REG - Develop North PLC - Final Results
30/03/2023 18:30
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RNS Number : 8481U Develop North PLC 30 March 2023
To: RNS
From: Develop North PLC
LEI: 213800EXPWANYN3NEV68
Date: 30 March 2023
Subject: Annual Financial Report
Chairman's Statement
Highlights
· Net Asset Value total return of 2.3% (2021: 4.8%)
· Increase in earnings per share from 3.1p to 3.7p
· Total dividends of 4 pence per share paid or payable for the year
· Loan facility with Shawbrook Bank Limited renewed to May 2023
· Change of name to reflect more accurately the nature of the Company's
activities
INTRODUCTION
I am pleased to present the Company's results for the year ended 30 November
2022, during which the Company entered its sixth year of trading. Key themes
during 2022 have been rising interest rates, soaring inflation, much of it
driven by rising energy prices after Russia's invasion of Ukraine and
post-Covid supply chain issues. As to the real estate sector in which Develop
North operates, potential property buyers are effectively being left with less
money in their pockets just as mortgage rates have begun to rise.
Meanwhile building supplies and building energy costs have gone up along with
domestic product affecting the market place. Later in the year, the
destabilising effects of a government U-turn, covering a broad range of
policies from windfall tax to fracking were reversed within weeks, which
seriously unsettled business confidence, including the financial and foreign
exchange markets.
This was the background against which Develop North continued to go about its
business during the year, adding new and strongly financed project loans to
the portfolio while managing older projects as they gradually exited.
OBJECTIVE; MANAGERIAL ARRANGEMENTS; COMPANY NAME
The Company seeks to achieve its investment objective through a diversified
portfolio of fixed rate loans secured over land and/or property in the UK.
During the financial year under review, the Company changed its name to
Develop North PLC. The change of name took effect on 4 May 2022. The London
Stock Exchange stock ticker symbol, previously PBLT, became DVNO with effect
from 6 May 2022. The Company's ISIN, SEDOL and LEI designations remain
unchanged.
The Directors believe that the new name reflects the Company's refreshed
investment strategy, existing portfolio exposure and regionally focused
investment objective, while the underlying investment policy remains
unchanged.
PERFORMANCE; REVENUE AND DIVIDENDS
Despite the testing market conditions described above, 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.
Depending upon the performance of the investment portfolio and considering
broader market conditions, a final balancing payment may be made at the end
of the financial year to ensure that the Company continues to comply with
HMRC's investment trust qualification criteria.
Revenue for the year to 30 November 2022 increased to 3.68 pence per share
(2021: 3.09 pence). The Board has declared and paid three quarterly interim
dividends of 1.0 pence per share for the year ended 30 November 2022 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 31 March 2023 to shareholders on
the register at the close of business on 17 March 2023 (ex-dividend date 16
March 2023).
NET ASSET VALUE
The Company's net asset value ('NAV') fell to 81.8 pence per share as at 30
November 2022, having been 83.9 pence twelve months earlier. Taking into
account dividends paid and declared for the period, this equates to a positive
net asset value total return for the financial year of approximately 2.3% and
after an impairment charge reflecting tougher economic conditions expected 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
+5.2% and of the AIC's 'Debt-Loans' sector of +6.6% (Source: AIC).
GEARING
Loan facilities during the year consisted of a £6.5 million credit facility
with Shawbrook Bank Limited, with £4.0 million drawn down at the financial
year end and £0.5 million repaid since the year end. The facility provided by
Shawbrook Bank Limited was renewed to May 2023. The Directors understand from
discussions with Shawbrook that the facility will be renewed and it is
intended that this will take place in advance of its expiry date.
INVESTMENT PORTFOLIO; NEW INVESTMENTS; PROJECT IMPAIRMENTS
The total value of the Company's portfolio now stands at £25.5m, from 17
projects, an increase of £7.3m since last year.
New Investments The Company agreed two new loans during the year, including a
£2.2 million, nine month facility to fund the construction of four family
homes in Morpeth, Northumberland, and a £1.9 million facility to fund the
construction of executive homes across two sites in Darras Hall, Ponteland and
Stocksfield, Northumberland.
