Annual Report • Dec 31, 2018
Annual Report
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Transform Regenerate Revitalise
Annual Report and Financial Statements 2018
To create sustainable new communities for people to live, work and play
To be the leading land and property regeneration specialist in the North of England and Midlands
Harworth is a leading regenerator of land and property for development and investment which owns, develops and manages a portfolio of c.21,500 acres of land on around 120 sites located throughout the North of England and the Midlands. The Group specialises in the regeneration of large, complex sites, in particular former industrial sites, into new residential developments and employment areas.
10.7m sq. ft
of consented land for commercial space
(2017: 12.1m sq. ft commercial space)
Our land and property portfolio in the North of England and the Midlands has potential to deliver:
154.2MW of low carbon capacity
installed on our sites
(2017: 159.7MW of low carbon energy)
Up to £3.6bn in Gross Value Added to UK plc (2017: £2.9bn)
alongside a total of
(2017: 18,000+ potential homes)
of commercial space (2017: 21.6m sq. ft of commercial space)
(2017: 300MW to the National Grid)
| Our strategy | 04 |
|---|---|
| How we add value | 06 |
| Markets we operate in | 08 |
| Our year: key 2018 achievements | 10 |
| Our track record since 2015 | 12 |
| Chairman's statement | 14 |
| Chief Executive's statement | 16 |
| How we create new places and generate returns | 20 |
| Case study: Logistics North | 22 |
| Financial Review | 24 |
| Case study: Riverdale Park | 32 |
| Managing Risk | 34 |
| Business continuity assessments | 45 |
| Case study: Acquisitions | 46 |
| Corporate, Social and Environmental Responsibility | 48 |
| Our People | 50 |
| Our Partners | 56 |
| Operating Responsibly | 64 |
| Social Responsibility | 66 |
| Environmental Responsibility | 70 |
| Board of Directors and Company Secretary | 74 |
|---|---|
| Chairman's introduction | 76 |
| Statement of Corporate Governance | 79 |
| Nomination Committee Report | 92 |
| Audit Committee Report | 94 |
| Directors' Remuneration Report | 100 |
| Directors' Report | 120 |
| Statement of Directors' Responsibilities | 124 |
| Independent auditors' report | 126 |
|---|---|
| Consolidated income statement | 132 |
| Consolidated statement of comprehensive income | 133 |
| Balance Sheets | 134 |
| Consolidated statement of changes in equity | 135 |
| Company statement of changes in equity | 136 |
| Statements of cash flows | 137 |
| Notes to the financial statements | 138 |
| Company information and investor timetable | 176 |
|---|---|
| Definitions and abbreviations used | 177 |
More information can be found by going to our website harworthgroup.com
| DEVELOPMENT Driving the capital growth of our portfolio through delivery of planning permissions, site remediation and infrastructure, before crystallising land sales |
EPRA NNNAV growth and total return per share |
Value Gains | |
|---|---|---|---|
| INVESTMENT Ensuring sustainable income generation through asset management of existing rental sites, direct development of new space and recycling of portfolio into higher value adding opportunities |
Profit Excluding Value Gains |
Interest cover | |
| SECTORS Concentrating on those property markets with strong, through-the-cycle returns (residential, and industrial & logistics) |
Consented and potential residential plots |
Consented and potential commercial space |
|
| REGIONS Leveraging our strong relationships in our core areas in the North of England and Midlands to expand our land and property portfolio |
Number and geographic spread of sites |
Number and geographic spread of acres |
|
| ACQUISITIONS Growing our portfolio by utilising and recycling capital to buy new sites to maintain net asset value growth across the portfolio (including joint ventures) |
Investment in acquisitions and JVs in the year |
Disposals less development spend |
|
| FINANCING Maintaining the Group's low balance sheet gearing to complement risk-appropriate high operational gearing |
Net loan to value | Net debt |
Turn to page 36 to read about our Key Risks
Cadley Park, Swadlincote R-evolution Phase 2, AMP Simpson Park, Harworth
| Markets Delivery Politics |
Finance People Legal & Regulatory |
Governance & internal controls |
Communications & stakeholder management |
|---|---|---|---|
| Risk icon key | |||
| 2018 year-end gearing of 12.3% | Ideal target range gearing remains 10%-15% net loan to value |
||
| We invested c.£60m in 2018 (and c. £140m between 2014 and 2018) to replenish and grow the portfolio in order to sustain future growth |
We want to keep replenishing the portfolio and delivering EPRA NNNAV growth which will require the same, or higher, levels of acquisitions |
||
| Our portfolio remains focused on the North of England with an increasing emphasis on the Midlands and the North West |
We want to expand our portfolio to the North West and Midlands to have similar strength to our Yorkshire and Central heartland |
||
| Our current focus is on the "beds and sheds" sectors which have strong fundamentals in the regions we operate in |
Our sectoral focus will remain on residential and commercial in the medium-term as these suit our urban edge-of-settlement and regional locations |
||
| We are covering our overheads and interest costs and have been increasing the resilience of our income streams |
Our ambition remains to cover the overheads, interest, tax and dividends from ongoing rental and other operating income |
||
| 12.6% p.a. EPRA NNNAV per share growth and total return of 13.3% in 2018 |
We continue to aim to achieve total return of at least 10% per annum as a consistent average through the property cycle |
Competitive advantage comes from our ability to add value through active management rather than reliance on market movement, with 80% of value gains achieved in 2018 attributed to management actions
RECEIPTS
CAPITAL REINVESTMENT
We currently have planning consents for over 11,000 residential plots and nearly 11 million sq. ft of commercial space. A large proportion of these consents are taken forward as Major Developments – often seen as showcase projects for regeneration.
We have a large landbank of brownfield and greenfield land across the North of England and the Midlands, owning and managing c.21,500 acres of land on around 120 sites. An important part of our strategy is to replenish our portfolio with acquisitions to ensure the growth of the business.
Our core skill as a business is to create a strategic vision and plan for all our sites which, when brought to market with planning permission for residential or commercial uses, creates value.
RISK ICONS
| MARKETS | DELIVERY | POLITICS | FINANCE | PEOPLE | LEGAL & REGULATORY |
GOVERNANCE & INTERNAL CONTROLS |
COMMUNICATIONS & STAKEHOLDER MANAGEMENT |
|---|---|---|---|---|---|---|---|
Finally, we actively asset manage our landholdings and built commercial space to deliver further value from the portfolio. Asset management also includes repurposing our built space, where appropriate, regearing leases in order to grow our income and managing our Business Space and Natural Resources sites to ensure overheads are minimised and tenants are satisfied.
We are now selling c.£20m p.a. of mature income generating sites, reinvesting the receipts in higher value adding opportunities.
Once a use for a site has been identified, we apply value engineering principles through our in-house development team in remediating land and creating development platforms that match the proposed use.
We either sell engineered land for residential or commercial purposes, or retain land to grow our income portfolio – either through leasing directly developed commercial units or renting out land.
Our core markets across the North of England and the Midlands are well suited to our strategy and business model
Simpson Park, Harworth AMP, Rotherham
Housing under-supply is driving consistently good demand for land from housebuilders of all types in our regions
New houses on our sites in the North of England and the Midlands have a more affordable price to earnings ratio than in many parts of the UK
Housing remains the UK government's key domestic priority, supported by continued incentives for new purchasers and new planning guidance through the NPPF designed to accelerate housebuilding
Steady demand for well-located industrial space continues, with supply continuing to be squeezed across all regions. UK vacancy rate stands at <6%
Industrial sector is forecast to continue to outperform both the office and retail markets in the medium-term
Local support for sustainable new commercial development remains strong, driven by the desire for economic regeneration and the need for business rate receipts
Pheasant Hill Park, Doncaster Logistics North, Bolton
7 NORTH WEST
16 NORTH EAST
54 YORKSHIRE & CENTRAL
12 MIDLANDS
32 COMMERCIAL CLAWBACKS
Outline planning consents granted for 778 residential plots, of which 560 were delivered from the Group's first three PPA1 successes in Nottinghamshire, Derbyshire and Yorkshire
Applications submitted for over 3.3m sq. ft of commercial space and 993 residential plots with the majority due to be determined in 2019
1 PPAs are agreements with landowners by which Harworth incurs the cost and risk of promoting land through planning. If successful, Harworth shares some of the value gain, after first recovering its costs, when the land is sold.
1,049 residential plots sold across nine parcels at an average value of c.£30,000/plot (at book value). 1.15m sq. ft of consented commercial land sold across four parcels for a total consideration of £30.9m, delivering a profit on sale of £1.0m
15 Major Developments being delivered as at year-end. Portfolio2 has consent for 11,077 residential plots and c.10.7m sq. ft of commercial space
Over 300,000 sq. ft of longterm lettings secured on eight new commercial buildings, including new headline rents secured at the AMP and Logistics North. Less than 100,000 sq. ft of directly built space available across the portfolio. Installed energy capacity on our land of 154.2MW
SECTORS
RESIDENTIAL PLOTS - CONSENTED/ PIPELINE COMMERCIAL SQ. FT - CONSENTED/PIPELINE (k)
REGIONS
ACRES SITES
ACQUISITIONS
ACQUISITIONS AND JV INVESTMENT (£'m) DISPOSALS LESS DEVELOPMENT SPEND (£'m)
FINANCING
NET LTV (%) NET DEBT (£'000)
ACCIDENTS (All minor and includes figures for contractors) RIDDOR REPORTS
EMPLOYEES
SAFETY
EMPLOYEE NUMBERS (*As at date of report) Employee Satisfaction (%)
As this is my first statement since assuming the Chair at Harworth in March last year, I would like to start with some reflections on becoming involved with the business. However, may I first express my thanks to my predecessor, Jonson Cox, for everything he did to facilitate a smooth transition from him to me and also my recognition of the considerable contribution he made to the creation of Harworth in its current form as an established, listed development company with a differentiated, and proven, specialism in the regeneration of difficult former industrial sites.
My principal previous property experience was serving as Deputy Chairman at Bovis Homes for approaching 10 years before my retirement last May. As a house builder, one is primarily concerned with the sale of a standard product with well-defined production costs and margins, such that progress can be tracked against a generic build process that permits measurement of uniform stages such as "slab" or "roofed-in". Sites may be acquired in different locations but what is produced on each site largely conforms to standard house types.
I have rapidly discovered that property at Harworth is very different – every site has its own very individual challenges and opportunities to create value. Of course, one starts off with a site assessment against required average returns but the course the development takes may differ radically from how it was first envisaged. As the team learns more about the site and as market conditions change, so the pace and shape of development may evolve. Parts of the site may be sold earlier or later than planned; parts may be developed by Harworth itself and held within our income generating portfolio rather than sold for others to develop; adjacent land may be added to the masterplan and change the balance of commercial and residential uses; and skilful remediation may bring forward additional areas that were not initially envisaged as suitable for development. Every site has to be understood in great detail by those responsible for its development. There is no such thing as a "cookie cutter" approach to Harworth's sites.
Successful development of large, complex and frequently challenging sites requires particular skills and experience, and it is Harworth's people that are at the heart of its differentiation. The well-used adage that an organisation is only as good as its people has never been truer than at Harworth. There may only be 68 people but our ability to create value derives from their ability to: identify land and property opportunities; create deliverable masterplans; negotiate acquisitions, disposals, and leases; develop relationships with local stakeholders; build partnerships with funders, developers, house builders, and commercial clients; devise innovative remediation solutions for complex heavy industrial legacies; identify the right point in the market to offer sites for sale; and manage complex projects requiring the organisation of, and interaction with, multiple professional advisers and contractors.
The other notable difference between Bovis and Harworth is time-scale. A house builder will typically look to be in and out of a site in a couple of years. The scale of some of Harworth's developments means that we may be continuing to extract value from a site for up to 20 years or more. A house builder will determine whether or not to buy a site on its assessment of the attractiveness to potential customers of the location and the community of which the site is a part. Harworth will create places and communities where none exist. It is Harworth's vision of the end game on a development that house builders and commercial clients buy into. When our management considers the potential of a development, they have to have a long-term vision of their ability to create value over many years into the future. Each year's results in isolation are an important guide to our commercial effectiveness but average return across the cycle is the most accurate measure of the quality,
and sustainability, of our delivery. It is the very long-term, and through the cycle, characteristics of our business that persuaded us that the Restricted Share Plan outlined in the Directors' Remuneration Report is a better fit to the strategy of our business than the 3-year Long-Term Incentive Plan that we have adopted previously.
