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

Okay. Good morning, everyone, and welcome to Harworth's 2025 Half Year Results presentation. We're delighted you could join us today, and I'm delighted that Kitty is back from maternity leave and here with me. So between us, we're going to present the results over the next 25 minutes or so, and then we'll open the floor to questions. We're going to take questions from everybody in the room here first. But for those joining online, please submit your questions and we'll do our best to answer as many as possible. So turning to the highlights. I'm pleased with the progress that the business has made during the first half of the year. There's a lot going on across our portfolio, and we are continuing to make good, solid progress against our strategic objectives. The market backdrop remains tricky as businesses navigate through the impact of last October's budget and the market view on the economy, with any expected early improvement not quite there yet. That said, for Harworth, we're a through-the-cycle business with a clear strategy, strong execution and our core sectors of Industrial & Logistics and Residential remain in structural under-supply. And we have a strong land bank to deliver into these markets. Through the year, we've been utilizing our balance sheet and investing across our sites to support both sales and future development. Strong operational momentum underpins progress against our strategy and has delivered solid growth at our gross assets level. Our Industrial & Logistics assets have performed well and are the main drivers of value at a portfolio level, delivering an 8% property return and are a key driver of future growth. Residential assets were stable at a headline level. There were some mixed valuation outcomes in this period, and this has impacted our total accounting return, which remains positive and moving us forward towards our GBP 1 billion of EPRA NDV target. Kitty will cover this in more detail as we move through the presentation. All of this is reflected in the strong organic growth that we've driven at a gross asset level, up 53% to just shy of GBP 945 million since the end of 2020. In the same period, we sold GBP 607 million of London property assets, reinvesting the capital whilst managing our leverage at one of the lowest levels in the sector. Our EPRA NDV is up by 41% to GBP 725 million in the same period, consistently growing year-on-year through the volatile markets of, in particular, the last 3 years. For half 1, 2025, we have delivered a total accounting return of 1.1%. In the first half of 2025, we've invested just under GBP 55 million in our Industrial & Logistics sites. GBP 32.3 million was spent on development largely infrastructure works across a range of sites, from moving the ASICs and starting enabling works at Wingates, which some of you will remember from the site tour in the summer, to completing the development platforms at Chatterley and building at Droitwich. And of course, we're making good progress enabling the Skelton site for Microsoft. In the period, we've completed an 80,000 square foot development at the Advanced Manufacturing Park, which was pre-let to Technicut, and this asset has now transferred into our investment portfolio. And post period end, we reached practical completion on 169,000 square foot building at Droitwich. At Waverley, we also completed one of the final pieces of community infrastructure, opening our Olive Lane development which provides a high street and community and health centers for the residents, students and businesses across the site. At the end of quarter 1, we invested GBP 22.5 million in land assembly, including buying our JV partner share of Gateway 45 for GBP 20 million. Gateway 45 is adjacent to our Skelton Grange site on the edge of Leeds and probably one of the best sites in West Yorkshire. It has outlined planning consent for 800,000 square feet and excellent off-site infrastructure already in place. And a major win after 4 years of engagement with local and central government was the lifting of the High Speed 2 Safeguarding in the summer, which now releases this site fully for development. We continue to progress a substantial volume of Industrial & Logistics product through the planning process. And in half 1 2025, we submitted applications for 4.9 million square feet with our Northern Gateway joint venture and Junction 15 sites making up the bulk of this volume. 71% of our 34.6 million square foot pipeline now has planning consent or is in the planning process. And since period end, we've submitted further planning applications at Diseworth in the Midlands and Gonerby Moor on the A1, which will unlock volume in our medium-term pipeline. At the half year, GBP 8.7 million of our Industrial & Logistics pipeline had a planning consent, and we were active across 66% of this part of the pipeline. As in 2024, we've continued to invest in enabling works to derisk the site through delivery through half 1 '25 and to make our sites as liquid as possible. These are crucial years in the delivery of our strategy as we create capacity from our consented land to deliver at scale into our regional markets. And we're focused on putting the business in the best possible position to capitalize on opportunities as we continue to derisk sites through planning and investment. At the period end, we progressed a sizable pipeline with 2.4 million square feet of enabling works completed at sites such as Chatterley Valley near Stoke, Gateway 36 at Barnsley and the Advanced Manufacturing Park in Rotherham. And we're currently on site with a further 3.3 million square feet at sites such as Gascoigne Wood, Wingates and Skelton Grange in Leeds, where we're delivering the second phase of service land to enable the remaining payment from Microsoft of GBP 53.5 million, which is targeted for the end of 2026, but also the remaining 300,000 square foot of pipeline from Harworth land. We remain on track to transform our investment portfolio to 100% grade A by the end of 2027. And at half 1, 66% of assets by value are Grade A, up from 18% at the end of 2020. In the period, we've transferred over 80,000 -- 180,000 square foot Grade A asset at the AMP into the portfolio, with a further 169,000 square foot from the Droitwich development reaching completement post period end. We continue to recycle capital by selling secondary assets, having sold 434,000 square foot in the year-to-date across two assets. So taking the post-period end activity into account, this will give us a pro forma of 71% of assets by value being Grade A and 58% by area. And the eagle-eyed of you amongst you in the room will have noticed that the pro forma value number in the pack is different to that, that's on the screen, but the percentages are correct. So with that, I'll now hand over to Kitty. Thank you.

