REG - Develop North PLC - Annual Financial Report
26/03/2024 07:00
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RNS Number : 2344I Develop North PLC 26 March 2024
To: RNS
From: Develop North PLC
LEI: 213800EXPWANYN3NEV68
Date: 26 March 2024
Subject: Annual Financial Report
Chairman's Statement
Highlights
· Net Asset Value total return of 1.4% (November 2022: 2.3%)
· Continued reduction in the Company's risk profile as the collective
LTV reduced to 65.1% from c.67% a year earlier
· Decrease in earnings per share from 3.7p to 2.5p
· £1.1m distributed to shareholders during the year
· Re-pricing of loan book in line with higher interest rates created a
c.9% year-on-year increase in average rates charged
· Total dividends of 4 pence per share paid or payable for the year
· Share buybacks during the year enhanced the NAV per share for
remaining shareholders by 0.3%
· Loan facility with Shawbrook Bank Limited renewed to May 2025
INTRODUCTION
I am pleased to present the Company's results for the year ended 30 November
2023, during which the Company entered its seventh year of trading.
Once again the economic backdrop, especially with regard to real estate-linked
investment, has been hallmarked by increases in interest rates, together with
high but generally easing inflation figures as 2023 progressed.
UK base rates rose from 3% at the start of our financial year in December 2022
to 5.25% by August 2023. This figure was a little higher than the Office of
Budgetary Responsibility's predicted 2023 peak of 4.8% which we reported last
year. However, no further rate rises occurred during the remainder of the year
and into early 2024.
A combination of soaring energy prices, supply chain disruptions caused by
global geopolitical events, not least Russia's invasion of Ukraine, triggered
price rises that reached a 41-year high of 11.1% in October 2022. Underlying
pressures gradually eased over the following twelve months such that inflation
had fallen to 4.6% by the beginning of November 2023.
Turning to property prices, the latest ONS figures show that the average house
price was £6,000 cheaper in November 2023 than a year earlier, a trend
generally attributed to a combination of high mortgage rates, cost of living
increases and low market confidence.
Prospects have undoubtedly improved as borrowing rates have come down and cost
price inflation has eased. Our Investment Adviser has prudently adopted
Zoopla's prediction of a 2% fall in house prices across our regions, while
reporting improved confidence of stability within cost budgets and a further
improvement in the availability of labour and sub-contractors, with the
potential to shorten build programmes.
OBJECTIVE; MANAGERIAL ARRANGEMENTS; COMPANY NAME
The Company seeks to achieve its investment objective primarily through a
diversified portfolio of fixed rate loans predominantly secured over land
and/or property in the UK and managed by its Investment Adviser, Tier One
Capital Ltd ('TOC').
The change of the Company's name to Develop North PLC, as reported last year,
has had a positive impact since its implementation on 6 May 2022.
The name not only has the benefit of brevity but gives an immediate insight
into the Company's ambitions and regionally focused investment objective. The
Company's upgraded web site, www.developnorth. co.uk
(http://www.developnorth.co.uk) , has had a similarly beneficial effect while
being readily accessed via a simple internet search using the Company's name.
PERFORMANCE; NET ASSET VALUE
The Company's net asset value ('NAV') fell to 78.9 pence per share as at 30
November 2023, having been 81.8 pence per share twelve months earlier. Taking
into account dividends paid or declared for the period, this equates to a net
asset value total return for the financial year of approximately +1.4% and
after a modest increase in the impairment charge, reflecting the Investment
Adviser's expectations for the UK economy in the year ahead.
This figure may be placed into context by comparison with the total return
figures over the same period of the Association of Investment Companies'
('AIC') 'Property-Debt' sector, of which the Company is a component member, of
+4.5% and of the AIC's 'Debt-Loans' sector of +9.9% (Source: AIC).
The total value of the Company's portfolio now stands at £19.5 million.
REVENUE AND DIVIDENDS
The Company has adhered to the dividend policy established in 2021, namely to
pay dividends at a rate of 1 penny per share per quarter, equivalent to 4
pence per share per year in aggregate.
For the year to 30 November 2023, revenue decreased to 2.5 pence per share
(November 2022: 3.7 pence).
The fall in revenue per share is a result of an increase in impairments this
year linked to legacy projects, which are substantially concluded.
The Board has declared and paid three quarterly interim dividends of 1.0 pence
per share for the year ended 30 November 2023 and I am pleased to report that
a fourth interim dividend of 1.0 pence per share has been declared. This
dividend will be paid on 28 March 2024 to shareholders on the register at the
close of business on 8 March 2024 (ex-dividend date 7 March 2024).
SHARE BUYBACKS
In November 2023 the Company announced the introduction of a share buyback
programme to repurchase an initial figure of up to £500,000 of its Ordinary
shares. The programme's objective is to reduce the discount to net asset value
at which the shares may be trading.
As at 30 November 2023 the Company had repurchased 689,838 Ordinary shares at
an average discount to NAV of 10%.
GEARING
Loan facilities during the year consisted of a £6.5 million credit facility
with Shawbrook Bank Limited. There were no funds drawn under the loan facility
at 30 November 2023. £1.5m has been drawn down since the year end.
The Shawbrook loan facility was renewed to May 2025, thereby providing
adequate liquidity for the Investment Adviser to take advantage of lending
opportunities as they arise.
INVESTMENT PORTFOLIO; NEW INVESTMENTS; PROJECT IMPAIRMENTS
The total value of the Company's portfolio now stands at £19.5m, from 17
projects, a decrease of £5.0m since last year. The quality of the underlying
loan book continues to improve with the Loan to Value moving from 66.8% at 30
November 2022 to 65.1% at year end.
New Investments The Company agreed four new loans during the year, including a
£2.2 million, 30-month facility to fund the construction of a new warehouse
in Darlington, Durham; a £1.1 million, 18-month facility to refurbish a hotel
and wedding venue in North Yorkshire and two residential developments for a
combined £2.4 million in Aberdeenshire, Scotland.
The change in interest rate environment is also being reflected in the net
rates of interest on new and refinanced projects. This will help to mitigate
the higher interest and higher inflation that the Company is facing.
Exits There were three portfolio exits, bringing total exits to eighteen since
inception. In addition, partial redemptions occurred for three other projects
in the portfolio.
Impairments As required under the stringent requirements of accountancy
standard IFRS 9, the Company has reflected the more uncertain economic
conditions resulting in an increased general provision at year end.
All loans are written balancing risk and return, whereby contingencies are put
in place, typically in the form of capital/equity in the projects subordinate
to the Company's loan. This arrangement protects the Company in the event that
the underlying properties being supported do not realise the full expected
value and/or that the return of capital could be delayed by sales taking
longer than anticipated. The Board and the Investment Adviser believe that
this substantially mitigates the risks associated with the downturn.
The Investment Adviser's Report provides further detail on performance and the
activity within the loan portfolio. This includes information on deployment of
capital, progress on projects undertaken as well as any profit share received,
impairments and uplifts on loans and loan
redemptions.
LONG TERM PERFORMANCE
The Company was incorporated in 2016, and as is set out in the Investment
Advisor's Report included in this Annual Report, it has reinvested its entire
capital base more than twice, supporting SME developers and similar
entrepreneurs predominantly in the North of England and Scotland.
The strategy adopted shortly after incorporation has been applied consistently
and has proven successful. A deep understanding of the local market, of the
individual sites that our lending supports, and of the borrowers themselves,
coupled with financial and credit disciplines has meant that loans issued
since 2018 (22 loans and over £41 million) have produced an IRR to date of
9.6%, with a loss of capital of only 0.5%. Given the conservative Loan to
Value and the protection this security over the underlying property affords,
this is a very acceptable outcome, particularly in the very low interest rate
environment that has prevailed through most of this period. I believe this
compares favourably with comparative alternative lenders and highlights the
differentiators inherent in localised lending. I also note the not
inconsiderable support that this lending has provided to the local economies
in the areas the loans have been made, making a significant social impact in
regional communities.