The structure of Harworth's shareholdings is also very different to the listed companies that I have previously chaired. With the Peel Group and the Pension Protection Fund holding slightly over 50% of Harworth, and represented at the Board table, as Chairman one receives directly and in real time shareholder perspectives on decisions and feedback on issues faced by the Group. This is invaluable. Importantly, by their support for our cashbox placing in early 2017 they demonstrated their alignment with our long-term objectives to grow our business. Equally, I am very grateful for the welcome I have received from our other material institutional shareholders and look forward to seeing institutional participation on our register grow over time as the potential inherent in Harworth becomes more broadly communicated and recognised.
Whilst Harworth is a constituent member of the FTSE Small-Cap index, it operates to all intents and purposes as if it were in the FTSE-250 index and aspires to be a member in due course. Its process of corporate governance is well-established and substantially met the Code requirements of a premium-listed company before we made the transition to the Premium List in August 2018. The smoothness of that process is itself a credit to our in-house company secretarial and finance teams and to the many advisers that worked with us on the exercise. When considering joining Harworth I was impressed by the content and clarity of our annual report and broader shareholder and media communications. We have a first-rate Board, as evidenced by our recent external Board Effectiveness Review, with a broad range of skills and relevant experience around the Board table. With such as our non-executive participation on the Group's People Steering Group we are clearly cognisant, and in the vanguard, of developments in corporate best practice. The recruitment of new non-executive directors now allows us to constitute our principal Board committees on a fully independent footing.
The other aspect of Harworth that attracted me to the opportunity was its track-record of delivery and 2018 has been no exception. Once again, the Group has met its objective of over 10% through the cycle total return, this time delivering 13.3% in a year supported by a number of successes, not all of which were envisaged at the start of the year. Owen provides further commentary on this in his Chief Executive's statement. This bears out the capability of our teams to identify and then realise opportunities for value creation. In any one year there may be both upsides and downsides – what is much more important is what the business achieves over the medium-term. That medium-term delivery will be determined by our development pipeline. Hence as important as our in year result was what we did to support our future returns - the £14.2m that we invested in development acquisitions, themselves supported by £43.7m of income-generating acquisitions; our commitment of £33.0m further investment, predominantly infrastructure, in sites we own; the 993 residential plots and 3.3m commercial square feet for which we applied for planning consent; and the 778 residential plots and c.0.1m commercial sq. ft on which we
realised outline planning consent during the year. Whilst 2018 was again characterised by substantial investment, this was balanced by significant disposals, realising £93.2m during the year. This enabled us to maintain our commitment to low financial gearing, ending the year with a 12.3% net loan to value ("LTV"), well within our target range.
Acquiring appropriate new sites is the life-blood of our future growth and a strong understanding of, and relationships with, local markets are, in our view, key to identifying, negotiating, and subsequently developing such sites. Hence our decision during 2018 to move to a regional structure with new regional teams in the Midlands, based out of Birmingham, and the North-West, out of Manchester, complementing our existing Yorkshire and Central area, based at our head office in Rotherham. We are delighted to have secured proven, experienced, regionallybased management to lead these new regions and they are in the process of building out their teams to match the intended growth of their regional portfolios. Our acquisition of 350 acres at the former Ironbridge power station in Shropshire exemplifies this regional expansion within Harworth's existing focus on transforming large, complex development sites.
We have added two new Non-Executive Directors over the last month. This addressed both the retirement in September this year of Tony Donnelly after nine years with Harworth, and the need, as a premium-listed company, for at least half the Board, excluding the chair, to comprise independent directors. It will also enable us to add a further independent non-executive to our Remuneration and Audit Committees from which Steven Underwood, the representative of the Peel Group on our Board and, therefore, not independent, will then stand down. In line with our establishing a Midlands region, Ruth Cooke brings us extensive experience in the Midlands real estate sector, having been Chief Executive of Midland Heart, a large regional housing association from 2012-2018, a founder member of the West Midlands Housing Association Partnership, and a Board member at Marketing Birmingham. She is a chartered accountant and a corporate treasurer. Angela Bromfield has extensive commercial strategy, marketing and communications executive experience, having held leadership roles in these areas at Premier Farnell, Anglo American, and Morgan Sindall. She is currently a non-executive director and Remuneration Committee Chair at Churchill China and Zotefoams.
We are disappointed that Andrew Kirkman, our Finance Director, will be leaving us on 30 June to become the Chief Financial Officer of CLS Holdings but understand this move as the next step in his career. I would like to thank Andrew for his contribution towards Harworth's success while he has been with us and wish him well for the future. The process of recruiting his successor is underway.
May I finish by thanking everyone who has contributed so much to making 2018 another successful year for Harworth – our management team, our colleagues, our customers, our business partners, advisers and suppliers. As I said at the beginning of my statement, Harworth is all about its people.
Chairman 16 April 2019
Harworth Group has once again delivered another year of strong operational performance and a double-digit total return to shareholders, demonstrating the focus and technical skills of the team in creating sustainable, regenerationled developments. Our focus on "beds and sheds" within the regional markets of the North of England and the Midlands underpins our decision to invest in a regional delivery model with new teams in areas of strong projected growth, to sustain the business moving forward.
In 2018, the Group delivered double-digit total return per share growth of 13.3% (2017: 13.2%), with EPRA NNNAV of £466.5m at the year-end (2017: £414.2m). This includes value gains of £51.3m (2017: £47.4m), ahead of our expectations, whilst Profit Excluding Value Gains ("PEVG") rose to £9.8m (2017: £2.2m), which includes £6.8m for the promote fee for the letting of M&G Real Estate's forward-funded LN175 unit at Logistics North.
Our performance is in line with the key strategic aim of the business - to be the leading land and property regeneration specialist in the North of England and the Midlands, delivering double digit total returns to shareholders by providing innovative and sustainable solutions on the land we bring forward for remediation and development. We also aim to be a good neighbour in the communities in which we operate and to provide customer-driven solutions to our end users in a market dominated by standard developments. In simple terms we listen to our customers and key stakeholders in the communities in which we operate, when masterplanning our developments.
Our operational focus remains consistent: extracting maximum value from our land and property portfolio in the North of England and the Midlands to grow EPRA NNNAV; building our recurring income base with the aim of covering all operating costs and dividends; acquiring brownfield, and urban edge, land in sustainable locations; whilst at the same time buying and developing income-producing property to underpin the sustainability of our long-term business model. This is underpinned by using our land assembly, masterplanning, technical, placemaking and asset management expertise to transform redundant land and sustainable urban edge locations into places where people want to live and work. We continue to focus on our core regions of Yorkshire & Central, the Midlands and the North West in which to invest our management time and capital whilst maintaining a watching brief on the strong markets immediately to the south of our existing Midlands region.
Our strategy and business model remain well-suited to the fundamentals of the "beds and sheds" markets across the North of England and the Midlands. Our ongoing land sales to house builders continue to be driven by steady demand for new homes, supported by their comparative affordability and the continued lack of delivery of the new homes the UK needs to keep pace with the rate of household formation. The rise of e-tailing and increasing demands of consumers supports demand for logistics, distribution and manufacturing space, with the industrial sector forecast to outperform both the office and retail markets in the medium-term.
Central and local government support for our business model remains stable, with an extension of Help to Buy confirmed until March 2023 (albeit in more restricted form from 2021) alongside fairly modest changes to the National Planning Policy Framework. With changes to local government funding driving the need for local authorities to work with trusted partners to deliver high-quality development, which can then contribute to Business Rates, Council Tax receipts and the New Homes Bonus, our products remain as economically and socially relevant as they have ever been.
Four principal management actions continue to deliver capital growth from our existing land and property portfolio: securing planning consents on major schemes; remediating and providing infrastructure on consented land for redevelopment; placemaking followed by premium land sales to residential and commercial occupiers; and directly developing our own industrial units for either sale or letting. All have underpinned
value gains during the year. To maintain the sustainability of our business and support our continued growth it is essential that we continue to replenish the portfolio as we work through our more mature sites. To that end, we aim to grow our strategic land portfolio by at least 10% each year.
Planning success and progress across the portfolio remained strong in 2018, with outline planning consent secured for 778 residential plots (2017: 825) and 76k sq. ft of commercial space (2017: over 3m sq. ft) across seven sites. This included three Planning Promotion Agreement ("PPA") successes, including securing outline permission for 400 plots at Market Warsop in Nottinghamshire in April 2018. As at 31 December 2018, total consented residential plots under direct ownership and PPAs/ options stood at 11,077 plots and consented commercial space on our land at c.10.7m sq. ft, providing a robust pipeline for sales and direct development opportunities over at least the next decade.
2019 will be a significant year for the business in securing new outline planning consents to increase this pipeline still further. In 2018 we submitted planning applications on our land for 993 new residential plots and over 3.3m sq. ft of commercial space. During 2019 a number of new applications are expected to be submitted for over 3,000 further residential plots.
Plot sales for both residential and commercial uses continue to be carefully planned, both to realise further value gains and to reinvest capital into the ongoing development of our wider portfolio and in new acquisitions. A total of 1,049 residential plots were sold across nine parcels for £33.6m to national and regional housebuilders during the year, with repeat customers including Taylor Wimpey, Barratt and Avant Homes showing the popularity of the de-risked engineered land parcels that we make available, and the relative affordability of their products to consumers. Profits on sale were also realised from the disposal of engineered development land for commercial uses totalling 1.15m sq. ft, including the sale in October of the 55-acre Lounge site in Leicestershire for £18.7m and the £10.9m sale of the 18-acre G2 plot at Logistics North in December to Lidl (UK), representing further repeat customers for the business.
One of our principal areas of focus is to sustain this momentum by making further land acquisitions and cultivating industry and stakeholder relationships as our operating geography grows. 2018 represented a record year for new acquisitions with eleven land and property purchases made for a consideration (inclusive of costs) of c.£60m in total, supported by the extension of our Revolving Credit Facility to £100m in April. Our acquisitions were a mix of strategic land and income-producing properties with development potential. The largest of these was the purchase in May of the 112-acre Nufarm site at Wyke, Bradford, for £32.45m plus acquisition costs. Less than a mile from Junction 26 of the M62, the site comprises an agrochemical works set over 32 acres alongside 80 acres of unoccupied land. It is let on a 50-year lease (expiring 2055) at a current passing rent of over £2.1m per annum, representing a net initial yield of 6.2% and a reversionary yield of 7.0% based on rental increases. The 80 acres of unoccupied land has long-term potential for commercial development. In the previous month, we also purchased a 22-acre site in Flaxby, North Yorkshire for £8.75m plus acquisition costs. Within half a
mile of Junction 47 of the A1(M), the site comprises a c.276k sq. ft commercial unit occupied by Ilke Homes, the modular homes manufacturer. A 14-year lease has been agreed with Ilke at a stabilised rent of £1m per annum, representing a net initial yield of 10.9% and a reversionary yield of 12.1%. The site's very low density of 29% also provides a potential opportunity for further commercial development.
In support of our expanding regional presence, we acquired land at two strategic sites in the Midlands in May, totalling 165 acres, for a total consideration of £3.88m plus acquisition costs. At Cinderhill in Derbyshire, we acquired another 112 acres of strategic land across three parcels as part of site assembly to support the promotion through Amber Valley District Council's Local Plan. Cinderhill has the potential to be a substantial, residential-led development across 421 acres that could deliver up to 3,000 new homes and 450k sq. ft of commercial space. We also acquired 53 acres in Bardon, Leicestershire, adjacent to the Group's existing development at Coalville. Close to Junction 22 of the M1, we are already promoting the site through the planning process for a 350k sq. ft scheme of manufacturing, distribution and roadside uses.
Our strategic move into the Midlands was further evidenced in June with our acquisition of the 350-acre former Ironbridge coal-fired power station in Shropshire. Located adjacent to Ironbridge town centre, the site comprises around 240 acres of brownfield land and a neighbouring parcel of over 100 acres of agricultural land. We are already promoting the site through the planning process, with the first public consultation held in November. We are targeting a new mixed-use development of at least 1,000 homes alongside commercial development, leisure uses and a significant amount of public open space. Further consultation on our plans will take place in Spring 2019 prior to submission of an outline planning application.
