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

Good afternoon, and welcome to the Harworth Group plc Full Year Results 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 can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Lynda Shillaw. Good afternoon.

Thank you, and good afternoon, everybody. Thank you for joining us. And again, our apologies to those of you who dialed in earlier in the week when we were unable to go ahead. So I'm Lynda Shillaw, Chief Executive of Harworth Group. I'm joined by my colleague, Dougie Maudsley, who is our Interim CFO; Kitty Patmore, our CFO, is currently on maternity leave. And Dougie's other day job is our Group Finance Director. So you're in good hands on the numbers. I'm going to sort of dive straight into the presentation and talk about the operational performance that the business sort of delivered during 2024. And it was a year of outperformance and strong returns. I hope you can see that from this slide. We delivered a total accounting return of 9.1% in the year. That was a really strong result in the context of the low leverage at the end of the year, but actually sort of the market as a whole, and it puts us a lot in that front pack in terms of real estate company sort of returns. That drove our EPRA NDV on to GBP 719.5 million, so that's up 8.5% year-on-year. And that equates to 17.2p a share, up on 2023 to 222.3p. The loan to value, as I sort of said sort of at the top, remained very low. We were back at 5.4% at the end of 2024, and we continue to maintain that low level of leverage compared to the peers and the market more broadly. Dougie will sort of talk through in more detail sort of in the finance section of the presentation on the slides, but you can see from this, we had low net debt, really high liquidity. And very pleasingly, we went into the FTSE 250 in September sort of last year, which has been a real milestone achievement for the business. The other point to draw out really on this slide is like that TAR of 9.1% is really sort of strong for '24. Our average 5-year total accounting return at 8.4%, all the way through with that prudent debt and strong liquidity has again been pretty market-leading. It compares against MSCI for the same period. The All Property index delivered about 5.1%. So that consistency of delivering strong high single, low double-digit returns through that period has been, a, a focus of the business; but b, something that we've been able to achieve largely through our model, and it's driven very much by management actions. So to just sort of dive a bit deeper into sort of some of the sort of key drivers of return. Pleasingly for us, it was across the whole portfolio, but we did have a couple of quite big landmark transactions, as you can see from this slide. So the total property sales were up year-on-year, 71% at GBP 215.8 million. During the year, we sold 4.4 million square foot of Industrial & Logistics land. And that was largely sort of in 2 very big transactions: so one, GBP 53.4 million, was the first phase disposal of Skelton Grange to Microsoft, and that came in on the 19th of December; and then the second transaction, which came in on the 23rd of December, was the disposal of our land at Ansty following receipt of a planning consent to Frasers Group. That was a conditional sale that had been agreed back in 2021, but it was conditional on planning. And actually, by working with a single large strategic occupier, we've accelerated that site sort of through planning by the best part of the decade. So we were really pleased with the outcome on that one. Where Skelton is concerned, we are on site currently undertaking the remediation works so that we can hand a fully serviced site over and conclude the Phase 2 of the transaction in early 2026. So we're on site with those works now. Both of these transactions generated significant value and profitability for the group. But as I say, they weren't alone. During the year, we also managed to sort of sell 2,385 residential plots. It's up significantly on 2023, sort of 104% up. And actually, overall, we're trending very nicely towards that 2,000 plots on average per annum target that we have at the end of 2027. You will see some volatility in the resi sales year-on-year. It's pretty natural. It's to do with the mix of sites that we have, but the overall underlying trend, as I've just said, is up. And while we were doing all of that, we remain incredibly focused on our 2030 and 2040 net zero carbon targets. And we saw a 17% reduction in carbon emissions driven by the use of alternative fuels in -- for direct plant operations on site and also an increased take-up in EV vehicles by our people. The next couple of slides have a bit of a similar theme, and they're really sort of illustrating the planning success and actually sort of how that derisks our pipeline. So if we look at Industrial & Logistics first, during the year, we had a great year for planning. We secured 6.8 million square feet of the consents. We have 3.5 million square feet of land allocated, takes our total consented pipeline to 8.4 million square feet. So there's significant underlying value to deliver as we sort of continue to unlock that pipeline. And you can see from the funnel on the bottom on the right-hand side that, that pipeline is now 63% derisked, which is really important as we sort of kick into the second half of the strategic plan and kick on to drive that growth towards GBP 1 billion of EPRA NDV. And our target in terms of what we're aiming to deliver either for ourselves or into the market by the end of 2027 is 4 million square foot of that 6.8 million square feet -- sorry, the 8.4 million square feet that's consented, and that has a GDV of GBP 0.6 