When the Company was incorporated in 2016, it took onto its balance sheet
loans to ten existing projects, and made four additional loans in the first
year of trading. Several of these loans resulted in a capital loss, and not
all were able to service their interest, leading to historic impairments. The
substantial majority of these loans have now been concluded, and as such the
Board and the Investment Advisor are confident that the level of impairment
that has been necessary historically will not recur.
BOARD OF DIRECTORS
In accordance with the requirements of the UK Corporate Governance Code all
Directors will stand for re-appointment at the AGM.
ANNUAL GENERAL MEETING
The Company's AGM will be held at The Grey Street Hotel, 2-12 Grey Street,
Newcastle on Thursday, 25 April 2024 at 12 noon. Visitors are requested to
arrive at the hotel reception no later than 11:50 a.m.
The Board strongly encourages all shareholders to exercise their votes in
respect of the meeting in advance, by completing and returning their proxy
forms to the Company's registrar. This will ensure that the votes are
registered.
In addition, shareholders are encouraged to raise any questions in advance of
the AGM with the Company Secretary via email to cosec@MaitlandGroup.com
(mailto:cosec@MaitlandGroup.com) or by post to the Company Secretary at the
address set out in the Annual Report.
Any questions received will be replied to by the Company after the AGM.
OUTLOOK
Notwithstanding one major political event looking increasingly likely at some
stage during 2024 - namely, a general election - a degree of market confidence
and property transaction volumes is expected in 2024 as interest rates ease
and affordability improves.
As well as inflation continuing a generally downward trend, financial markets
are pricing in cuts to the base rate during 2024. Looking forward, the Bank of
England now expects to see a further slowing down in headline inflation to a
likely 3.1% in the final quarter of 2024 before returning to normalised levels
of around 2% in 2025. Economic growth is expected to remain weak, on the other
hand, with unemployment rising and frozen tax thresholds limiting any
increase, in real terms, in take home earnings.
With the return of both interest rate and construction cost stability, our
Investment Adviser has adopted a more positive outlook for 2024, citing
relative confidence in property as an asset class, a continuing shortage in
housing and an increasing ability to compete in debt markets. Key risks
remain, nevertheless, and a contraction in asset values cannot be discounted,
though any downturn is expected to be shallow.
We are transitioning to the higher interest rate world, and recent lending
reflects this in the rates at which we are now lending. While the outlook for
business is challenging, I am confident the Company has placed itself in a
good position for the current year and beyond.
The property markets where the Company lends, while not immune to wider
economic trends, have not suffered the turbulence experienced in other parts
of the UK (in particular the South East). As such, the affordability of home
prices has been less stretched and there has consequently been only a modest
correction in prices in response to the changing interest rate regime.
Moreover, I believe the lending disciplines which the Investment Advisor has
in place will continue to provide protection to our loan portfolio; the
relationships with developers, the maintenance of prudent Loan to Value ratios
and the knowledge of each site and developments to which we lend. In short,
Develop North will press ahead with identifying and investing in real estate
projects of the highest quality, continuing to enhance the Company's portfolio
and strengthen its reputation in the market. This should lead to the creation
of shareholder value that is sustainable in the longer term, while also
providing a positive social impact to the communities within which many of us
live and work.
John Newlands
Chairman
25 March 2024
Investment Adviser's RePORT:
REVIEW OF THE 12 MONTHS TO 30 NOVEMBER 2023
Investment Adviser's Highlights:
· Exits of three portfolio projects, bringing the number of
exits since inception to eighteen
· NAV Total Return of 1.4% for the year to 30 November 2023 and an
annualised dividend yield of 4.7%, resulting in £1.1m of income distributed
to shareholders
· £3.4m deployed into 6 projects
· Loan to Value ('LTV') has decreased to 65.1% from 66.8%,
delivering on our strategy to build risk resilience and improve the credit
quality of our loan book
· 71.2% of funds deployed in North East England reflecting the
Company's ongoing commitment to focus operations on our chosen regional
markets.
This Annual Report covers the sixth full year of performance and seventh audit
review of the Company since its listing in January 2017.
The Company's primary purpose is to provide debt finance to the property
sector. The Company also benefits from a small number of equity positions
attained at nil cost in six of the borrowing entities which it supports. In
addition, the Company benefits from exit fees on redemption of other projects
that additionally contribute to the Senior & Profit lending type.
Progress on the Company's Strategic Objectives:
· Weighted Average interest generated was 8.2% - up from 7.56%
in the prior year
· Size of investment portfolio year-on-year decreased due to
three successful exits
· Prudent cost control saw overheads maintained at £0.5m
· Portfolio Loan to Value ('LTV') improved at 65.1%
· Further progress in managing non-performing assets and
improvement in loan book quality, including £0.36m repaid by legacy projects.
· Fund liquidity further improved, enabling the commencement of the
first Company share buyback exercise in November 2023.
The Economic Backdrop and Outlook:
The year had seen continued strategic risk challenges presented in both
significant inflation and increased borrowing rates. Average inflation in the
year was 6.7%, albeit down from 10.7% in the previous 12 months. UK base rates
saw six consecutive increases from 3% to 5.25%. Notwithstanding those
challenges, the UK economy avoided falling into the recession predicted at the
start of the year. Looking forward, the Bank of England ('BoE') expects to see
a slowing down in headline inflation from 4.6% at 30 November 2023 to a likely
3.1% in the final quarter of 2024 before returning to normalised levels of
around 2% in 2025. Markets are predicting that inflationary control will calm
interest rate movements and see some relief built in to lower the base rate to
4.25% by the end of 2024, although the BoE themselves are more pessimistic at
5.1%.
The end of 2022 saw house prices come off a peak, coupled with lower supply of
new builds as volume housebuilders reduced the number of new site starts. A
slower market was seen across the North East and Scotland in 2023, partly
driven by increased mortgage costs relative to wage growth. Looking forward,
we have adopted Zoopla's prediction of a 2% fall in house prices across our
regions; however, we are encouraged by recent pay settlements above inflation
to bring some confidence back to mortgage affordability.
This financial year also saw an easing to both build cost inflation and labour
rates. Building Cost Information Service Construction Data ('BCIS') material
price increases peaked at 18% in 2022 before dropping to zero for the 12
months to September 2023 and forecasting 2% in 2024. That stability was
coupled with a 6% contraction in new work output in 2023 and a further 1% fall
forecast in 2024. These factors combined, this then gives some confidence of
stability within cost budgets and a further improvement in the availability of
labour and sub-contractors to aid the shortening of build programmes.
With the return of both interest rate and construction cost stability we have
adopted a more positive outlook for 2024. Key risks remain and a contraction
in asset values cannot be discounted, although we anticipate any downturn to
be shallow.
The increased rate environment saw us set higher targets for Investment Rate
of Return ('IRR') on projects.
Despite the ongoing uncertainties, we are pleased to report an active year for
new transactions and deployments to existing projects, together with full and
partial exits:
· Croft, North Yorkshire - £1.1m 18-month facility
· Aberdeen, Scotland - £1.7m 24-month facility
· Aberdeen, Scotland - £0.8m 10-month facility
· Darlington, North East England - £2.2m 30-month facility
During the year a total of £3.4m was deployed into six projects, including
the four new projects mentioned above.
At the year-end, fund deployment totalled £19.5m. The quality of the
underlying loan book continues to improve with the Loan to Value moving from
66.8% at 30 November 2022 to 65.1% at 30 November 2023
Portfolio Exits
Three loans were repaid during the year, bringing the number of exits in the
portfolio to eighteen since inception.
Partial Redemptions Update
During the year there were £8.6m of partial redemptions across six of the
portfolio projects, including the three exits in the year
Impairments
In accordance with IFRS 9, the Company recognises the gross interest
receivable on all its loans, and then recognises an impairment charge if that
interest is not paid by the borrower and there is not a clear expectation that
this can be recovered subsequently. During the year, there were two projects
unable to meet their interest requirements in full.
IFRS 9 also requires the Company to consider various credit loss scenarios and
assign a risk weighting to these. This calculation generates a provision which
is taken as a general impairment for the year. In this period the Company has
increased the provision to £146,000 from the £114,000 that was in place at
30 November 2022. This provision is based on forward looking scenarios to
withstand market-related shocks reflecting current economic uncertainties.