The final acquisition of the year represented our first move into residential development in the North West. In November we purchased 56 acres at Moss Nook in St Helens, Merseyside. The site, which was under option for two years, is a brownfield site situated just over a mile away from St Helens town centre with an existing planning consent for 900 new homes. We are already applying our masterplanning, land remediation and infrastructure expertise to create a new vision for the site and to prepare part of the site for a first sale of engineered land.
Progress has also been made in securing further land options and new PPAs. As at 31 December 2018, 197 acres of thirdparty land was secured under option, with PPAs secured to promote 4,919 residential plots and 0.4m sq. ft of new commercial space through the planning system.
The evolution of the business and pace of its growth has made implementation of a regional structure the logical next step. As a result, we appointed three Regional Directors in the Autumn to take forward the acquisition, promotion and development of all sites in our core regions of Yorkshire & Central, Midlands and the North West. We believe that this will generate greater management cohesion between the acquisition and delivery functions and will create regional teams embedded in their respective local markets, further increasing the profile of the business and supporting us in securing more developable land and property to grow the business in a sustainable manner.
Excellent progress continues to be made by our Income Generation team, growing the size and strength of our recurring income base to cover, over time, all operating costs of the business and dividends. The team also makes a significant contribution to our achieved value gains through its work in directly developing new commercial space and asset managing our existing income portfolio.
The team's strategy evolved further in 2018, with the sales of mature assets with little further value-add potential, and of low-yielding agricultural land and property with little development potential, in turn supporting the purchase of higher-yielding assets, in many cases with development potential. The team has continued to undertake selective direct development in response to the ongoing undersupply of good quality commercial space in the regions, generating both value gains and new sources of long-term income.
The extension of our Revolving Credit Facility to £100m in April, coupled with the sale of Harworth Business Park in North Nottinghamshire in March, enabled the acquisitions of Nufarm and Flaxby referred to above. The additional income headroom these acquisitions provide allowed us to dispose of all five built commercial units, totalling 145k sq. ft, at Phase 1 of our Gateway 36 Business Park in Barnsley, South Yorkshire for £15.8m, reflecting a net initial yield of 4.76% and generating a profit on sale. This was a great result for the business, given the site did not have outline planning consent in place until 2014.
Lettings progress has been strong in 2018, with over 787k sq. ft of new and renewed letting activity to a variety of occupiers, at favourable rents. At the end of December, only two of our wholly owned speculative development units in the Business Space portfolio (c.31k sq. ft) remained vacant, reflecting the underlying strength of the industrial property market across the North of England. Strong growth in rental values was also recorded on the three sites where we have directly developed new commercial space.
At Logistics North in Bolton, five key lettings were agreed. In January, we agreed a 15-year lease with Vaclensa Limited for our C5 "R-evolution" unit, totalling 28k sq. ft, at a then new headline rent for Logistics North of £7.00psf, reflecting the continued strong demand for high quality industrial assets in the region. Four new
leases were also agreed for the "Multiply Logistics North" units that we are developing in joint venture with the Lancashire County Pension Fund. In March, Hardscape, the UK's premier landscaping material supplier, became the scheme's first tenant on a 15-year lease for the 45k sq. ft Unit F2/A. This was followed in October by a 15-year pre-let to rijo42, the UK's leading supplier of commercial coffee machines, coffee beans and coffee ingredients, at a rent of £7.25psf for the 20k sq. ft Unit F2/E. A further six "Multiply" units, totalling 271k sq. ft, were practically completed in the Autumn. In November, UW Homes Services Ltd, a smart meter installation and maintenance business, took a 10-year lease of the 31k sq. ft Unit F2/C at a new headline rent for the North West of £7.75psf. Finally, kitchen supplier PJH Group Limited took 63k sq. ft of space at the "Multiply" F1/A unit on a ten-year lease. Five remaining units totalling c.275k sq. ft (Harworth's 20% share equating to c.56k sq. ft) remain available at "Multiply" to let in 2019.
At the Advanced Manufacturing Park ("AMP") in Rotherham, the 52k sq. ft "R-evolution Phase 2" is now fully let. With the market for new-build commercial space remaining strong, driven by a lack of good quality existing supply, we undertook construction of the third phase of "R-evolution" at the AMP, comprising 57k sq. ft of commercial space that practically completed at the end of August 2018. The first letting of that space, the c.25k sq. ft Unit 6A-D was completed in October, with Bodycote taking a 15-year lease, leaving two remaining units totalling 31k sq. ft available to let in 2019.
In addition to growing income from our own commercial development, the team let M&G Real Estate's LN175 unit, a 175k sq. ft industrial unit at the front of Logistics North, to an advanced manufacturer on a 20-year lease in December. Under the terms of our forward funding agreement with M&G, this triggered a one-off net "promote fee" of £6.8m, supporting the delivery of stronger than anticipated PEVG across the portfolio.
The team also continues to asset manage our 2.7m sq. ft Business Space portfolio to reduce voids and increase rental returns. All of this activity meant that Business Space revenue in 2018 increased to £11.9m (2017: £8.4m). The weighted average unexpired lease term ("WAULT") to expiry across the portfolio now stands at 14.1 years (2017: 7.5 years), whilst the vacancy rate has reduced to 14% (2017: 17%).
Launch of R-evolution Phase 3, AMP
Our revenues for the period were bolstered by the work of our Natural Resources and Operations teams seeking out new opportunities. A total of 154.2MW (2017: 159.7MW) of energy capacity is now installed on our land, providing a long-term income stream from a combination of ground rents and royalties. The team's focus remains on growing future income from alternative technologies with better short-term prospects and from maintaining income from our tipping operations, which has the added benefit of supporting site remediation. As a by-product of our remediation, engineering and development activities, we continue to generate income from recycled aggregates and coal fines, albeit these will decline in the medium-term.
The outlook for the Income Generation business remains positive. Demand for new commercial space in our regions remains solid, with a national vacancy rate of less than 6%, continued growth of on-line retailing and the need for supply chain suppliers to be near original equipment manufacturers on our developments. As a result, the business will continue to undertake selective direct development on key sites to improve further the breadth and quality of our income base and to support NNNAV growth.
The four successive years of double-digit total returns to shareholders, well in excess of industry averages, is principally due to the innovation, technical expertise, experience, determination and resilience of all our colleagues across the Harworth team. We now comprise a team of 68 people working across three regional offices and on sites. Our people remain committed to increasing the value of our land and property portfolio by creating great new places for people to live and work. My continued thanks go to the entire team, our delivery partners and external professional teams for their hard work in maintaining the Group's growth trajectory, whilst maintaining our values, culture and standards.
I have also developed a strong working relationship with our new Chairman, who has brought a fresh challenge and perspective to the business since his appointment in March last year. He shares my view that the core of our success is due to the range and quality of activities we undertake and oversee. I am delighted that we are growing the business, both in terms of size and coverage, in a sustainable manner, whilst retaining our core principles. Alastair has also brought a new perspective to organisational development and the mentoring needed for all senior members of our executive team to support the growth of the business, whilst maintaining our underlying culture.
The quality and attraction of our engineered land and commercial property space, matched with favourable market conditions in our core regional markets, position the business strongly for continued EPRA NNNAV growth and further improvement in the quality and breadth of our recurring income base.
Over 50% of this year's budgeted sales have already been agreed, supporting the Group's performance for the year ahead, although we still expect performance to be second half weighted. So far in 2019 we have made two strategic land acquisitions, both in the North West, for residential development and have agreed terms on a number of other sites in all regions which are now moving through the legal process. We also anticipate the majority of our existing planning applications will be determined in 2019. With healthy demand for new lettings and enough strategic land and property opportunities for the business to pursue, the business remains well set up for ongoing growth.
We expect the solid economic growth in the North West, Yorkshire and the Midlands to continue into 2019. Whilst Brexit is causing short-term uncertainty at a macro-level and pulling the Government's attention and time away from other important economic and social challenges, the fundamental strengths of, and opportunities in, our core regional markets remain, and we expect them to endure in the medium to long-term.
Chief Executive 16 April 2019
Thoresby Colliery was the Midlands' last deep mine to shut, with its closure in July 2015 signalling the end of over nine decades of mining that once produced 100,000 tonnes of coal per week. Following Harworth taking on the site from UK Coal in October 2015, it has spent the past three years delivering a number of actions in acting as 'master developer' – undertaking site safety and security measures, demolishing vacant structures, developing a vision and masterplan for the site and importing and exporting materials to create development platforms and a new Country Park. It is therefore an excellent long-term case study in showcasing the Group's work.
Harworth has effectively exercised its skill in being able to drive NNNAV growth – with the site now Harworth's fifth most valuable site – whilst creating and delivering a vision for a high-quality sustainable development for local people in Edwinstowe, Ollerton and beyond to be proud of. These pages provide a snapshot of how it's been done.
Between the Colliery closing on 10th July 2015 and Harworth taking ownership and responsibility for the site from that October, staff from UK Coal and Harworth worked on a comprehensive handover plan. This saw staff work up appropriate technical and health & safety due diligence, including regular liaison with the Coal Authority, as the public body that works to resolve the impacts of mining, to provide the information required to proceed with development.
As on all major sites, Harworth's initial priority was on site safety and security works, including the establishment of a new security presence at the site's gatehouse, the treatment of the site's former coal lagoons and the demolition of now-vacant structures, as explained below.
A large number of structures on the site's 150-acre former pit yard were identified early in Harworth's ownership as being solely for mining use and not suitable for any form of redevelopment. As a result, Harworth and its contractors spent part of 2015, 2016 and most of 2017 safely bringing down a number of industrial structures – including the site's former pithead and rapid loader – in order to clear the site ready for redevelopment as per its emerging masterplan (see below).
Prior to receiving an outline planning consent for 800 new homes and 250,000 sq. ft of commercial space in October 2017, Harworth's Major Projects team spent the best part of two years working with local stakeholders to develop an agreed vision and masterplan for the site. This followed six principal steps:
A seventh step, being the establishment of a site-specific management company to manage public open space, will be undertaken ahead of the sale of Phase 1 of the site.
Thoresby's final masterplan includes the agreement of a design code with Newark & Sherwood District Council to ensure the built development fits within the character of the local area, including the adjacent Sherwood Forest.
SITE THEN - 2016 SITE NOW - 2019
From late 2017, Harworth has committed its capital to preparing land and infrastructure on a phased basis in order to accelerate development and secure ongoing interest in the scheme. The site's first phase of around 10 acres is close to Thoresby's existing estate road as part of the Group's commitment to reuse as much of a site's previous infrastructure as possible.
Harworth has also accelerated the development of the site's Country Park, totalling 350 acres, as part of making the site as attractive a place for all new residents to live as possible whilst also confirming Thoresby's 'good neighbour' use to residents in nearby Edwinstowe and the adjacent Sherwood Forest.
As on all of its Major Developments, Harworth has worked with a specialist residential agent to pull together a specific Phase 1 sales pack for housebuilders to scrutinise prior to bids being made. Final bids ultimately provide prima facie evidence for Harworth's year-end valuation process. Harworth will be adopting the same approach on all of its remaining residential and commercial development phases over the next ten years as the development is eventually built out.
Harworth's flagship development in the North West went from strength to strength in 2018, with a series of income-producing deals at gradually increasing rents supporting the continual improvement of the quality of its income portfolio whilst acting as a source of value gains.
2018 saw the build out and practical completion of Phase 2 of "Multiply Logistics North" – Harworth's joint venture with the Lancashire County Pension Fund, advised by Knight Frank Investment Management. Five new warehouses ranging from 20k to 31k sq. ft in addition to a larger warehouse at 149k sq. ft were built, adding to the three units built by the joint venture in 2017.
Four new leases at "Multiply" were agreed for these units across the year. In March, Hardscape, the UK's premier landscaping material supplier, became the scheme's first tenant on a 15-year lease for the 45k sq. ft Unit F2/A. This was followed in October by a 15-year pre-let to rijo42, the UK's leading supplier of commercial coffee machines, coffee beans and coffee ingredients, at a rent of £7.25psf for the 20k sq. ft Unit F2/E. In November, UW Homes Services Ltd, a smart meter installation and maintenance business, took a 10-year lease of the 31k sq. ft Unit F2/C at a new headline rent for the North West of £7.75psf. Finally, kitchen supplier PJH Group Limited took 63k sq. ft of space at the "Multiply" F1/A unit on a ten-year lease. Five remaining units totalling c.275k sq. ft (Harworth's 20% share equating to c.56k sq. ft) remain available at "Multiply" to let in 2019.