Thank you, Lynda, and good morning, everyone. It's great to be back in the room and to see you all again. I seem to have been gifted some bugs from the back-to-school crew at home. So bear with me if I sneeze or cough or need a tissue or a drink, but let's get looking at the portfolio. Our overall portfolio was valued at GBP 944 million as at 30th of June and is 2/3 weighted to Industrial & Logistics, including strategic land, major developments and the investment portfolio. The Industrial & Logistics land bank, mostly through freehold land and options, has the potential to deliver 34.6 million square feet, and the Residential land bank through freehold land and planning promotion agreements has the potential for over 31,000 plots. Both plot numbers and square footage have increased since year-end as we aim to maintain our land bank duration, and all parts of the portfolio increased in value in the first half. These gains in value and scale reflect our active asset management and targeted acquisitions, resulting in a substantial portfolio with significant latent value. The investment portfolio was valued at GBP 319 million and has performed well in the first half. Annualized headline rental income grew by 4.6% over the period. Leasing activity was 2% higher on a like-for-like basis, with renewals and rent reviews achieving on average a 16% uplift to previous passing rents. The investment portfolio is overall reversionary with headline rental income 15% below year-end ERVs. As the proportion of Grade A assets increases, the rental tone has strengthened further with rent per square foot rising 6.3%. Vacancy levels have reduced through successful lettings and changes in portfolio mix and I'm delighted to say that since period end, we have let the final unit at Gateway 36. Including this and taking out secondary assets sold since June, this would reduce vacancy further to 3.1%. In transfers on the graph, we completed the building for Technicut at the AMP, which included the incorporation of renewable energy for an innovative green lease structure, and this transferred into the investment portfolio during the period. This portfolio continues to provide a steady rental stream, supporting our overheads and offering opportunities to add value, and it remains a vital cornerstone of our funding strategy. Now looking ahead, we will maintain disciplined asset management, developing new Grade A properties to hold while selectively selling assets, ensuring a high quality and liquid portfolio. Turning now to Residential. We submitted planning applications for 1,200 plots during the period. This included 900 plots at Cefn Park near Wrexham, and we submitted 300 plots at our Coalville site, leveraging our prior infrastructure investment to increase available plots. Combined with our applications made in 2024, we now have over 3,000 residential plots progressing through the planning system. The portfolio comprises over 31,000 plots. And alongside our freehold ownerships, we continue to add different structures, such as delivery partnerships and capital-light structures. And most recently, we've conditionally exchanged on the new strategic partnership with the Church Commissioners for England, where the joint venture will deliver a significant mixed-use development of 1.2 million square feet of employment space and around 1,500 residential plots. Importantly, 44% of the residential pipeline is either consented or actively moving through planning, an essential step in value creation and building a strong service land pipeline. Following planning consent, residential land is serviced in phases to meet demand from housebuilders and mixed tenure developers. Currently, 69% of land with planning consent has enabling works underway on site as part of our phased delivery. We've seen solid demand for land in the first half of the year. We sold 649 plots in half 1, a mixture of planning promotion agreements and freehold land sales. And since period end, a further 146 plots have completed. We also have around 1,500 plots conditionally exchanged and in legal process for sale in the second half. And once these complete, we are on track to exceed our 2,000 plot sales target for the year. Alongside housebuilder sales, we remain active with our mixed tenure proposition. So far this year, we've reached practical completion on our first phase of affordable housing at Great Places with homes now occupied, and we are active on delivering on two further sites. Accelerating residential sales supports our capital efficiency by recycling funds from mature sites into early stage Residential and Industrial & Logistics developments. All our schemes are place-making initiatives, and we've continued to be active throughout 2025, including achieving practical completion of two forest schools on our Thoresby Vale and Coalville sites opening in time for the new school year. Turning now to the financial performance of the group. Our key financial metric is EPRA NDV, which reflects our net assets adjusted to show the current value of our property portfolio as of 30th of June. This value is independently assessed every 6 months and reported in our accounts. And in the first half of 2025, our EPRA NDV increased by 0.8% to GBP 725 million. Growth was driven by rental income, fees and development management