In addition, further funds were invested in facilities created during the
second half of the previous financial year. This has led to a significant
increase in the total size of the loan book which will support portfolio
revenues over future months and years. 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 fifteen since
inception. In addition, partial redemptions occurred for six other projects in
the portfolio.
Impairments As specified by the 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. The Board and the Investment Adviser believe that this substantially
mitigates the risks associated with the downturn.
The Investment Adviser's Report provides more 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.
BOARD OF DIRECTORS
As described in last year's annual report, new and slightly lower levels of
remuneration for board members were put in place during the financial year.
The revised scheme was put before shareholders at the 2022 Annual General
Meeting ('AGM') and the Resolution was approved.
In accordance with the requirements of the UK Corporate Governance Code all
Directors will stand for re-appointment at the AGM.
CHANGE OF AUDITOR
The appointment by the Directors of MHA MacIntyre Hudson as the Company's
auditor last year was ratified at the 2022 AGM, together with their
reappointment this year.
ANNUAL GENERAL MEETING
The Company's AGM will be held at The Grey Street Hotel, 2-12 Grey Street,
Newcastle on Thursday, 27 April 2023 at 12 noon.
The Board strongly encourages all shareholders to exercise their votes in
respect of the meeting in advance, by completing and returning their proxy
forms. 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
While market conditions are clearly testing, there are signs on the horizon of
improving markets. The British Chamber of Commerce ('BCC') recently estimated
that core inflation, which passed 11% in the fourth quarter of 2022 should
slow to 5% by the final quarter of 2023 and, optimistically, the BCC suggests
inflation will return to the Bank of England's target of 2% per annum by late
2024.
Interest rates are also not expected to rise indefinitely. According to the
Office of Budgetary Responsibility, the Bank Rate is expected to peak at 4.8%
by the end of 2023 before falling back.
While economic forecasts may remain challenging in the months ahead, Develop
North will continue to seek out investment opportunities of the highest
quality. We are pleased to have successfully delivered on last year's aims of
increasing deployment and investment income and by reducing the risk within
the loan book. We expect more of the same in the year ahead.
John Newlands
Chairman
30 March 2023
Investment Adviser's RePORT:
REVIEW OF THE 12 MONTHS TO 30 NOVEMBER 2022
Investment Adviser's Highlights:
· Investment interest increased by 8% to £1.8m.
· £11m deployed into 6 projects, reflecting an increase of 40.9% in
the size of the loan book by year end.
· NAV Total Return of 2.3% and an annualised dividend yield of 4.7%
resulting in £1.1m of income distributed to shareholders.
· Exits of three portfolio projects, bringing the number of exits since
inception to fifteen.
· Loan to Value (LTV) has dropped to 66.8% from 71%, delivering on our
strategy to build risk resilience and improve the credit quality of our loan
book.
· 68% of funds deployed in North East England reflecting the Company's
ongoing commitment to focus operations on our chosen regional markets.
This Annual Report and Accounts covers the fifth full year of performance and
sixth audit review of the Company since its listing in January 2017.
The Company's investment objective 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 contributes to the Senior and Profit lending type.
This financial year has seen the base rate increase above 1% for the first
time since the global financial crisis of 2008. Market expectations see these
increases continuing into 2023 with a peak of between 4% and 5%. These rises
are the Bank of England's response to the return of inflation in the UK which
reached double digit percentages during 2022. As a result, the UK economy is
likely to go into recession during 2023, but that is forecast to be shallower
yet longer than initially feared prior to the November 2022 government Autumn
statement.
2022 saw house prices in the UK grow sharply with the forecast for 2023 to be
a reversal of some of those increases before a return to moderate price rises
from 2024 onwards. Build cost inflation and labour shortages in the
construction sector have placed significant strain on development budgets and
project profitability. Build costs are expected to return to more stable
levels in 2023 which will relieve some of the challenges developers are
facing.
We expect the changes in the economy to provide challenges and opportunities
for the Company over the next twelve months and beyond. Interest rate rises
will increase the weighted average cost of capital of the Company but we are
already taking the opportunity to increase the net income by charging higher
rates on new loans and to the existing loan book. The high street banks have
withdrawn further from development finance and the Company is taking the
opportunity to win further business by providing finance to experienced
developers with strong track records.
Deployment
Despite the ongoing uncertainties faced, we are pleased to report an active
year for new transactions, deployments to existing projects together with full
and partial exits.
