Harworth Group plc (UK6A.SG) Earnings Call Transcript

Good morning, and welcome to the Harworth Group plc investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself. However, the company will review all questions sent today and publish responses where it's appropriate to do so. Before we begin, I'd like to note the following poll. I'd now like to hand to Lynda Shillaw, CEO. Good morning.

Good morning, everybody. I'm Lynda Shillaw, Chief Executive of Harworth Group, and I would like to welcome you all to today's call. I'm delighted to also be joined here by Kitty Patmore, our Chief Financial Officer. As you'll probably be aware, this is our first presentation on the Investor Meet Company platform. And we're delighted to have an opportunity to speak directly to our valued individual shareholders and those who are considering an investment in Harworth. So to begin, a very brief background to me and Kitty for those who haven't met us before. I joined Harworth in 2020, and I'm just coming up to my second anniversary of being with the business. I spent over 30 years working in the U.K. real estate sector, both in London and in the regions. And I've led property teams at BT, Beta, Lloyds Banking Group and Manchester Airport Group before joining Harworth. I also sit on the Board of Vivid Housing Association, and I'm a former Nonexecutive Director of the Crown Estate. Over to you, Kitty.

Thanks very much, Lynda, and good morning, everyone. I'm Kitty Patmore, Harworth's Chief Financial Officer, and I joined the business in 2019. I started my career working in the real estate banking sector, and after that, held a senior leadership role at Harworth Real Estate, which management of the largest private rented housing investment portfolios in the U.K. As most Harworth, I also sit as a Nonexecutive Director on the Board of LondonMetric plc.