revenue, which is included under net revenue on this slide as well as valuation gains from management actions focused on maximizing the potential of our development sites. These gains were partially offset by operating costs, interest and dividends. And this steady progress in NDV moves us closer to the GBP 1 billion target for the end of 2027. So turning to the detail of value gains, the main component of the valuation movements. Our Industrial & Logistics portfolio delivered a strong performance. Value gains reflecting a property return of 5% were driven by management actions in strategic land and major developments. For example, at Wingates, heavy investment in servicing land combined with rising rents in the Northwest market contributed to these gains. And at Droitwich, we are on site, close to completing our Grade A building, all contributing to an 8% return in the land part of the portfolio. This moves us closer to our target of delivering 4 million square feet of built space or service land sales by 2027. Additionally, our investment portfolio saw value gains of 1.6% in the first half, supported by active asset management, successful lettings and a rental market providing growth. And combined with the rent yield from this part of the portfolio, gives a total property return of around 4.1% for this part in the first half. Turning to the Residential portfolio. One of its key roles, especially for more mature sites, is to generate cash through land sales, which we then reinvest into the business for value creation. The residential value performance this half was mixed. Strategic land was flat as planning applications were put into the system. These remain at the beginning of their planning journey and will generate value as approvals progress. In major developments, demand for service residential land remains strong, with 649 plots sold in period, and this was reflected in the headline valuations, which remained stable with some sites increasing in value. We saw some rising delivery costs, some one-off, which led to a 3% reduction in valuation. And additionally, cost increases related to prior -- to site-wide infrastructure works on prior sales reflected in losses on sale contributed to an overall minus 5% property return on residential land and development sites. These cost increases were concentrated in two particular areas. Broadly 1/3 was cost inflation in horizontal costs and professional fees, with 2/3 site-specific one-off costs that we do not expect to be repeated. Looking ahead, demand remains healthy, and we are optimistic about exceeding our 2,000 plot sales target for the year. So overall, the portfolio achieved value gains GBP 15.5 million in the first half, and this represents 2% growth across the entire portfolio. Activity across our Industrial & Logistics assets was the main driver of these gains outperforming the market. Residential valuations were stable, impacted by some cost increases focused on a small number of sites. With a loan to value at 19% at half year, this remains within our long-standing guardrails of a maximum of 25% midyear and a maximum of 20% at year-end. Our net debt increased from GBP 46.7 million at the end of 2024 to GBP 179.4 million at June 2025. As Lynda has spoken about, the increase was mainly driven by development spend as we progress works on our sites to create value ahead of year-end sales. And this year, the weather was particularly good for enabling works even in the North, and we're able to move sites forward at speed. Additional factors include payment of tax following sales at the end of last year, and these increases were partly offset by proceeds of sale received during the period. And as we entered the second half, we had GBP 59.8 million in cash and available revolving credit facilities, which we've maintained over the summer with development spend funded by sales proceeds. Looking forward to year-end, with strong visibility on land and property sales, which is expected to reduce loan to value from the current 19% down to a range of between 10% and 15%. We will continue investing in our sites and making selective land assembly acquisitions in half 2. Rent and fee income is expected to broadly cover our operating costs. and proceeds from service land and property sales, along with deferred consideration from prior sales will generate a positive cash flow in the second half, and this will come together to reduce net debt. This cash flow pattern I've spoken about before, which reflects our normal seasonal cycle with higher facility drawdowns midyear to fund site investments, balanced by repayments from property sales at year-end. And this approach ensures we maintain financial flexibility to support growth going forward. Our portfolio is entering an exciting new phase where site delivery is really now accelerating. We remain committed to building strong partnerships, developing our substantial pipeline and using capital efficiently to drive growth. We announced yesterday that I'll be expanding my role, and I'm excited to be leading our strategic and funding partnerships, refining our capital allocation and aligning with our sustainability priorities, all key pillars for this next stage of growth. I'll now hand you back over to Lynda to take you through the outlook and the road map to reach GBP 1 billion NDV.