billion. Move on to the next slide, so it's a similar theme for Residential. So again, we were successful securing sort of some planning consents for 818 plots, another 600 allocated takes our consented pipeline to 4,568 plots. You can see again on the graphic in the funnel on the bottom right that 46% of that pipeline is now derisked, which is a really important thing for us because that residential sort of land sale part of our portfolio drives a lot of cash that we actually recycle into investing in the sites that we're bringing forward for development. The other thing probably to draw out on this slide is you'll see that the pipeline has ticked up to a really healthy over 31,000 plots at the end of '24. Eagle-eyed amongst you if you looked at the interims would have seen it probably sort of it was in the 27,000s, and that's because we successfully acquired a couple of quite chunky sites which we brought into that portfolio. And as I said at the top, we are really ticking forward nicely towards that average of 2,000 plots per annum sales by the end of 2027. And the average price in terms of the sales at the moment is around GBP 50,000 a plot, but we'll talk about that a bit more in a couple of slides. So what does it mean in terms of our strategic targets? Well, basically, you can see from this that sort of everything is moving in the right direction. You'll see the baseline of 2020 in that very first column, and you'll see our progress in 2024. So as of 2024, the investment portfolio is now 45% Grade A. So that's against the baseline that was less than 10% back in 2020. Our ambition by the end of '27 is to get that to 100% Grade A, and we will be on track to do that, as you'll see in terms of the development pipelines we'll talk through later on in the deck. In terms of what we're building, so back in 2020, we had an average of 200,000 square foot a year up to that point. By 2024, we've seen that tick up every year, but we're on site with 377,000 square foot either completed or under development in 2024. But really importantly, we were also on site with enabling works to support the delivery of 3.1 million square feet. And again, I'll bring that to life as we get towards the end of the presentation. So again, we're confident that we'll be at that 800,000 square foot per annum average as we move towards the end of 2027. Accelerating residential sales plots, I already told you, we're sort of on track for the 2,000, so I won't tell you again. And then scaling up land acquisitions and promotions, we've maintained that 12- to 15-year land supply target by making selective sort of acquisitions to support some of our existing developments, but also bringing some really great new sites into the portfolio as we went through 2024. And then the targets remain as we've talked about both back in '21 when we launched the strategy, so that GBP 1 billion of EPRA NDV, sort of we're on track to sort of hit that target at the end of '27. And then we introduced a new target in the middle of 2024, where we talked about growing our Industrial & Logistics portfolio to GBP 0.9 billion by '29. And again, we're on track to do that with the pipeline that we have to deliver. So if we look at each elements of the portfolio, again, just a few things to draw out on this slide. It's a slide that some of you, if you've seen us present before, will be familiar with. But the portfolio is -- this is our land and property portfolio overall, and it is split into 3 main categories. You have got strategic land, which you can see sort of in both Residential and Industrial & Logistics at the top of that donut in the top third of the donut. You have -- and that land makes up around 20% of the portfolio by value. And it's land that either doesn't have a planning permission because we might still be in the process of assembling it or, actually, it has got a consent, but we haven't yet started work on site to bring it forward for development. The next sort of category is major developments. And you can see, again, if you just sort of work down sort of on to more or less the middle quadrant of each donut -- of the donut, you can see Residential major developments on the left and Industrial & Logistics on the right. That makes up around 40% of the portfolio by value, and that is land where we have planning and we've actually started work on site. So that could be infrastructure work or it could be vertical development work as well. And then the third bit, which is sort of the bottom sort of dark green bits of the donut is our investment portfolio, which is 35% of the portfolio by value, and those are standing income-producing assets. And we believe there's still really a significant amount of embedded value to be unlocked from what is a really quite high-quality extensive land bank in great locations. And we're now having made the sales that we made last year from the Industrial & Logistics part of our portfolio, we're now at 33.6 million square foot of capacity plus the 31,000-plus residential plots that I talked to earlier. A couple of other key points on this slide is you'll see sort of the GBP 858.8 million valuation of this land and property portfolio sort of in the middle of the donut. And that portfolio has actually grown in value by up by around 39% since 2020. So that's reflecting the management actions as we've driven sites through the planning process and into development. It's also actually sort of reflecting some of the acquisitions that we've made through that period as well. To put it into context, we sold over GBP 0.5 billion of land and property in the same period as well. So not only we've driven the underlying value of the London property portfolio up by 39%, we sold over GBP 0.5 billion of