Develop North

DEVELOP NORTH PLC

Interim Report & Financial Statements for the six months ending 31 May 2023

Announcement of Interim Results

LEI: 213800EXPWANYN3NEV68

This announcement contains regulated information.

Chairman's Statement

Highlights

·  Dividends paid and declared of 2.0p per share (2022: 2.0p)

·  Ordinary share mid-price equivalent to a premium of 2.1% as at 31 May 2023

·  Gearing facility with Shawbrook Bank Limited renewed for two years to May 2025

·  Net Asset Value total return of 0.0%

Background

The Company entered its seventh year of trading during the period under review, which has included continuing turmoil on the world stage, steep levels of UK inflation that governmental measures have thus far struggled to moderate and further increases in interest rates. At the same time, the consensus of political analysts is that the while UK economy may narrowly avoid a technical recession, there will be a slowdown in economic activity as businesses and consumers adjust to the rapid change in the interest rate environment.

Net Asset Value

The Company's Net Asset Value per share decreased from 81.79p to 79.81p over the six months ended 31 May 2023. Taking the effects of dividend distributions into account, this has resulted in a broadly flat NAV Total Return (0.0%) for the period.

This figure may be placed into context by the total return figures over the same period of the Association of Investment Companies' (AIC's) "Property-Debt" sector, of which Develop North is a component member, of +2.4% and of the AIC's "Debt-Loans" sector of +1.7%.

Dividends

A quarterly dividend of 1 penny per share was paid on 30 June 2023. As set out in the Annual Report the Company expects to pay dividends at a rate of 1 penny per share per quarter, equivalent to 4 pence per share per year in aggregate.

Depending on market conditions and the performance of the investment portfolio, a final balancing payment may be made at the end of the current financial year so as to at least fulfil the investment trust qualification requirements.

Investment Portfolio

The total value of the Company's portfolio now stands at £23.7 million, from 17 live projects.

New Investments:

The Company agreed one new loan during period, a £1.13m 18-month facility to fund the acquisition of a hotel at Croft on Tees, North Yorkshire. Shortly after period end the Company agreed a £1.65m facility for two years to fund the development of 18 homes in Aberdeenshire, Aberdeen. Further details are provided in the Investment Adviser's report.

Exits:

There were no portfolio exits during the period but there were partial redemptions across four projects. Post period end, there were two further exits.

Impairments:

As specified by the requirements of accountancy standard IFRS 9, the Company has continued to reflect the more uncertain economic conditions. While the general provision remained static at the period end, the impairment charge for the period has increased, largely due to adverse outcomes on legacy loans, i.e. those that were acquired by the Company at incorporation. The Board believes that the downside impact of these early loans is now fully recognised in the net asset value.

The loan portfolio is discussed more fully in the Investment Adviser's Review.

Gearing

The Company continues to benefit from a gearing facility with Shawbrook Bank Limited, recently renewed for a further two years until May 2025, with £2.9m drawn at the period end. At the time of writing, the loan had been fully repaid.

Outlook

The UK economy and the real estate sector in particular appear well placed to benefit as the effects of COVID disappear into the rear view mirror, energy prices begin to fall and (given fair winds) inflation and interest rates approach their peaks.

In the meantime, however, project finance costs remain high as do the prices of raw materials and indeed of labour. It is helpful in this regard that there is no shortage of high quality potential borrowers approaching the Company for loans and who are prepared to agree terms and interest rates appropriate to the prevailing market conditions.

John Newlands

Chairman

25 July 2023

Investment Adviser's Review

REVIEW OF THE 6 MONTHS TO 31 MAY 2023

Investment Adviser's highlights:

· NAV Total Return of 0.0% for the 6 months to 31 May 2023.

· Funds deployed into one new project

· Loan to Value (LTV) of portfolio reduced to 65.5%

· Dividends totalling 2.0p per share paid or declared for the six months to 31 May 2023, equivalent to an annualised dividend yield of 4.91%.

This Interim Report covers the end of the sixth and the beginning of the seventh year of performance 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 contribute to the Senior and Profit lending type.

The first six months of the financial year have seen the base rate increase to 5.0% at the time of writing (July 2023), with expectations that they may exceed 6.0% by the end of 2023 and remain at these levels until the second half of 2024. These rises have been driven by the ongoing presence of core inflation which the Bank of England has been attempting to bring under control for the past twelve months. Recent economic analyses suggest that there is risk of the UK entering a recession later this year, though some commentators say it may be narrowly avoided.

2023 has seen house prices decline across the UK. This is expected to continue for the rest of 2023 and all of 2024 (Source: Savills & Knight Frank). These forecast declines would see prices return to summer 2021 values. Build cost inflation and labour shortages in the construction sector have stabilised but the viability of new projects is still challenging.