Thank you, Kitty. Now turning to the agenda for this session. This is our first presentation on the Investor Meet Company platform. We're conscious that some of you may be less familiar with Harworth, and we therefore like to begin with a brief introduction to the company, our investment case and our markets. We'll then take you through some of the highlights of our half year results, which we announced to the market last month. And then we'll close with an outlook and an explanation of why we feel very confident in Harworth's positioning and prospects as we enter in a more challenging environment. We'll then close with some Q&A. And just a reminder, you can submit questions through the browser at any stage during the presentation. So starting with an introduction to Harworth. Harworth is one of the U.K.'s leading London property regeneration companies. We started life as a division of U.K. coal, responsible for remediating and restoring former coal mine sites. But we've been an entirely stand-alone business listed on the London Stock Exchange since 2015. And since then, we've grown, and we've diversified our portfolio significantly. And today, we own around 14,000 acres across 100 sites in the North England and the Midlands. Harworth's purpose is to invest to transform London property into sustainable places where people want to live and work. Our developments have the potential to deliver almost 30,000 new homes and 32 million square foot of industrial and logistics employment space, together, contributing GBP 4.1 billion in gross value add to regional economies. And you can see from the map on the right-hand side of this slide, our geographic coverage. With regional offices in Birmingham, Leeds and Manchester, our head offices in Rotherham in South Yorkshire on the site of our largest development, Waverley. Once the sites for chorine coking works, today, Waverley is a thriving new community, and we're well on the way to delivering 30,000 new homes and over 2 million square foot at the Advanced Manufacturing Park, which is a regionally significant center of excellence where occupiers include Rolls Royce, Boeing, McLaren, Automotive and the U.K. Atomic Energy Authority. Waverley is a testament to Harworth's vision, expertise and long-term approach as well as our commitment to partnerships and placemaking. So why would you invest in Harworth? This slide provides just an overview of what we think differentiates us as a business. First, we're specialists in what we do. And we have a unique set of in-house expertise in regenerating large complex sites. We're focused on the industrial and logistics and residential sectors, and those are characterized by significant supply and demand imbalances. Our focus of the North England and the Midlands are experiencing -- the region is experiencing significant economic growth and investment as our major beneficiaries of government policy. We have a large and high-quality pipeline of strategic land and development sites, which we largely own freehold. And we have a robust financial position with low leverage and significant liquidity, which allows us to unlock the potential of our sites, deliver development and pursue new growth opportunities. And last but not least, we are, and take great pride in being, a responsible business, focused on building thriving communities, providing new homes, jobs and opportunities and minimizing our environmental impact. All of this, over the last 5 years, has translated into a strong track record, delivering an average total return of circa 10% per annum. So now look at our business model. So turning to how we create value as a business. Harworth is a specialist regenerator of large, complex and often formal industrial sites. As set on this slide show, we're a master developer that takes the land from an undeveloped and often brownfield state through the remediation and planning process before preparing the land and developing the infrastructure needed for development. We then either sell the service line housebuilders or increasingly, in the case of our employment space, we directly develop industrial and logistics units ourselves using construction contractors. Harworth sites are renowned for their place-making, and we always go over and above to provide both residents and workers with well-designed public realm, lots of green space and communities, to ensure that our developments are a place where people want to live and work. Once our employment sites are complete and let to occupiers, we will often retain them in our investment portfolio. This portfolio plays a key role in our strategy by generating a recurring rental income, which largely covers our overheads and gives us access to a broader range of financing options. It also allows us to continue to generate value from what we have delivered. I've touched on this already, but our expertise is one of the key differentiators for us. And to deliver, this means we really need to invest in our people. Our team has