land and property as we've gone crystallizing some of those value gains and actually recycling that capital. Today, Industrial & Logistics is 63% of the portfolio by value. And we are projecting that, that will be 85% by 2029 when we've grown that investment portfolio as we intend to. And then just really briefly, the tables on the right-hand side show really sort of how value gets created as we work land from non-consented strategic land regardless of it being Industrial & Logistics or Residential. We work it up through planning, which gives you consented strategic land. You can see the values per square foot or per plot ticking up as we go into major development, again, continue to invest and actually drive value. And then either if it's resi, it becomes a service land sale. And if we're developing to hold it in our portfolio, it becomes part of our greater investment portfolio. So that basically brings to life us creating value at each stage of the process. If we take a look at each portfolio sort of in a bit more detail, the strategic land is really the secret weapon to Harworth. I mean it's key to scaling the business. It's key to sustaining this long-term, through-the-cycle growth. And a significant proportion of our value gains are driven through land assembly and as we work that land through the planning process. So what you can see taking these 2 waterfalls together is you can see us investing in acquisitions as we go through the year. So from a residential perspective, we invested in a strategic land partnership. It's the first one we've done sort of over in Grimsby, for example, which brought a significant number of plots into the pipeline. From an Industrial & Logistics perspective, there were acquisitions at sort of Wingates in particular, which is one of our key sites, actually bringing some more land into that development. The acquisitions added about GBP 15.5 million of value as we went through the year. On the top graphic, you can see that GBP 41.3 million of disposals. That's us disposing of Ansty. So Ansty, because we were never intended to build it and never made it even though it got planning in the year into major developments, it was a disposal, so you can see it coming out there. And then as if you move across the other big movement is the planning progress. So that revaluation, the GBP 31.4 million and the GBP 8.6 million, sort of driving GBP 40 million of value gains, and that is associated with us progressing plan -- sites through planning and actually derisking those sites. So if we're putting infrastructure and all building on it, it moves into major developments. And again, similarly looking at sort of waterfalls like sort of a bit in tandem here, you can see we're on site with GBP 82 million of investment in terms of development spend. So that's infrastructure, it's platform creation, servicing the sites, getting them ready to build. And in the case of Droitwich, we were on site building, and we're also on site building at the Advanced Manufacturing Park. On the top waterfall, you can see the disposals. So that big disposal of GBP 42.3 million there is selling the first phase of Skelton Grange to Microsoft. So you can see that coming out there. If you flip to the bottom waterfall, the big acquisition was Stewartby, where we bought a site that actually had a consent and has brought 1,000 plots into the portfolio. That's in that GBP 31.9 million. And then next to that, you see the GBP 73.4 million, that's the plot disposals basically. We had a record year for resi plot sales. So you can see quite a chunky number coming out. And then we still get an element of revaluation coming forward in both portfolios. Sometimes it's tweaking the master plan and increasing the density, for example, in the residential space. Sometimes it will be as a result of some land assembly we've made in previous years, there's some marriage value. Sometimes it will just be sort of a reflection of actually as the site is consistently being derisked, you're getting a tick-up in value associated with that, but all of those portfolios after disposal still moving forward in value. And then from an investment portfolio perspective, the fundamentals remain really strong, as you can see from here. We're generating GBP 17.5 million of headline rent from quite a diverse range of sectors. But this portfolio has always been quite diverse. We like that. It's continued to perform sort of through the cycle for us. The growth to GBP 900 million by the end of 2029 will underpin both increased earnings, but also our ability to increase and grow the dividend as we go. If you look at the waterfall on the bottom left on this slide, what the graphic shows is a couple of sort of key drivers of value. So the acquisition was our acquisition of Catalyst, which is a site that is close to the Advanced Manufacturing Park. We bought it really well, a really opportune time in the market. It's already outperformed its valuation after cost. It's reversionary and actually sort of it's brought some really high-quality tenants and income into the portfolio. And then if you move sort of across the slide, you'll see sort of revaluation sitting there at GBP 19.6 million. That is largely driven by management actions, so those are like-for-like. Rents are up 4.9% year-on-year, adding GBP 0.7 million per annum of headline rental income, and that has been delivered at a 4.3% premium to December ERVs. But also, we've got some renewals and rent reviews sort of within that, which in themselves were on average up 22% to passing rent. And the portfolio still retains a reversionary nature, so it's about 19% reversionary. So there's a lot to sort of go as we go through future years. And then over to you, Dougie.