The Company agreed two new facilities during the year:
· Fairmoor, North East England - £2.2m 9-month facility
· Moor Lane, North East England - £1.9m 18-month facility
During the year a total of £11.0m was deployed into six projects including
the two new projects mentioned above.
At the year-end, fund deployment totalled £25.5m, with 10.0% headroom for net
growth. The quality of the underlying loan book continues to improve with the
Loan to Value moving from 70.9% at 30 November 2021 to 66.8% at year end.
Portfolio Exits
Three loans were repaid during the year, bringing the number of exits in the
portfolio to fifteen since inception.
Partial Redemptions
During the year there were £3.5m of partial redemptions across seven 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 further impairment for the year. In this period the Company has
increased the provision to £114,000 from the £33,000 that was in place at 30
November 2021. This provision is based on forward looking scenarios to
withstand market-related shocks reflecting current economic uncertainties.
Gearing
In May 2022, the Company renewed its committed revolving credit facility with
Shawbrook Bank for a further year. Again, the key driver was headroom and
liquidity and its renewal for a fifth year demonstrates the support that the
Company has from its lender, and the growing confidence in future deployment
given the current strength of pipeline. As noted in the Chairman's Statement
on page 5, it is intended that the facility will be renewed in advance of its
expiry.
PROFIT SHARE PROJECTS
There are currently six Profit Share projects in the portfolio (November 2021:
six).
REBRAND
In May 2022 the Company changed its name to Develop North PLC. The Investment
Adviser supports the view that the new name reflects the Company's refreshed
investment strategy, existing asset base exposures and regionally focused
investment objective.
OUTLOOK
Economic Outlook
Residential
As at 30 November 2022, 70.4% of deployed funds were invested across 12
projects with a residential focus, with a further £0.3m committed to live
projects.
The housing market has seen considerable increases over the past 12 months but
the outlook from Savills is a reduction in house prices by some 8.5% in the
North East and 9% in Scotland in 2023, ahead of growing 20% and 19% in the
four years thereafter. That immediate decline is both lower than the UK
average and is seen as a correction of steep rises in the post-Covid period,
with house prices remaining significantly ahead of their 2016 to 2019 average.
Mortgage availability and affordability is also important to consider. There
was significant disruption and uncertainty during September and October 2022
as the markets reacted to the short premiership of the then new prime
minister. Stability quickly returned by the year end, rates dropped and there
is no evidence of a contraction in bank liquidity or in mortgage lenders
seeking to exit the market in the North. Our view, based on experience from
within the portfolio, is that the mortgage market is still robust. It is worth
noting that around 50% of house transactions nationally, according to
Nationwide, were bought with either cash or mortgages at less than 50% LTV
suggesting limited pressure on affordability of mortgages.
Turning to cost pressures, construction cost increases have been the biggest
threat in the sector, with significant price rises absorbed by developers and
contractors in the post-Covid recovery period across 2021 and 2022. Going
forward, cost increases will remain, but at lower levels with BCIS forecasts
for both materials and labour being far closer to the Bank of England target
inflation rate of 2% in each of the next 5 years.
The Company's residential exposure is predominantly in the North East (90.5%).
This will continue to be a key focus as this region continues to offer
affordability for house buyers, despite the recent increase in prices.
Projects are appraised using the views of market experts for sales values,
build cost and delivery, with all assumptions stress tested.
Commercial
As at 30 November 2022, 29.6% of deployed funds were invested across five
projects with a commercial focus.
The new investment strategy implemented in 2021 allows the Company to be more
selective in the level of exposure to commercial developments. We believe that
a selective approach to the Company's deployment in the commercial property
sector will continue to create shareholder value. The sectors within the
commercial property space that the Company currently has exposure to are:
· bereavement (crematorium);
· strategic land; and
· shared office space.
Each of the above sub-sectors offer downside protection in the current
uncertain economic times. Our current pipeline offers further opportunities to
increase our exposure to other sectors that we anticipate will be similarly
resilient. We will continue to identify and support professional, experienced
and reliable management teams who have a clear vision and robust plan.
PIPELINE
There is currently £2.5m at various stages of deployment across three
projects with 47.0% in the North East.