Gearing
In May 2023, the Company renewed its committed revolving credit facility with
Shawbrook Bank for a further two years. As previously, the key driver was
headroom and liquidity and its renewal demonstrates the support that the
Company has from its lender, and the growing confidence in future deployment
given the current strength of pipeline.
PROFIT SHARE PROJECTS
There are currently four Profit Share projects in the portfolio (November
2022: six) reflecting further progress in our strategic aim to simplify and
focus on debt-only products.
BUYBACK PROGRAMME
In November 2023, the Company announced the commencement of a share buyback
programme. The Company repurchased 689,838 Ordinary shares in November 2023. A
further 566,369 Ordinary shares were repurchased in December 2023. The shares
are held in treasury
OUTLOOK
Residential
As at 30 November 2023, 73.9% of deployed funds were invested across twelve
projects with a residential focus with a further £1.6m committed to live
projects.
This represented a 20.4% decrease over 2022 and formed part of our response to
the pressures across the Residential sector in 2023.
Commercial
As at 30 November 2023, 24.6% of deployed funds were invested across five
projects with a commercial focus.
PIPELINE
There is currently £5.2m at various stages of due diligence across two
commercial projects in the North East, one of which was completed post
financial year end.
PERFORMANCE SINCE 2018
Ten projects were brought into the portfolio on listing, with a further four
projects supported in the first year of trading. Of these fourteen projects,
six had capital write-offs of circa £4m.
Since 1 June 2018, the Company has provided loans totalling £40m across
twenty new projects. These projects have generated an average IRR of 9.6% with
only 0.5% of capital write-offs which have been more than covered by
associated exit and plot fees. These projects have also been lower risk
projects with LTVs lower than the legacy projects.
The quality and experience of each management team that we are in discussions
with will continue to enhance the Company's portfolio and strengthen its
reputation in the market. This should lead to the creation of shareholder
value that is sustainable in the longer term.
With input cost stability predicted to emerge, relative confidence in property
as an asset class, a continuing shortage in housing and an increasing ability
to compete in debt markets, we are looking forward to growing fund deployment
post the year end.
Ian McElroy
Tier One Capital Ltd
25 March 2024
THE INVESTMENT PORTFOLIO AS AT 30 NOVEMBER 2023
Sector % of LTV* Loan Value LTV* Loan Value
Portfolio (Nov 22) (Nov 23) (Nov 22) (Nov 22)
£'000s £'000s
Residential 69.8% 62.1% 14,221 69.0% 17,111
Commercial 24.5% 73.6% 5,005 61.9% 7,508
Cash 5.7% - 1,154 - 638
General Impairment - - (146) - (114)
Total/Weighted Average 100.0% 65.1% 20,235 66.8% 25,143
*LTV has been calculated using the carrying value of the loans as at the
balance sheet date
PRINCIPAL AND EMERGING RISKS
The Board of Directors has overall responsibility for risk management and
internal control within the context of achieving the Company's objectives.
The Directors confirm that they have carried out a robust assessment of the
principal and emerging risks facing the Company, including those that would
threaten its business model, future performance, solvency or liquidity, as
they operated during the year and up to the approval of the Annual Report.
The Board agrees the strategy of the Company, taking into consideration the
Company's risk appetite. With the assistance of the Investment Adviser, the
Board has drawn up a risk matrix, which identifies the key risks to the
Company, as well as emerging risks. In assessing the risks and how they can be
mitigated, the Board has given particular attention to those risks that might
threaten the viability of the Company. These key risks fall broadly under the
following categories:
· Investment and strategy risk
The Company's targeted returns are targets only and are based on estimates and
assumptions about a variety of factors including, without limitation, yield
and performance of the Company's investments, which are inherently subject to
significant business, economic and market uncertainties and contingencies, all
of which are beyond the Company's control and which may adversely affect the
Company's ability to achieve its targeted returns. Accordingly, the actual
rate of return achieved may be materially lower than the targeted returns, or
may result in a partial or total loss, which could have a material adverse
effect on the Company's profitability, the net asset value ('NAV') and the
price of Ordinary shares.
Borrowers under the loans in which the Company invests may not fulfil their
payment obligations in full, or at all, and/or may cause, or fail to rectify,
other events of default under the loans.
The Board is responsible for setting the investment strategy to achieve the
targeted returns and for monitoring the performance of the Investment Adviser
and the implementation of the agreed strategy.
An inappropriate strategy could lead to poor capital performance and lower
than targeted income yields.
This risk is mitigated through regular reviews and updates with the Investment
Adviser, monitoring of the portfolio sectors against the investment
restrictions on a quarterly basis and tracking of loan to value ratios of the
underlying property projects
· Market risk
The Company's investment strategy relies in part upon local credit and real
estate market conditions. Adverse conditions may prevent the Company from
making investments that it might otherwise have made, leading to a reduction
in yield and an increase in the default rate.
The Company holds 100% of its assets in the United Kingdom.
To mitigate the market risks, the Board receives quarterly updates from the
Investment Adviser containing information on the local market conditions and
trends. This information is reviewed alongside the sector split of the
portfolio to ensure the portfolio is aligned to meet future challenges.
· Financial risk
The Company's activities expose it to a variety of financial risks that
include interest rate risk, liquidity risk and credit risk. Further details on
these risks and the way in which they are mitigated are disclosed in the notes
to the financial statements.
· Operational risk
The Company has no employees and relies upon the services provided by third
parties. It is primarily dependent on the control systems of the Investment
Adviser and Administrator who respectively maintain the assets and accounting
records.
Failure by any service provider to carry out its obligations in accordance
with the terms of their appointment could have a detrimental effect on the
Company.
To mitigate these risks, the Board reviews the overall performance of the
Investment Adviser and other key third-party service providers on a regular
basis and has the ability to terminate agreements if necessary. The business
continuity plans of key third-party service providers are subject to Board
scrutiny.
· Legal and Regulatory risk
In order to qualify as an investment trust, the Company must comply with
section 1158 of the Corporation Tax Act 2010. The Company has been approved by
HM Revenue & Customs as an investment trust. The Company is listed on the
London Stock Exchange. Non-compliance with the taxes act or a breach of
listing rules could lead to financial penalties and reputational loss.
These risks are mitigated by the Board's review of quarterly financial
information and compliance with the relevant rules.
Management Report and Directors' Responsibility Statement
Management report
Listed companies are required by the DTRs to include a management report in
their Financial Statements. The information is included in the Strategic
Report on pages 12 to 19 inclusive (together with the sections of the Annual
Report and Accounts incorporated by reference) and the Directors' Report on
pages 22 to 26. Therefore, a separate management report has not been included.
Directors' responsibility statement
The Directors are responsible for preparing the Annual Report and financial
statements, in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with UK adopted International Financial
Reporting Standards ("UK adopted IFRS") and with the Companies Act 2006, as
applicable to companies reporting under international accounting standards.
Under Company law the Directors must not approve the financial statements
unless they are satisfied that, taken as a whole, they are fair, balanced and
understandable and provide the information necessary for shareholders to
assess the Company's position and performance, business model and strategy and
that they give a true and fair view of the state of affairs of the Company and
of the total return or loss of the Company for that period. In order to
provide these confirmations and in preparing these financial statements, the
Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· make judgments and estimates that are reasonable and prudent;
· state whether applicable UK adopted IFRS have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
· prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business and the Directors confirm that they have done so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006, where applicable. They are responsible for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
The financial statements are published on www. DevelopNorth.co.uk
(http://www.DevelopNorth.co.uk) which is a website maintained by the Company's
Investment Adviser. The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the Company's
website. Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Under applicable UK law and regulations, the Directors are also responsible
for preparing a Strategic Report, a Directors' Report, Statement of Corporate
Governance and Directors' Remuneration Report that complies with that law and
those regulations.
Directors' confirmation statement
Each of the Directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with UK
adopted IFRS and with the Companies Act 2006, as applicable to companies
reporting under international accounting standards, give a true and fair view
of the assets, liabilities and financial position and total return or loss of
the Company; and
· The Management Report, referred to herein, which comprises
the Chairman's Statement, the Investment Adviser's Report, Strategic Report
(including risk factors) and note 17 of the Financial Statements includes a
fair review of the development and performance of the business and position of
the Company, together with the principal risks and uncertainties that it
faces.
