Harworth Group plc (UK6A.SG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Harworth Group plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. I'd now like to hand you over to Lynda Shillaw, CEO. Good afternoon.

Good afternoon, everybody. And welcome to Harworth's second presentation on the Investor Meet company platform. And this is largely focused on our full year results for 2022 that we announced last month, but we'll also talk about our outlook for 2023. So I'm Lynda Shillaw, I'm Chief Executive, and I'm delighted to be joined by Kitty Patmore, our Chief Financial Officer. And we're once again very pleased to have an opportunity through this platform to speak directly to our valued individual shareholders and those who are considering an investment in Harworth. This slide shows the agenda for today. I'll begin with an overview of our performance during 2022. As I said at the start, I'll comment on the market backdrop, but also report on the progress that we're making in delivering our strategy. I'm then going to hand over to Kitty to take you through the financials, and then I'll provide an operational update and our view on the outlook for the remainder of 2023. We'll then close the session with some Q&A. And just as a reminder, you can submit questions at any time during the presentation, and we will aim to answer as many of these as we can at the end. So I'd like to begin with 3 key takeaways from Harworth's performance during 2022. It was a year of significant operational and strategic progress, and we delivered on every aspect of our strategy to become a GBP 1 billion business by 2027. We saw record levels of residential plot sales and direct development of industrial and logistics space. And we also added a record number of square feet to our pipeline through acquisitions, and we're well underway in transitioning our investment portfolio to modern grade A. From the perspective of the market, it was, however, very much a year of 2 halves. And following significant valuation gains in the first half, we saw rapid outward yield shifts in the second half amid a softening of macroeconomic conditions. And over the year as a whole, our management actions to drive value across the portfolio actually managed to largely offset the yield shifts, and we ended the year with a broadly flat EPRA NDV and total return. We consider this to be a very robust performance given the scale of the second half headwinds. Finally, and most importantly, looking forward, we are really well positioned. Our focus markets remained strong and characterized by resilient demand and undersupply. What's more, we have a strong financial position, a large land bank that we own or control and a highly experienced management team for our focus on execution. So the last 2 to 3 years have seen both tailwinds and headwinds amplified by the global pandemic and the macroeconomic uncertainty that is a consequence of this, and also from the beginning of last year, the war in the Ukraine. Against this backdrop, Harworth has delivered consistently strong operational performance, making significant progress in implementing our strategy and growing the business. And I've said before, this is a marathon, not a sprint. You can't just do regeneration. Harworth is a long-term through-the-cycle business, and that means that we look through these near-term market conditions as we execute our plans. Harworth is all about its people. And over the last 2 years, we've built our team to enable us to deliver our strategy successfully. And it is their skill and hard work and efforts that are essential in driving our business forward. And also, we believe that we have the right strategy and all the right ingredients to realize the full potential of our portfolio to deliver long-term growth to our investors. So looking at the highlights of 2022 in more detail. Our industrial and logistics pipeline grew to a new high of 35 million square feet, driven by strong acquisitions performance across our regions. We also completed the development of 432,000 square feet of space during the year at Bardon Hill and the Advanced Manufacturing Park. Our residential pipeline remains stable at just under 30,000 plots, a significant achievement in itself, considering that we sold over 2,200 plots during the year. And this is again a new record for us. And even in the second half of the year, we were transacting in line with or ahead of our June 2020 valuations. Staying with residential, we launched our single-family build-to-rent portfolio, and we are working on heads of terms with our preferred investors and contracts with construction partners. As we work through the pipeline faster, it's really important for us to keep filling the hopper, and you'll see that we added 8.5 million square feet of industrial and logistics space and over 2,500 residential plots to our pipeline through a combination of freehold acquisitions, options and planning promotion agreements. With the transfer of Bardon Hill to our investment portfolio, it now