This progress was supplemented by three other key deals in 2018. In January, a 15-year lease with Vaclensa Limited for Harworth's C5 "R-evolution" unit, totalling 28k sq. ft, at a then new headline rent for Logistics North of £7.00psf. There was also the £10.9m sale of the 18-acre G2 plot at Logistics North in December to Lidl (UK), representing a further repeat customer for the business at the development in order for the retailer to build its new regional distribution headquarters. Harworth also let M&G Real Estate's LN175 unit, a 175k sq. ft industrial unit at the entrance to the site, to an advanced manufacturer on a 20-year lease in December. Under the terms of our forward funding agreement with M&G, this triggered a one-off net "promote fee" of £6.8m, supporting the delivery of stronger than anticipated Profit Excluding Value Gains across the portfolio.
Nearly 5,500 people are now employed at Logistics North and once fully developed it is expected to create an additional 1,500 jobs and eventually add over £300m in Gross Value Added (GVA) to the local economy. The speed of delivery has exceeded all expectations, driven by the demand for new commercial space in the region. Harworth is also close to completing the 550-acre Country Park that bounds the site, with an increased number of residents from nearby villages in Bolton, Salford and Wigan using the site for activities including running, cycling and birdwatching.
With no units or land remaining to accommodate any requirements above 150,000 sq. ft at Logistics North and with a limited supply of new manufacturing or distribution units in Greater Manchester, Harworth's focus in 2019 will be on securing planning consent from Bolton Council for Phase 1 of its Wingates site adjacent to Junction 6 of the M61 for 1.1m sq. ft of commercial space, in addition to securing tenants for the remaining "Multiply" units and completing the site's Country Park.
| KEY FACTS: LOGISTICS NORTH | |
|---|---|
| Location | Junction 4 of M61, Bolton, Greater Manchester |
| Site Acreage | 800 acres: 250 acres for employment, 550 acres for Country Park |
| Former use | Cutacre surface mine |
| Progress made on site | Consent granted for 4m sq. ft of employment in 2013. Infrastructure and build out began in 2014 and has continued to present day, with full completion expected in 2020 |
| Key occupiers on site | Amazon, Aldi, Lidl, Whistl, MBDA, Komatsu |
| Total jobs on-site as at March 2019 | c. 5,500 |
Andrew Kirkman, Finance Director
In 2018, Harworth continued to build its track record since re-listing, delivering the fourth consecutive year of over 13% total return; this is ahead of our long-term average ambition of over 10% annual total return. Total return (NNNAV growth plus dividends) per share over the last year was 13.3% (2017: 13.2%). The graph below shows the movement in net asset value, and total return, over the last year:
We use a number of Alternative Performance Measures ("APMs") alongside statutory amounts. We believe that these assist in providing stakeholders with additional useful information on the underlying trends, performance and position of the Group. Note 2 to the Financial Statements gives a full description and reconciliation of our APMs.
Operating profit before exceptional items contributing to growth in EPRA NNNAV, rose by 23.0% to £61.1m, 19.0p per share (2017: £49.6m, 15.4p per share). As set out in Note 2, this is operating profit before exceptionals (2018: £33.6m, 2017: £39.7m) plus profits from joint ventures (2018: £3.8m, 2017: £4.0m) and the revaluation gains on development property (2018: £22.9m, 2017: £5.8m) plus the revaluation gains on overages (2018: £3.5m, 2017: £nil) less value gains on development property released on sale (2018: £2.8m, 2017: £nil) which, because they are held as inventory, are not included in the balance sheet.
The operating profit before exceptional items which contributed to growth in EPRA NNNAV growth is best understood as being composed of two elements:
Net finance costs rose to £4.0m (2017: £2.3m) as a result of higher levels of debt to fund the growth of the business and the write-off of fees associated with the increase in our Revolving Credit Facility. However, given higher PEVG, interest cover rose to 4.65x (2017: 3.41x). Our tax rate in 2018 remained below the statutory corporation tax rate as a result of ongoing progress with land remediation relief claims and the recognition of previously assumed lost tax losses. Cash tax payments continue to be minimised by the utilisation of historic tax losses.
The fall in earnings per share to 10.61p (2017: 15.76p) reflects the impact of the beneficial deferred tax movements in 2017 and the fact that the statutory measure, as opposed to the EPRA balance sheet movement, does not fully reflect the improved value gains since movements on development properties and overages are not included in the balance sheet. The total dividend per share for 2018 has been increased by 10% to 0.911p (2017: 0.828p) consistent with previous years and reflecting our long-run ambition to deliver double digit total return through the cycle.
Net debt at £64.4m or 12.3% net loan to value (2017: £32.3m and 7.0%) reflects our prudent gearing approach and is in-line with our stated 10.0% - 15.0% target range. In February 2018, the Group extended the term of its £75.0m Revolving Credit Facility ("RCF") with RBS to February 2023, on the same terms except with an increase in margin from 200 to 210 basis points, and in April 2018 the RCF was increased to £100.0m with Santander joining the facility on the same terms as RBS.
Until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should thus be held as investment property. We categorise all properties/ land that have received planning permission as development properties. As at 31 December 2017, the balance sheet value of all development sites was £210.5m and the market value of all development was £216.3m reflecting the £5.8m uplift in value of these sites, which is appropriately not reflected in the balance sheet. More detail is set out in the 2017 Annual Report and Financial Statements.
Property categorisation is reviewed as at 30 June and 31 December each year. In 2018 no new properties were recategorised from investment to development property as a result of planning permissions because: the planning permission granted at Swadlincote was an amendment to an existing planning permission; our part of the site at Athersley which received planning permission has been transferred to assets held for sale as it is now being actively marketed; and the remaining planning permissions received were for our first three PPA successes. There were some minor movements from investment to development properties, and vice-versa, as a result of sub-dividing some sites and the intentions for these smaller parcels.
As at 31 December 2018, the balance sheet value of all development sites was £204.2m and their market value was £230.2m reflecting the £26.0m uplift in value of these sites. In order to highlight the market value of development sites, and overages, and to be consistent with our investment properties, we are using EPRA NNNAV, which includes the market value of development properties and overages less notional deferred tax, as our primary net assets metric. We will, however, continue to report EPRA NAV which is EPRA NNNAV excluding deferred tax and the mark to market movement on financial instruments.
The table below sets out our top ten sites by value, which represent 47% of the total value of all our properties, split by their categorisation and showing the total acres, currently consented residential plots and commercial space:
| Housing plots | Commercial space | ||||||
|---|---|---|---|---|---|---|---|
| Site | Type | Region | Acres | Consented | Sold/Built | Consented | Built |
| Waverley | Development | Yorkshire | 454 | 3,890 | 1,218/850 | – | – |
| Coalville | Development | Midlands | 346 | 2,016 | 0 | – | – |
| Nufarm | Investment | Yorkshire | 112 | – | – | 0.30m sq. ft | 0.30m sq. ft |
| Waverley (AMP) | Investment | Yorkshire | 113 | – | – | 2.10m sq. ft | 1.50m sq. ft |
| Thoresby | Development | Midlands | 460 | 800 | 0 | 0.25m sq. ft | 0.00m sq. ft |
| Melton CP | Investment | Midlands | 141 | – | – | 0.30m sq. ft | 0.30m sq. ft |
| Rossington | Development | Yorkshire | 307 | 1,200 | 522/170 | 0.10m sq. ft | 0.05m sq. ft |
| Gateway 45 | Joint Venture | Yorkshire | 166 | – | – | 2.60m sq. ft | 0.00m sq. ft |
| Four Oaks BP | Investment | North West | 19 | – | – | 0.43m sq. ft | 0.43m sq. ft |
| Chatterley | Development | North West | 129 | – | – | 1.20m sq. ft | 0.00m sq. ft |
| TOTAL | 2,247 | 7,906 | 1,740/1,020 | 7.28m sq. ft | 2.58m sq. ft |
Revenues in 2018 were £78.1m (2017: £53.7m), split between revenue from operations £33.2m (2017: £23.9m) and revenue from the disposal of development properties £44.8m (2017: £29.8m). Revenue from operations is split between: Income Generation £25.6m (2017: £18.2m), where revenue mainly comprises rental and royalty income together with some sales of coal fines and salvage; and Capital Growth £7.6m (2017: £5.7m). The increase in revenue from Income Generation reflected improved lettings and business space acquisitions made in 2017 and 2018. The revenue from Capital Growth reflected the recognition of promote fees for the lettings of the two units at Logistics North which were forward funded by M&G Real Estate. The two units, LN175 and LN225, were let in 2018 and 2017 respectively.
Cost of sales comprises the inventory cost of development property sales and the operating costs for business space, natural resources, agricultural land and coal fines activities. Cost of sales increased to £53.6m (2017: £37.7m) of which £43.1m related to the inventory cost of development property sales (2017: £27.9m). Other costs were primarily the costs associated with coal fines £5.0m (2017: £2.2m).
Revenue and cost of sales in 2017 include amounts relating to the M&G forward funding contract at Logistics North as Harworth acted as principal in this transaction. This principal relationship was as a result of Harworth having exposure to potential construction and credit risks as well as the potential rewards of managing the construction on time and to budget and letting the buildings favourably and early.
Total overheads, which include the overhead costs of the Capital Growth and Income Generation segments and central costs, amounted to £12.9m (2017: £12.0m) and were in line with expectations, reflecting increased costs due to the expansion of the business in the regions.
The table below shows the results of the business, on an alternative performance measure basis to tie to EPRA NNNAV, split between Capital Growth, Income Generation and Central Overheads:
| 2018 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Capital Growth |
Income Generation |
Central Overheads |
Total | Capital Growth |
2017 Income Generation |
Central Overheads |
Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| Revenue | 52.5 | 25.6 | – | 78.1 | 35.4 | 18.3 | – | 53.7 |
| Cost of sales | (45.0) | (8.6) | – | (53.6) | (32.3) | (5.4) | – | (37.7) |
| Overheads | (2.5) | (2.2) | (8.2) | (12.9) | (1.9) | (1.8) | (8.3) | (12.0) |
| Notional development property costs (2) |
(1.7) | – | – | (1.7) | (1.9) | – | – | (1.9) |
| Other operating income | – | – | – | – | – | – | 0.1 | 0.1 |
| Profit/(loss) excluding value gains (1) |
3.2 | 14.8 | (8.2) | 9.8 | (0.7) | 11.1 | (8.2) | 2.2 |
| Revaluation gains (2) | 9.0 | 11.7 | – | 20.7 | 20.6 | 6.3 | – | 26.9 |
| Profit on disposals (2) | 1.5 | 1.7 | – | 3.2 | 8.0 | 2.7 | – | 10.7 |
| Pension charge | – | – | (0.1) | (0.1) | – | – | – | – |
| Operating profit/(loss) before exceptional items |
13.7 | 28.2 | (8.3) | 33.6 | 27.9 | 20.0 | (8.2) | 39.7 |
| Net exceptional items | – | – | (0.6) | (0.6) | – | – | 0.3 | 0.3 |
| Operating profit/(loss) | 13.7 | 28.2 | (8.9) | 33.0 | 27.9 | 20.0 | (7.9) | 40.1 |
| Joint ventures | – | 3.8 | – | 3.8 | – | 4.0 | – | 4.0 |
| Operating profit/(loss) before exceptional items plus JVs |
13.7 | 32.0 | (8.3) | 37.4 | 27.9 | 24.0 | (8.2) | 43.8 |
| Revaluation gains on development properties |
22.9 | – | – | 22.9 | 5.8 | – | – | 5.8 |
| Revaluation gains on overages | 3.5 | – | – | 3.5 | – | – | – | – |
| Development property value gains attributable to sales |
(2.8) | – | – | (2.8) | – | – | – | – |
| Operating profit/(loss) before exceptional items which contributed to EPRA NNNAV |
37.3 | 32.0 | (8.3) | 61.1 | 33.7 | 24.0 | (8.2) | 49.6 |
| Value gains (including JVs and development properties) |
34.1 | 17.2 | – | 51.3 | 21.0 | 26.4 | – | 47.4 |
Notes:
(1) A full description and reconciliation of the alternative performance measures in the above table is included in Note 2 to the Financial Statements
(2) The income statement has been re-presented to show the profit on development property sales (£3.5m; 2017: £7.7m) within profit on disposals and development property impairment (£1.7m; 2017: £5.8m) within revaluation gains. This notional cost is the reversal of these amounts
(3) There are minor differences on some totals due to rounding
Set out below are value gains for 2017 and 2018, which comprise profit on disposals, revaluation gains on investment properties (including joint ventures) and revaluation gains on development properties and overages:
| 2018 | 2017 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| £m | Profit on disposals |
Revaluation gains Management |
Market | Total(1) | Profit on disposals |
Revaluation gains Management |
Market | Total(1) | |
| Development/Capital Growth | |||||||||
| Major Developments | 0.8 | 17.7 | 6.5 | 25.0 | 8.0 | 8.7 | 4.3 | 21.0 | |
| Strategic Land | 0.7 | 5.8 | 2.6 | 9.1 | 0.0 | 12.2 | 1.2 | 13.4 | |
| Investment/Income Generation | |||||||||
| Business Space | (0.0) | 7.0 | 0.1 | 7.0 | 0.5 | 4.4 | 0.8 | 5.7 | |
| Natural Resources | 1.8 | 8.1 | 0.7 | 10.5 | 2.2 | 1.4 | 0.1 | 3.7 | |
| Agricultural Land | (0.0) | 0.0 | (0.3) | (0.3) | 0.0 | 2.6 | 1.0 | 3.6 | |
| Total | 3.2 | 38.5 | 9.6 | 51.3 | 10.7 | 29.2 | 7.5 | 47.4 |
Notes:
(1) A full description and reconciliation of the alternative performance measures in the above table is included in Note 2 to the Financial Statements
The Group made property sales of £93.2m in 2018 (2017: £54.8m) achieving a profit on disposals of £3.2m (2017: £10.7m). The sales were split between those of residential serviced plots of £33.6m (2017: £23.0m), commercial development of £30.9m (2017: £22.7m) and other, mainly mature income-generating sites and agricultural land, of £28.7m (2017: £9.1m). In addition, Harworth undertook direct development on its sites with a land value of £1.0m (2017: £2.1m) and its share of property sales in its joint ventures was £1.1m (2017: £0.9m).