The Directors consider that the Annual Report and Accounts taken as a whole,
is fair, balanced and understandable and it provides the information necessary
to assess the Company's position and performance, business model and strategy.
On behalf of the Board
John Newlands, Chairman
25 March 2024
INCOME STATEMENT
Year ending Year ending
30 November 2023 30 November 2022
Notes Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
REVENUE 2 1,722 - 1,722 1,787 - 1,787
Investment interest
Total revenue 1,722 - 1,722 1,787 - 1,787
Losses on investments held at fair value through profit or loss 4, 8 (201) (2) (203) (36) (342) (378)
Amortisation of exit fees - 32 32 - - -
Total net income 1,521 30 1.551 1,751 (342) 1,409
Expenditure 3 (65) - (65) (67) - (67)
Investment adviser fee
Impairments on investments held 4, 9 (116) (441) (557) (12) (136) (148)
at amortised cost
Other expenses 4 (513) - (513) (548) - (548)
Total expenditure (694) (441) (1,135) (627) (136) (763)
Profit/(loss) before finance costs and taxation 827 (411) 416 1,124 (478) 646
Finance costs (155) - (155) (132) - (132)
Interest payable
Profit/(loss) before taxation 672 (411) 261 992 (478) 514
Taxation 5 - - - - - -
Profit/(loss) for the year 672 (411) 261 514 (478) 514
Basic earnings per share 7 2.50p (1.53)p 0.97p 3.68p (1.78)p 1.90p
The accompanying notes form an integral part of the financial statements.
The total column of this statement represents the Company's Income Statement,
prepared in accordance with UK adopted IFRS. The supplementary revenue return
and capital return columns are both prepared under guidance published by the
Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing
operations.
There is no other comprehensive income as all income is recorded in the
statement above.
Statement of Financial Position
As at As at
30 November 2023 30 November 2022
Notes £'000 £'000
Non-current assets
Loans at amortised cost 9 6,208 12,659
6,208 12,659
Current assets
Investments held at fair value through profit or loss 8 3,024 4,874
Loans at amortised cost 9 10,496 7,948
Other receivables and prepayments 10 13 11
Cash and cash equivalents 1,154 638
14,687 13,471
Total assets 20,895 26,130
Current liabilities
Loan facility 11 - (4,000)
Other payables and accrued expenses 12 (191) (109)
Total liabilities (191) (4,109)
Net assets 20,704 22,021
Share capital and reserves
Share capital 13 269 269
Share premium 9,094 9,094
Special distributable reserve 12,267 12,849
Capital reserve (1,059) (644)
Revenue reserve 133 453
Equity shareholders' funds 20,704 22,021
Net asset value per ordinary share 78.92p 81.79p
The accompanying notes form an integral part of the financial statements.
These financial statements were approved by the Board of Directors of Develop
North PLC (a public limited company incorporated in England and Wales with
company number 10395804) and authorised for issue on 25 March 2024. They were
signed on its behalf by:
John Newlands
Chairman
Statement of Changes in Equity
For the year ending 30 November 2023 Share capital Share premium Special distributable reserve Capital reserve Revenue reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At beginning of the year 269 9,094 12,849 (644) 453 22,021
Total comprehensive profit for the year:
Profit for the year - - - (411) 672 261
Transactions with owners recognised directly in equity:
Dividends paid - - (85) - (992) (1,077)
Repurchase of shares into treasury - - (497) (4) - (501)
At 30 November 2023 269 9,094 12,267 (1,059) 133 20,704
For the year ending 30 November 2022 Share capital Share premium Special distributable reserve Capital reserve Revenue reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At beginning of the year 269 9,094 13,093 (166) 294 22,584
Total comprehensive profit for the year:
Profit for the year - - - (478) 992 514
Transactions with owners recognised directly in equity:
Dividends paid - - (244) - (833) (1,077)
At 30 November 2022 269 9,094 12,849 (644) 453 22,021
Cash Flow Statement
Year ending Year ending
30 November 30 November
2023 2022
Notes £'000 £'000
Operating activities
Profit before taxation 261 514
Losses on investments held at fair value through profit and loss 213 342
Impairments on loans at amortised cost 592 136
Gains on investments held at fair value through profit and loss (10) -
Uplifts on loans at amortised cost (35) -
Amortisation of exit fees (32) -
Interest expense 155 132
Changes in working capital
Increase in loan interest receivable on investments held at fair value through (93) (147)
profit and loss
Increase in loan interest receivable on loans at amortised cost (133) (249)
(increase)/decrease in other receivables (2) 16
Increase/(decrease) in other payables 82 (26)
Net cash inflow from operating activities after taxation 998 718
Investing activities
Loans given (3,369) (10,986)
Loans repaid 8,620 3,570
Net cash INFLOW/(OUTFLOW) from investing activities 5,251 (7,416)
Financing
Equity dividends paid (1,077) (1,077)
Repurchase of shares into Treasury 13 (501) -
Bank loan drawn down 14 - 4,251
Repayment of bank loan 14 (4,000) (251)
Interest paid (155) (132)
Net cash (OUTFLOW)/INFLOW from financing (5,733) 2,791
Increase/(DECREASE) in cash and cash equivalents 516) (3,907)
Cash and cash equivalents at the start of the year 638 4,545
Cash and cash equivalents at the end of the year 1,154 638
Notes to the Financial Statements
1. Accounting Policies
Significant Accounting Policies
(a) Basis of Preparation
The financial statements of Develop North plc have been prepared in accordance
with UK adopted International Financial Reporting Standards ("UK adopted
IFRS") and with the Companies Act 2006, as applicable to companies reporting
under international accounting standards. The financial statements were also
prepared in accordance with the Statement of Recommended Practice, Financial
Statements of Investment Trust Companies and Venture Capital Trusts ("SORP")
issued by the AIC (as issued in July 2022), where this guidance is consistent
with UK adopted IFRS.
The financial statements have been prepared on a going concern basis under the
historical cost convention, except for certain investment valuations which are
measured at fair value.
The notes and financial statements are presented in pounds sterling (being the
functional currency and presentational currency for the Company) and are
rounded to the nearest thousand except where otherwise indicated.
The Company reviews forthcoming changes to UK adopted IFRS and does not
anticipate material changes as a result of these.
NEW STANDARDS OR AMENDMENTS FOR 2023 FOR FORTHCOMING REQUIREMENTS
New standards, interpretations and amendments issued which are not yet
effective and applicable for the periods beginning on or after 1 December
2023:
Effective date accounting periods on or after 1 January 2024:
IAS 1 Amendments to accounting for non-current liabilities with covenants
GOING CONCERN
The financial statements have been prepared on a going concern basis. At the
forthcoming AGM shareholders are invited to vote on the continuation of the
Company. The Board understands that the Investment Adviser has taken soundings
of major shareholders and therefore it has a high degree of confidence that
this vote will be passed by shareholders; however, the vote is outside the
control of the Board and thus, in the context of assessing the future
prospects of the Company, it represents a material uncertainty which (if the
vote were to be lost) may cast significant doubt upon the ability of the
company to continue as a going concern. The financial statements do not
include the adjustments that may be necessary should a positive vote from the
shareholders to continue not be received and the Company was not able to
continue as a going concern. The disclosures on going concern on page 25 of
the Directors' Report form part of these financial statements.
INTEREST INCOME
For financial instruments measured at amortised cost, the effective interest
rate method is used to measure the carrying value of a financial asset or
liability and to allocate associated interest income or expense over the
relevant period. The effective interest rate is the rate that discounts
estimated future cash payments or receipts over the expected life of the
financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or financial liability. In calculating
the effective interest rate, the cash flows are estimated considering all
contractual terms of the financial instrument but does not consider expected
credit losses. The calculation includes all fees received and paid and costs
borne that are an integral part of the effective interest rate.