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
30 March 2023
THE INVESTMENT PORTFOLIO AS AT 30 NOVEMBER 2022
Sector % of LTV* Loan Value LTV* Loan Value
Portfolio (Nov 22) (Nov 22) (Nov 21) (Nov 21)
£'000s £'000s
Residential 67.8% 69.0% 17,111 73.7% 10,480
Commercial 29.7% 61.9% 7,508 66.7% 7,043
Cash 2.5% - 638 - 4,545
General Impairment - - (114) - (33)
Total/Weighted Average 100.0% 66.8% 25,143 70.9% 22,035
*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 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 Board has considered and
continues to keep under review the political, economic and investment risks to
the Company associated with the UK's withdrawal from the EU at the beginning
of 2021 and the UK's future relations with the EU. This withdrawal might lead
to a reduced or increased demand for the Company's shares as a result of
investor sentiment which may be reflected in a widening or narrowing of the
discount.
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 obligation 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 all other third party service providers on a regular
basis and has the ability to terminate agreements if necessary. The business
continuity plans of key third parties 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 the 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 (together with the sections of the Annual Report and Accounts
incorporated by reference) and the Directors' Report within the Annual Report.
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 judgements 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 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, whose names and functions appear in the Annual Report,
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
30 March 2023
INCOME STATEMENT
Year ending Year ending
30 November 2022 30 November 2021
Notes Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
REVENUE 2 1,787 - 1,787 1,643 - 1,643
Investment interest
Total revenue 1,787 - 1,787 1,643 - 1,643
(Losses)/gains on investments held at fair value through profit or loss 4, 8 (36) (342) (378) (136) 190 54
Total net income 1,751 (342) 1,409 1,507 190 1,697
Expenditure 3 (67) - (67) (68) - (68)
Investment adviser fee
Impairments on investments held 4, 9 (12) (136) (148) (139) (69) (208)
at amortised cost
Other expenses 4 (548) - (548) (467) (24) (491)
Total expenditure (627) (136) (763) (674) (93) (767)
Profit/(loss) before finance costs and taxation 1,124 (478) 646 833 97 930
Finance costs (132) - (132) (1) - (1)
Interest payable
Profit/(loss) before taxation 992 (478) 514 832 97 929
Taxation 5 - - - - - -
Profit/(loss) for the year 992 (478) 514 832 97 929
Basic earnings per share 7 3.68p (1.78)p 1.90p 3.09p 0.36p 3.45p
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 2022 30 November 2021
Notes £'000 £'000
Non-current assets
Loans at amortised cost 9 12,659 7,929
12,659 7,929
Current assets
Investments held at fair value through profit or loss 8 4,874 7,589
Loans at amortised cost 9 7,948 2,629
Other receivables and prepayments 10 11 27
Cash and cash equivalents 638 4,545
13,471 14,790
Total assets 26,130 22,719
Current liabilities
Loan facility 11 (4,000) -
Other payables and accrued expenses 12 (109) (135)
Total liabilities (4,109) (135)
Net assets 22,021 22,584
Share capital and reserves
Share capital 13 269 269
Share premium 9,094 9,094
Special distributable reserve 12,849 13,093
Capital reserve (644) (166)
Revenue reserve 453 294
Equity shareholders' funds 22,021 22,584
Net asset value per ordinary share 81.79p 83.88p
The notes below 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 30 March 2023. They were
signed on its behalf by:
John Newlands
Chairman
Statement of Changes in Equity
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
For the year ending 30 November 2021 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 13,497 (263) - 22,597
Total comprehensive profit for the year:
Profit for the year - - - 97 832 929
Transactions with owners recognised directly in equity:
Dividends paid - - (404) - (538) (942)
At 30 November 2021 269 9,094 13,093 (166) 294 22,584
Cash Flow Statement
Year ending Year ending
30 November 30 November
2022 2021
Notes £'000 £'000
Operating activities
Profit before taxation 514 929
Losses on investments held at fair value through profit and loss 342 152
Impairments on loans at amortised cost 136 542
Gains on investments held at fair value through profit and loss - (342)
Uplifts on loans at amortised cost - (473)
(Increase)/decrease in loan interest receivable on investments held at fair (147) 30
value through profit and loss
Increase in loan interest receivable on loans at amortised cost (249) (156)
Interest expense 132 1
Changes in working capital
Decrease/(increase) in other receivables 16 (6)