Super. Thanks, Lynda. I guess first thing to say is Lynda has talked through all the excellent operational performance and delighted to say that that's translated through to the financial performance as well. If we start with a look at the income statement and the underlying revenue table in the bottom left, so the green table there, total property sales were GBP 215.8 million for the year. That's a 71% increase on 2023. So within that figure, you've got the record residential sales that Lynda was talking about as well as the Phase 1 sale to Microsoft at Skelton Grange. You've also got the Ansty strategic land sale to Frasers Group as well. So a significant increase on the previous year. Looking at income generation, that's ever so slightly lower this year. And the reason for that is that as we've had the full year impact of the sales that we made in 2023 and early '24, where we crystallized GBP 80 million in proceeds or just over GBP 80 million in proceeds from sales of secondary investment assets where we had taken them through their asset management and realized those proceeds. Now as we go through the next few years, you'll see the income increase from Grade A assets with -- as we complete further direct development, but also with the full year impact of the acquisition of Catalyst, which was bought in October '24. On development revenues, we've got GBP 18.7 million. It's a significant increase on the previous year. The drivers behind that are we completed a build-to-suit development on behalf of an owner occupier at the Advanced Manufacturing Park, and we have started development work at Skelton Grange for Microsoft as well. And we started a little bit earlier than we completed the sale to make sure that we are on site, and that's why it's a little more than you'd anticipate for having completed the sale of it in December. So together, that gives us underlying revenue of GBP 257 million. That is 70% higher than 2023. The statutory revenue excludes the sale of the investment property because that's recognized on the right-hand side on a net basis in the other gains line. So statutory revenue was GBP 181.6 million, which you can see on the right-hand side in the statutory income statement. Other things to pull out, administrative expenses increased by GBP 5.8 million during the year. So this is principally due to higher salary expenses from increased employee numbers as we brought people in to deliver the strategy. So we have 138 people working on our sites across our 3 regions compared to 120 at the end of 2023. So still a relatively small number of people driving a lot of value. On the other gains line, that includes the impact of increases in the value of -- fair value of investment properties. So that's the management actions around planning progress and letting of previously completed direct development that Lynda talked through when we were walking through the waterfalls. And that's also where you see the profit on sale of investment property come through, so particularly the sale of Ansty. So together, this gives us a profit of GBP 57.2 million, which is an increase of over 50% compared to 2023. And the final thing to mention on this slide is that we have increased our dividend by 10%, again, in line with our policy, and we've now increased it by 10% every year for 8 consecutive years. If I move on to the balance sheet, key things to point out here are the increase in EPRA NDV, which is now GBP 719.5 million, and that keeps us well on track to hit the GBP 1 billion target by the end of 2027. Other key points to mention are the increase in the value of the property portfolio, and that's reflecting those value gains from management actions, particularly the planning progress in Industrial & Logistics, but also the lettings in the investment portfolio, offset by the impact of sales as we've made them. So when combined with the dividend paid during the year, the EPRA NDV increase led to that total return of 9.1%, which is a significant increase on the 5.1% achieved in 2023. Moving on to look at funding and liquidity. So we have a target net loan to portfolio value of below 20% at the year-end and a maximum of 25% during the year. We do that because we have a seasonal profile where we go out and we spend and invest in our sites through the year, and then the sales tend to come through in the second half of the year following the completion of those works. So at the end of the year, our net loan to portfolio value was 5.4%, so very well within that 20% year-end target range. You can see from the slide that it bridges from the small -- a small increase in the net debt from GBP 36.4 million to GBP 46.7 million as at the end of December '24. Now with the key bits being the development spend, acquisitions, particularly the acquisition of Catalyst within there and then brought down by the sales during the year as well. Now just because of the timing of sales, you'll see we were sat on a large amount of cash as at the year-end, so GBP 117 million. And then that was due to the timing of those sales that Lynda talked about, particularly Ansty and the sale of Skelton, and we repaid GBP 90 million straight after the year-end, so bringing that back down again. Now that gives us cash and liquidity headroom as at the end of the year of GBP 192.4 million, which is excellent for supporting what we need to do as we move through the next phase of the strategy. So that's on the financials. If I move on now to talk about the future, and I'll talk very quickly about the scaling in the investment portfolio before handing over to Lynda to talk through the pathway to GBP 1 billion by the end of 2027. So we announced during the year that we would scale the investment portfolio to GBP 0.9 billion by the end of 2029. And there's a few reasons for us to do that. So firstly, it will give us increased rental income and scale of that portfolio. So at GBP 0.9 billion, it will be providing rental revenue of around GBP 45 million to GBP 50 million. Now that increases the rental income and, therefore, gives us the opportunity to increase the income component of returns through higher dividends. The other thing that the increased investment portfolio does for us is it plays a really important role in our funding strategy. So at the moment, at close to GBP 300 million, it's very good from giving the lenders comfort when it comes to the revolving credit facility that we have. But as that gets bigger, what we'll be able to do is we'll be able to increase the options of different types of debt and be able to put more long-term debt in and drive some greater efficiency within our cost of capital as a result as we progress through into the next phases of the strategy. If I move on to the next slide, this really shows that we've been on this journey ever since the strategy was announced in 2021 to increase the level of direct development that we do and also transition to modern Grade A. In the period from 2021, we have added over 900,000 square feet of modern Grade A to the portfolio and of which 70% of that has been built by ourselves on sites that we have promoted and then enabled. So we've taken the value all the way through the different stages and then built in there now in the investment portfolio. We've supplemented this, this year with the acquisition of Catalyst in October last year, I should say, bringing in that over 900,000 square feet during that time. We're currently on site at the end of -- or at the end of the year at Droitwich, where it was originally a secondary investment asset where it wasn't using the full footprint. And therefore, we have -- we're in the midst of doing 167,000 square feet there where it makes much more efficient use of that, and it was an option where we were able to redevelop there. We're also on site at the AMP and close to the practical completion of 80,000 square feet, which is pre-let at the Advanced Manufacturing Park. Lynda talked about the significant enabling works that we've done, and you can see on the right-hand side an example of that where we've completed enabling an infrastructure works for 1.3 million square feet at Chatterley Valley, and that is there ready for us to build on. So we can build on up to -- we can start up to 500,000 square feet this year, and the timing in which we do that will be based on us taking advantage of the market opportunities that are available. If I move to the next slide, what this shows is it shows the impact of that on the investment portfolio over time. So you can see the 80 -- the red and white boxes on the left-hand side, you can see the secondary assets, and you can see the impact of us having made the sales and realized GBP 80 million of proceeds or over GBP 80 million of proceeds over the period as we've made the sales at the end of having maximized the asset management opportunities there. And you can also see the Grade A portfolio increasing every single year as we've gone through from 2021. It's currently 45% Grade A by area, but you can see that, that is a higher proportion as on value. You can also see down the bottom on the blue line, the average headline rent per square foot has increased significantly. And the key driver within that is, as we've increased the quality of the portfolio, it drives higher rents. So when we're at 100% Grade A by the end of 2027, the average rents that we'll be achieving, the current ERVs for them are between GBP 8.50 and GBP 11.50, and they will move on as well with rental growth as well. And then we're targeting the GBP 0.9 billion by the end of 2029 as we increase the level of direct development, and we are on track to do that. And I think now that should be -- back to you, Lynda.

