.6 million), 86.0 per cent of which is with Homes England, Local Authorities, DfE and other government bodies.

In response to Covid-19 related construction and sales delays, the Group has sought and received credit approval to extend facility durations and milestones in respect of two loans funding our Manchester New Square joint venture development. The 10 month extension (to October 2021) of the £51.0 million senior facility and 17 month extension (to May 2022) of the £24.6 million mezzanine facility will provide additional time in which to complete the construction and sale of the residential apartments; 44 per cent of which have already been reserved or exchanged).

In addition to these measures the Group has also applied for a number of facility expansions with existing lenders and these are being reviewed by respective credit departments at this time. None of these extensions are being relied upon to form our view on going concern, which has no material uncertainties attaching to it and which has been described in more detail in note 1.

The Group has not taken advantage of the Coronavirus Large Business Interruption Loan scheme. HSBC (the Group's corporate lender) has indicated that the Group would qualify, subject to usual approvals and processes.

The Group's net debt position at 31 March 2020 totalled £122.1 million (30 September 2019: £104.9 million), producing a net gearing ratio of 30.6 per cent (30 September 2019: 26.0 per cent) on an IFRS NAV basis and 25.0 per cent (30 September 2019: 19.9 per cent) on an EPRA NAV basis. Look-through gearing levels are higher as shown below due to the shorter-term borrowings used to fund development expenditure in respect of the Manchester New Square and Homes England borrowings within the Rugby and Wintringham joint ventures.

Homes England now account for 75.1 per cent of all Group borrowings with Local Authorities and other government bodies accounting for a further 1.4 per cent (as shown in the table below).

The Group's only gearing covenant, which attaches to the £40 million Revolving Credit Facility with HSBC, has a limit of 40 per cent and is based on borrowings (on a non-look-through basis) and EPRA NAV.

Other principal loan covenants (which are predominantly associated with Homes England loans) are based on loan to value ratios attaching to specific property assets. These ratios typically range between 40 per cent and 75 per cent.

The Group was covenant compliant in the six months to 31 March and is forecast to remain compliant throughout the going concern review period, as described in note 1. Compliance has been stress tested as part of that exercise and the Group has identified further mitigations that could be used to cure any potential covenant breaches, including pledging more asset value as security. On large sites we typically seek to give lenders charges over smaller areas of land, rather than a charge over the whole site, which provides additional charging capacity if required. By way of example, out of a total value of £272.4 million for Alconbury at 31 March, £133.6 million is subject to a fixed charge, leaving £138.8 million of additional charging capacity.

The Group's weighted average loan maturity at 31 March 2020 was 6.3 years (30 September 2019: 6.7 years) and weighted average cost of borrowing on drawn debt was 3.7 per cent (30 September 2019: 3.8 per cent).

The Group has no loans maturing over the next three years, except for the Newark Homes England facility (£6.1 million currently drawn), the £11.2 million Deansgate Hotel facility (which is currently being marketed as a development site with planning) and the joint venture development loans at Manchester New Square. The Newark facility will be repaid out of residential plot sales and the Manchester New Square and Deansgate borrowings will also be repaid from sale proceeds.

The Group continues to assess its long-term viability using the procedures set out on page 33 of the 2019 Annual Report and Accounts, however in this period of uncertainty, particular attention has been paid to the Group's assumptions around non-contractual receipts and non-committed expenditure as well as the additional mitigations that might be used to counter adverse events (as described in note 1).

Having completed this review, the Directors can confirm that they have a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities as they fall due over the 18 months to 30 September 2021.

Post balance sheet matters

Subsequent to 31 March 2020, the Waterbeach joint arrangement sold the converted medical accommodation (let to Papworth Hospital Trust) for £18.6 million. The Development Management Agreement arrangements were such that Urban&Civic received £18.2 million of these proceeds to clear all amounts previously advanced.

Principal risks and uncertainties

The principal risks of the business are set out on pages 38 to 43 of the 2019 Annual Report and Accounts, which include a commentary on their potential impacts, links to the Group's strategic priorities and identification of relevant mitigation factors.

Since the publication of the 2019 Annual Report and Accounts, the Board, with the support of the Executive Management Committee, has undertaken further reviews and believes that although there have been no material changes to the composition of the Group's principal risks, the risk scores and ratings across a number of these risks have increased as a result of Coronavirus. The movements in risk ratings and a description of the movement are set out below.

1. Although the risk rating has not changed classification in the period, the risk score has increased.

The Board believes the previously reported mitigation actions, together with the increased controls noted above, appropriately manage these increased risks.