stands at 18% grade A, up from 11% in 2021. And across the portfolio, we continue to see strong levels of occupier interest and letting activity, securing deals at premiums to ERV on previous passing rents. Finally, the Harworth Way, our sustainability framework runs for everything that we do as a business and it has been a transformative year for us as we have created a dedicated sustainability team, developed a detailed net zero carbon pathway while enhancing our metrics, the data collection and analytical capability. And our focus in 2022 has been on understanding the carbon journey, of what we build and setting the program of work from 2023 onwards necessary to deliver and report against our objectives. Enhancing our reporting on the social impact of what we do is a key focus of 2023 because we believe that what we do in the regions makes a difference to communities and because our portfolio has the potential to deliver GBP 4.6 billion of gross value add. So turning to our markets. This slide provides an overview of some of the key trends that we're seeing. The chart in the top left shows that following the record first half, 2022 ended up being the third strongest year ever for industrial and logistics take-up surpassed only by 2021 and 2020. Demand softened slightly in the second half, but it still remained well above the long-term average. In the bottom left, we pulled out some of the key trends in the drivers of demand for industrial and logistics space, where a significant shift is underway. Third-party logistics and manufacturing saw their strongest year ever for take-up and this is likely to be driven by trends such as on-shoring, near-shoring and a focus on supply chain stability. These offset the reduced demand from online retailers who recorded their lowest takeup in 5 years. In addition, 86% of the demand was the grade A space, underscoring occupiers' preferences for modern, high-quality and sustainable units and endorsing our strategy to transition the investment portfolio to 100% grade A by 2027. Elsewhere in the market, supply remains close to record lows with average vacancy rates below 4%. And in some of our regions, such as the West Midlands, it's lower still with a vacancy of around 3% and less than half a year of supply in the market. Turning to Residential. Following a strong first half, the latter months of 2022 saw weaker demand as higher mortgage rates, challenging affordability and subdued consumer confidence took hold. This has undoubtedly had an impact on housebuilders who have been cautious in their recent reporting, which has suggested whilst pricing and incentive levels have seen some adjustment, demand has showed signs of recovery albeit not yet to the levels seen in early 2022. And the chart on this slide indicates one of the potential drivers of this. Average mortgage rates have come in from their post mini-budget spikes. And if this continues, it should improve affordability and the consumer outlook. Finally, and particularly relevant to our strategy of broadening our range of residential products, the bottom right chart shows the single-family build-to-rent market has grown rapidly in recent years and is set to increase exponentially over the next decade to over 70,000 dwellings. Investors continue to be attracted to the highly defensive and consistent returns offered by these products and the sustainability led rental communities that they can provide. So before I hand over to Kitty, I just want to take a few moments to review our strategic scorecard. And as I further mentioned at the beginning, it shows progress against all 4 growth drivers of our strategy to reach GBP 1 billion of EPRA NDV by 2027. We significantly [ set up ] the direct development from previous years and are now making good progress to delivering an average of 800,000 square feet per annum by 2027. To manage risk, we combine small to midsized speculative bills with pre-let and build-to-suit opportunities, and we will flex this to respond to changing market conditions. In Residential, we saw a particularly strong year for plot sales. This was driven by buoyant housebuilder demand. And in response to this, we brought forward land sales to capture these strong market conditions. It's also important to remember that our target of selling 2,000 plots per year is an average, and that we will see years above and below this figure depending on market conditions and with the phasing of our sites. Our 12 to 15-year land supply was maintained by the acquisitions, as I've already mentioned. And our investment portfolio reached 18% grade A which is a significant step-up from 11% at the end of 2021 and has continued to rise post year-end with the completion of additional direct development and selected sales of more mature investment portfolio assets. So as you can see, we've made a lot of progress operationally and we remain on track to reach our GBP 1 billion target by 2027. And with that, I'd like to hand over to Kitty to take you through the financials. Thanks, Kitty.