Thanks, Dougie. Okay, just a couple more slides from me. So this slide basically sort of shows sort of a number -- there's a number of components to it. So firstly, on the left, you can see actually sort of the route a site takes from the point that we assemble the land and we start to walk it through the planning process. And as I said sort of earlier, moving sites through planning is a key driver of returns for us. And we now have consent for 8.4 million square feet and over 4,500 residential plots. So that puts us in a great place to fire forward through the sort of the next 3 years of the plan. It's really important to actually sort of, what you see on the left-hand side, to not just driving returns, but providing those -- that platform to grow to GBP 1 billion of EPRA NDV by the end of 2027. And I think actually, what this also brings to life for me, this slide is actually it shows this through-the-cycle business model. And it underpins sort of actually sort of how we're structured as a business, how we work, how we create value and ultimately crystallize sort of that value for investors, but also is a key sort of -- it's a key driver of how we focus on allocating our capital and the specialist skill set that we have in the business to make sure that we're only bringing land into the portfolio that we can walk through the process. And actually, we're only walking stuff through the process that we can actually sort of -- that we can -- that we know is going to unlock and drive that value. So that's our sort of model on a page, sort of buy the land, work it through planning, drive returns as we go and then actually bring it into production. There's a constant refining and optimization of the master plans. Your master plan like at the beginning of 2010 could actually look quite different by the time you get to 2020 because it needs to be flexible to adapt to the market. And we're really focused on making sure that we can unlock high-value uses as we go through. Skelton is a great example of that. Sort of if you look back to when we probably did the original plan for Skelton, a hyperscale data center would not have been sort of in there. But actually, as that market has started to sort of come to life, we're actually looking at not just Skelton, but which other sites we might be able to pivot into that to unlock high-value uses and drive value. This slide shows that the portfolio is in a great position to deliver. And actually, we're delivering into 2 sectors where there is still structural undersupply nationally, but there's a real shortage of supply of industrial and logistics product in our regions. What this graphic is basically showing you is that from now, so we're on site at the AMP, we're on site at Droitwich, we should be on site at Chatterley Valley and potentially sort of other sites as we go through this year, depending on where the market is, but we are basically going to turn into delivering 4 million square foot of that GBP 8.6 million that has a consent. We're going to turn into delivering that between now and the end of 2027. We're going to do that into a number of parts of the market. So if you look at the sort of dark-blue box on the sort of on the right-hand side of that graphic in the middle, about 40% of what we develop will be built to hold in our investment portfolio. So that's part of the investment portfolio growth and that churn of the secondary assets that remain in there out. And then we estimate about 60% of what's left will be a mixture of build-to-suit for owner occupiers or investors. There'll be some forward funding in there, and there'll be some service land sales in there. So this portfolio needs to work really hard for us in a number of ways. One, it's about delivering product that we want to hold in our investment portfolio. The other is about actually delivering cash that we can then sort of recycle and go again. And while we're doing all of that because it doesn't just -- you don't just get the consent and then sort of deliver and start from scratch. We will be enabling over 5 million square feet of sites that are coming through behind the sites that have currently got a consent so that actually we'll just keep rolling forward from sort of 2027 onwards in terms of delivery. If the market improves, we will take every opportunity that we can to accelerate both in terms of often on-site enabling works, but also in terms of delivery. But at the moment, our plan is scope to sort of do sort of what you see on this slide, which is basically deliver to the market or to offer us to hold 4 million square feet between now and 2027 and basically get on site doing enabling works for another 5 million square feet. This next slide sort of puts it, I suppose, into context. So you're looking at our strategic plan period from '21 to '27, 2020 being the base year or the baseline year for the plan. And if you start on the left-hand side of this chart, you'll see over the 4 years sort of to 2024, we delivered an 8.7% compound annual growth rate. And that was basically largely firing on a limited number of Industrial & Logistics sites that were in production, but actually sort of through -- by accelerating through that residential land bank and increasing the sort of mix of tenure of our products. That delivered a cumulative 39.5% EPRA NDV growth in quite a volatile and unstable economic environment, which shows the resilience of our model, taking land from a really low value base and actually sort of working it through the system and into production. So we did 8.7% over the 4 years to '24. Looking forward to '27, it means we're going to do an 11.6% compound annual growth rate sort of to achieve the GBP 1 billion of EPRA NDV. And we're confident that we can do that because of the sort of graphic in the middle, the one I just talked through on the previous page, because we're turning now into a very significant industrial and logistics land bank to deliver both for ourselves and into the market. While we're doing that, we will be continuing to acquire as we always have done. We'll be continuing to work through our residential land and self-service remediated plots to house builders. We'll be continuing to deliver some of our mixed tenure products into registered social landlords and others. So everything sort of keeps going. It's just there is a big platform now that's been created to deliver that I&L stock into the market. And so what does it mean in terms of story and outlook? Well, sort of I have probably said some of this, but just to reinforce, there is a structural undersupply in the industrial and logistics and residential markets. That has not changed at all sort of over the last few years. The wider planning and policy reform that's happening is really supportive of our sector and actually the sectors that we deliver stock into. From a U.K. critical infrastructure and emerging industrial strategy needs, they really support our model, and we've got some really big sites that can deliver into that across the regions that we operate into. So you'd be unsurprised sort of to hear me say, therefore, it means we're working closely with local authorities, closely with mayors and their teams, actually making sure we can position our sites as well as possible into their plans. That consented pipeline is really well located. We don't assemble big swaths of land in any old place. We make sure we're assembling it in the right place. And importantly, it can deliver at scale. And as I've just said, it has a strategic fit to actually what's coming through sort of in terms of regional special strategies as well as government industrial strategy. We're well aligned in terms of the products that we deliver to investor and occupier demands in our regions, but we retain that flexibility to be able to pivot into emerging sectors and new sectors and actually sort of match what our land bank can deliver to that. There is material underlying land value -- underlying value to be unlocked in our land. And it's underpinned by, I think, 2 real superpowers. I mean one is the strategic land bank itself. We are long on land. That is our model. That is how we create value. But actually, you need a team with the specialist skill sets to unlock it and then to be able to manage it into delivery and the sort of flexibility that I've just been talking about. The other sort of superpower is our balance sheet. We've got a really strong record of recycling the capital, maintaining sort of the capacity in that balance sheet, keeping prudent leverage, which enables us to almost like eat what we kill and go again and actually drive returns, but also drive the underlying value of the business forward. And with that, I'm going to conclude the formal part of the presentation, and we'll go to questions. And Dougie and I will do our best to answer as many of them as we possibly can. Thank you.