Profits on disposals fell mainly as a result of previously appropriately recognising value gains on prospective property sales at the 2017 year-end and 2018 half-year. In addition, the introduction of IFRS 15 has resulted in the recognition of interest receivable on deferred consideration such that interest of £0.2m (2017: £0.0m) will be recognised in future years relating to sales.
Cash proceeds from sales were £78.9m (2017: £46.6m) reflecting the sales in the year of £93.2m (2017: £54.8m), less deferred consideration on sales in the period of £22.7m (2017: £14.3m), plus deferred consideration received from sales in the prior year of £8.4m (2017: £6.1m).
We have split the revaluation gains of £48.1m (2017: £36.7m) to reflect the contribution from active management through the achievement of milestones of £38.5m (2017: £29.2m) and market movements of £9.6m (2017: £7.5m). Whilst there is a degree of subjectivity in this split, it highlights that the majority of the value gains continue to come from active management. In 2018, the principal revaluation gains across the divisions reflected the following:
Exceptional items in 2018 were a charge of £0.6m (2017: credit of £0.3m) and comprised the costs for the step-up from standard to premium listing (see below). Exceptional items in 2017 comprised three separate items which related to sundry receipts and costs from the Group's legacy activities.
The income statement credit for taxation for the year was £1.3m (2017: £7.8m credit) which comprised a deferred tax credit of £0.5m (2017: £9.3m credit) and a current year tax credit of £0.8m (2017: £1.5m charge). The movement in deferred tax comprised the following:
The current tax charge comprised the following:
At 31 December 2018, the Group had deferred tax liabilities of £12.3m (2017: £13.0m) related to unrealised gains on investment properties and had recognised deferred tax assets of £7.3m (2017: £7.5m). The net deferred tax liability was £5.0m (2017: £5.5m).
Earnings per share fell to 10.61p (2017: 15.76p). This fall reflects the impact of the beneficial deferred tax movements in 2017 and the fact that the statutory measure, as opposed to the EPRA balance sheet movement, does not fully reflect the improved value gains with movements on development properties and overages not included in the balance sheet. Diluted earnings per share fell to 10.53p (2017: 15.68p) for the same reasons.
An interim dividend of 0.278p per share (2017 interim: 0.253p) equivalent to £893k (2017 interim: £813k) for the 2018 financial year was paid on 19 October 2018. A final dividend for the 2018 financial year of 0.633p per share (2017 final: 0.575p) is proposed. The total dividend for the year of 0.911p per share (2017: 0.828p) equivalent to £2.928m (2017: £2.66m) is in line with our progressive dividend policy and represents a 10% increase over the prior year, reflecting our long run ambition to deliver double digit total return through the cycle. The final dividend will be paid on 31 May 2019 to shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019.
As set out below, EPRA NNNAV increased to £466.5m as at 31 December 2018 from £414.2m as at 31 December 2017. This increase was as a result of movements in the year, being operating profit before exceptionals plus share of profits of joint ventures, overages and development property gains of £61.1m, less exceptional costs of £0.6m, interest costs of £4.0m, tax charges (including overages and development properties notional deferred tax) of £2.7m and dividends of £2.7m plus other movements of £1.2m.
| Investment and development properties (including investments in joint ventures, assets held for sale 496.1 and occupied properties) Cash 8.6 Other assets 69.6 Total assets 574.3 Gross borrowings 73.0 Deferred tax liability 5.0 Derivative financial instruments 0.1 Other liabilities 54.3 Net assets 441.9 Mark to market value of development properties and overages less notional deferred tax 24.6 EPRA NNNAV 466.5 |
31 December 2018 £m |
31 December 2017 £m |
|
|---|---|---|---|
| 457.1 | |||
| 8.4 | |||
| 31.5 | |||
| 497.0 | |||
| 40.6 | |||
| 5.5 | |||
| 0.1 | |||
| 41.5 | |||
| 409.3 | |||
| 4.9 | |||
| 414.2 | |||
| Number of shares in issue less Employee Benefit Trust shares | 321,314,989 | 321,250,750 | |
| NAV per share 137.5p |
127.4p | ||
| EPRA NNNAV per share 145.2p |
128.9p | ||
| EPRA NAV per share 148.3p |
131.0p |
(1) A full description and reconciliation of the alternative performance measures in the above table is included in Note 2 to the Financial Statements.
The increase in trade and other receivables to £66.7m (2017: £30.4m) was mainly as a result of £20.5m owing on deals which were agreed in December, which has now been paid, and a £12.0m increase related to higher levels of deferred consideration due from housebuilders reflecting greater sales volume. The increase in current trade and other payables to £52.6m (2017: £38.5m) was mainly as a result of greater levels of VAT payable (c.£7.5m increase) as a result of higher sales and an increase of £2.4m to £25.2m in development spend accruals again reflecting higher activity levels.
As has been consistently stated, Harworth's financing strategy is to be prudently geared, in particular not gearing our Capital Growth properties being our Strategic Land and Major Developments sites. We believe this prudence gives the Group a number of advantages:
Harworth's financing strategy also involves the Group seeking in principle to maintain its cash flows in balance by funding infrastructure spend and investment in acquisitions through disposal proceeds.
The graph below shows the Group's management of net debt during the year:
To reduce refinancing risk, on 13 February 2018 Harworth extended the term of its existing £75m RCF with RBS by two years such that it now expires in February 2023. The extension was on substantially the same terms, the only notable change being a slight increase in margin to 210 basis points ("bps") over LIBOR (from 200bps). To increase financing flexibility, drive continued growth and maintain an efficient balance sheet, on 30 April 2018 Harworth increased the size of its RCF from £75m to £100m, with Santander joining the facility alongside RBS. RBS' commitment remains at £75m with Santander's initial commitment at £25m. There were no other material changes to the terms of the RCF. The Group also uses infrastructure funding, provided by public bodies to promote the development of major sites for employment and housing needs, as part of our funding. At 31 December 2018 the Group had four infrastructure facilities with all-in funding rates of between 3.2% and 4.0%.
The Group's hedging strategy is to have roughly half its debt at a fixed rate and half exposed to floating rates. On 20 July 2018, Harworth cancelled its existing £30m fixed rate interest swap which was due to expire on 30 June 2020 (incurring total break costs of £18.5k) and in its place entered into a 4-year, £45m fixed rate interest swap at an all-in cost of 1.235% (including fees) on top of the existing 210bps margin paid under the RCF. The new swap was put in place to reflect increased levels of borrowing and to increase its term commensurate with the extension in the term of the RCF. The interest rate swap is hedge accounted with any unrealised movements going through reserves.
As at 31 December 2018, Harworth's gross Loan To Value ("LTV") was 13.9% (2017: 8.8%) and net LTV was 12.3% (2017: 7.0%). This was in-line with our stated 10.0%-15.0% net LTV target range. However, as set out above, Capital Growth sites are deliberately not geared, so if gearing is just assessed against the value of Business Space and Natural Resources properties this equates to a gross LTV of 38.9% (2017: 26.2%) and a net LTV of 34.3% (2017: 20.8%).
The Group had borrowings and loans of £73.0m at 31 December 2018 (2017: £40.6m), being the RBS RCF of £58.7m (2017: £23.4m) and infrastructure loans of £14.3m (2017: £17.2m). The Group's cash and cash equivalents at 31 December 2018 were £8.6m (2017: £8.4m). The resulting net debt was £64.4m (2017: £32.3m). The weighted average cost of debt, using 31 December 2018 balances and rates, was 3.3% with a 0.84% non-utilisation fee on undrawn RCF amounts (2017: 3.0% with a 0.8% nonutilisation fee on undrawn RCF amounts). For the twelve months to 31 December 2018 Harworth's interest cover, as calculated by the RBS/Santander RCF covenant calculation, was 4.65x (2017: 3.41x) against a covenant test of 1.5x.
As a result of the receipt of cash from December 2018 transactions, cash and undrawn facilities as at the end of February 2019 increased by £6.8m to £56.4m, with net debt falling to £56.5m.
The graph below shows the repayment profile of the £73.0m of borrowings and loans as at 31 December 2018:
On 1 August 2018 Harworth confirmed that it had received approval from the UK Listing Authority for the transfer of the listing category of all of its ordinary shares from a standard listing (shares) to a premium listing (commercial company). Harworth subsequently satisfied the conditions for UK FTSE indices inclusion and joined the indices on 24 September 2018.
Andrew Kirkman
Finance Director 16 April 2019
The 112-acre former McCormick Tractor Factory site in Doncaster, purchased by Harworth in December 2015, is the first of its non-legacy portfolio to yield sales receipts following three years of detailed planning, site investigation and remediation works and the completion of on-site infrastructure including new roads and drainage.
The site is adjacent to one of the principal gateways into Doncaster, less than two miles from its town centre and close to both established residential communities and commercial developments including retail and showroom uses. Harworth replanned the site's consent with Doncaster Council in 2017 to create a market-facing outline of 600 new homes and 250,000 sq. ft of commercial space including retail uses, a care home and retirement village.
Parcel C1, a plot totalling approximately six acres, was sold to Arnold Clark at the end of 2017 following its receipt of reserved matters planning consent and Harworth's preparation of an engineered development parcel ready for development. Arnold Clark is now constructing a car showroom which will complete in 2019.
Harworth built on this momentum in 2018 with the preparation of land for the first of four residential phases at the development. Barratt Homes acquired an 11.4 acre parcel in November, where it intends to construct 191 homes across a range of tenures from Spring 2019. Barratt is a repeat customer of Harworth, following previous land purchases at Waverley in Rotherham and Pheasant Hill Park, the former Rossington Colliery further east in Doncaster.