Responsibility statement

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and a description of where to find the principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

Signed on behalf of the Board on 10 June 2020

David Wood

Group Finance Director

Consolidated statement of comprehensive income

For the six month period-ended 31 March 2020

The Group had no amounts of other comprehensive income for the current or prior periods and the (loss)/profit for the respective periods is wholly attributable to equity shareholders.

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

Consolidated balance sheet

As at 31 March 2020

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

Consolidated statement of changes in equity

For the six month period-ended 31 March 2020

Consolidated cash flow statement

For the six month period-ended 31 March 2020

Notes to the condensed consolidated interim financial statements

For the six month period-ended 31 March 2020

1. Accounting policies

Basis of preparation

These condensed consolidated financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 2019 Annual Report and Accounts. The financial information for the six months ended 31 March 2020 and 31 March 2019 does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006 and is unaudited.

The statutory annual accounts of Urban&Civic plc for the year ended 30 September 2019 have been reported on by the Company's auditor and have been delivered to the Registrar of Companies. The independent auditor's report on the annual accounts for 2019 was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

Going concern

These condensed consolidated interim financial statements have been prepared on a going concern basis, which assumes that the Group will continue to meet its liabilities as they fall due.

The Directors continue to assess going concern through reviewing five year business plans, which are presented periodically at Board meetings, however in this period of uncertainty a more detailed review, focussing on monthly cash positions over the next 18 months to 30 September 2021, has been undertaken.

The assumptions attaching to these forecasts provide for maintained construction programmes (as these are largely fully funded through existing development facilities) and reduced residential sales (which assumed that sales rates do not recover markedly until April 2021).

Forecast house price, land price and cost price inflation assumptions are in line with those used by CBRE in arriving at their strategic site valuations at 31 March and broadly reflect no house price or land price inflation until Q2 2021 (2.5 per cent to 4 per cent thereafter) and cost price inflation at 2 per cent throughout the forecast period.

Any forecast disposals in the base case prior to Spring 2021 relate to transactions that are in documentation at the time of the review (such as the Papworth sale which is noted in the financial review as completing subsequent to 31 March and realised £18.2 million of cash for the Group).

In addition, the base case model includes further downside sensitivities:

· Removal of non-contracted residential sales income (leaving £34.1 million of contractual minimums due over the period to 30 September 2021; equivalent to 2.1 times the annual cash overhead sum of £16 million; which comprises £25 million of gross overheads less depreciation, non-cash share based payment charges and discretionary bonuses).

· A further six-month deferral (to Autumn 2021) of 50 per cent of non-contracted land promotion receipts, together with an assumption that 10 per cent of forecast base case promotion receipts are fully abortive.

These downside sensitivities combine to form an extreme downside scenario which reduces the forecast cash flows by a maximum of £84.5 million over the 18-month period to 30 September 2021.

Mitigating actions that could be taken to address this extreme downside scenario include:

· Cessation of uncommitted strategic land development works, which are not associated with contracted residential sales income.

· Cessation of non-committed capital investment in respect of a number of identified early stage projects.

· Further drawdown under the Group's Revolving Credit Facility.

· Cessation of dividends beyond this interim period.

These combined mitigations would increase the Group's cash flows by a maximum of £91.2 million over the 18 month period to 30 September 2021.

A further £66.5 million of other potential mitigations (including the facility expansions referred to in the financial review, the expected disposal of Deansgate development site and drawings under the Coronavirus Large Business Interruption Loan scheme) would provide additional headroom.

The Board is satisfied that these mitigating actions would protect the Group from the extreme downside scenario set out above and would mean that the Group would still have sufficient cash resources to meet its obligations.

No key loan covenants are projected to be breached during the period under review, having analysed prior period recessionary falls in land values (in the Group's geographic locations), calculated consequential covenant headroom and identified additional uncharged land which could be used to enhance loan security for lenders (as noted in the financial review). Strategic site land values would need to fall between 17 per cent and 72 per cent before any covenants were breached. In such an event the Group has the option of pledging further land as additional security.

Three loan facilities currently expire in the 18 months to 30 September 2021. The first is the Newark Homes England facility (£6.1 million currently drawn), the second is the £11.2 million Deansgate Hotel facility (which is currently being marketed as a development site with planning) and the last is the joint venture development loans at Manchester New Square.

Post 31 March 2020 credit approvals were received for extensions to expiry dates for the Manchester New Square loans and the Deansgate loan. These extensions push terms beyond 30 September 2021 and provide additional time for development completion (in the case of Manchester New Square) and sale; thereby triggering loan repayments.

The Newark facility is capable of being repaid out of existing contracted residential receipts and plot reservations.

