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Harworth geared up for growth, underpinned by valuable land bank

Harworth geared up for growth, underpinned by valuable land bank

It doesn’t take the intellectual capital of a Mark Twain to realise the adage of: ‘Buy land, they’re not making any more of it,” is a truism, especially as the UK battles with perpetually rising house prices, and now following the chaos of the last few weeks of government, rising mortgage rates. With the average house price in England at GBP371,158, the ambition of many to buy their own home has never been dimmer in over a decade.

That’s why companies like Rotherham-based Harworth Group LON:HWG are in a key place to help ease the supply constraints. Harworth is the grand-daughter of the National Coal Board, later following the privatisation of the industry in 1987, British Coal which had its assets bought by RJW Mining, which became UK Coal and ceased operations in 2015.

After the Thatcherite shake-down on the coal industry in the 1980s, and the subsequent move towards less-polluting, renewable energy resources, the mines that had powered Britain’s Industrial Revolution all closed, leaving the last man standing as Harworth Group, the property management arm of the coal industry. Not much mining was left, but there were lots of closed coal mines and disused spoil heaps that created an industrial scar across Yorkshire, Lancashire and the Midlands.

Old King Coal

And it is here that Harworth stepped in, as remediation and infrastructure specialists, master planning overseers, direct developers and as a land bank for other developers. The company listed in May 2016 and today has a market capitalisation of GBP361.8m. It has regional offices in Birmingham, Manchester, Leeds and South Yorkshire.

The company is one of the UK’s leading remediation and regeneration companies and currently has assets under management of 14,000 acres across approximately 100 sites, valued GBP889m with the potential to deliver 28,990 new homes, 32.2 million square foot (m sq.ft) of industrial and logistics space and GBP4.1bn of gross value added to regional economies through the businesses and families living and working in its developments.

Lynda Shillaw, the company’s chief executive said in a call: “…our purpose is to invest in and transform land and property into sustainable places where people want to live and work […] our head office in in Rotherham, South Yorkshire, is on the site of our largest development, Waverley [which was] once the site of Orgreave Coal and Coking Works. Today, Waverley is a thriving new community and we’re well on the way to delivering 3,000 new homes and over 2m sq.ft at the advanced manufacturing plant, which is a regionally significant centre of excellence.”

Harworth prides itself on being a remediation specialist on large complex sites, and is focussed on developing new industrial and logistics and residential properties both characterised by significant supply and demand imbalances. The company has been benefitting from the government’s Levelling-Up strategy, and Shillaw said that the North of England and the Midlands are experiencing significant economic growth and investment, and major beneficiaries of government economic policy.

Robust leverage

The developer has a large and high-quality pipeline of strategic land developments, said Shillaw, which is largely held in freehold, and a: “robust financial position, with low leverage and significant liquidity which allows us to unlock the potential of our sites, deliver development and perceive new growth opportunities.”

The company has delivered an average total return of around 10% a year for the last five years.

The company opened trading today (25th October) at 110p and had fallen to 108p by mid-morning trading. The shares have offered a -40% year-to-date return with a -36.5% one-year return and prices have ranged between 99p and 193.3p over a 52-week period.

The company takes the role of master developer for an undeveloped brownfield industrial site. Its initial work is to remediate the site and sort out the planning application process before developing the land. The company will then put in basic infrastructure and either sell plots of land to housebuilders like Barratt LON:BDEV for house-building, or develop the sites themselves by sub-contracting out the construction of new industrial sites.


Recurring rental income

“Once completed, we often retain the finished development in our investment portfolio, which takes a key role in our strategy by generating a recurring rental income that largely covers our overheads and gives us access to a broader range of financing options,” explained Shillaw.

The company hopes to grow the business to an EPRA net disposal value (which represents Net Asset Value under a disposal scenario of all property and assets in the land bank, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. It’s a valuation tool used in the property sector and regulated by the European Public Real Estate Association to value developed and undeveloped land banks) of in excess of GBP1bn by 2027. “…this represents evolution, not revolution and builds upon what we already do, but with a material shift in the pace and scale of delivery,” said Shillaw.

Strategically, the CEO said, Harworth hopes to: increase its direct development of industrial and logistics plots; accelerate sales and broaden the range of its residential products; grow its strategic land portfolio and land promotion activities; and reposition its investment portfolio to modern Grade A status to achieve this target.

Hitting targets

Kitty Patmore, chief financial officer for Harworth added during the call: “We have 600,000 sq.ft completed or under development this year and are well on our way to hitting our target of 800,000 sq.ft. per annum, […] and we have broadened the range of our residential products […] completing 1,600 plot sales – a strong performance – on the back of increased developer demand.”

Patmore added that as a result of acquisitions in 1H22, Harworth has maintained a land bank of 12- to 15-years. Shillaw added that by the end of the year approximately 20% of the investment portfolio will be Grade A status.

The year has, undoubtedly been difficult, with the market bringing new challenges for the UK property sector. However, Shillaw remains confident that Harworth’s focus market of industrial and logistics and residential is the right place to be and will remain strong over the long term. “They are both critical to the growth of the UK economy and both are in structural undersupply.”

Patmore said the company had a strong 1H22. “We undertook a record level of direct development in the industrial and logistics portfolio,” she said, “…we’ve continued to accelerate residential sales and we progressed a number of strategic initiatives making a several acquisitions in the period to grow our development pipeline.”

The company’s residential pipeline represents 29,000 plots and the company has already hit 100% of its budgeted sales for the year, said Patmore.

The investment portfolio has a very high rent collection, reduced vacancy and significant rental uplift. Gains over the year were fairly split between residential and industrial and logistics developments. Revenue for 1H22 was GBP62.6m, for 1H22, up from GBP18.9m in 1H21.

Debt renegotiation

Net debt, however was up quarter-on-quarter from GBP42.6m to GBP67.8m. Patmore explained that this was fairly typical in the development cycle, where the company spends on development in the Spring than in the Winter this development spend is offset by sales later in the year.

Administration expenses ticked up by GBP2.2m to GBP10.9m in 1H22 compared to the previous period, due to higher salary costs die to increasing headcount to manage the company’s growth.

Patmore said: “The company remains prudently geared, with a target net-loan-to portfolio value at the year end of 20%, with a maximum of 25% across the year.” As at end June 2022, the net-loan-to-portfolio value of 7.6%.

The company recently renegotiated a revolving credit facility of GBP200m with an accordion option of GBP40m. The company also carries site-specific development loans. Harworth had GBP144.4m cash in hand and available drawings as at end 1H22 and will not need to return for refinancing for another four years.

Developers are going to find the next few years tough in the UK as a combination of affordability and high mortgage interest rates will undoubtedly put a damper on prices and sales. However, this is most extreme in the South East and London, less so in the northern coalfields, and having a reasonable liquidity cushion, a valuable land bank and diversification should mean that Harworth will be able to withstand any storms.

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