(Decrease)/(increase) in other payables (26) 4
Net cash inflow from operating activities after taxation 718 681
Investing activities
Loans given (10,986) (8,266)
Loans repaid 3,570 13,221
Net cash (OUTFLOW)/inflow from investing activities (7,416) 4,955
Financing
Equity dividends paid (1,077) (942)
Bank loan drawn down 14 4,251 -
Repayment of bank loan 14 (251) (1,150)
Interest paid (132) (1)
Net cash INFLOW/(outflow) from financing 2,791 (2,093)
(DECREASE)/Increase in cash and cash equivalents (3,907) 3,543
Cash and cash equivalents at the start of the year 4,545 1,002
Cash and cash equivalents at the end of the year 638 4,545
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 2022 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
2022:
IAS 1 Amendments to improve accounting policies disclosure
Effective date accounting periods on or after 1 January 2023
IAS 12 Amendments to deferred tax related assets and liabilities arising from
a single transaction
Effective date accounting periods on or after 1 January 2023
New standards, interpretations and amendments issued which are not yet
effective and not applicable for the periods beginning on or after 1 December
2022
IFRS 17 Replacing IFRS 4 - Insurance contracts Effective date accounting
periods on or after 1 January 2023
IFRS 16 Amendment to the accounting for the sale of leases and leaseback
transactions
Effective date accounting periods on or after 1 January 2024
IAS 1 Amendments to accounting for non-current liabilities with covenants
Effective date accounting periods on or after 1 January 2024
GOING CONCERN
The financial statements have been prepared on a going concern basis. The
disclosures on going concern set out in the Directors' Report within the
Annual 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. The carrying amount of these assets is adjusted by any
expected credit loss allowance as described in the impairment note below.
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. 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. A sensitivity
analysis is included in note 16.
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 2022, there were sixteen loans in the portfolio. Four of
those projects supported included either an equity stake of 25.1% for the
Company or an exit fee mechanism. Please see note 8 for details on these six
projects.
The Board has deemed that five projects (2021: 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 only 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.
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 £978,000 (2021: £488,000) where the amounts four (2021:
two) individual borrowers each exceeded 10% or more of the Company's revenue.
The individual amounts were £282,000, £256,000, £243,000 and £196,000
(2021: £260,000, £228,000).
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. INCOME
30 November 2022 30 November 2021
£'000 £'000
Interest from loans 1,787 1,643
Total income 1,787 1,643
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 cent. per annum of the
prevailing Net Asset Value if less than £100m; or 0.50 per cent. 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 2022 (year to 30 November 2021: £nil).
There are no performance fees payable.
30 November 2022 30 November 2021
£'000 £'000
Investment Adviser fee 67 68
4. Operating expenses
30 November 2022 30 November 2021
Revenue Capital Revenue Capital
£'000 £'000 £'000 £'000
Legal & professional 13 - 28 24
Directors' fees 85 - 90 -
Audit fees related to the audit of the financial statements 57 - 41 -
Fund Administration and Company Secretarial 85 - 82 -
Brokers' fees 30 - 30 -
Marketing fees 18 - - -
AIFM fee 17 - (12) -
Impairments on loans amortised at cost* 12 136 139 542
Uplifts on loans amortised at cost* - - - (473)
Losses/(gains) on investments held at fair value through profit or loss 36 342 136 (190)
Other expenses 243 - 208 -
Total other expenses 596 478 742 97
*Loan impairments consist of impairments to interest on loans of £48,000
(2021: £275,000) and a capital impairment on the loan of £478,000 (2021:
£542,000). Loan uplifts consist of a capital uplift on the loans of £nil
(2021: £663,000).
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 2022 30 November 2021
£'000 £'000
Current corporation tax at 19% (2021:19%) - -
Deferred taxation - -
Tax on profit on ordinary activities - -
Reconciliation of tax charge
Profit on ordinary activities before taxation 514 929
Taxation at standard corporation tax rate 19% (2021: 19%) 98 176
Effects of:
Income not subject to tax 91 (18)
Interest distributions (205) (153)
Utilisation of losses not recognised for deferred tax purposes 16 (5)
Tax charge for the year - -
There is an unrecognised deferred tax asset on losses of £230,408 (2021:
£135,727) calculated at the relevant deferred tax rate of 25%.