Thank you, Lynda, and good afternoon, everybody. I'd now like to take you through Harworth's financial performance during 2022 in more detail. So starting with our balance sheet. Our EPRA NDV, which is our net assets, assuming all of the properties are held at market value, remains broadly flat year-on-year and with GBP 633.8 million as at 31st December 2022 equating to 196.5p per share. This is the result of a strong first half performance, followed by significant market-driven outward yield shift in the valuations of our investment portfolio and more mature industrial and logistics development sites in the second half. Our management actions were able to largely offset this yield shift, and the overall result was a reversal of our first half gains and therefore, a broadly flat valuation performance and EPRA NDV movement during the year. And I'll talk a little bit more about our valuation performance in a moment. Net debt was GBP 48.4 million, increased from its position at the end of last year, largely due to higher direct development spend, such as our Bardon Hill site, but it remains relatively low in historical terms. And combined with the dividend, our broadly flat EPRA NDV movement led to a total return of 0.1% during the year. Turning to the income statement. Sales of service land and property, in addition to income from rent, royalties and fees resulted in group revenue of GBP 166.7 million during the year, an increase from GBP 109.9 million in 2021. The growth was due to higher serviced land and property sales, which totaled GBP 138.5 million in the year, including the sale of our Kellingley site for GBP 54 million, plus growth in rental income due to complete to direct development projects and fees from development management and planning promotion agreements. Looking forward, around 72% of our budgeted sales for 2023 are now completed, exchanged or in heads of terms. Administrative expenses increased by GBP 2.9 million during the year. This is principally due to higher salary costs resulting from increased employee numbers to support our growth strategy. Admin costs expressed as a percentage of revenue decreased during the year from 17% to 13%. And we do expect the pace of growth in employee numbers to reduce going forward. Revaluation movements are an important component of our performance and are seen both in the income statement and the balance sheet. In the income statement, we can see the decreases in the fair value of assets held for sale and investment properties. These consist predominantly of our investment portfolio, our strategic land and our natural resources portfolio, but it doesn't include any changes in the fair value of our development properties. And if you exclude the impact of revaluation gains and losses, both from 2021 and 2022, operating profit increased year-on-year. Tax charges decreased due to unrealized gains and losses on investment properties and all these factors combined resulted in a profit after tax of GBP 27.8 million compared to GBP 94 million in the prior year, which was heavily influenced by the 2021 valuation gains. Finally, the Board has decided on a final dividend of 0.929p per share, bringing the total dividend for the year to GBP 1.333 per share. This represents a 10% increase on the prior year, which is in line with our dividend policy. So looking at our valuation movements in some more detail, this slide shows the component parts of our GBP 2 million valuation loss during the year, which compares to a valuation gain of GBP 160.5 million in 2021. This year, we have split our major development and strategic land sites by market sector to show the different valuation dynamics of each. In industrial and logistics, headline yields over the 12 months moved out by up to 150 basis points or 30% to 40%, alongside continued rent growth with occupier demand. These market trends were seen across our investment portfolio, industrial and logistics major development sites and near-term strategic land sites. The full downwards market movement was largely offset through our management actions on our sites, such as planning progress in strategic land, securing grants and development progress, including development completions and major development site mix and new above-market level lettings in the investment portfolio. As a result, although headline yields move 30% to 40%, the industrial and logistics part of our portfolio only reduced the value on a like-for-like basis by around 12%. Our record residential land sales, which transacted in line with or above book value, helped to drive gains across our residential major developments and strategic land, including at our Ironbridge development, and our natural resources and agricultural land portfolio remained broadly stable year-on-year. This slide provides a breakdown of our GBP 737 million portfolio as at 31 December 2022. Industrial and logistics lands and property shown here in shades of green, account for around 60% of our portfolio by value, with residential land and property showing here in shades of blue accounting for most of the remainder. The table on the right-hand side summarizes for each segment the pound per square-foot for industrial and logistics sites and pound per plot for residential sites. And this shows quite clearly the significant value that we generate by taking sites through the planning system putting in place infrastructure and services, in the case of industrial and logistics, developing and letting them to occupiers. It also shows the huge potential value of our currently unconsented strategic land pipeline, which actually represents 29.6 million square feet of industrial and logistics space and 23,200 residential plots. This has increased from 22.4 million square feet and around 22,000 plots in 2021. This slide shows our valuation gains and losses for every 6 months over the past 5 years and is very useful for putting our second half performance into perspective. And it demonstrates how, despite the valuation movement in the second half, by taking a long-term approach, we've been able to deliver over GBP 275 million of cumulative value gains over the past 5 years and have also delivered an average annual total return of 9.8% over the same period. So turning to look at debt. The slide -- chart on the slide bridges the increase in our net debt position from GBP 25.7 million at the end of 2021 to GBP 48.4 million as at the end of 2022. The main driver was an increase in development spend and cash and working capital used in operations as we stepped into our growth strategy, and this was largely offset by the significant sales proceeds we utilized during the year. This chart also shows the headroom afforded by our cash position and revolving credit facility, which I'll provide some more detail on that. Our financing strategy remains to be prudently geared, and we have a target net loan to portfolio value at year-end of below 20%, with a maximum of 25% during the year. At year-end, our net loan to value was just 6.6%, slightly higher than at the end of 2021, but well within our target levels. In early 2022, we agreed to a new senior debt package comprising a GBP 200 million revolving credit facility together with a GBP 40 million uncommitted accordion. This facility replaced our previous loan, 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 the slide. So in summary, 2022 saw a robust financial performance for the group and we remain in a strong financial position with low loan to value and cash and available facilities of GBP 175.6 million and no major refinancing requirements until 2027. We'll continue to monitor closely the external environment, and we will use our skills and flexibility to target our capital to drive long-term value for shareholders. And with that, I'd like to hand you back to Lynda to take you through the operational review.