Thanks, Kitty. We're both going to have this cold by end of this week. Okay. So we've successfully grown our Industrial & Logistics land bank, progressing sites through planning and into delivery. We're investing to create a scalable platform, a deliverable pipeline and a strong ability to respond to market opportunities. The growth in our plan accelerates in the later years as having investors significantly in enabling works in 2024 and 2025, we intend to deliver around 4 million square foot of capacity into the market as we go through the period 2025 to 2027. This will be delivered through a mix of build-to-hold, build-to-suit, forward funding and service land sales. While this part of the portfolio is in delivery, we continue to invest in around 5 million square foot of enabling works to unlock significant development capacity in the coming years. And the graphic which may be familiar to those of you who saw our year-end results presentation, remind you of the volume of enabling works and service land and development that we're targeting by the end of 2027. And we're making really good progress. As I've already mentioned, we've completed 2.4 million square foot of enabling works and are on site with a further 3.3 million square foot. And this demonstrates that we're making good headway in creating the development pipeline to deliver our strategic objectives. In the year-to-date, we've completed the first 2 build-to-hold assets, which are now in the investment portfolio, illustrated by that tiny orange bar in the bottom right-hand corner. But over time, you'll see the bars on the right-hand side of the graphic fill up to reflect the progress as we accelerate through the next couple of years. We remain focused on scaling the business and investing to progress towards our GBP 1 billion EPRA NDV target. Since the end of 2020, we've delivered cumulative growth of 40.5%, which equates to a compound annual growth rate of around 7.7%. Now the chart illustrates the key elements driving us to GBP 1 billion. And having built a deliverable pipeline, we have a line of sight on what we need to do to get there. There's no silver bullet as we continue to invest the cash that we generate to drive the land bank forward. It's a mix of these components and our ability to flex and respond to market conditions and pivot into opportunities that will deliver sustainable growth and value creation. So in summary, we've opened up the next generation of sites in our portfolio, and we've built a scalable platform that supports value growth across all areas. Our land bank is one of our superpowers. We have sites with planning consents in strong locations across the regions that can deliver at scale. And we continue to invest through the cycle to make our sites liquid, putting us in a strong position to both deliver capacity into the market as it improves, and capitalize on emerging sectors. Our specialist skill set spans a number of these core growth sectors, and we have a strong track record of delivery. We have clear visibility of the pipeline opportunity presented by our sites, and we have confidence in delivering our strategic targets. Our long-term through-the-cycle business model means that we navigate short-term uncertainties and remain focused on creating long-term value for our shareholders. With that, I'd like to thank you for your continued support and attention, and we look forward to answering your questions. Thank you for listening.