We expect a bumpy ride for the economy for the remainder of 2023. The Company has used the first six months to reprice some of the existing loan book and to deploy at higher rates for new projects. There has been a continued focus on liquidity, including the renewal of the gearing facility for a further two years in May 2023.

DEPLOYMENT

Despite the ongoing uncertainties, we are pleased to report an active period for new transactions and deployments to existing projects, together with full and partial exits:

The Company agreed one new facility during the period:

· Croft, North Yorkshire - £1.13m 18-month facility

A further £1.65m was deployed into a new 2-year facility in Aberdeen, Scotland in June 2023.

During the period a total of £1.67m was deployed into four projects, including the Croft project mentioned above.

Portfolio Exits

There were no portfolio exits during the period. In June 2023, there were two successful exits, bringing the number of exits to seventeen since inception.

Partial Redemptions

During the period there was £3.04m of partial redemptions across five of the portfolio projects.

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 period, three projects were unable to meet their interest obligations.

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 period. In the six months ended 31 May 2023 the Company has set the provision at £114,000. This is unchanged from the general provision at 30 November 2022. This provision is based on forward looking scenarios and is designed to withstand market-related shocks, including those that may arise as a result of the current inflationary environment.

Gearing

In May 2023, the Company renewed its committed revolving credit facility with Shawbrook Bank for a further two years. Again, the key driver was headroom and liquidity. This renewal for a sixth year 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 six Profit Share projects in the portfolio (Nov 2022: six).

OUTLOOK

Economic Outlook

Residential

As at 31 May 2023, 61.3% (£14.45m) of deployed funds were invested across 12 projects with a residential focus, with a further £1.65m committed to live projects.

The housing market has declined during 2023, offsetting some but not all of the past two years' increases. Estate agents Savills and Knight Frank predict that house prices will decline by 10% and 5% respectively in 2023. Capital Economics forecasts that house prices in Q4 of 2023 will be 8.5% lower than in Q4 of 2022. The outlook remains negative for 2024 before returning to growth thereafter.

Mortgage availability has been significantly impacted. Rising interest rates will challenge buyers on the affordability test as interest payments will represent a significant proportion of household income. Supply chain issues for both availability and pricing of labour and materials have improved in 2023 and there are anecdotal signs that they have returned to historic levels.

The Company's residential exposure is predominantly in the North East (87.9%) and Scotland (12.1%). Both regions continue to have amongst the best affordability, with loan to income ratios remaining lower. We continue to appraise projects using the views of market experts for sales values, build cost and delivery, with all assumptions stress tested.

Commercial

As at 31 May 2023, 35.3% of deployed funds were invested across five projects with a commercial focus.

The Company continues to be selective in the level of exposure to commercial developments. We believe our 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);

·  weddings;

·  strategic land; and

·  shared office space.

Each of the above sub-sectors offer downside protection in the current uncertain economic times, with the latter two also giving flexibility for the borrowers as and when trends change. 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 £9.2m at various stages of due diligence across four projects, of which 82.0% is 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.

Ian McElroy

Tier One Capital

25 July 2023

THE INVESTMENT PORTFOLIO AS AT 31 MAY 2023

*LTV has been calculated using the carrying value of the loans as at the balance sheet date

Interim Management Report

The principal and emerging risks and uncertainties that could have a material impact on the Company's performance have not changed from those set out on pages 15 and 16 of the Company's Annual Report for the year ended 30 November 2022.

The Directors consider that the Chairman's Statement and the Investment Adviser's Review, the disclosure on related party transactions and the Statement of Directors' Responsibilities together constitute the Interim Management Report of the Company for the six months ended 31 May 2023 and satisfy the requirements of the Disclosure Guidance and Transparency Rules 4.2.3 to 4.2.11 of the Financial Conduct Authority.

The Interim Report has not been reviewed or audited by the Company's Auditor.

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this Interim Report. For these reasons they consider that there is sufficient evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities Statement

We confirm that to the best of our knowledge:

·   The condensed set of financial statements has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit of the Company, as at 31 May 2023, as required by the Disclosure Guidance and Transparency Rule 4.2.4R;

·   The Interim Report includes a fair review of the information required by the Disclosure and Transparency Rule 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·   The Interim Report includes a fair review of the information concerning related party transactions as required by Disclosure Guidance and Transparency Rule 4.2.8R.

On Behalf of the Board

John Newlands

Chairman

25 July 2023

CONDENSED INCOME STATEMENT

The notes form an integral part of the financial statements.

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with UK adopted International Financial Reporting Standards ("UK adopted IFRS") in conformity with the requirements of the Companies Act 2006. 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.

CONDENSED Statement of Financial Position

The accompanying notes form an integral part of the financial statements.

The 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 July 2023.

They were signed on its behalf by:

John Newlands

Chairman