Thanks, Kitty. And now I would like to provide some more detail on our operational progress during 2022. Slide 16 provides an overview of our 35 million square foot industrial and logistics portfolio, over half of which is held -- freeheld or in joint ventures. And the 5 million square feet of this space has a planning consent and includes mature sites such as the Advanced Manufacturing Park and Gateway 36. Both of these have been hugely successful scheme, and we saw strong demand during the year as we brought forward the next phases of development. Our planning consents also includes sites such as Chatterley Valley, where flight preparation works began towards the end of 2022 for what will eventually be 1.2 million square feet of employment space at the heart of the Ceramic Valley Enterprise zone in Staffordshire. Over 5.5 million square feet of development is progressing through the planning system, including Gascoigne Wood in North Yorkshire and Skelton Grange in Leeds. And during the year, we entered into option agreements for 2 significant sites, one in North Yorkshire and the other adjacent Junction 15 of the M1 in Northamptonshire. Both of these sites have been highly sought-after industrial locations and have huge potential, and we look forward to working with local stakeholders to bring forward our plans as we work through '23. The table on the top right shows the potential gross development value to come from a selection of these sites, which could be as high as GBP 1.7 billion, demonstrating a significant pipeline of development in our strategic plan [indiscernible] and signaling the potential value that we can unlock from the long-term pipeline as we continue to assemble schemes and work through planning system. Turning to our residential portfolio, which has the potential to deliver around 30,000 housing plots, of which just under 1/4 have a planning consent. As I said, it's been a record year for residential plot sales, which totaled 2,236. And within that figure, we saw some significant milestones. We completed our largest sales to date in a 450-plot transaction with Barratt and David Wilson Homes at Waverley. We sold the first phase of our 1,000 home mixed-use regeneration scheme Ironbridge also to Barratt and David Wilson. And we completed the sale of 80 plots to regional housebuilder Cadeby Homes at South East Coalville which brought the total number of housebuilders that Harworth has transacted with to 21. As a master developer, we pride ourselves on investing in residential sites to provide great infrastructure, amenities and green space to residents. And this slide provides just the flavor of what we've been up to during the year, progressing applications for new schools, developing new facilities and improving connectivity. Same with residential, one of our key strategic objectives is to broaden the range of our residential products. We made important progress on that front during the year, launching our first single-family build-to-rent portfolio of up to 1,200 homes. Some of you may have heard it referred to as Project Spur. It has attracted significant levels of interest, and we have now selected our preferred investments in construction partners and are progressing towards exchange. We now have a mixed tenure team in place within Harworth. And as you can see from this slide, work is well underway to explore other types of residential products that could be delivered across our sites using strategic partners where appropriate. Offering these products alongside our traditional service plot product has many benefits. It provides us with an important diversification and it allows us to accelerate the delivery of our residential sites and gives us the opportunities to control build quality, innovation and sustainability, which is critical for maintaining a sense of place also preserving land values and meeting our net zero carbon goals. And I look forward to providing you with a further update on the progress of the build-to-rent portfolio and these other residential products in due course. Our GBP 281 million investment portfolio -- residential portfolio for the group is a key part of Harworth's funding structure and growth strategy. This portfolio delivers an annualized rent roll of GBP 19.7 million and continues to deliver robust financial metrics. And you can see from the chart on the top right of this slide that the occupier base is diverse. It's focused on those sectors that are currently driving demand, such as manufacturing and third-party logistics. And you can see from the bottom right of the slide that the operational metrics also remained strong with a long weighted average unexpired lease term of over 11 years and a low vacancy rate of 2.7% when excluding our recently completed Bardon Hill development. And also, you'll see we continue to have strong rent collection. During the year, we completed over 600,000 square feet of lettings, adding close to GBP 1.7 million of annualized rent, and we transacted at significant premiums to previous passing rents and ERVs. After year-end, you may have seen press releases that we completed the sale of 2 sites for a total of GBP 12.6 million, in line with or ahead of December '22 valuations as part of our strategy to recycle capital and transitioning the investment portfolio to modern grade A. As many of you will know, the Harworth Way is our framework for embedding sustainability and social value throughout our culture, our operations and our strategy. And one of the key pillars of the Harworth Way is planet which to us means minimizing our environmental impact, building in climate resilience and promoting biodiversity. Last year, Harworth committed to becoming net zero carbon for Scope 1, Scope 2 and Scope 3 business travel emissions by 2030, but also to be net zero carbon for all emissions by 2040. To meet these objectives, we have appointed our first Director of Sustainability, and we've put in place a sustainability team. Our priority for this year has been devising our net-zero carbon pathway and embedding its commitments into a range of work streams and targets. This slide provides just a few of these in areas such as the development of our industrial and logistics and residential sites and also including targets to be net zero carbon on all new industrial and logistics developments by 2030. More details of this can be found in our net zero carbon pathway report, which is available on our website now. During the year, we also completed a strategic review of our natural resources portfolio. You may remember if you heard me talk at the half year that we haven't completed that work in the first piece of strategy work, but we did that as we worked through 2022. And this comprises sites used for a wide range of energy production and extraction purposes. The review aimed to determine how best to protect and optimize value from this portfolio while maximizing the role that these assets play in realizing our sustainability ambitions. The outcome has been to develop an energy and natural capital strategy, and we aim to develop renewable energy generation and storage solutions and other green initiatives such as reforestation or rewilding of our natural resources assets. Our existing natural resources team will also have a wide responsibility for embedding these energy concepts and principles across each one of our development sites as part our master plans to maximize energy availability and bring capital for residents occupiers. And we also believe that over time, this will create some preserved value for investors while achieving Harworth's net zero carbon ambitions. So turning to the outlook. Following the rapid outward deal movements of late 2022, some signs of stability seems to be returning to the market in the early months of 2023 as the speed of interest rate rises and outward yield shift slows. That said, the war in Ukraine continues and economies are still responding to energy and other commodity shocks that this triggered. We're encouraged by these trends, but at this early stage in the year, we remain cautious about the economic backdrop for 2023. Uncertainty is likely to remain in our markets until interest rates reach their peak and inflation falls back to manageable levels creating conditions for growth and improved investor confidence. Against this backdrop, Harworth is well positioned. We're a long-term through-the-cycle business. As I said at the top, you cannot do regeneration quickly. Most of our sites will be in development planning or land assembly through the next few years and into the next decade. This means that while we are active through the cycle, we modify our short-term funds to reflect changes in the market. We're also looking through these near-term market conditions to where we need to invest to create the future value and returns that we can unlock from our sites. And in closing, I'd like to emphasize that what we do is important to the local economies that we invest in and the communities that we create. Our focus markets are drivers of economic growth and continue to have robust fundamentals. And moreover, in an economy in need of planning reform that truly drives growth, there remains an acute shortage of high-quality consented land. Importantly, we control our land bank, and we control when and where we invest. And we have a highly experienced management team who are focused on execution. As we navigate the business through the challenge of the wider economic backdrop, we're confident that our strategy is the right one to deliver long-term value to stakeholders while also meeting our net zero carbon commitments. And our strong financial position are differentiated products and the scale and mix of our portfolio position us well to realize the full potential of our sites. And with that, we'd be delighted to take your questions. As a reminder, you can continue to submit questions, and we'll aim to get through as many as we can. Thank you. Thanks, [ Alessandro ].