[Operator Instructions] As you can see, we have received questions throughout today's presentation. And Lynda, I'll hand over to you at this point, and I'll pick up from you at the end.

Brilliant. Thank you very much. Okay. So I'll maybe start with the first couple and then sort of Dougie can pick up sort of number three. We'll read the questions out so that you all know what we're talking about or what we're trying to answer as we go. So we got a question from [ Keith ] is the first question that says in corporate planning terms, 2027 is not that far away now. What happens when 2027, the GBP 1 billion and the 2,000 residential plot sales are achieved? It's a really great question, Keith. I mean we are already, as we go through this year, starting to do the strategy work for actually what happens beyond '27. Sort of I firstly like don't want to get to '27 then have to have write a whole new strategy then. That seems crazy. So actually, sort of looking at how we built the portfolio, looking at how we're refining sort of that and what it can deliver is really critical sort of -- it's a critical thing to do now well in advance of 2027, and we should be talking to investors in 2027 about what comes next basically. So that work is ongoing. We've already given a glimpse in terms of the Industrial & Logistics portfolio scaling to GBP 900 million by 2029. And actually, we think for the reasons Dougie sort of set out earlier, that is really important to basically catapult the next phase of growth beyond GBP 1 billion. But we're working on that now, and we'll talk to investors about the strategy as we get closer towards 2027. Next question I've got is from [ James ], which says, with 45% of the core investment portfolio now Grade A, what percent of remaining assets need significant upgrades? And how much capital is budgeted for this? So if you've got the presentation in front of you and you sort of go back to -- I'm going to sort of flip back to put the slide, Slide 13, which is a slide on the investment portfolio, you'll see there's a very small amount of development spend in there, it's about GBP 1.5 million. And there's 2 things going on here. Normally, we only invest associated with lease events and/or actually new lettings. So if we're going to keep one of those assets in our portfolio, so the investment comes alongside sort of a lease event or a new letting and it's rentalized. So when it comes to that secondary portfolio, that's how we typically treated it. So we've never sat there with a great big budget to upgrade it because the reality of it is it's not going to be in the portfolio by 2027, and we'll have churned out all of the secondary stock or the vast majority. There may be sort of a couple of sites in there that have redevelopment potential like Droitwich, which actually will just move into another part of the portfolio. But the reality of it is all the secondary stock that is in there should not be -- if it's not -- if it doesn't fit into a redevelopment potential category, sort of we'll be out of that portfolio by 2027, and it will be replaced by those modern Grade A assets that we're building between now and then. So it's never a big -- we never sort of sit there and think we've got to spend like either X pound a square foot or X million on it. It's literally dealt with as we come to lease events or the stock is actually being recycled out of the portfolio. And then Dougie, do you want to take the question 3 from [ Richard ], yes?