On an ongoing basis the Investment Adviser assesses whether there is evidence
that a financial asset is impaired. The basis of calculating interest income
on the three stages of impairment (detailed below) are as follows:
Stage 1 Interest is calculated on the gross outstanding principal
Stage 2 Interest is calculated on the gross outstanding principal
Stage 3 Interest is calculated on the principal amount less impairment
EXPENSES
Expenses are accounted for on an accruals basis. The Company's administration
fees, finance costs and all other expenses are charged through the Income
Statement and are charged to revenue. Fees incurred in relation to operational
costs of the loan portfolio, such as legal fees, are charged through the
Income Statement and are charged to capital.
DIVIDENDS TO SHAREHOLDERS
Interim dividends declared during the year are recognised when they are paid.
Any final dividends declared are recognised when they are approved by the
Shareholders at the Annual General Meeting.
TAXATION
Taxation on the profit or loss for the period comprises current and deferred
tax. Taxation is recognised in profit or loss except to the extent that it
relates to items recognised in other comprehensive income or directly in
equity, in which case it is also recognised in other comprehensive income or
directly in equity respectively.
Current tax is the expected tax payable on the taxable income for the period,
using tax rates and laws enacted or substantively enacted at the reporting
date.
Deferred income taxes are calculated using rates and laws that are enacted or
substantivity are expected to apply as or when the associated temporary
differences reverse. Deferred income tax is provided using the liability
method on all temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes. Deferred income tax assets are recognised only to the
extent that it is probable that taxable profit will be available against which
deductible temporary differences, carried forward tax credits or tax losses
can be utilised. The amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of assets and
liabilities. Deferred income is recognised in profit or loss unless it relates
to a transaction recorded in other comprehensive income or equity, in which
case it is also recognised in other comprehensive income or directly in equity
respectively.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The financial assets and financial liabilities are classified at inception
into the following categories:
Amortised cost:
Financial assets that are held for collection of contractual cash flows where
those cash flows represent SPPI ('solely payment of principal and interest')
and that are not designated at fair value through profit and loss are measured
at amortised cost. At initial recognition, these assets are recognised as the
amounts advanced to customers on the trade date. Financial assets are
derecognised when the rights to receive cashflows from the financial assets no
longer exists. The carrying amount of these assets is adjusted by any expected
credit loss allowance as described in the impairment note below. Interest
income from these financial assets is included in Investment Interest using
the effective interest rate method. Any gain or loss on derecognition is
recognised directly in the Income Statement. Impairment losses are presented
as separate line item in the Income Statement.
The Company's cash and cash equivalents, other receivables, other payables and
accruals, and the Company's loan facility are included within this category.
Fair value through profit and loss:
The Company has a number of borrower facilities in which it received a
minority equity stake or exit fee mechanism in conjunction with providing
those loan facilities. These loans are recognised at fair value through profit
and loss. At initial recognition, these assets are recognised as the amounts
advanced to customers on the trade date. Financial assets are derecognised
when the rights to receive cashflows from the financial assets no longer
exists. The fair value of the contracts is monitored and reviewed quarterly
using discounted cash flow forecasts based on the estimated cash flows that
will flow through from the underlying development project. Interest income
from these financial assets is included in Investment Interest using the
effective interest rate method. Any gain or loss on derecognition is
recognised directly in the Income Statement. Impairment losses are presented
as separate line item in the Income Statement. A sensitivity analysis is
included in note 16.
Any values attributed to the equity stakes of these borrowers are incorporated
into the overall loan valuation.
Exit fees:
Some of the financial assets measured at amortised costs have an exit fee.
There are two types of exit fees; those recognised at the end of the term of
the financial asset once it has been repaid, and those recognised during the
term of the financial instrument where here they are linked to specific events
such as plot sales.
IMPAIRMENT
At initial recognition, an impairment allowance is required for expected
credit losses ('ECL') resulting from possible default events within the next
12 months. When an event occurs that increases the credit risk, an allowance
is required for ECL for possible defaults over the term of the financial
instrument.
The key inputs into the measurement of ECL are probability of default ('PD'),
loss given default ('LGD'), and exposure at default ('EAD'). These inputs are
then considered and applied against residential and commercial facilities in
the loan book. ECL are calculated by multiplying the PD by LGD and EAD.
PD has been determined by considering the local market where the underlying
assets are situated, economic indicators including inflationary pressures on
build costs, government policy, and market sentiment. For residential loans
this has been further broken down into two scenarios; where only sales risk is
still present, and where both construction risk and sales risk still exist.
LGD is the magnitude of the likely loss if there is a default. The LGD models
consider the structure, collateral, seniority of the claim, and recovery costs
of any collateral that is integral to the financial asset. LTV ratios are a
key parameter in determining LGD. LGD estimates are recalibrated for different
economic scenarios and, for lending collateralised by property, to reflect
possible changes in property prices. EAD represents the expected exposure in
the event of a default. The Company derives the EAD from the current exposure
to the borrower. The EAD of a financial asset is its gross carrying amount at
the time of default. EAD for residential facilities has been further broken
down into two scenarios; where the build is complete, and where construction
is ongoing.
A financial asset is credit-impaired when one or more events that have
occurred have a significant impact on the expected future cash flows of the
financial asset. It includes observable data that has come to our attention
regarding one or more of the following events:
· delinquency in contractual payments of principal and interest;
· cash flow difficulties experienced by the borrower;
· initiation of bankruptcy proceedings;
· the borrower being granted a concession that would otherwise not be
considered;
· observable data indicating that there is a measurable decrease in the
estimated future cash flows from a portfolio of assets since the initial
recognition of those assets, although the decrease cannot yet be identified
with the individual financial assets in the portfolio; and
· a significant decrease in assets values held as security.
Impairment of financial assets is recognised on a loan-by-loan basis in
stages:
· Stage 1: A general impairment covering what may happen within the next
12 months, based on the adoption of BIS standards as outlined below.
· Stage 2: Significant increase in credit risk, where the borrower is in
default, potentially in arrears, where full repayment is expected and the
underlying asset value remains robust. The ECL calculation recognises the
lifetime of the loan.
· Stage 3: Credit impaired, where the borrower is in default of their
loan contract, in arrears, full loan repayment is uncertain and there is a
shortfall in underlying asset value. The ECL calculation recognises likely
failure of the borrower.
As at 30 November 2023, there were eighteen loans in the portfolio. Four of
those projects supported included either an equity stake of at least 25.1% for
the Company or an exit fee mechanism. Please see note 8 for details on these
four projects.
The Board has deemed that six projects (November 2022: five); are currently
impaired and specific additional provisions have been made against these
facilities in these financial statements.
The other twelve loans have been assessed as not impaired.
The Company's response to IFRS 9 requirements has been based on the Bank for
International Settlements ('BIS') Basel Supervisory Committee liquidity risk
tool recommendations.
FAIR VALUE HIERARCHY
Accounting standards recognise a hierarchy of fair value measurements for
financial instruments which gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The classification of
financial instruments depends on the lowest significant applicable input, as
follows:
· Level 1 - Unadjusted, fully accessible and current quoted prices in
active markets for identical assets or liabilities. Examples of such
instruments would be investments listed or quoted on any recognised stock
exchange.
· Level 2 - Quoted prices for similar assets or liabilities, or other
directly or indirectly observable inputs which exist for the duration of the
period of investment. Examples of such instruments would be forward exchange
contracts and certain other derivative instruments.
· Level 3 - External inputs are unobservable. Value is the Directors'
best estimate, based on advice from relevant knowledgeable experts, use of
recognised valuation techniques and on assumptions as to what inputs other
market participants would apply in pricing the same or similar instrument.
All loans are considered Level 3.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in hand and short-term deposits in
banks with an original maturity of three months or less from inception.
OTHER RECEIVABLES
Other receivables do not carry interest and are short-term in nature. There
were no irrecoverable amounts accounted for at the year end or the prior
period end.
RESERVES
SHARE PREMIUM
The surplus of net proceeds received from the issuance of new shares over
their par value is credited to this account and the related issue costs are
deducted from this account.
CAPITAL RESERVE
The following are accounted for in the capital reserve:
· Capital charges;
· Increases and decreases in the fair value of and impairments of loan
capital held at the year end
As at year end the Capital Reserve comprises both realised and unrealised
gains and losses and so does not contain distributable reserves.