Lynda, Kitty, thank you very much for the presentation. [Operator Instructions] Just while the company takes a few minutes to review these questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. Tom, if I may, could I just ask you to read out the questions when it is appropriate to do so, and then I'll pick up from you at the end.

Absolutely. Thank you, [ Alessandro ]. Okay. So the first question we have, I guess, is for Kitty. It says over 2021 and 2022 combined, how have investment yields moved?

Yes. So thinking sort of really about industrial and logistics because I suppose that's the business of the portfolio that's seeing sort of real sort of tightening of yields, I suppose, as we came out of COVID, we saw sort of high demand from e-commerce and then sort of feeding through to probably a peak point in sort of maybe April sort of time last year, and then as interest rate rises came through, so those industrial and logistics yields sort of moved out. So if we wind all the way back to sort of 2020, probably prime yields are probably about 4% at the time, I would say. Over the course of 2021, we saw that tighten probably -- so I think -- so CBRE placed sort of prime yields at the end of 2021 at 3.5% and then in June last year at 3.25%. So they moved from the -- over the course of 18 months from 4% into 3.25%. And then in the 6 months from June to December, they moved all the way up to 5%. So you saw them sort of come in and then go out, but actually go out further than the end of 2020 over the course of -- sort of 2 years further back than the end of 2020. And then thinking about sort of our investment portfolio, as I guess, a proxy for some of that and how you can see how the asset management actions that we've taken, trend movements as well play into it too. At the end of 2020, that investment portfolio had a net initial yield of 6.1%. By the end of 2021, that had come in to 5.6%. So that came in. And then at the end of last year, at the end of 2022, it was back at 6.2%. So the yields in the market, prime yields and secondary yields, it's interesting to say, moved almost exactly the same as prime yields. We've thought for a while they might not move as much as prime yields, but actually at the time, they almost have pretty much mirrored prime yields. So that had moved from the end of 2020 being sort of 4% into 3.25% and then back out to 5%. And our investment portfolio went from sort of 6.1% into sort of 5.6% and then back up to 6.2%, so you would have expected it to move further. It didn't move quite as far because we have sort of increased rents. And we've also increased the proportion of grade A within the portfolio by upgrading assets or developing our own assets over the period too. So you can see sort of it in both ways how the market has moved.

Thank you, Kitty. The next question, I think, is probably for Lynda. It is, could you please describe the criteria that define a grade A development or building?

I'm sure every developer you ask will give you a different answer. But here's the Harworth version of this. Location, specification, occupier covenants and the sort of -- and the lease basically, so the sort of quality of lease. And that can be in term, in length. It can be sort of how many sort of breaks are sort of sitting there. We've really focused on the new buildings that we are developing and bringing into our portfolio to getting green leases in place with occupiers as well. But it's a combination of all of those factors. It's very difficult to build a grade A office and attract a grade A occupier in the wrong location. But as I mentioned when we were doing the presentation that we're seeing that occupiers are very focused on the specification now of buildings. And what does that mean for us? Our buildings are basically a minimum of bringing excellence in delivery. We're targeting and really focused on delivering EPCAs but they have integrated solar, really high levels of installation. And also with Harworth, the sites that it sits within, so it's not just about the building that we build, but it's about sort of shared amenity, whether that is green space or whether that it seems like sustainable urban drainage systems. And I think actually, not just for us but for many developers as you start to move forward over time, on-site provision beyond integrated solar on roofs energy, but also forms of backup will form part of that spec as we move forward. So like I said, I'm sure every developer will give you their flavor, but that's the Harworth flavor.

Thank you, Lynda. And the next question is for Kitty. How are your assets valued and how often?