grown significantly over the past couple of years. We were around 90 people at the end of 2021, and we're well in excess of 100 now. In 2018, we established a regional structure that created a Midlands region managed by team based in Birmingham, and the Northwest region with a team based in Manchester. These 2 regions joined Harworth's existing Yorkshire and Central team, which manages the majority of Harworth's legacy sites and is based our head office in Rotherham and in Leeds. The regional structure allows for local teams that live and work in the regions they are developing and transacting in. With each region, we have specialists in acquisition, planning, development and project management, and they're supported by a wide array of expertise in head office, which cover every step of the development cycle. Several of our head office team members have decades of experience, making them foremost experts in areas such as environmental management and land remediation. Just over a year ago, we announced a growth strategy and at delivering growth from our significant land bank by deploying our existing strengths and scale. This strategy aims to grow the business on an EPRA net disposal value of over GBP 1 billion by 2027. Now for Harworth, this plan is evolution, not revolution. It builds on what we already did, but with material shifts in the pace and the scale of delivery. At the core of this strategy are 4 key drivers of growth outlined in dark blue on this slide: Increasing direct developments in industrial and logistics; accelerating sales and broadening the ranges of our residential products; growing our strategic land portfolio; and repositioning our investment portfolio to modern Grade A. And I'll outline our progress against these key drivers in a moment. Now while market conditions have undoubtedly become more challenging in recent months, we remain confident that our focus markets of industrial and logistics and residential are the right ones to deliver long-term value. This is because they're both critical to the growth of the U.K. economy, and they're both in structural under supply. The top left chart shows supply of industrial and logistics space in the U.K. represented by the bars for each of the last 13 years. And as you can see, supply remains close to historical lows, and this is also driving record low vacancy rates. This has been exacerbated more recently by the availability of labor and materials, but also through planning delays and the fact that development isn't always happening in the places that have the highest demand. And as a result, we're seeing a mixed pattern of availability across the regions. It is estimated that if we add all industrial and logistics space currently under construction to this supply, it would still only be equivalent about a year's worth of demand. The chart on the bottom left shows the demand side. The occupier base is becoming more diverse and therefore, more resilient with increasing demand from third-party logistics companies and manufacturers more than offsetting a decline in demand from online retailers. This is likely driven by the rise of onshoring and near-shoring, which continues to be a driver of demand across the market. To have a look at the residential market, the chart on the top right, shows that the supply of new housing in the U.K. has been consistently below the long-standing U.K. government target of 300,000 new homes a year. Recent reporting from housebuilders has shown that despite the market doing delivery targets remain high, particularly in undersupplied regional markets. And that is particularly relevant to our new single-family rental portfolio that we launched in May. The bottom right chart shows the build-to-rent market remains strong, with investment volumes in the first half setting a new record as an increasingly diverse range of investors look to gain exposure to this structural growth sector. As I mentioned already, Harworth and its people prides itself on being a responsible business, and we've continued our work embedding the Harworth way through our strategy and operations, with particular focus on the design and carbon use in operation of the logistics assets that we build. Throughout last year, we worked with our Board ESG Committee to ensure that the ESG targets and metrics that we set measure ourselves against going forward are right for Harworth. This has culminated in us identifying 8 focus impact areas against which we will measure our sustainability progress this year. Amongst these areas is a target to become operationally net carbon zero by 2030 and to become fully net carbon zero as a business by 2040. During the year, we appointed our first Director of Sustainability, Peter Henry. And we also welcomed Marzia Zafar, who joined our Board in June as a Nonexecutive Director and brings with her further sustainability and energy market expertise that we're already beginning to benefit from. I'd now like to hand over to Kitty. Sorry, Kitty.