REVENUE RESERVE
The net profit/(loss) arising in the revenue column of the Income Statement is
added to or deducted from this reserve which is available for paying
dividends.
SPECIAL DISTRIBUTABLE RESERVE
Created from the Court of Session cancellation of the initial launch share
premium account and is available for paying dividends and the repurchase of
shares. The Special distributable reserve is used to prevent the Revenue
reserve going into a negative position when paying distributions.
REPURCHASE OF SHARES TO HOLD IN TREASURY
The cost of repurchasing ordinary shares to hold in Treasury is charged to the
Special distributable reserve and the related stamp duty and transaction cost
is charged to the 'capital reserve' and dealt with in the Statement of Changes
in Equity. Share repurchase transactions are accounted for on a trade date
basis.
SEGMENTAL REPORTING
The Chief Operating Decision Maker is the Board of Directors. The Directors
are of the opinion that the Company is engaged in a single segment of
business, being the investment of the Company's capital in financial assets
comprising loans. All loan income is derived from the UK. The Company derived
revenue totalling £714,000 (November 2022: £978,000) where the amounts from
two (November 2022: four) individual borrowers each exceeded 10% or more of
the Company's revenue. The individual amounts were £354,000 and £360,000,
(November 2022: £282,000, £256,000, £243,000 and £196,000).
USE OF SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported for assets and liabilities as
at the reporting date and the amounts reported for revenue and expenses during
the year. The nature of the estimation means that actual outcomes could differ
from those estimates. Estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimates are revised and in any future periods affected.
The key driver to determine whether loans are classified as fair value through
profit or loss or amortised cost is if the facility has an exit fee or equity
stake attached. Where these are present the loan is classified as fair value
through profit or loss.
The following are areas of particular significance to the Company's financial
statements and include the use of estimates or the application of judgement:
CRITICAL JUDGEMENTS AND ESTIMATES IN APPLYING THE COMPANY'S ACCOUNTING
POLICIES - INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS:
The Company owns profit share holdings or has exit fees mechanism in relation
to 6 of the borrowers in place as at the year end. The loans held have been
designated at fair value through profit and loss. The determination of the
fair value requires the use of estimates. A sensitivity analysis is included
in note 16. The key uncertainties are around the timings and amounts of both
drawdown and repayments as these are determined by construction progress and
the timing of sales.
CRITICAL JUDGEMENTS AND ESTIMATES IN APPLYING THE COMPANY'S ACCOUNTING
POLICIES - LOANS AMORTISED COST CLASSIFICATION AND IMPAIRMENTS:
The Company uses critical judgements to determine whether it accounts for its
loans at either amortised cost using the effective interest rate method less
impairment provisions or at fair value through profit and loss. The
determination of the required impairment adjustment requires the use of
estimates. The key uncertainties are around the timings and amounts of both
drawdown and repayments as these are determined by construction progress and
the timing of sales. See notes 8 and 9 for further details.
2. REVENUE
30 November 2023 30 November 2022
£'000 £'000
Interest from loans 1,722 1,787
Total income 1,722 1,787
3. Investment Adviser's Fees
Investment Adviser
In its role as the Investment Adviser, Tier One Capital Ltd is entitled to
receive from the Company an investment adviser fee which is calculated and
paid quarterly in arrears at an annual rate of 0.25% per annum of the
prevailing Net Asset Value if less than £100m; or 0.50%. per annum of the
prevailing Net Asset Value if £100m or more.
There is no balance accrued for the Investment Adviser for the period ended 30
November 2023 (year to 30 November 2022: £nil).
There are no performance fees payable
30 November 2023 30 November 2022
£'000 £'000
Investment Adviser fee 65 67
4. Operating expenses
30 November 2023 30 November 2022
Revenue Capital Revenue Capital
£'000 £'000 £'000 £'000
Legal & professional 20 - 13 -
Directors' fees 85 - 85 -
Audit fees related to the audit of the financial statements 77 - 57 -
Fund Administration and Company Secretarial 97 - 85 -
Brokers' fees 30 - 30 -
Marketing fees 1 - 18 -
AIFM fee 18 - 17 -
Impairments on loans amortised at cost* 116 476 12 136
Uplifts on loans amortised at cost* - (35) - -
Losses on investments held at fair value through profit or loss* 201 2 36 342
Other expenses 185 - 243 -
Total other expenses 830 443 596 478
*Loan impairments consist of impairments to interest on loans of £317,000
(November 2022: £48,000) and a capital impairment on the loan of £478,000
(November 2022: £478,000). Loan uplifts consist of a capital uplift on the
loans of £35,000 (November 2022: £nil).
All expenses are inclusive of VAT where applicable. Further details on
Directors' fees can be found in the Directors' Remuneration Report within the
Annual Report.
5. Taxation
As an investment trust the Company is exempt from corporation tax on capital
gains. The Company's revenue income from loans is subject to tax, but offset
by any interest distribution paid, which has the effect of reducing the
corporation tax. The interest distribution may be taxable in the hands of the
Company's shareholders.
30 November 2023 30 November 2022
£'000 £'000
Current corporation tax at 23% (November 2022:19%) - -
Deferred taxation - -
Tax on profit on ordinary activities - -
Reconciliation of tax charge
Profit on ordinary activities before taxation 261 514
Taxation at standard corporation tax rate 23% (November 2022: 19%) 60 98
Effects of:
Expenses/(income) not subject to tax 95 91
Interest distributions (248) (205)
Tax losses not recognised within deferred tax 93 16
Tax charge for the year - -
* With effect from 1 April 2023, the main rate of Corporation tax increased
from 19% to 25%, therefore a hybrid rate of 23% has been used.
There is an unrecognised deferred tax asset not recognised on losses of
£331,409 (November 2022: £230,408) calculated at the relevant deferred tax
rate of 25%. There is no expiry date for the recognition of the unrecognised
deferred tax asset.
6. Ordinary dividends
30 November 2023 30 November 2022
Pence per Pence
share per
£'000 share £'000
Dividends paid in the year relating to previous year:
Interim dividend for the quarter ended August, paid in December 1.0 269 1.0 269
Interim dividend for the quarter ended November, paid in April 1.0 269 1.0 269
Dividends paid during and relating to the year:
Interim dividend for the quarter ended February, paid in June 1.0 269 1.0 269
Interim dividend for the quarter ended May, paid in September 1.0 270 1.0 269
Total dividends paid in the year 1,077 1,077
Of the dividends paid in the year, £85,000 (November 2022: £244,000) has
been paid from the Special distributable reserve. This is to ensure the
Revenue reserve does not go into a negative position.
The Company intends to distribute at least 85% of its distributable income
earned in each financial year by way of interest distribution. A third interim
dividend of 1.00 pence per share was declared on 23 November 2023, payable on
28 December 2023. On 29 February 2024, the Company declared a fourth interim
dividend of 1.00 pence per share for the quarter ended 30 November 2023,
payable on 28 March 2024.
7. Earnings per share
The revenue, capital and total return per ordinary share is based on each of
the profit after tax and on 26,907,053 ordinary shares, being the weighted
average number of ordinary shares in issue (excluding shares held in Treasury)
throughout the year. During the year there were no dilutive instruments held,
therefore the basic and diluted earnings per share are the same.
8. Investments held at fair value through profit or loss
The Company's investment held at fair value through profit or loss represents
its profit share arrangements whereby the Company owns 25.1% or has an exit
fee mechanism for four companies.
30 November 30 November
2023 2022
£'000 £'000
Opening Balance 4,874 7,589
Loans deployed 59 80
Principal repayments (1,802) (2,600)
Movements in interest receivable 93 183
Unrealised losses on investments held at fair value through profit or loss (203) (378)
Amortisation of exit fees 3 -
Total investments held at fair value through profit and loss 3,024 4,874
Split:
Non-current assets: Investments held at fair value through profit and loss due - -
for repayment after one year
Current assets: Investments held at fair value through profit and loss due for 3,024 4,874
repayment under one year
Please refer to note 16 for details of the approach to valuation and
sensitivity analysis.