Yes. So our assets are valued every 6 months by an independent valuer. So that we use BNP and [ settles the value end ] of the portfolio, and they do a half year valuation and a full year valuation as well. That's why this shows slightly differently between the statutory net assets but you need to look at the EPRA NDV which is the EPRA NAV, which has the market value of all of the assets as at 31st of December to get the latest view. So everything is valued on that basis. And we've got different types of property within the portfolio, so the most mature being the investment portfolio, and that's valued based on comparable evidence looking at yields and rents. Development sites both industrial and logistics and residential tend to be valued as sort of almost looking at what can be driven -- what value can be driven out of those sites over sort of a period of time and therefore what's the land value assuming those receipts, those costs and assumes profit levels and again, looking at comparable evidence and sort of too. So what we find is certainly for sort of residential sites, for example, sales that we make from those sites can be quite influential to sort of the valuation because it's proving sort of what somebody would pay for serviced land. And then we've got sort of strategic land within the portfolio, and that tends to be sort of looking at other sort of land transactions sort of longer term typically sort of sitting there with much less sort of hope value in it and sort of very long term, then it can be all the way back to sort of agricultural land values too. We've got a little bit of agriculture in the portfolio, and we've also got the natural resources portfolio which is the next gen natural resources tends to be sort of looking again at the income streams that can be driven off those sites and applying the yields to it.

Thank you, Kitty. The next question, I think, will be for Lynda. It's are there any potential regulatory changes to the planning process or planning more generally that will have an effect on the strategy?

I suppose the sort of simple answer is no. We -- as a business, we have a really skilled team of planners embedded in each of our regions as well in the center. Planning on the scale that we develop and regenerate is always quite a long process. Even on brownfield sites where there's a presumption in favor of development, it's about actually making sure that you're getting the right scheme that's going to be supported by the local authorities and local residents. So we work really hard and we put -- actually, as we've grown the business and we've really accelerated into the strategy, we've put extra resource into our planning teams in the regions as well as at the center because we're actually active now probably on more planning applications across the business than we were 2 years ago, but they are taking sort of longer to get through the system. And the planners themselves, local planners themselves are, a, under-resourced and they have been for a very long time, but they're also having to cope with things like nitrate neutrality. It doesn't have a massive impact on any Harworth site that are hosted into that. But in other parts of the country, that is a significant issue for developers, but also the introduction of the sort of biodiversity net gain targets in local authorities and actually the overlay of that into an already quite complex planning process is taking some time for local authorities to digest. We're skilled at getting through that process. That's one of the sort of core ways that we start to create value and unlock our sites. And we've got a really long track record of success. So all I'd say is it's not going to affect what we do. We'll continue to do that and put the resources that we need to work it through the process. But it's probably no easier than it was last year or the year before actually to get schemes consented.

Thank you, Lynda. The next question is, how will net zero requirements over the next several years affect your business?

So I think there's really sort of simple like 50,000 sort of thoughts -- answer to this, which is if you don't start to decarbonize your products and what you deliver, it will affect the business in the sense of it's going to go to value. So I'd come back to -- we saw this in the office market actually sort of if you go back 10 to 20 years ago when people started to build the sort of then modern version of offices, and there was a huge amount of debate around will there be a green premium or a brown discount. The reality was the occupier -- investors -- institutional investors drew what the product needed to be. And therefore, if yours didn't look like that, you were basically going to -- you're achieving lower rents. It was maybe less attractive to occupiers and eventually, you have to invest. And I think we're sort of at the same place with actually development generally now. Again, that [ sum that will ] -- that sort of sticks in my mind, the 8% to 6% of space that was taken up last year was grade A, so that is the more sustainable, the more energy efficient, the more lighter, the brighter the nicer for occupiers and for workforces. So the reality of it is that we're not immune to this. We're going through this with the rest of the development community. I think simply not continued to progress and develop our products to support the decarbonization of our business is probably -- that will be more punitive than doing it. Does it introduce additional costs to some extent? Yes, in some parts of what we do. But then there are other things where, for example, you are putting in some sites more electricity sort of network and infrastructure because you're not putting gas in. So that Ironbridge, there's no gas being put into Ironbridge, there's no gas going into Chatterley. And some of our housebuilder customers on some of our existing sites where we do have the sort of dual fuel are asking actually for more electricity than gas in the later phases of their development. So I think it's one that the whole industry is grappling with and working through. But if you get a chance to look at our net zero carbon pathway document, we've really sort of clearly identified in that, I think, the journey that we're on as a business, but also that, I say, a lot of the sector is on to making sure that we deliver as decarbonized a product, as we work through the next decade, as possible.

Thanks, Lynda. Next, is a kind of comment and a question from Gareth. He says I'm a longtime small shareholder for over a decade. Thank you very much for your support. My congrats on a fine performance given a tough H2. Leaving aside general economic strategy, what are the key specific moves by government that you would ideally like to see to help foster your further growth?