The Directors have concluded that it is appropriate to prepare the consolidated interim financial statements on a going concern basis.

Significant accounting policies

In the current period, the Group has adopted IFRS 16 'Leases' which has resulted in the Group recognising a right-of-use asset and liability on the balance sheet initially at the present value of all future lease payments for any leases for which it is the lessee. The treatment of leases where the Group is acting as a lessor is substantially unchanged from that currently applied under IAS 17. The Group has elected to adopt IFRS 16 using the Cumulative Effect Method meaning that full retrospective adjustment of comparative periods is not required. The impact on the Group's balance sheet at 1 October 2019 was to increase both property, plant and equipment and other payables by £4,327,000.

Other than as described above, the same accounting policies, presentation and method of computation are followed in these condensed interim financial statements as were applied in the Group's latest audited financial statements and the accounting policies used in preparing these condensed interim financial statements are those which are expected to be applied for the financial year ending 30 September 2020.

Use of estimates and judgements

Revenue recognition

Judgement is involved when determining how much revenue to recognise at a point in time in respect of residential property sales where there is variable consideration which is only determined at the point of the future onward sale of constructed homes by the Group's housebuilder customers. In determining the amount of revenue recognised, the Directors consider factors that may give rise to significant reversals and for this period have assessed that a 20 per cent reduction in house prices, being the approximate peak to trough fall in house prices in the last two recessions, and a one year delay in receipt of overage payments, to take into account a significant fall in sales rates in a downturn, are appropriate reductions to cover the risk of significant reversal.

Fair value measurement of properties

The Group's investment properties, as presented within the results, and the majority of the Group's trading properties for the purpose of EPRA valuations, are valued on a semi-annual basis by CBRE Limited (CBRE), an independent firm of chartered surveyors, and to a lesser extent by the Directors, on the basis of fair value. Where property assets are bifurcated between investment and trading properties, the Directors have allocated CBRE's valuation with reference to the nature of the properties in each classification. The valuation at each period end is carried out in accordance with guidance issued by the Royal Institution of Chartered Surveyors. Fair value represents the estimated amount that should be received for selling an investment property in an orderly transaction between market participants at the valuation date. EPRA valuations are discussed in further detail within note 18.

Due to the outbreak of Covid-19, the following wording was included in CBRE's valuation report at 31 March 2020 in relation to the assets subjected to their valuation:

"The outbreak of the Novel Coronavirus (Covid-19), declared by the World Health Organisation as a 'Global Pandemic' on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.

Market activity is being impacted in many sectors, as at the Valuation Date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to Covid-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.

Our valuations are therefore reported as being subject to 'material valuation uncertainty' as set out in VPS 3 and VPGA 10 of the RICS Valuation - Global Standards. Consequently, less certainty - and a higher degree of caution - should be attached to our Valuation than would normally be the case. Given the unknown future impact that Covid-19 might have on the real estate market, we recommend that you keep the Valuation of these Properties under frequent review.

For the avoidance of doubt, the inclusion of the 'material valuation uncertainty' declaration above does not mean that the Valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that - in the current extraordinary circumstances - less certainty can be attached to the Valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the Valuation".

Director valuations are deemed to have the same level of uncertainty at 31 March 2020.

Property value assumptions

The key inputs to the strategic property valuations, for both investment properties and trading properties valued for EPRA purposes including properties wholly owned, within joint ventures vehicles, or subject to joint arrangements included:

The inter-relationship between the unobservable inputs set out above and the fair value measurement is unchanged from that reported in the 2019 Annual Report and Accounts. Please refer to note 1 for the impact of the Coronavirus on the property valuations at 31 March 2020.

Other than as described above, there have been no new or material revisions to the nature and amount of estimates reported in the 2019 accounts.

2. Revenue and gross profit

3. Operating (loss)/profit

Operating (loss)/profit is arrived at after allocating £2,482,000 of directly attributable administrative expenses to the cost of investment and trading properties (six months to 31 March 2019: £2,142,000; year ended 30 September 2019: £5,461,000).

4. Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker and within the 2019 Annual Report and Accounts. The chief operating decision maker has been identified as the Board of Directors.

The segmental results that are monitored by the Board include all the separate lines making up the segmental IFRS operating profit. This excludes central overheads and taxation which are not allocated to operating segments.

Consolidated statement of comprehensive income

For the six month period-ended 31 March 2020

Consolidated balance sheet

As at 31 March 2020

Consolidated statement of comprehensive income

For the six month period-ended 31 March 2019

Consolidated balance sheet

As at 31 March 2019

Consolidated statement of comprehensive income

for the year ended 30 September 2019