That's all right. Thanks very much, Lynda. And hi everyone again. I would like to take you through some of the highlights of our half year results for the 6 months to 30th of June 2022, which we announced to the market on the 13th of September. Now by any measure, the first half of 2022 was really strong for Harworth. We undertook a record level of direct development in our industrial and logistics portfolio. We continued to accelerate our residential sales. We progressed a number of strategic initiatives. And we made several acquisitions to grow our development pipeline. This slide provides some of our highlights for the period in more detail. Our Industrial & Logistics pipeline now totals 32 million square feet, and we've really gone through the gears on our direct development strategy with over 430,000 square feet completed after period end. This included our Bardon Hill site in Leicester, which invest net zero carbon principles and is already predominantly pre-let. Our residential pipeline represents just under 29,000 plots. And here, we've had a successful period for land sales, having already completed, exchanged or entered heads of terms from over 100% of our budgeted sales for the year. Staying with residential, we launched our single-family build-to-rent portfolio of up to 1,200 homes or 10 sites. We're delighted with the response we received so far from potential investment partners, and we are targeting exchange on this portfolio by the end of the year. Over the first 6 months, we grew our pipeline where almost 4 million square feet, and we added over 1,100 clubs through a number of exciting land assembly acquisitions during the period. And our investment portfolio continued to post robust operational metrics with very high rent collection, reduced vacancy and significant rental uplifts on leasing amounts. And lastly, as Lynda has just spoken about, we added a number of new roles to our team. Our people have been and always will be critical to our success in this matter. So looking in a little bit more detail on our scorecard for our strategy for the first half. These are the 4 growth drivers of our strategy, which in to just set out. And you can see from the middle column highlighted in green, just how much we stepped into the delivery of our strategy in the first half as we progress towards our 2027 ambition shown in the right-hand column. We have over 600,000 square feet, either completed so far this year or currently under development, more than any previous period, and we're well on our way to reaching our ambition of an average 800,000 square feet per annum. We had a very active half for plot sales, completing over 1,600 as we took advantage of a particularly strong housebuilder demand. And again, this shows significant progress towards our ambition of 2,000 plots per annum to be sold by 2027. While the 30 acquisitions we made in the first half, we maintained our land supply of 12 to 15 years. And finally, following the completion of Bardon Hill, approximately 1/5 of our investment portfolio will be Grade A space. And as you can see from the bottom of this slide, we are well on our way to reaching our GBP 1 billion of EPRA NDV goal. So looking at the financial performance for Harworth in the first half, I will take this you through this in a little bit more detail now. And starting with our balance sheet. Our main KPI is EPRA NDV, that is an adjusted net asset measure. So all this does is this adjustment to net assets principally puts all of our development and investment properties at their current market value. EPRA NDV increased to GBP 724.8 million as at 30th of June 2022, which equates to GBP 224.7 per share. This represented a 13.7% increase on our EPRA NDV per share of GBP 197.6 as at 31st of December 2021. This growth was predominantly driven by an increase in portfolio valuation, and you can see us in the property portfolio and the mark-to-market adjustment on development properties lines at this table. These gains were partially offset by an increase in deferred tax liabilities due to unrealized gains on investment properties. Within the valuation gains, we see management actions on our sites securing sales, completing direct development, moving our sites through planning and securing new lettings on our investment portfolio. The gains were fairly evenly split across industrial and logistics and our residential sectors. Net debt of GBP 67.8 million increased from a position as at 31st December 2021. And this is very typical for our development spend profile, where we start to spend on sites during the spring development period and then see the development spend offset by sales proceeds at the end of the year. However, I would say the GBP 67.8 million is lower than at the same point last year. Combined with the dividend, growth in EPRA NDV led to a total return of 14.1% during the period, which is slightly below the prior level -- prior year, but still high compared to historic levels. Turning to the income statement. Sales of service lines and property, in addition to income from rents, royalties and fees, resulted in group revenue of GBP 62.6 million, which compares to GBP 18.9 million in the prior year period. This increase derived primarily from accelerated service land sales, which was the result of us taking advantage of particularly strong housebuilder demand and saw total property sales increase from GBP 11.5 million in the first half of 2021 to GBP 39 million in the first half of 2022. You can see from this slide that we have a robust sales profile for the remainder of the year. Revaluation gains are important components of our performance. And these are seen both in the income statement and the balance sheet. In the income statement, we can see the increases is in the fair value of assets held for sale and investment properties. These consist predominantly of our investment portfolio, our strategic land and natural resources portfolio, but this does not exclude any increases in the fair value of our development properties. Admin expenses increased by GBP 2.2 million from the first half of 2021 to GBP 10.9 million. This is principally due to higher salary expenses resulting from increased employee numbers, reflecting the growth in the group as we pursue our strategy. Admin expenses expressed as a percentage of revenue remains in line with the 2021 financial year at 17%. And all these factors resulted in a profit after tax of GBP 79.1 million compared to GBP 56.4 million in the prior year period. Finally, we provide an interim dividend of 0.404p per share. This reflects an underlying growth of 10% on the prior year, which is in line with our progressive dividend policy. Slide 18 shows a breakdown of our GBP 889 million portfolio as at 30th June 2022. Now industrial and logistics, land and property shown here in shades of green account for around 2/3 of our portfolio by value, and our residential land and property shown in shades of blue accounts for around 1/3. This slide shows that the strategic land price value is around half that of the equivalent major development segments. However, the strategic land sites at 3 to 4x number of plots for commercial square feet that can be delivered on the major development sites. This underlines the potential in the portfolio and the value we create as we take sites from planning into the development phase. The investment portfolio shown here in shades of darkest green now totals GBP 295 million. This continues to be an important component of our financing strategy. And as development sites reach practical completion such as Bardon Hill, they will be transferred to this portfolio. Together with the Natural Resources portfolio, it creates a recurring income source to service our debt facilities supplemented by sales proceeds. Harworth's financing strategy remains to be prudently geared, and we can have a target net loan portfolio value at year-end of below 20% and a maximum of 25% during the year. At period end, our net loaned value was just 7.6%, slightly higher than as at 31st December 2021, but below our position at the same point last year and well within our target levels. Earlier this year, we agreed a new senior debt package comprising of a GBP 200 million revolving credit facility, together with a GBP 40 million accordion option. This facility replaced our previous revolving credit facility and added HSBC to our Lending Club and provides the group with additional firepower and flexibility. Alongside this, we continue to enter into site-specific developments and infrastructure loans, as you can see from the table of our drawn debt on the right-hand side of this slide. So in summary, the first half of 2022 saw a strong financial performance for the group. And we made into a more uncertain economic period in a solid position with low gearing and cash and available facilities of GBP 144.4 million, increased further since period end with the sale of our Kellingley site. And we have no refinancing requirements for a further 4 years. We will continue to monitor closely the external environment, and we will use our skills and flexibility to target our capital, drive long-term value for shareholders. And I'll hand you back now to Lynda to take you through the operational review.