Well, I'll try to do this and not vent my spleen, we'll see. But it's a great question, and thank you for your comment because actually, in any ordinary year, the result actually sort of smashed the lights out. It just didn't look that pretty given what was going on in the market. So we very much appreciate that comment. . I think the biggest thing for our sector is actually planning reform that supports growth. So I mean, I've been around the sector for a very long time, and I've seen all sorts of different sorts of governments and different attempts to reform planning and nobody's got it right yet. And I think actually, this government have probably got it more wrong than most actually at the moment. But planning reform needs to be designed so it supports growth, so that it supports investment and so that investors are not ultra-cautious about the time it's going to take something to sort of work through the system, whether or not they're actually going to get sort of support even if they get an office's recommendation and how protractive that process can be. I think it's got to be really joined up as well at a regional level. So we're seeing -- as we've gone through the last few years, you see more and more combined authorities for them and they are much bigger geographical patches that can basically take a much more -- an overview, if you like, of sort of regional economies and what needs to go where. And you're seeing that in Greater Manchester actually. You're out consulting on sort of their spatial strategy which is places for everyone and 9 of the 10 authorities are involved in that. And between them, they've worked out and agreed like where they're going to drive employment and where they're going to drive housing. And that is quite advanced now actually, that sort of plan working its way through the process. And if you -- on the slide earlier, you'll see that we've got a number of sites that are actually sort of caught within sort of that process on previous reviews. I think it's going to be joined up in a way as well, but it's not focused on like the latest gimmicks. So we've got investment zones. We've got town center regeneration funds. We've got free ports. We've got all sorts of things going on, which make it really difficult for local authorities themselves to basically focus their time and resource. And they often only get 2, 3 weeks to put a bit together, which means actually it's 2 or 3 weeks when they're not working on your planning applications. So there's a whole raft of things. For me, if they fundamentally sat back and said, actually, let's -- the planning system worked to support growth and then make sure we're incentivizing both local authorities and investors and occupiers in the right way, that would be my nirvana.

Thank you, Lynda. Next question, given the strength of the balance sheet and the quality of the portfolio, why do you think the share price doesn't represent your splendid efforts?

I think this might be a double header with Kitty, kitty and I, probably both. I'll just -- I'll start by saying it's not just how -- it is sector-wide. I mean the real estate sector is generally sort of -- is trading sort of more as a discount than sort of not. I think for us, sometimes we can get caught between a REIT and a housebuilder, but for -- it's about delivering against that strategy in my mind, which is long-term consistent delivery driving those sort of high single, low double-digit returns and continuing to grow the company. And I think it's that consistency of performance through the cycle that basically sort of just stick to you and there's a number of our investors have said to us actually as we've done the roadshows, stick to anything and basically sort of this will come good. But the sector as a whole is out of favor at the moment. And that has been driven by sort of the rising interest rates and the impact sort of on the cost of debt that people need to sort of come in and actually bring schemes forward. And one of our strengths at this point in time relative to sort of many others is actually the strength of our balance sheet. Kitty?

No, I would agree with all of that, Lynda. I think the sector is definitely out of favor, I think. So it feels frustrating to be honest when we feel like we've delivered operationally, that we're progressing on the strategic plan, we're still anticipating being sort of at GBP 1 billion of net assets in 2027 as well. And we're just very focused on doing that and talking to people and sort of highlighting what Harworth has to offer really.

And we're all shareholders as well. So we watch it through the lens that you're watching it through as well. So -- but equally, we're shareholders because we believe -- we're close to the company officers, CEO, CFO and the sort of senior team. Many of our people across the business are shareholders. And we believe the strategy is the right strategy and that we'll sort of get to that GBP 1 billion. And the business is well set for growth there and hopefully in years to come beyond that as well.

Thank you very much, both. The next question, I think, is a slight kind of misunderstanding of the strategy, but I'll read it anyway just for transparency. It's in a world where industrial REITs are trading at 30% plus discounts to NAV, how do shareholders benefit from your strategy of buying industrial property at prices which will be much closer to valuation?

Do you want to go on that one, Kitty? .

Yes, absolutely. It's really interesting in that it sort of highlights that the REITs are also trading at a discount at the moment as well. And our strategy is very much to sort of manage our land and property and to develop it in the right instance in order to create value. So we -- to be clear, we're not going and buying industrial property like build sheds. We are building our own. And we have built in the past, but we don't now. So we build our own and with that, the advantage that, that gives us we can sort of build and create crystallized development profit there. So we're creating value through the development build. Where we're buying it is land. It's long-term strategic land pipeline, and we're buying it with a view not that we will sit and hold that and not do anything with it, but that at the right time, we will take it through planning. We'll put in place at the infrastructure and services and utilities, and we will ultimately build that out. And through that life cycle, we will have created value at every stage of it, such that the combination of the portfolio means that the value it's created at any time drives us towards that GBP 1 billion of NDV. So it works out or gives us that average total return that we've delivered over the last 5 years of sort of 10% as well. So I think it's quite -- it is quite different from the REIT, which is sort of collecting rent and yes, asset managing sort of rental portfolio. We have an element of that, but then we also have all of these other actions also drive value in the portfolio, and we're very focused on maximizing those.

Thanks, Kitty. And the final question we have for now -- or the penultimate question is, what's the biggest risk to your residential, industrial and strategic land markets? It's quite a big question.