Further land parcels will be prepared by Harworth in 2019, including for the development's second residential phase and for other commercial uses. The development is expected to take around seven years to complete in line with its outline planning consent.
| Site's previous use | Tractor factory between 1946 and 2007; site laid dormant from then until 2015 |
|---|---|
| Total acreage | 112 |
| Nearby development | Doncaster College; range of car dealerships; Wheatley Hall Retail Park; long-established residential communities in Wheatley |
| Focus of Harworth work between 2016 and 2018 |
Demolition of vacant buildings; re-masterplanning of previous outline consent; cut and fill to create development platforms, alongside creation of new access; negotiation with housebuilders and commercial occupiers |
| Confirmed purchasers | Arnold Clark Barratt Homes |
The Board has ultimate responsibility for determining the risk appetite of the Group and for the implementation and regular review of policies, processes and controls to mitigate and manage risk. The Board recognises that not all risks can be eliminated, or sufficiently mitigated at an acceptable cost and that there are some risks which, given the nature of the Group's business and the growing track record and experience of the team, it is prepared to accept. The Board also recognises that the Group's insurance programme plays an important part in reducing the impact of certain inherent risks which are neither acceptable nor capable of removal.
The Group Risk Register ("GRR") is the principal tool used by the Board and senior management team for monitoring the strategic risk profile of the business and the measures in place at an operational level for mitigating and managing risk. The GRR maps the risk profile of the business, with individual risks currently grouped into eight categories, being: markets (M); delivery (D); politics (P); finance (F); people (PP); legal and regulatory (L); governance and internal controls (G); and communications and stakeholder management (C). Those categories remain subject to regular review. Risks are scored on a "heat map", from "very low" to "very high", according to residual risk status (after accounting for mitigation measures already in place) and materiality. Emerging risks are also identified, together with steps that have been identified to mitigate them.
The GRR is now reviewed quarterly by both the senior management team and the full Board. Updates are made as necessary, both to the profile of certain risks and, in some cases, risk categories, and to the risk mitigation and management measures undertaken and planned, together with the anticipated impact of such measures to reduce risk exposure. Quarterly reviews also identify any emerging risks. Those quarterly reviews are informed by both the Board's high-level assessment of risk and more detailed operational feedback from senior management, following consultation with their respective teams. The risk profile of the business, as reflected in the GRR, is measured against the Board's risk appetite, which is reviewed annually. The Board's objective is to maintain, as far as possible, an alignment between its risk appetite and the risk profile of the business.
20–25
Increasing Unchanged Decreasing
Harworth risk profile
* Impact risk scoring determined by one or more of Balance sheet, P&L or reputational inputs
6–10
11–16
1–2
3–5
The executive team, supported by the senior management team, has ultimate responsibility on a day-to-day basis for: the Group's risk profile; the implementation of, and adherence to, risk management controls and procedures; and monitoring the continued effectiveness of the same. Following regionalisation of the business the management of operational risks relies increasingly on a framework of internal controls and processes for: monitoring existing and emerging (but identified) risks; identifying new operational risks; and ensuring the effectiveness of risk mitigation measures. Work is ongoing to evolve those controls and processes in the context of the new regional structure. That said, the business continues to have a relatively small team and short reporting lines and members of the senior management team are, therefore, closely involved in day to day operations and often able themselves to identify new and changing risks.
The GRR identifies an "owner" of each risk, being a member of the executive team, who takes responsibility for the status and management of that risk, in some cases with support from other members of the senior management team. All members of the senior management team consult regularly with their teams about, and feed-back (to the Management Board) on, existing and new operational risks, and the effectiveness of risk management measures. This feed-back is reflected in the quarterly updates to the GRR.
Alongside maintenance of the GRR:
Operational Teams: Real-time reporting and feedback to Regional Directors and Divisions Leaders on existing and new risks and on risk management measures
Board: Ultimate responsibility for risk appetite and management. Annual review of risk appetite. Quarterly review of risk profile and management, in conjunction with
Management Board
Delegated authority for monitoring internal controls and processes, including overseeing annual, external audit of controls and the need for an internal audit function
Management Board: Responsible for day to day risk profie and ensuring implementation of, adherence to, and effectiveness of,
risk mitigation and risk management measures. Quarterly review of risk profile and risk management ahead of Board review
Regular site visits and maintenance of site risk register, material changes to which are reported to the Board monthly and are incorporated in reviews of the GRR
The Group is currently operating against a backdrop of heightened economic and political turbulence surrounding the UK's exit from the EU. The Board is mindful that these macro conditions could lead to a downturn in the regional residential and/or commercial property markets in which the Group operates. Alongside the 2019 budget and five-year strategic plan presented to the Board in the fourth quarter of 2018, the executive team modelled a severe market downturn lasting throughout 2019 and 2020. It forecast the potential impact on, and headroom in, the Group's property valuations and cashflow, and the measures available to the Group to mitigate against the same. That analysis has demonstrated that the Group, which is well-capitalised and has low financial gearing, is in a resilient position both to withstand adverse market movements and to capitalise on acquisition opportunities which may arise in a climate of continued economic and political uncertainty. Further detail is set out in the viability statement on page 45.
Notwithstanding the Group's downside forecasting, the housing, logistics and manufacturing markets in the Group's core regions remain supported by long-term fundamentals and both local and central government policy, and currently do not show signs of a material downturn. That said, there is some evidence of a slow-down in the rates of sales by housebuilders. This prompted a short delay to, and a change to the payment structure of, one prospective sale of residential land at the turn of the year, albeit contracts have now been exchanged for that sale. That example apart, we have not experienced any adverse impact on sales.
The increased likelihood of a downturn in the residential and/or commercial property markets, set against the current economic and political backdrop, has been reflected in the GRR by an increase in the risk status of the markets risk category, from "medium" to "high" risk (when compared to the 2017 Annual Report).
There has also been an increase in the risk status of the governance and internal controls category, from "low" to "medium" risk. This reflects that the Group's framework of internal controls and processes needs to evolve to respond to the regionalisation of the business. We expect this category to revert to a "low" risk status over the coming months as controls and processes are embedded into the regional structure, and certain other initiatives connected to cyber security and information security are implemented.
Whilst there have been some modest changes to the status of certain other individual risks across the business, there have been no material changes to the overall profile of other risk categories since publication of the 2017 Annual Report, with all other categories scored as either "medium" or "low" risks. We anticipate an increase in the risk status of the people category over the coming months, reflecting the recruitment and succession challenge as our regional structure continues to bed in. The status of all other categories is expected to remain unchanged.
Below is a detailed analysis of the Group's principal risks and uncertainties, similar to that in the 2017 Annual Report, reflecting the latest review of the GRR by the Board and the points referred to above. This analysis: (A) records the current profile of each risk category, after mitigation; (B) lists the mitigation measures already in place and those identified for implementation over the next 12 months; and (C) indicates how each risk category could impact our strategic priorities.
| Current risk profile | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Key | Very Low | Low | Medium | High | Very High | ||||
| Our estimate of the current level of risk, taking account of controls and mitigation already in place. Risk is difficult to estimate with accuracy and so may be more or less than indicated |
VL | L | M | H | VH | ||||
| Anticipated movement in risk profile | |||||||||
| Increasing | Decreasing | ||||||||
| Current assessment of anticipated movement in risk in the next 12 months |
|||||||||
| Link to Strategy | |||||||||
| Link to Strategic Priorities | |||||||||
| Development | Investment | Sectors | Regions | Acquisitions | Gearing |
| Summary of the Group's Risk Profile | ||||||||
|---|---|---|---|---|---|---|---|---|
| Risk categories | Markets (M) | Delivery (D) | Politics (P) | Finance (F) | People (PP) | Legal + Reg'tory (L) |
Governance + Controls (G) |
Communications + S'h M'mnt (C) |
| Risk appetite | M | M | M | M | M | VL | L | M |
| Risk profile | H | M | M | M | M | L | M | L |
| Expected |
change
Note: based on the latest review of risk appetite and risk profile undertaken by the Board and referred to on page 34.
Turn to page 4 to read about Our strategy
A downturn in one or more of the property markets in which we operate, being the residential, logistics and manufacturing property sectors in the North of England and the Midlands, could: limit value gains across our portfolio or, in extreme cases, cause parts of our portfolio to drop in value; restrict the number of planned sales we make; and/or result in underperformance by our Income Generation assets.
Those adverse consequences could be exacerbated if our strategy does not evolve to respond to changes in our core markets.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
H
The "high" risk rating of this category reflects that we appear to be late in the property cycle and potential concerns about a market downturn, together with the backdrop of heightened political and economic turbulence as negotiations continue for the UK's exit from the EU. Against that backdrop, we expect the risk rating will remain high during 2019.
The executive team monitors, and updates the Board at least monthly on, prevailing market conditions. Given current turbulence in the macro economic and political climate, the Group's plans remain subject to ongoing review and will evolve to respond to any material movements in the Group's core regional markets.
We will continue to take steps to widen our geographical footprint, which will further mitigate against market movements at a regional level.
R2. Delivery Determined by exposure to both external and internal factors
M
Our ability to generate EPRA NNNAV growth and/or grow our investment returns could be adversely affected by external factors, such as: a sparsity of and/or increased competition for attractive acquisition opportunities; adverse planning decisions; or market-driven increases in development costs, or by internal factors, such as poor operational delivery.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
The "medium" risk rating of this category reflects the balance between: more competition for acquisition targets and some uncertainty around future labour and raw material costs once/if Brexit is implemented, which elevate risk; and our successful track record on planning promotion and continuous improvements to internal processes and controls, which mitigates the risk. We expect the profile of this risk category to remain largely unchanged over the coming 12 months.
Our planning promotion team has a proven track record for promoting schemes through the planning application process. Success is achieved through careful masterplanning and preparation of applications, alongside tireless stakeholder management at a local level.
The Governance and Internal Controls section below identifies the steps we are taking to embed our framework of internal controls and internal reporting regime into the new regional structure, to ensure effective operational delivery and appropriate reporting of financial and commercial information to the executive team and Board.
Changes in national and/or local government policy, including planning, could impact the Group's activities.
Current risk profile: Strategic priorities potentially impacted: Anticipated movement in risk:
M
The "medium" risk rating of this category reflects: the relative stability of central Government planning policy (Help to Buy persists and there were only modest changes to the National Planning Policy Framework), and the broadly supportive backdrop of local planning policy; balanced against the challenges faced as a result of HS2 safeguarding, and the medium-term potential for a Land Value Capture initiative. We expect the profile of this risk category to remain largely unchanged over the coming 12 months.
During 2018 we effected a sale of the majority of our Lounge site, which is also subject to safeguarding by HS2 Limited.
We will play an active role in the newly established BPF Regional Policy Committee, which is to be chaired by Owen Michaelson.
R4. Finance Determined by exposure to both external and internal factors
It remains our ambition to cover the Group's operating costs, interest, tax and dividends from ongoing rental and other operating income. A shortfall in income could impair our ability to maintain activity levels to deliver EPRA NNNAV growth and/or investment returns during periods of market downturn. It could also result in an interest cover covenant breach on our revolving credit facility.
We use debt capital, in the form of bank debt, infrastructure loans and a bonding facility, to help fund our activities. If that capital is temporarily unavailable, or only available at a materially increased cost, or our debt capacity is constrained, that could fetter our ability to grow EPRA NNNAV and/or investment returns.
Gaps in our insurance programme could lead to an irrecoverable financial loss.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
M
The finance category has a "medium" risk profile reflecting a balance between: a material increase in recurring income from acquisitions, direct development and asset management, an increase in our revolving credit facility limit to £100m, implementation of a new fixed interest rate hedge, and continuous improvements to financial reporting and forecasting; set against an increase in overheads from regionalisation and growth, and further work needed to secure additional infrastructure loan funding. We expect the profile of this risk category to remain largely unchanged over the coming 12 months.
All covers were reviewed at the January 2019 insurance renewal, as a consequence of which a cyber security insurance policy was put in place and business interruption cover was increased.
We intend to commence construction of a third phase of the "Multiply Logistics North" speculative development, alongside LCPF. Other direct development opportunities will be monitored.
We recognise that, alongside our property portfolio, Harworth's people are its biggest asset. If we undertake inadequate resourcing and succession planning or fail to engage properly with, develop and/or retain, our people, this will have a severely adverse effect on the performance of the business and our ambitions for growth.
We also recognise the value of diversity at all levels of the business and aim to improve this progressively.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
| M |
The "medium" risk rating of this category reflects the challenge of a modest increase in staff turnover following implementation of a regional structure, but also the opportunities it presents for career progression and the work undertaken (and ongoing) on succession planning and employee engagement.
Given the continued bedding in of the regional structure and the modest increase in staff turnover, it is anticipated that recruitment and succession will be more of a challenge over the coming months, reflected in an anticipated increase in risk rating for this category.