6. Ordinary dividends
30 November 2022 30 November 2021
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 - -
Interim dividend for the quarter ended November, paid in April 1.0 269 1.5 404
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 1,077 942
Of the dividends paid in the year, £244,000 has been paid from the Special
Distributable reserve.
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 17 November 2022, payable on
29 December 2022. On 9 March 2023, the Company declared an interim dividend of
1.0 pence per share for the quarter ended 30 November 2022, payable on 31
March 2023.
7. Earnings per share
The revenue, capital and total return per ordinary share is based on each of
the profit after tax and on 26,924,063 ordinary shares, being the weighted
average number of ordinary shares in issue 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
2022 2021
£'000 £'000
Opening Balance 7,589 16,809
Loans deployed 80 904
Principal repayments (2,600) (10,284)
Movements in interest receivable 183 106
Unrealised gains/(losses) on investments held at fair value through profit or (378) 54
loss
Total investments held at fair value through profit and loss 4,874 7,589
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 4,874 7,589
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
2022 2021
£'000 £'000
Opening balance 10,558 6,046
Loans deployed 10,906 7,362
Principal repayments (970) (2,937)
Movements in interest receivable 261 295
Movement in impairments (148) (208)
Total loans at amortised cost 20,607 10,558
Split: 12,659 7,929
Non-current assets: Loans at amortised cost due for repayment after one year
Current assets: Loans at amortised cost due for repayment 7,948 2,629
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 £148,000 (2021:
£208,000). 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 2021 3,090
Provisions for impairment losses 137
at 30 November 2022 3,227
Stage 1 provisions at 1 December 2021 33
Provisions for impairment losses 81
Stage 1 provisions at 30 November 2022 114
Stage 2 provisions at 1 December 2021 -
Provisions for impairment losses -
Stage 2 provisions at 30 November 2022 -
Stage 3 provisions at 1 December 2021 3,057
Provisions for impairment losses 56
Stage 3 provisions at 30 November 2022 3,113
Stage 1, 2, and 3 are referenced in more detail below.
10. Receivables
30 November 30 November
2022 2021
£'000 £'000
Prepayments 11 27
Total receivables 11 27
11. loan facility
30 November 30 November
2020 2021
£'000 £'000
Bank loan 4,000 -
On 27 May 2022 the Company entered into a £6.5m committed revolving facility
with Shawbrook Bank Limited, expiring on 26 May 2023. £4.0m was drawn down at
the year end, at an interest rate of 7.31%. The facility is secured against a
debenture over the assets of the Company.
12. Other Payables
30 November 30 November
2022 2021
£'000 £'000
Accruals 109 135
Total other payables 109 135
13. Share Capital
Nominal value Number of
£'000 Ordinary shares
of 1p
At 30 November 2021 269 26,924,063
Issued and fully paid as at 30 November 2022 269 26,924,063
The ordinary shares are eligible to vote and have the right to participate in
either an interest distribution or participate in a capital distribution (on a
winding up).
14. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
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
At 30 November 2020 Cash Non-cash At 30 November
£'000 flows flows 2021
£'000 £'000 £'000
Short term borrowings 1,150 (1,150) - -
Total liabilities from financing activities 1,150 (1,150) - -
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 2022 (30 November 2021: £90,000). £nil was payable
at the year end (30 November 2021: £nil).
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 £67,000 investment adviser's fee during the
year (30 November 2021: £68,000) and £nil was payable at the year end (30
November 2021: £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:
· Gatsby Homes
The Company owns 25.1% of the borrower Gatsby Homes Ltd which was disposed of
during the year. The loan amount outstanding as at 30 November 2022 was £nil
(30 November 2021: £468,000). Transactions in relation to loans repaid during
the year amounted to £441,000 (30 November 2021: £797,000). Interest due to
be received as at 30 November 2022 was £nil (30 November 2021: £nil).
Interest received during the year amounted to £36,000 (30 November 2021:
£136,000).