It's a really good question. I feel like we've been thrown into the eye of the storm over the last 2 years, both to the good and the sort of -- and the bad actually. And I think probably my answer to that would be the long-term nature of our business, the strength of our balance sheet and our ability to decide what we're going to invest in and when actually mitigates a lot of the really sort of big risks that sort of has been thrown at us, whether it was through COVID, sort of whether it was the crazy sort of [ mini budgets ] and what's sort of gone on since then sort of what potentially is happening in sort of banking sort of still or not? I mean -- so the strength of the balance sheet, the long-term nature of the cycle, our ability to turn things off, not start things if we don't want to because we're not compelled to is actually a real strength. I think fundamentally, a major economic downturn that was sustained -- and by sustained, I mean like in a sort of 3 to 5 years, is going to sort of -- it will hurt us but it will hurt everybody else as well. But controlling your land bank means that you can adapt the product that you deliver as well. And in a lot of ways here, we really bring that to life on what we've been doing with the residential portfolio. So to continue to sort of work through those sites and keep the right level of momentum in terms of residential phases for delivery. If the sales market is going to be saturated or slower, we've introduced more resilience by build -- by bringing our own build-to-rent products in. And also, we've got an affordable product that's coming sort of down in flames as well, both of which are really sort of attractive to sort of -- to local authorities and to government because they basically need more housing delivered in the U.K. So I think our -- so the risk is always going to be market risk which actually, like I say, will impact everybody. And those macro things that we just can't control. As a management team, we've just got to be really aware, work really hard to make sure we're not [ coals on hot fire or anything ], but more importantly, make sure that we control our land bank. We control what's delivered and when. And basically, we flex sort of where we need to. And again, another example will be, if you look at industrial and logistics development -- we started quite a lot of spec last year, so Bardon was spec, the Gateway 36 development was speculative, so was the Advanced Manufacturing Park. This year, whilst we're finishing the Advanced Manufacturing Park because that started late in the year, this year, we will do no speculative development. It will be pre-let-led. So we can control those factors. But I think the worst thing of all for us and everybody else will be an absolutely stagnating economy. But that's just a long term -- if that's a long-term issue, that's something, as management, that we'll find a way of working through.

Thanks, Lynda. And then the final question is, is the inflation in material and labor costs a big issue?

So last year, yes, frozen for everybody else. You've got inflation, and then you've got a tightness of supply because the construction industry and the housebuilding industry were both going gangbusters. So last year, inflation was running -- the number there because we were asked this question the other day, but running between 8% and 12% sort of depending on what part of the country you were in, what you were tendering for. On some materials, it was running well over 20%. So if it was civil, so sort of roads and major infrastructure, you were starting -- you were seeing sort of some elements of materials actually with inflation into their 20s. And like I say, the labor side was a constricted labor supply. And particularly housebuilders saw this where sort of their workforce can walk from one site to another, and in the day, sort of get an extra sort of 50 quid a day, and that was taking people away sort of an extra half a day on a Friday. So we would -- and we're not really in that market this year. So cost inflation has come off. It's still sort of running somewhere between 6% and 8%, but the labor inflation is still there, and we and everyone else is seeing that still, the --sort of labor cost inflation. The thing that is happening though is development has slowed down. So you're starting to get some more capacity coming back into the pipeline. So for us, and we're actively tendering on schemes now. The good news is as we go through our valuation process, and we review every single one of our sites internally twice a year. We adjust all of our cost plans and our sort of expectations and we look at what we need to do to continue to make that site sort of hit -- those sites hit the returns. What we're seeing is tenders coming in, in line with our cost plans. And that's important because those cost plans ultimately sort of go through to our valuations. So we are sort of seeing that -- it feels like it's starting to normalize a little bit, albeit it's not coming off as fast as maybe people expected it would.

Yes. I think, Lynda, just to add to that. We had some tenders back in last week, and they actually came in cheaper than we were anticipating. So it does feel like it's moving that way. And then just to be clear, all cost inflation up to the end of December is already reflected in the valuation numbers.

Lynda, Kitty, Tom, thank you very much. I think you actually managed to address every single question from investors. And of course, the company will review all those questions submitted today and we'll publish those responses on the Investor Meet company platform. But just before we direct investors to provide you with their feedback, which is as particularly important to the company, Lynda could I just ask you for a few closing comments?

Yes. I think sort of -- we've got the outlook and conclusion sort of slight slip, and I'd just like to sort of reinforce a number of points. It was a tough second half in 2022, but the business long-term through-the-cycle, all of our sort of management actions make us really resilient to what the cycle has thrown us because, as I was saying earlier, we can adjust what we do. And that was actually how we managed to offset virtually all of those market movements in the second half of '22. We're executing the strategy really well. We've resourced up. The team are really focused. We're active across more sites than we ever have been. The morale within the businesses is good. The engagement is good. We're continuing to sort of diversify the business really well as well. But I do come back to this slide, strong financial position gives us the firepower and the flexibility that we need. So if there's opportunities, we were able to execute those, but also we're able to sort of take a view on where we need to invest this year to preserve value in future years as well. And that's really important, actually. But the scale of our portfolio and this fact that we've got control over it sort of alongside that financial firepower makes this business really, really resilient.

Lynda, Kitty, Tom. Thanks once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management of Harworth Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you, everybody.

Thanks very much. Bye-bye.