There has been some modest progress in improving diversity across the business, albeit there remains a lot more work to do. There is an update on progress and initiatives on pages 51 to 53 of the Our People section of this report.
We will recruit for the regional roles which have not yet been filled and for succession.
R6. Legal and Regulatory Determined by exposure to both external and internal factors
Given the nature of our operations and certain of our legacy and acquired sites, management of environmental and health and safety risks and regulatory compliance, are key components of our activities and are afforded very high priority. The Board has limited appetite for environmental risk and seeks to minimise health and safety risk as far as possible. Environmental and/or health and safety incidents and/or regulatory breaches (under the General Data Protection Regulation ("GDPR"), Bribery Act or Modern Slavery Act, for example) could result in costs, financial penalties, liabilities to third parties and/or reputational damage.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
| L |
The Board has a "very low" risk appetite for legal and regulatory risks. Given the nature of the business, there is an inherent environmental and health and safety risk in the operations we undertake. This means that, whilst every effort is made to mitigate risk to the greatest extent possible, the risk scoring of this category remains "low" rather than "very low" as per our risk appetite.
Mandatory online training was delivered to all staff in the second half of 2018 on the avoidance of modern slavery, bribery and facilitation of tax evasion, and whistleblowing. This coincided with the introduction of a new and more robust whistleblowing policy and procedure.
The structure and composition of the EES team will remain subject to review to ensure that it evolves, in terms of skillset and experience, with the estate management needs of our portfolio.
R7. Governance and Internal Controls Determined by exposure to largely internal factors
Deficiencies in our governance measures and/or internal controls and processes (including cyber and information security measures) could lead to inefficiencies, financial underperformance, or even financial loss and/or liability.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
| M |
The "medium" risk scoring for this category is higher than the Board's "low" risk appetite. This reflects that the Group has identified that its framework of internal controls and processes and internal reporting regime needs to evolve to respond to the regionalisation of the business. We expect this category to revert to a "low" risk status over the coming months as controls and processes are embedded into the regional structure, and certain other initiatives connected to cyber and information security are implemented.
A new and more robust whistleblowing policy and procedure was implemented during 2018.
Our internal controls and processes will remain subject to ongoing review, including external audits on an annual basis, to ensure they remain "fit for purpose" as the business grows and delivers via a regional structure and across a growing portfolio. This will continue to include an annual review by the Audit Committee as to whether the business should establish an internal audit function. Such a function does not currently exist because, to date, the executive and the Audit Committee has concluded that the business is neither large, nor complex, enough to warrant it.
R8. Communications and stakeholder management Determined by exposure to both internal and external factors
Working with a broad spectrum of stakeholders is fundamental to our business activities and performance. If we do not communicate properly with our investors and maintain strong relationships with all stakeholders this will lead to underperformance, both operationally and of our share price.
| Current risk profile: | Strategic priorities potentially impacted: | Anticipated movement in risk: |
|---|---|---|
| L |
The "low" risk profile of this category reflects the extensive work undertaken: to improve our investor relations programme; and to review our engagement with stakeholders and formalise the way we consider stakeholder interests when making strategic and significant operational decisions. We expect the profile of this risk category to remain largely unchanged over the coming 12 months.
Please see the Our Partners section of this report on pages 56 to 63 for more detailed explanation of the means by which we identify, engage with, and consider the interests of our stakeholders. Measures have been implemented to improve engagement between the Board and employees. Please see the Our People section of this report on pages 50 to 53 for more details.
Significant planning promotion and consultation exercises will continue in relation to our Ironbridge and Wingates sites, amongst others.
The Directors have assessed the Group's prospects, both as a going concern and in the context of its viability longer term. This assessment informs the following distinct statements:
Both assessments are closely linked to the Directors' robust assessment of the principal risks facing the Group (including those that would threaten its business model, future performance, solvency or liquidity), which is outlined on pages 37 to 44.
Accounting standards require that the Directors satisfy themselves that it is reasonable for them to conclude whether it is appropriate to prepare financial statements on a going concern basis. There has been no material uncertainty identified which would cast significant doubt upon the Group's ability to continue using the going concern basis of accounting for a period of at least 12 months following the approval of this Annual Report. In assessing going concern, the Directors take into account the Group's cash flows, solvency and liquidity positions and borrowing facilities – this is reinforced by the work performed as part of the five-year strategic plan as set out in the viability statement below. At year end, the Group had cash and cash equivalents of £8.6m, net debt of £64.4m and a net loan to value of 12.3%. The Group has a £100m revolving credit facility with RBS and Santander, which contains typical financial covenants and runs until February 2023. At the year-end there was headroom of £41.0m in that facility. It also has infrastructure loans totalling £14.4m. The financial position of the Group, including information on cash flow, can be found in the Financial Statements on pages 126 to 175. In determining whether there are material uncertainties, the Directors consider the Group's business activities, together with factors that are likely to affect its future development and position (see Our strategy (pages 4 and 5), How we add value (pages 6 and 7), The markets we operate in (pages 8 and 9) and the Group's principal risks and uncertainties (pages 36 to 44)).
The Directors have assessed the prospects of the Group over a longer period than the 12 months required by the 'Going Concern' statement. The Board conducted this review for a period of five years ending 31 December 2023, with three years of detailed assessment and two years in outline. This period was selected for the following reasons:
The five-year strategic plan review focuses on the expected growth of the business primarily in terms of EPRA NNNAV including dividends. The strategic plan review also considers the Group's valuations, recurring income, cash flows, covenant compliance (particularly interest cover), financing headroom and other key financial ratios over the period. These metrics are subject to sensitivity analysis which involves flexing the main assumptions underlying the forecast both individually and in unison. Further work was performed in this year's strategic plan to look at business resilience in 2019 and 2020 given heightened political and economic uncertainty.
The main assumptions relate to the forecast supply and demand dynamics for the residential and commercial property markets, and the availability of acquiring new sites. Where appropriate, analysis is carried out to evaluate the potential impact of the Group's principal risks occurring. The five-year review also makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required.
The principal risks and uncertainties that are considered relate to economic assumptions, income generation variability and appropriate staffing levels. Principally, these fall within the Markets, Delivery, Politics and People categories of risk identified on pages 37 to 39 and 41. Sensitivity analysis has been applied in terms of value gains and valuations (particularly in the context of loan to value covenants and availability of our banking facility), income generation, cash flow and EPRA NNNAV impacts. These risks are fairly well balanced on the up and downside. If needed, more cash could be generated through increased sales and/or reduced development spend and acquisitions. Such cash could be targeted toward the acquisition of income generating properties, if needed to raise available income.
Based on the results of this analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.
2018 was a record year of acquisitions for Harworth, with eleven sites being purchased for a total consideration of £57.9million – more than double 2017's quantum. These acquisitions added £3.1m of long-term income to improve the quality of Harworth's income base alongside strategic land purchases that could deliver c. 2,000 plots and over 1.5m sq. ft of commercial space.
In total, 883 acres were acquired across the North of England and the Midlands, with five key strategic land purchases of note. Significant progress was made in the Midlands, with the purchase of the 350-acre Ironbridge power station in Shropshire from Uniper marking Harworth's second former power station purchase since 2014. Public consultation has already begun on a 1,000+ home residential and leisure development, with a planning application to be submitted before the end of the year. Two strategic land purchases were also made in Leicestershire to supplement Harworth's strategic landbank close to its major development at Coalville, with the first application – for c.365,000 sq. ft of commercial space across 53 acres – already submitted to North West Leicestershire District Council for determination in the first half of 2019.
Strong progress was also made in the North West, with the 56-acre purchase of the Moss Nook site in St Helens from Banks Property Group marking Harworth's entry into the region's residential development market. The site was the subject of a range of industrial uses for the best part of a century and with an outline consent already in place for 900 new homes, Harworth will begin preparing land in 2019 to sell the first phase to a housebuilder. As also referred to within the first case study, a further 97 acres of potential commercial land was purchased just off Junction 6 of the M61 in Bolton at Wingates as part of the assembly of land for a new commercial development of 1.1m sq. ft of new manufacturing and distribution space. This is now the subject of a planning application which is expected to be determined by Bolton Council in the first half of 2019.
Harworth now has an active churn strategy of selling mature income generating sites with limited potential for further value uplift. The sales proceeds are then reinvested into higher income yielding sites with future development potential. This strategy resulted in two significant incomeproducing sites being acquired in the year. The first, the 112-acre Nufarm site in Bradford, includes a 32-acre agrochemical works let to Nufarm UK Ltd on a lease that expires in 2055 at a current passing rent of £2.1m per annum, alongside 80 acres of unoccupied land with the long-term potential for a new commercial development. In addition, the 22-acre Flaxby site in Harrogate, less than 1 mile from the A1(M), was purchased for £8.75m prior to modular homes manufacturer, Ilke Homes, agreeing a new 14-year lease that represented a stabilised initial yield of 10.9%. In addition to generating an additional £3.1m of new income per annum combined, both purchases contributed to Harworth's improved WAULT position at the end of the year of 14.1 years and a reduced vacancy rate across its Business Space portfolio of 14%.
With a solid five-year track record of acquisitions now in place and over £50m cash/facility headroom in place at the end of 2018, Harworth's investment in its regional model in Yorkshire & Central, the Midlands and the North West provides a further source of competitive advantage in developing the relationships required to bid successfully on further strategic land and income-producing sites in the future.
Former Ironbridge power station
| Quantum of purchases since 2014 | Over £140m spent across c.30 sites |
|---|---|
| Split between acquired sites and former coal mining sites now in Harworth's portfolio |
By value 31% acquired and 69% former coal mining |
| Geographic range of purchases since 2014 | South: Droitwich, Worcestershire North: Former Alcan Smelter, Northumberland |
| Total consideration of purchases made in 2018 | £57.9m across 11 sites plus up to a further £3.25m depending on planning |
| Additions to portfolio in 2018 | £3.1m of additional income Over 2,000 potential residential plots and over 1.5m sq. ft of potential commercial space to be the subject of future planning applications |
| Acquisitions focus | 100+ acre strategic land purchases, including former power stations and public sector owned land Income producing acquisitions with wider strategic land potential |
Our long-term success as a business is underpinned by a commitment to Corporate, Social and Environmental responsibility. Our approach falls into five core areas which are explained in more detail over the following pages.
Long-term, sustainable performance must be underpinned by the development and retention of our people, together with the recruitment of individuals who buy into the Harworth culture, to support our growth ambitions. We can only achieve that if we: promote a strong and positive culture; engage meaningfully with our employees; take steps to improve diversity, in its widest sense and at all levels of the business; create an environment in which our employees can develop their skills and experience; and reward them appropriately for their hard work and contribution.
The Board recognises that effective stakeholder engagement is a key component of good corporate governance and will help to promote long-term, sustainable success and growth. The Board has always had regard to its obligations under section 172 of the Companies Act 2006 but, having regard to the 2018 Code and to guidance published by ICSA and the Investment Association, during 2018 the Board re-assessed its approach to stakeholder engagement. One of the principal outputs from that review was a stakeholder map which is summarised on pages 56 to 63. This identifies our key stakeholders, records how we engage with them, identifies the strengths in that engagement but also, importantly, the challenges we face and the improvements we can make.
Harworth takes its responsibilities as a sustainable regeneration company extremely seriously. Working safely and with appropriate regard to our legal obligations forms a critical part of being socially responsible in our day-to-day delivery.
As one of the UK's leading regeneration companies, we recognise that we influence the design and delivery of future communities. It is a serious responsibility and one that we are proud to deliver on in the way we: design and deliver our projects; and work with local communities during their build-out.
With many years' experience in regenerating large and often complex development sites, Harworth has an established track record in managing the environmental impact of its operations. This includes: recycling materials from demolition and land remediation; tackling the environmental legacy of previous industrial site uses; and encouraging staff to take personal responsibility for reducing harmful emissions from our activities.
The development of large and complex sites and the intensive asset management of our investment properties is only possible with a team of skilled, experienced, innovative and dedicated professionals. There is no better demonstration of this than the extent to which value gains are driven by active management of the Group's assets. Whilst the Harworth team has grown during the year, with the introduction of a regional operating structure, it remains relatively small. Long-term, sustainable performance must be underpinned by the development and retention of our people, together with the recruitment of individuals who buy into the Harworth culture, to support our growth ambitions. We can only achieve that if we: promote a strong and positive culture; engage meaningfully with our employees; take steps to improve diversity, in its widest sense and at all levels of the business; create an environment in which our employees can develop their skills and experience; and reward them appropriately for their hard work and contribution.