· Thursby Homes (Springs)
The Company owns 25.1% of the borrower Thursby Homes (Springs) Ltd. The loan
amount outstanding as at 30 November 2022 was £1.3m (30 November 2021:
£2.4m). Transactions in relation to loans repaid during the year amounted to
£918,000 (30 November 2021: £502,000). Interest due to be received as at 30
November 2022 was £213,000 (30 November 2021: £209,000). Interest received
during the year amounted to £157,000 (30 November 2021: £261,000).
· Northumberland
The Company owns 25.1% of the borrower Northumberland Ltd. The loan amount
outstanding as at 30 November 2022 was £356,000 (30 November 2021: £1.3m).
Transactions in relation to loans repaid during the year amounted to £911,000
(30 November 2021: £683,000). Interest due to be received as at 30 November
2022 was £3,000 (30 November 2021: £10,000). Interest received during the
year amounted to £32,000 (30 November 2021: £123,000).
· Coalsnaughton
The Company owns 40.17% (30 November 2021: 25.1%) of the borrower Kudos
Partnership. The loan amount outstanding as at 30 November 2022 was £2.2m (30
November 2021: £2.3m). Transactions in relation to loans issued during the
year amounted to £80,000 (30 November 2021: £404,000). Interest due to be
received as at 30 November 2022 was £324,000 (30 November 2021: £170,000).
Interest received during the year amounted to £196,000 (30 November 2021:
£228,000).
· Oswald Street
The Company owns 25.1% of the Riverfront Property Limited Partnership. The
loan amount outstanding as at 30 November 2022 was £388,000 (30 November
2021: £408,000). Transactions in relation to loans made during the year
amounted to £nil (30 November 2021: £nil). Interest due to be received as at
30 November 2022 was £5,000 (30 November 2021: £5,000). Interest received
during the year amounted to £31,000 (30 November 2021: £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. 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
2022, with impairments amounting to £148,000 (30 November 2021: £208,000).
Our maximum exposure to credit risk as at 30 November 2022 was £26,130,000
(30 November 2021: £22,719,000).
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.
Further details on the exposure to, and management of, credit risk by the
Company is included in both the Investment Advisor's Report above and the
Strategic Report in the Annual Report.
Loans held at amortised cost as at 30 November 2022
Total
£'000
Stage 1 20,000
Stage 2 378
Stage 3 229
20,607
Loans held at amortised cost as at 30 November 2021
Total
£'000
Stage 1 9,456
Stage 2 378
Stage 3 724
10,558
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 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 assets as at 30 November 2021
In one year In two or more Total
£'000 years £'000
£'000
Cash and cash equivalents 4,545 - 4,545
Loans at amortised cost 2,629 7,929 10,558
Investments held at fair value 7,589 7,589
Total 14,763 7,929 22,692
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
Financial liabilities as at 30 November 2021
In one year In two or more Total
£'000 years £'000
£'000
Bank loan - - -
Total - - -
INTEREST RATE RISK
The interest rate profile of the Company was as follows:
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
as at 30 November 2021
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 27 - - 27
Loan Interest receivable 657 - - 657
Other payables and accrued expenses (135) - - (135)
Cash and cash equivalents - - 4,545 4,545
Loan facility - - - -
Investments held at fair value through profit and loss - 7,191 - 7,191
Loans at amortised cost - 10,299 - 10,299
Total 549 17,490 4,545 22,584
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 2022, the forecast increases in interest rates will see an additional
£188k of finance costs over the next twelve months assuming an average drawn
balance of £3.6m in the year. These additional costs are and will be
mitigated by an increase in the rates charged on new facilities written and a
repricing of the back book. 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% (2021: 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. 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 £330,000 as
at 30 November 2022 (30 November 2021: £387,907). 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 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
30 November 2021
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value - - 7,589 7,589
Total - - 7,589 7,589
A reconciliation of fair value measurements in Level 3 is set out in the
following table:
30 November 2022 30 November 2021
£'000 £'000
Opening Balance 7,589 16,809
Loans deployed 80 904
Principal repayments (2,600) (10,284)
Movements in interest receivable 183 106
Unrealised (losses)/gains on investments held at fair value through profit or
loss
(378) 54
Closing Balance 4,874 7,589
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
On 26 January 2023, a new loan was Issued to Modnarway 2 Ltd with an initial
drawdown of £1.13m.
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
finnCap Ltd (Financial Adviser and Broker) +44 (0) 207 220 0500
William Marle
Maitland Administration Services 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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