Thank you, Kitty. I'd now like to provide a bit more color and some more detail on our operational progress during the first half. Slide 16 provides an overview of our 32 million square foot industrial and logistics portfolio, of which approximately 2/3 is held freehold or in joint ventures. Around 1/4 of our pipeline is consented. And this comprises of facts such as Bardon Hill in Leicester, which we completed after period end, as well as larger sites such as our Advanced Manufacturing Park and Gateway 36, both in South Yorkshire, where over 200,000 square foot of development is currently underway as part of the next phases of both sites. Over 6 million square feet of our pipeline is in the planning system awaiting determination. And this includes 3 million square feet across our Gascoigne Wood, Skelton Grange and Halton main sites, where we are targeting the determination in the next 6 months. The remainder of the pipeline is either in land assembly or preplanning phases, and it includes sites such as Rothwell in Northamptonshire, which we bought at the end of last year, and we've acquired a further small parcel land in the period and are currently engaging with local stakeholders in advances submitting a planning application. And finally, we continue to make good progress with sales so far, completing, exchanging or entering into heads of terms on 97% of our budgeted industrial and logistics land sales for the year. And as Kitty has mentioned, we were delighted to complete the sale of our Kellingley development in early September for GBP 54 million. Turning to our residential portfolio. This has the potential to deliver almost 29,000 housing lots with around 1/4 of these already consented. As we've touched on already, it's been a very active period for plot sales. We took advantage of significant house builder demand during the first half. We completed the sale of over 1,600 plots, including our largest service land sale to date to Barratt and David Wilson homes at Waverley. That parcel has the potential to deliver up to 450 new homes and marks one of the final phases of land sales at the site where around 3,000 homes will be built in total. We were also excited to market our first phase of service residential plots at our own bridge site during the period, and we saw highly competitive bidding process amongst the housebuilders. We significantly advanced placemaking works across some of our largest residential sites, so at Waverley, a new 150-bedroom hotel is under construction, and we have received planning for a new primary health associate at the site. Dry throat this morning. Development is also about to begin of Highwall Park, a new 1.5 kilometer linear part running through the heart of the site, which will connect the Advanced Manufacturing Park to Waverley Lakes. Meanwhile, at our 2,000 home South East Coalville development, planning been submitted. So just bear with me 1 minute. Sorry, that is a first, I'm afraid, I'll go again. So our 2,000 home South East Coalville development, planning has been submitted for a new 420 place Forest school at the site to sit alongside a new local center and extensive green space. And if we turn to the residential land portfolio. Elsewhere in the residential space, in May we launched our single family build-to-rent portfolio to take advantage of this rapidly growing market for which Harworth developments are particularly well suited. This portfolio represents a unique forward funding and long-term investment opportunity for a prospective partner to deliver up to 1,200 homes across 10 sites in Yorkshire, the Midlands and the Northwest. These sites have benefited already from Harworth's investment as well as our master planning and placemaking expertise, which has delivered green space, recreational facilities and a well-designed public realm. For existing residents, the introduction of the build-to-rent product is expected to add further to the vibrancy and attractiveness of these communities. Launching this portfolio allows us to accelerate the delivery of our residential sites because the BTR product can be built out alongside the residential plots that we sell to housebuilders rather than having to phase the development to take account of local absorption rates. It's also a good diversification in the event that we see a softening of the traditional build-to-sell market. We have received really strong levels of interest from prospective investors since we launched the portfolio to the market. We have a target date both the end of this year to exchange contracts with the build-out and phased handovers to take place over the subsequent 3 years. We're making good progress and look forward to updating you later in the year. So turning to our investment portfolio. Our GBP 294 million investment portfolio is a key part of Harworth's funding structure and growth strategy. This portfolio delivers an annualized rent roll of GBP 18 million and continues to post robust financial metrics. So you can see from the chart in the top right of this slide that the occupier is diverse, focused on sectors such as logistics, chemicals and manufacturing. And during the half, we completed close to 50,000 square feet of lettings, adding close to GBP 100,000 of annualized rent, transacted at significant premiums to previous passing rent and ERVs. This was then followed by significant leasing activity at Bardon Hill after period end. Once these leases are completed, they will have add 2.2 million in annualized rent and increase the grade A proportion of our investment portfolio from 11% at period end to 19%. As you can see from the bottom right of this slide, the operational metrics also remain strong in this portfolio with a long weighted average of expired lease term of over 11 years, a low vacancy rate of 3.9% and continued strong rent collection. So before I open up to questions, I just wanted to spend a few moments on our outlook. Harworth has made a strong operation and financial progress in the first half. We've seen significant increase in our EPRA NDV, which has brought us even closer to our ambition to reach GBP 1 billion. Over the last couple of years, Harworth has consistently delivered a strong performance despite an unprecedented macroeconomic backdrop. And the business has shown its ability to sustain its performance in an uncertain environment. This resilience is not by accident. It is as a result of our deliberate management actions to identify a strategy for growth, focus on the right markets and products, build expertise and maintain strong relationships. We are now seeing signs of both the residential and industrial and logistics markets are coming off their record highs. Most recent indicators suggest that the impact of rising interest rates on mortgage affordability, increasing inflation on household budgets and the withdrawal of government support, such as the Help to Buy scheme are likely to begin to impact house prices, albeit the fundamentals of long-term undersupply supporting pricing are still there. In the industrial and logistics sectors, yields are forecast to move out as debt markets tighten and interest rates rise. Supply chains and labor markets also still remain constrained, and this is likely to impact the pace of delivery and limit supply, reducing to occupiers and supporting rents. These conditions will have an impact on our valuations. And as previously flagged, we expect any 2022 gains to be first half weighted. This being said, investors still have a substantial amount of capital to deploy into the right product and into the right sectors. Harworth's products into the most resilient real estate asset classes and fundamentally, both are still undersupplied. The scale of our portfolio and our ownership allows us to drive value from management actions. And by controlling the phasing of our sites, we remain well positioned to deliver through the cycle. Our strength comes from our long-term focus and our ability to work through and adapt to changing market conditions. Thank you very much for your time, and I would like to open up to questions. I'm going to hand over to Tom Loughran, who's our Head of Investor Relations, who will be reading these out for us. Thank you.