Yes. Perhaps...

Sorry, it's question 3 from Keith. Sorry.

Yes, I think it's got a different number next to it. So a question from Keith is you referred to 2024's Skelton Grange activities being Stage 1, and how much further expenditure is there needed to complete the future stages? And what are the expected revenues from Microsoft? So the best way to think about it are there are 3 parts to the deal. So plot 1 sale of -- sale unserviced to Microsoft, which we completed at the end of December, and that brought in GBP 53 million. We've also got the remediation of plot 1 and then the third part is that we sell plot 2 on a remediated basis, which we are targeting for the first half of 2026, which will bring in another GBP 53 million. And the development work that we're doing will bring in around GBP 16 million as we go through that development work on plot 1. Overall, the deal is massively profitable. And by the time we get to the end of the completion of plot 2, we will have made a 40% or over 40% IRR from having purchased Skelton all the way through to the completion of that deal. And that doesn't take into account the additional land that we have remaining following on from that.

Okay. So shall I pick the question up from Richard on land and property values? Richard has asked, with land and property values rising, are you seeing any pressure on acquisition costs or changes in the competitive dynamics when bidding for new sites? It is a great question, actually. And to be honest, what we've seen in the land market is a land market that's been pretty steady. We have seen opportunities. There are very few for sellers out there. They're sitting there waiting for the market to improve. So that has sustained land prices. At the end -- one end of the market where we operate, which is that strategic land assembly, there's much less competition because it's so far away from bringing it into development, and you've got the risk of walking it through planning to secure your planning and bringing it into production. And we're quite -- we're really good at this. We have in-house acquisitions teams that sit across our regions, and we're quite patient if it takes us a decade to piece the site together. If it's a great site, we'll do that. So whilst there is competition, it's probably no worse than the competition that's always been there for that sort of land. And we've been, as you can see, really successfully replenishing our land bank. I think there was a window of opportunity last summer, but again, not a lot of stock in the market where we bought sites like Stewartby. Stewartby was a site that had been bought by an overseas investor. They've invested in it, and they've got a planning consent, but then we're not in a position to take it forward. So actually, we managed to step in and actually secure that site when nobody else in the market was really looking or actually willing to take on some of the -- some planning refinement that needs to be done. So at each ends of the spectrum, what I would say is we went through last year, strategic land then was pretty normal. At the opportunistic end, we started to see a few opportunities, and we capitalized on the ones that we wanted. And I think going forward, sort of there is a real shortage of big strategic land sites to -- in the market or actually sort of being assembled in the market to walk into planning and bring forth for development. I think that might change in a kind of planning environment. And I think a couple of interest rate cuts will start to sort of bring more competition back. But we're pretty good at buying land. It is a core strength of ours. As I said, it's one of our superpowers. And we're not actually seeing like that hurt us too much in terms of the increased cost of doing it because -- and actually, what we're focused on, we know the product that we want. So actually, we also, therefore, know the value of the product that we want. So I would say, hopefully, that sort of gives you a bit of a flavor as to how we go about it. But what we're not necessarily seeing is like an all-out war for land. Where it will come if the market improves quickly as it sort of -- as it can -- if interest rates start to come in, we'll be on consented land, which obviously is great for us because we're sitting there with quite a lot of it. So normally, that's the first place the competition goes before they actually decide that they want to take any planning risk, let alone any longer-term land assembly risk. And then, David -- I mean, Dougie, you might want to take this one, which is the current construction costs and availability of labor. We have got a table in on one of the sort of slides that we presented. I think it's my Slide 23 -- 24, sorry, which I can just sort of dip back to, which shows you the range that we see in terms of what we build. Would you want to pick that one up, Dougie?