Bjorn Zietsman from Panmure Liberum. Just a quick question on residential profit margins. You've mentioned the 1/3, 2/3 split that you expect, 2/3 are nonrepeatable. But on the 1/3, do you expect any profit margin pressure on residential sites relative to where they were 2 years ago as a result of professional fees and other fees rising?

So I think we've sort of seen those increases that have come through to half year, and it's important to think about sort of the way that the valuations are put together. So they're all independently done at the half year. And part of that involves a third-party view on the cost plans to deliver the sites. That's not just the costs sort of as of now. What we do is project forward all of the remaining costs for the sites going forward. So in effect, if you see inflation now, it's been applied across everything that's to come. I think it feels like inflation has been slowing this year. So we still think there's probably maybe a little bit more to come in the second half, but at a more muted level than we've seen in previous periods. So that's something that we bear in mind. But in the numbers that we present today, we've taken a good chunk of that, and add in...

And labor cost inflation is probably something that everybody is watching in terms of as we go through the second half and into next year as well.

And just a follow-on question, if I may. Just on the Industrial & Logistics demand and how that mix is shifting. Are you seeing more demand from manufacturing versus logistics, for example? And how is that progressing?

The honest answer is we've always seen a mix, sort of -- we've got a pretty sort of heavy chunk of our investment portfolio and what we build is actually built for manufacturing. I think we've -- in the trading -- in the trading statement in August, we talked about we have line of sight on about 1.2 million square foot of demand. So some of that is Gateway 36 was one of those things in the mix. But that spans pre-lets and actually service land sales. And again, it is pretty much a range of sectors, sort of from sort of 3PLs through to manufacturing. And you're starting to see certainly in the regions that we operate in, an awful lot of noise around defense but also around power. Power sort of mini nuclear and actually sort of where that will be manufactured. So you're starting to sort of see that sort of manufacturing sort of momentum start to rumble in terms of probably what's going to come forward over the next sort of 5 years or so.

Colin Sheridan at Davy. Just a couple for me, if I can. Maybe following up on the cost question first. Maybe just give us a little bit of a flavor of what those one-offs are maybe a couple of anecdotes if that's okay, just to give a feel for what they actually are? And I guess what I'm trying to get a feel for really is, are these costs that are ultimately going to be paid by Harworth at some point in time? Or are these costs that are a bit more downstream, let's say, on the homebuilder side that are being put into the underwrite effectively by homebuilders in the future at some point in time and if you're seeing much of that separately? And then I guess on Industrial & Logistics, I guess, a lot of talk about data centers, AI, growth zones, things like that. I wonder maybe a quick comment on where your thoughts are at the moment and how that overlaps with the Industrial & Logistics portfolio in terms of opportunities?

Okay. Super. So let's take the first one.

You take first. I will take the second.

Fine. So within the one-off sort of costs that probably fall into sort of two different buckets. So the first one, we've seen sort of just on sort of 2 or 3 sort of sites, some increased costs around some really specific pieces of infrastructure. So an example would be around sort of adopting drainage at Waverley, for example. Some of that drainage was put in place sort of a while ago and the cost of adopting that drainage now to a slightly higher standard are feeding through at a higher level than we sort of originally anticipated when we sold the plots that were associated with that drainage. The second sort of area is actually around sort of acceleration on some of the sites. So we've got planning in for additional units at both Coalville and Ironbridge at the moment. That happens because we get sort of an initial planning approval, we work through the sites, we start to deliver it, and then we start to eye up how we might be able to get some more plots on site, whether that's sort of on adjoining land at Ironbridge or sort of within sort of changing some of those allocations around. And a quirk of the valuations as we move forward is that we've sort of taken an additional sort of cost at the half year associated with a higher risk with those units and then associated with sort of sale and Section 106 payments, which certainly Ironbridge is still subject to viability tests sort of later in the scheme. Those are absolutely the right things to be doing for the business. So even though there are sort of increased costs associated with that within the cost plans, putting additional plots on those sites is going to drive long-term value, and we would expect that to see that come forward sort of in the future. I don't think so much of the feature that we're seeing at the moment is additional sort of costs feeding through from the housebuilders. It's something that we are alive to. I think it's probably because when we sell the service land, it is serviced to a particular point. So all of the costs of doing that are factored into sort of our plans going forward, but absolutely remains something that we're alive to.

I mean those service line valuations have been -- has been pretty stable, as we said in the presentation actually. So picking up on your sort of I&L question on the data center AI growth zones, I mean, to be honest, power availability is the absolute sort of key thing here, whether it's all there at day 1 or it actually can be underwritten and basically sort of delivered over an acceptable period of time is really sort of what will drive sort of where data centers locate in the U.K. I think we said before when we've been asked questions about this, we continue to sort of comb our portfolio and identify opportunities. We do believe we have sites that will actually deliver sort of some capacity into the data center market. But as I pulled out sort of on the slide in terms of like the market outlook, it's not just data centers now sitting alongside traditional I&L, you've actually got the defense sector, which is going to -- it's expected to grow significantly sort of over the next 5 to 10 years, infrastructure sort of around power, in particular. And things like food security actually are all starting to feature in the sort of market dynamics. So you've got sort of a fairly constrained supply of land coming through the planning system with a consent, fairly constrained volume of sites that can actually deliver at scale, and you've got a whole new sort of group of emergent sectors that are basically sort of going to feed into that demand.