9. Loans at amortised cost
30 November 30 November
2023 2022
£'000 £'000
Opening balance 20,607 10,558
Loans deployed 3,310 10,906
Principal repayments (6,818) (970)
Movements in interest receivable 133 261
Movement in impairments (557) (148)
Amortisation of exit fees 29 -
Total loans at amortised cost 16,704 20,607
Split: 6,283 12,659
Non-current assets: Loans at amortised cost due for repayment after one year
Current assets: Loans at amortised cost due for repayment 10,421 7,948
under one year
The Company's loans held at amortised cost are accounted for using the
effective interest method. The carrying value of each loan is determined after
taking into consideration any requirement for impairment provisions during the
year, allowances for impairment losses amounted to £557,000 (November 2022:
£148,000). Further details on impairment can be found within the accounting
policies note above.
Movements in allowances for impairment losses in the year
Nominal value
£'000
at 1 December 2022 3,227
Provisions for impairment losses 475
Write off prior year impairment (1,560)
at 30 November 2023 2,142
Stage 1 provisions at 1 December 2022 114
Provisions for impairment losses 32
Stage 1 provisions at 30 November 2023 146
Stage 2 provisions at 1 December 2022 -
Provisions for impairment losses -
Stage 2 provisions at 30 November 2023 -
Stage 3 provisions at 1 December 2022 3,113
Provisions for impairment losses 443
Write off prior year impairment (1,560)
Stage 3 provisions at 30 November 2023 1,996
Stage 1, 2, and 3 are referenced in more detail below.
10. Receivables
30 November 30 November
2023 2022
£'000 £'000
Prepayments 13 11
Total receivables 13 11
11. loan facility
30 November 30 November
2023 2022
£'000 £'000
Bank loan - 4,000
In May 2023 the Company renewed its £6.5m committed revolving facility with
Shawbrook Bank Limited, expiring in May 2025. No balance was drawn down at the
year end.
The facility is secured against a debenture over the assets of the Company.
12. Other Payables
30 November 30 November
2023 2022
£'000 £'000
Accruals 191 109
Total other payables 191 109
13. Share Capital
2023 2022
Allotted, issued and fully paid £'000 £'000
26,234,225 (November 2022: 26,924,063) ordinary shares of 1p each* 262 269
689,838 (November 2022: nil) ordinary shares of 1p each 7 -
26,924,063 (November 2022: 26,924,063) total ordinary shares of 1p each 269 269
* The Ordinary Shares (excluding shares held in Treasury) are eligible to vote
and have the right to participate in either an interest distribution or
participate in a capital distribution (on winding up).
No shares were issued by the Company during the year (November 2022: nil).
During the year, the Company bought back 689,838 shares to be held in Treasury
at a cost of £501,000 (November 2022: nil).
Between 1 December 2023 and 20 March 2024, the Company bought back a further
566,369 shares into Treasury.
14. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
At 30 November 2022 Cash Non-cash At 30 November
£'000 flows flows 2023
£'000 £'000 £'000
Short term borrowings 4,000 (4,000) - -
Total liabilities from financing activities 4,000 (4,000) - -
At 30 November 2021 Cash Non-cash At 30 November
£'000 flows flows 2022
£'000 £'000 £'000
Short term borrowings - 4,000 - 4,000
Total liabilities from financing activities - 4,000 - 4,000
15. Related Parties
The Directors are considered to be related parties. No Director has an
interest in any transactions which are, or were, unusual in their nature or
significant to the nature of the Company.
The Directors of the Company received £85,000 fees for their services during
the year to 30 November 2023 (30 November 2022: £85,000). £nil was payable
at the period and prior year end.
Ian McElroy is Chief Executive of Tier One Capital Ltd and is a founding
shareholder and director of the firm.
Tier One Capital Ltd received £65,000 investment adviser's fee during the
year (30 November 2022: £67,000) and £nil was payable at the year end (30
November 2022: £nil). Tier One Capital Ltd receives up to a 20% margin and
arrangement fee for all loans it facilitates.
There are various related party relationships in place with the borrowers as
below:
The following related parties arise due to the opportunity taken to advance
the profit share contracts:
· Thursby Homes (Springs)
The Company owns 25.1% of the borrower Thursby Homes (Springs) Ltd. The loan
amount outstanding as at 30 November 2023 was £36,000 (30 November 2022:
£1.3m). Transactions in relation to loans repaid during the year amounted to
(£1.5m) (30 November 2022: £918,000). Interest due to be received as at 30
November 2023 was £1,000 (30 November 2022: £213,000). Interest received
during the year amounted to £33,000 (30 November 2022: £157,000).
· Northumberland
Develop North PLC owns 25.1% of the borrower Northumberland Ltd. The loan
amount outstanding as at 30 November 2023 was £42,000 (30 November 2022:
£356,000). Transactions in relation to loans repaid during the year amounted
to £288,000 (30 November 2022: £911,000). Interest due to be received as at
30 November 2023 was £2,000 (30 November 2022: £3,000). Interest received
during the year amounted to £3,000 (30 November 2022: £32,000).
· Coalsnaughton
Develop North PLC owns 40.1% of the borrower Kudos Partnership. The loan
amount outstanding as at 30 November 2023 was £2.0m (30 November 2022:
£2.2m). Transactions in relation to loans made during the year amounted to
£nil (30 November 2022: £80,000). Interest due to be received as at 30
November 2023 was £424,000 (30 November 2022: £324,000). Interest received
during the year amounted to £108,000 (30 November 2022: £196,000).
· Oswald Street
Develop North PLC owns 25.1% of the Riverfront Property Limited Partnership.
The loan amount outstanding as at 30 November 2023 was £448,000 (30 November
2022: £388,000). Transactions in relation to loans made during the year
amounted to £59,000 (30 November 2022: £nil). Interest due to be received as
at 30 November 2023 was £8,000 (30 November 2022: £5,000). Interest received
during the year amounted to £47,000 (30 November 2022: £31,000).
16. Financial Instruments
Consistent with its objective, the Company holds a diversified portfolio of
fixed rate loans secured with collateral in the form of; land or property in
the UK, charges held over bank accounts and personal or corporate guarantees.
The benefit of a related profit share or exit fee mechanism may also be
agreed. In addition, the Company's financial instruments comprise cash and
receivables and payables that arise directly from its operations. The Company
does not have exposure to any derivative instruments.
The Company is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Company are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Company's risk
exposure. These policies are summarised below:
CREDIT RISK
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company.
In the event of default by a borrower if it is in financial difficulty or
otherwise unable to meet its obligations under the agreement, the Company will
suffer an interest shortfall and potentially a loss of capital. This
potentially will have a material adverse impact on the financial condition and
performance of the Company and/or the level of dividend cover. Management
determines concentrations of risk by assessing the characteristics of each
borrower and including these in the underwriting process. The most applicable
of these are the geographical location of the projects and the economic sector
the borrowers operate in. The Board receives regular reports on concentrations
of risk and the performance of the projects underlying the loans, using loan
to value percentages to help monitor the level of risk. The Investment Adviser
monitors such reports in order to anticipate, and minimise the impact of,
default.
There were financial assets which were considered impaired at 30 November
2023, with impairments amounting to £557,000 (30 November 2022: £148,000).
Our maximum exposure to credit risk as at 30 November 2022 was £20,895,000
(30 November 2022: £26,130,000).
All of the Company's cash is placed with financial institutions with a
long-term credit rating of A or better. Bankruptcy or insolvency of such
financial institutions may cause the Company's ability to access cash placed
on deposit to be delayed or limited. Should the credit quality or the
financial position of the banks currently employed significantly deteriorate,
cash holdings would be moved to another bank.
The carrying amount for investments held at fair value through profit or loss
best represents the maximum exposure to credit risk. The Company holds assets
as collateral against loans issued. The Company does not have assets held as
collateral.
Further details on the exposure to, and management of, credit risk by the
Company is included in both the Investment Advisor's report and the Strategic
Report within the Annual Report.
Loans held at amortised cost as at 30 November 2023
Total
£'000
Stage 1 16,390
Stage 2 275
Stage 3 39
16,704
Loans held at amortised cost as at 30 November 2022
Total
£'000
Stage 1 20,000
Stage 2 378
Stage 3 229
20,607
LIQUIDITY RISK
Liquidity risk is the risk that the Company will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
Company's investments comprise loans.