Yes, absolutely. So I guess just picking up on that range of GBP 65 million to GBP 85 million that you can see there, worth mentioning that a key driver of that is the size of the building and the specs. So it's that, that pushes it to being a relative broad range. I think the key things probably to say on construction costs are -- so cost inflation has eased off in comparison to what it was 18 months or so ago. We're still seeing particularly, I guess, in labor and professional service costs. But one thing that we have seen is we've seen tenders coming in competitively, and those are coming in within our cost estimates, which is important. And we've particularly seen that recently on direct development. It's probably the key things to mention.

Yes. And I think just sort of another maybe perspective on the labor market. The labor market for construction, whether it's housing or industrial and logistics, has been quite tight for quite a long time. We saw an exodus post GFC. We saw another exodus post-Brexit. Sort of COVID did have an impact. And actually, sort of the sector does have a skills issue when it comes to being able to really ramp up sort of to probably pre-COVID levels of production. That's not just a Harworth issue, that is a sector issue. And skills and the availability of skills and actually training people and bringing them into the sector is a topic that is at virtually every sort of forum that I attend across industry or with government or with the mayors and their teams and local authorities in the region. So people are very much looking at -- they know that they need builders, and they're very much looking at actually how they get sort of the next generation of people into the industry. It's one of the reasons that labor cost inflation has still been a bit higher than actually materials cost inflation, which has sort of really dropped back. But no one is at the volumes sort of the pre-COVID volumes of construction yet. So there will be some capacity in the market. But as the market starts to sort of build momentum, as I think we go through the second half of this year and into '26, you might start to see sort of particularly sort of the labor side of it starting to squeak a bit.

Perfect. Well, Lynda, Dougie, I think you've actually answered all the questions from investors. And of course, the company can review all the questions submitted today, and we will publish those responses out on the Investor Meet Company platform. But just before redirecting investors to provide you their feedback, which is particularly important to you both, Lynda, can I just ask you for a few closing comments?

Yes. Thank you. I mean I think for me, this is the slide, this is a slide that sort of we are very focused on making sure that we deliver that 4 million square foot of product into the market between now and 2027. So some of us to hold as part of that growth of our investment portfolio as part of the churn sort of out of the secondary stock, so it's fully modern Grade A. It is the platform that we spent 3.5 years building. So when I joined the company in 2020, we only had like a handful of Industrial & Logistics sites producing stock. Now to be in a position where we'll be as we go through both from now to sort of the end of this period, 6 to 8 on average, producing stock is a great place for us to be, not just to deliver that growth to GBP 1 billion, but actually deliver the growth beyond GBP 1 billion as well. So we spent a long time getting the business into this position. Everything else is firing. I think as I said sort of on the very first slide, it wasn't just one part of the business or one big deal that made our year and delivered that 9.1% total accounting return across the business, as I hope we've been able to show you in this presentation. The resi, the planning, sort of the product development was all contributing. So we're pleased that we've got the business into the position it's in, and actually sort of we'll continue to sort of fire through '25 to '27 by working through this land bank. And I think for context, you think about what we've achieved in really difficult years with the planning environment that's more supportive and, hopefully, economy that will start to sort of warm up as we go forward through the rest of this plan, sort of it's a great backdrop against which we're sort of trying to deliver this growth. And with that, thank you ever so much, everybody, for dialing in again, and sorry about the sort of mishap earlier in the week. Thank you.

Lynda, Dougie, thank you once again for updating investors today. Could I please ask investors not to close this session as you'd now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. On behalf of the management team of Harworth Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.