It's Matt Saperia from Peel Hunt. Can I ask a question about the capital-light opportunities? Can you just talk us through the one you've announced with the Church Commissioners, how the economics of that work? And how significant do you think this could be as a growth driver for the business going forward?

Yes. So I suppose the Church Commissioners joint venture is sort of the second one in these sort of strategic partnerships that we've looked at. The first being sort of one that we put in place sort of back end of last year at Grimsby. And the way that these have worked is a way of sort of working with landowners who perhaps holds a very big set of land banks but don't necessarily have the expertise to bring them forward through sort of delivery of sort of master planning, phased sort of delivery or sort of the capital and balance sheet to bring them forward. So it gives us the opportunity to work on some really amazing sort of sites where effectively, they bring the land, we bring our expertise and some of our balance sheet to deliver it, our expertise in bringing sort of debt and other capital sources as well. And then there's a profit sort of share as we work out sort of the back end. So for us, it gives us the benefit. We're not carrying sort of the land all the way through that sort of initial sort of phase. We can come in, we can work through them relatively quickly. We can take the share of the profits and fees and upside for really being the ones to drive the scheme forward. I think we see it in particular, in a particular part of the portfolio, Matt. So it's not necessarily something that we'll sort of pivot everything towards but actually, we have the skill set in-house. It makes sense to leverage that and to use it across other sites. And it's just a portion of the portfolio that will sit alongside our more normal sort of acquisitions.

It's fair to say, I mean, it plays incredibly well into that master developer skill set because that really is what this is all about. And we're a master developer, I would say, par excellence, but also with a balance sheet that enables us to co-invest. So you are going to see, I think, sort of more -- different types of models actually emerge sort of as landowners sort of look to unlock some of their sort of land bank opportunities. And I think this has a really sort of a good place in it for us.

Sarim Chaudhry from Jefferies. Just on the I&L pipeline on that 4 million square foot, how would you forecast or, I guess, guide rather on that 60% split between build-to-suit forward funding and service land? Is it a relatively even split? Or is there, I don't know, a greater focus on service land?

It's probably going to be -- it will be whatever drives the best returns. I mean it's pretty brutal, I'm afraid, but the reality of it is we know that we're targeting 40% of that to come into our investment portfolio as part of the transition to Grade A, but also the growth of it. So that's -- and you've seen sort of the first bit of that start to come in. The rest of it, one of the beauties of our portfolio is it is land, service land with planning consent that's sitting sort of in that GBP 4 million bucket as we continue to work through these sites, which means we've got product that we can supply into the market in a way that actually drives better returns. So we won't build it if it's not driving returns that we need. And you've seen at sell sites like Ansty, at sell sites like Kellingley, do sites like the Microsoft deal. You sort of do those every day of the week, if it was driving that level of returns because we can then redeploy really quickly into something else. So it's probably pretty brutal, isn't it from that perspective?

It absolutely is. I think the way sometimes I think about it is that 60% is all in effect forms of land sales. It's just sort of -- if you're selling sort of under a forward funding agreement or we're selling sort of under build-to-suit, there are additional revenue streams that we can serve additional layers of profit that we can take on it. So it's a balance, isn't it, as Lynda says. If we're sort of selling, and we're taking sort of then sort of then sort of that profit margin or sort of development fee, that might make sense equally sort of a really stellar deal like a Microsoft sort of deal. You're effectively getting that just within sort of the service of land sale as well. So we'll always weigh up the opportunities, balance the risk across the portfolio, but it will be a combination of all three.

We've got no questions online. Great. Right. Well, I think any more questions from the room, we're done, yes. I think we're done. Thank you ever so much for your attention, everybody. And we'll see some of you as we go through the rest of the next couple of weeks. Thank you.