Property and property-related assets in which the Company invests via loans
are not traded in an organised public market and are relatively illiquid
assets, requiring individual attention to sell in an orderly way. As a result,
the Company may not be able to liquidate quickly its investments in these
loans at an amount close to their fair value in order to meet its liquidity
requirements.
The Company's liquidity risk is managed on an ongoing basis by the Investment
Adviser and monitored on a quarterly basis by the Board. In order to mitigate
liquidity risk the Company has a comprehensive three-year cash flow forecast
that aims to have sufficient cash balances, taking into account projected
drawdowns on the live facilities to meet its obligations for a period of at
least 12 months. At the reporting date, the maturity of the financial assets
and liabilities was:
Financial assets as at 30 November 2023
In one year In two or more Total
£'000 years £'000
£'000
Cash and cash equivalents 1,154 - 1,154
Loans at amortised cost 10,421 6,283 16,704
Investments held at fair value 3,024 - 3,024
Total 14,599 6,283 20,882
Financial assets as at 30 November 2022
In one year In two or more Total
£'000 years £'000
£'000
Cash and cash equivalents 638 - 638
Loans at amortised cost 7,948 12,659 20,607
Investments held at fair value 4,874 - 4,874
Total 13,460 12,659 26,119
Financial liabilities as at 30 November 2023
In one year In two or more Total
£'000 years £'000
£'000
Bank loan - - -
Total - - -
Financial liabilities as at 30 November 2022
In one year In two or more Total
£'000 years £'000
£'000
Bank loan 4,000 - 4,000
Total 4,000 - 4,000
INTEREST RATE RISK
The interest rate profile of the Company was as follows:
as at 30 November 2023
Financial net assets on which no interest is paid Variable rate financial net assets
£'000 Fixed rate Financial Assets £'000
£'000 Total
£'000
Other receivables and prepayments 13 - - 13
Loan Interest receivable 766 - - 766
Other payables and accrued expenses (191) - - (191)
Cash and cash equivalents - - 1,154 1,154
Investments held at fair value through profit and loss - 2,588 - 2,588
Loans at amortised cost - 16,374 - 16,374
Total 588 18,962 1,154 20,704
as at 30 November 2022
Financial net assets on which no interest is paid Variable rate financial net assets
£'000 Fixed rate Financial Assets £'000
£'000 Total
£'000
Other receivables and prepayments 11 - - 11
Loan Interest receivable 976 - - 976
Other payables and accrued expenses (109) - - (109)
Cash and cash equivalents - - 638 638
Loan facility - - (4,000) (4,000)
Investments held at fair value through profit and loss - 4,329 - 4.329
Loans at amortised cost - 20,176 - 20,176
Total 878 24,505 (3,362) 22,021
Shawbrook provide a working capital facility which is capped at 30% of the Net
Asset value of the Company. Using forward looking SONIA figures as at November
2023, the forecast decrease in interest rates will see £2k less of finance
costs over the next twelve months assuming an average drawn balance of £1.4m
in the year. Since year end, the outlook for interest rate rises has eased.
Sensitising the equity discount rate has immaterial impact on the loans held
at fair value.
MARKET PRICE RISK
The management of market price risk is part of the investment management
process and is typical of an investment company. The portfolio is managed with
an awareness of the effects of adverse valuation movements through detailed
and continuing analysis, with an objective of maximising overall returns to
shareholders. Investments in property and property-related assets are
inherently difficult to value due to the individual nature of each property.
As a result, valuations are subject to substantial uncertainty. There is no
assurance that the estimates resulting from the valuation process will reflect
the actual sales price even where such sales occur shortly after the valuation
date. Such risk is minimised through the appointment of external property
valuers. The basis of valuation of the loan portfolio is set out in detail in
the accounting policies. The inputs into the DCF models are the forecast
monthly cashflows including sales values and build costs, the discount rate
which is the imputed interest rate at the time the facility was entered into
adjusted for any movements in the risk free rate as at current year end, and a
30% (November 2022: 30%) discount rate for the equity element to reflect the
higher level of uncertainty. Any changes in market conditions will directly
affect the profit and loss reported through the Income Statement. Details of
the Company's investment portfolio held at the balance sheet date are
disclosed in the Investment Adviser's Review on page 11. A 10% fall in the
sales value of the residential development projects and a 10% reduction in
asset value of commercial and investment property assets for those loans held
at fair value would have resulted in a further impairment to the portfolio of
£254,000 as at 30 November 2023 (30 November 2022: £330,000). The
calculations are based on the property valuations at the respective balance
sheet date and are not representative of the year as a whole, nor reflective
of future market conditions.
VALUATION OF FINANCIAL INSTRUMENTS
Accounting standards recognise a hierarchy of fair value measurements for
financial instruments which gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The classification of
financial instruments depends on the lowest significant applicable input, as
follows:
· Level 1 - Unadjusted, fully accessible and current quoted prices in
active markets for identical assets or liabilities. Examples of such
instruments would be investments listed or quoted on any recognised stock
exchange.
· Level 2 - Quoted prices for similar assets or liabilities, or other
directly or indirectly observable inputs which exist for the duration of the
period of investment. Examples of such instruments would be forward exchange
contracts and certain other derivative instruments.
· Level 3 - External inputs are unobservable. Value is the Directors'
best estimate, based on advice from relevant knowledgeable experts, use of
recognised valuation techniques and on assumptions as to what inputs other
market participants would apply in pricing the same or similar instrument.
30 November 2023
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value through profit and loss - - 3,024 3,024
Total - - 3,024 3,024
30 November 2022
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value - - 4,874 4,874
Total - - 4,874 4,874
A reconciliation of fair value measurements in Level 3 is set out in the
following table:
30 November 2023 30 November 2022
£'000 £'000
Opening Balance 4,874 7,589
Loans deployed 59 80
Principal repayments (1,802) (2,600)
Movements in interest receivable 93 183
Unrealised losses on investments held at fair value through profit or loss
(203) (378)
Amortisation of exit fees 3 -
Closing Balance 3,024 4,874
17. CAPITAL MANAGEMENT
The Company's capital is represented by the Ordinary Shares, share premium,
capital reserves, revenue reserve and special distributable reserve. The
Company is not subject to any externally imposed capital requirements.
The capital of the Company is managed in accordance with its investment
policy, in pursuit of its investment objective. Capital management activities
may include the allotment of new shares, the buy back or re-issuance of shares
from treasury, the management of the Company's discount to net asset value and
consideration of the Company's net gearing level.
18. Post Balance Sheet Events
· Since the year end £1,475,000 has been drawn down on the
Shawbrook loan facility
· on 23 November 2023, a third interim dividend of 1.00 pence per
share was declared, payable on 28 December 2023
· on 8 December 2023, the Company bought back a further 436,532
shares into Treasury
· on 13 December 2023, the Company bought back a further 20,834
shares into Treasury
· on 18 December 2023, the Company bought back a further 81,037
shares into Treasury
· on 21 December 2023, the Company bought back a further 27,966
shares into Treasury
· on 13 February 2024, a new loan was issued to Almscliffe Dhesi
Developments (1) Ltd with an initial drawdown of £576,000
· on 29 February 2024, a fourth interim dividend of 1.00 pence per
share was declared, payable on 28 March 2024
For further information regarding the Company (Ticker: DVNO) (LEI:
213800EXPWANYN3NEV68) please call:
Tier One Capital Ltd (Investment Adviser) +44 (0) 191 222 0099
Ian McElroy/Brendan O'Grady
Cavendish Capital Markets Ltd (Financial Adviser and Broker) +44 (0) 207 220 0500
James King / Andrew Worne
Apex Fund Administration Services (UK) Limited (Secretary) +44 (0) 1245 398950
ENDS
Annual Report and Financial Statements
The Annual Report and Financial Statements will be posted to shareholders and
will shortly be available on the Company's website (www.DevelopNorth.co.uk
(http://www.DevelopNorth.co.uk) ) or in hard copy format from the Company's
Registered Office.
A copy of the annual report will be submitted to the FCA's National Storage
Mechanism and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
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