Thanks very much, Lynda, and good morning, everybody. Thank you very much for everyone who has submitted questions so far. I'm just going to begin to read this out, but please note that you can still submit questions via the brands if you would like to. So Lynda and Kitty, the first question is, given the share price, would you look at share buybacks in the current environment?

Should I go on that one, Kitty?

Yes.

Sounds like it. So it's a great question. We haven't been asked that much over the years, but I suspect when you look at the markets, what you're seeing is whilst our shares are at a discount, so does everybody elves, it's sector-wide. Fundamentally, we're a company that's seeing growth. We believe that our strategy is the right one for the business. And we believe that actually reinvesting the cash that we throw off in more acquisitions and in the sites that we hold and develop and bringing forward will actually create long-term value and growth for shareholders. So sort of it's on our radar, as I imagine any CEO that you ask that question too, will say. But for Harworth, as a business in growth, we think actually that we serve shareholders best by reinvesting the cash and driving value going forward.

Thank you very much. The next question is could you expand on the natural resources portfolio? And what is the opportunity there for the company?

I feel like we're doing this a bit out of sync, but Kitty, do you want to go on that one?

Yes. No, I can do it. I think it's a really interesting sort of part of the portfolio, the natural resources side. So you'll have seen when I did sort of the big sub doughnuts of the overall shape of the portfolio, it's a relatively small component of it. At the moment, it consists of sort of land where we are either generating some renewable energy out of it. So we have some battery storage. We have built solar portfolio in the past. We have some winds of income as well that comes through. And then also sites where we're generating income through various uses that are on that site. So it might be to some of the old coal mines like coalmine methane extraction for example. We actually think it's a really interesting area, and we're hoping to talk a bit more about this in the year-end results because we have a ready specialists that skill set within that natural resources team, which we also deploy across our wider sites, so across all of our major development sites as well. And as part of our journey to be net zero carbon neutral to use that skill set within natural resources to look at how we can maybe drive some of those energy uses across our sites as we deliver our residential and our industrial and logistics communities as well. So a really big opportunity there for us.

Thank you very much. Next question is, what are your targets in terms of new land sites? And how generally are you finding the planning process?