We believe we have a strong and positive working culture at Harworth, but we feel that it needs to be defined better so that we can preserve and promote it as we continue to grow and embed our regional operating structure. An exercise, led by our Head of HR and Organisation Development, to formalise Harworth's core values, with the ultimate objective of defining them and our culture, is well underway and will be completed during this year. Once completed, we will use it as a framework for recruitment, decision-making and behavioural training across every aspect of the business.
The Board and executive team recognise the importance and benefits of engaging meaningfully with employees and considering how both strategic and operational decisions will impact the workforce. The Board is also mindful of the need to comply with 2018 Code in this regard.
Encouraging higher levels of employee engagement is a priority and measures have been introduced to achieve that objective. Recognising that effective engagement requires multiple forums and means, the following initiatives are in place:
One of the most important aspects of our employee engagement strategy is our PSG, which we established in the first half of 2018. It meets quarterly and comprises twelve employees, selected by our Head of HR and Organisation Development, from different teams across the business, seeking an appropriate mix, based on (amongst other things) length of service, experience and diversity.
The purpose of the PSG is twofold. From an operational perspective, it takes a lead in identifying and developing a "people agenda" and in proposing and implementing initiatives to drive that agenda. The group is also a forum for engagement between the Board and employees. PSG meetings are scheduled to take place immediately after Board meetings. This means two or three of our Non-Executive Directors can attend part of the PSG meeting where the views and concerns of employees are identified and discussed. Those views and concerns are fed back to the wider Board at the next Board meeting.
Ahead of its coming into force, the Board considered at length how best to satisfy the Group's obligations on workforce engagement under Provision 5 of the 2018 Code. Having regard to the nature and scale of Harworth's business the Board considers that the combination of measures listed above will facilitate effective engagement with employees. In particular, it views the engagement with the PSG as being akin to there being a designated "workforce" Non-Executive Director on the Board. Indeed, rather than there being a single designation, all Non-Executive Directors undertake that role at some point during the year. The Board will review the ongoing effectiveness of all engagement measures annually.
Whilst engagement with the workforce is important, it would be of limited value if the Board does not then consider the interests of employees when making its decisions, particularly those of a strategic nature or having widespread operational implications. The Our Partners section of this Report on pages 56 and 63 explains how the Board has taken steps to formalise the way in which stakeholder interests, including those of employees, form part of the Board's discussions and decision-making process. By way of example, the Board was mindful, and took account of the fact, that the move to a regional operating structure would present both challenges and opportunities for the workforce.
Engagement with employees at an operational level is equally important, particularly as we grow and embed our new regional structure which, without effective communication between teams, carries the risk of a "silo effect". The executive team, with support from the wider senior management team, continues to work hard to ensure effective engagement is maintained. We have a framework of active engagement which includes:
We recognise the benefit of a diverse (in its widest sense) workforce comprising individuals with different backgrounds, experience, perspectives and ideas. Like much of the real estate and construction sectors, we face a significant challenge to achieve that but we are fully committed to meeting it.
We are working hard to address that challenge but recognise that, with a small team and relatively low staff turnover (itself a positive), this will take time. To do so effectively we must first be transparent about the size of the challenge and the progress we are making along the way.
The analysis over the following pages demonstrates the gender imbalance across the Harworth team, particularly amongst the Board and senior management team. We are also mindful that there are still no individuals from an ethnic minority background working at Harworth. For transparency, whilst Harworth is not obliged to publish gender pay gap statistics, we have decided to undertake gender pay gap analysis. We reported on it voluntarily in the 2017 Annual Report and have done so again in this report.
Since publication of the 2017 Annual Report, we have applied more structure to our efforts in promoting and monitoring diversity. At a Board level, the Nomination Committee takes the lead on promoting and assessing the achievement of diversity across the business, in alignment with the 2018 Code. The Nomination Committee's annual timetable includes a review of diversity, particularly on the Board and at a senior management level, and the effectiveness of measures to improve it. Diversity is also an active and important consideration in the Committee's succession plans, reflected in the most recent appointments to the Board (see further below). The Nomination Committee reports and provides recommendations to the Board annually.
In September, the Board approved the adoption of a new Diversity and Equal Opportunities policy which addresses diversity more explicitly, gives it the prominence it merits, and reflects the proactivity with which the Board is looking to address the diversity challenge.
Whilst appointments will always be based on merit, Harworth is committed to giving women and people from ethnic minorities every opportunity to apply for, and be appointed to, the new and replacement roles for which we recruit and, as such, our desire to encourage diversity is a prominent consideration when we are recruiting at all levels of the business. We have implemented a policy by which candidate long-lists prepared by recruitment consultants will be rejected if they do not contain a diverse list of candidates.
These measures complement some other initiatives which were already (and remain) in place and are designed to ensure that opportunities for recruitment, development and promotion are available to everyone, regardless of circumstances or background:
The appointments of Ruth Cooke and Angela Bromfield to the Board represent positive progress on diversity. At an operational level, despite the work we undertook with our recruitment consultants to identify a diverse list of candidates, our most senior external appointments during 2018 were males. This means that all the members of our executive team continue to be male. The senior management team comprises three females and eleven males. That said, there has been more gender diversity across the candidates we have recruited for new roles in our regional structure. Overall, we have recruited for 11 new roles since publication of the 2017 Annual Report and 6 replacement roles. The gender balance of our recruitment is shown below:
| Females | Males | |
|---|---|---|
| Recruitment into new roles | 5 | 6 |
| Recruitment into replacement roles | 3 | 3 |
There were seven promotions during the year. Out of a workforce which was split 71% male : 29% female, five were promotions of male employees and two, including one to the senior management team, were of female employees.
It is important to stress that, whilst the Group's desire to improve diversity will be a consideration in decisions on recruitment and promotion, selections continue to be made based on merit and ability.
The results of our latest gender pay gap analysis (which reflects the position at April 2018) appear below, alongside the results from 2017. Overall, this analysis reflects some modest improvements in our gender pay gap statistics. Our mean and median gender pay gap has reduced. Our mean bonus pay gap remains broadly unchanged and our median bonus pay gap has increased slightly. This is attributable to our recruitment of females into more junior roles during the period, which reduces the median bonus figure for females across the business. We do not consider this to be a negative development, as these individuals should represent our future leaders. Positive movements in the lower and lower middle quartile analysis reflect the recruitment of females into junior and middle management roles in the regions. A positive shift in the upper middle quartile analysis is attributable to the promotion of our Head of HR and Organisation Development to the senior management team during the period.
| BOARD | INVESTMENT COMMITTEE2 |
MANAGEMENT BOARD3 |
ALL EMPLOYEES | |||
|---|---|---|---|---|---|---|
| 3 | (1) | 0 | (0) | 3 | 20 | (15) |
| 7 | (7) | 8 | (6) | 11 | 48 | (42) |
Note – figures in brackets reflect 2017 position.
1 At the date of this Report
2 Investment Committee of 8 has replaced Executive Committee of 6
3 Management Board is a newly formed committee and so has no like for like comparator from 2017
| Lower | Lower middle | Upper middle | Upper | ||||||
|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||
| Males | 60% | 64% | 53% | 69% | 94% | 100% | 90% | 90% | |
| Females | 40% | 36% | 47% | 31% | 6% | 0% | 10% | 10% |
We believe that our gender pay gap is more a function of historic trends across the property and construction sectors than reflective of a "Harworth" approach. These figures reflect the fact that, historically, men have held the vast majority of the most senior jobs in the property and construction sectors and, as such, our gender imbalance is particularly stark at the executive team level. Whilst we recognise this balance will take time to address this is something we are committed to achieve.
Whilst Harworth has a long way to go in improving diversity across its business, we have long been committed (since Harworth's formation in 2012) to creating a working environment that is free from discrimination, harassment and victimisation, where everyone feels valued and respected. This includes:
which one would expect from all responsible businesses.
The Nomination Committee leads on succession planning and development for the Board and executive team.
In the second half of 2018 our Head of HR and Organisation Development undertook a detailed review of succession and development plans for each role in the business (outside of the executive team). The output from that review was analysed first by the executive team and then presented to, and scrutinised by, the Board. A similar exercise will be undertaken each year for the recently expanded executive team.
All our employees have undertaken an externally facilitated "Insights" personality profile exercise, which helps us to understand the dynamics of our teams and informs our recruitment of new employees and our plans for CPD of existing team members. It also assists in optimising the way members of our executive and senior management teams engage with each other.
During 2018 work was undertaken by our Head of HR and Organisation Development to improve the structure of our appraisal process. It now follows a more rigorous and consistent process and timetable which ensures that performance is managed and development needs are identified early.
Many of our employees regularly attend external training courses, often to satisfy ongoing CPD requirements for their professional qualifications. This is often complemented by workshops and webinars hosted internally, typically with input from our professional advisers. Six of our employees continue to work towards professional qualifications. We support all employees in the pursuit and renewal of professional qualifications: both financially, and by encouraging CPD and the transfer of knowledge from senior to junior employees.
External coaching continues to be available to our executive and senior management teams and we encourage them all to use this resource from time to time.
We offer a comprehensive employee benefits package for all employees, which includes a pension scheme with abovemarket employer contributions, private medical insurance, life insurance and income protection. The employer pension contributions and insurance cover for employees is consistent across the whole business.
Bonuses for those employees who are contractually entitled are awarded, in part, for performance against Group Financial Targets, which are aligned with the Group's strategy for long-term, sustainable growth and applied consistently across the Group. In 2018, these targets were based on NNNAV gains, sales volume, acquisitions and profit excluding value gains. The balance of all bonuses are awarded for performance against personal objectives.
Following a review of our Remuneration Policy we are proposing to adopt a Restricted Share Plan ("RSP") in place of the two long-term incentive schemes we currently operate. Our ability to cascade the RSP, the operation of which will be simple and transparent, is one of the key reasons we are advocating this change. Further details on our proposals for an RSP, and an explanation of the rationale for it, appear at pages 100 to 102 of this report.
We also operate an established Save-As-You-Earn ("SAYE") scheme, which gives employees an opportunity (annually) to save up to £500 a month over 3 years and then purchase shares in the Company at a discount of 20% to the market price of the shares at the outset of the scheme. To date, approximately half of our employees have chosen to participate in the scheme and we expect more to do so this year. Alongside the SAYE, we are proposing the introduction of a Share Incentive Plan ("SIP"). If this is approved by shareholders at the AGM it will afford a mechanism by which the Company can encourage share ownership amongst employees by awarding shares to employees, or encouraging them to purchase shares, both in a tax efficient manner. Together, our existing SAYE and a SIP are tangible ways in which we can encourage share ownership amongst our workforce and our employees can share in, as well as contribute to, the Group's success.
Whilst offering an appropriate remuneration package for our employees will always be of high priority, recognition is equally important. We, therefore, emphasise celebrating successes, such as at our staff conference, quarterly breakfast briefings and employee roadshows and in our newsletter.
The average number of persons, including Executive Directors, employed by the Group and our staff costs for the period under review are set out in Note 6 to the Financial Statements.
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 55
The Board recognises that effective stakeholder engagement is a key component of good corporate governance and will help to promote long-term, sustainable success and growth. The Board has always had regard to its obligations under section 172 of the Companies Act 2006 but, having regard to the 2018 Code and to guidance published by ICSA and the Investment Association, during 2018 the Board re-assessed its approach to stakeholder engagement. This assessment was undertaken to: identify the Group's principal stakeholders; appraise the levels of engagement by the Board and wider business with those stakeholders; and review how the Board takes into account the interests of stakeholders when making decisions. There were two principal outputs from that review. First, we established a "stakeholder map", which is summarised over the next few pages.
| STAKEHOLDER GROUP | ENGAGEMENT | STRENGTHS |
|---|---|---|
| SHAREHOLDERS | • There is Board representation for our two largest shareholders, Peel Group and the Pension Protection Fund |
• Lines of communication with the Peel Group and the Pension Protection Fund are strong given Board representation |
| • Formal financial results reporting and webinar presentation twice a year (followed by investor roadshows) alongside RNS and RNS Reach announcements throughout the year |
• Improved profile amongst investors, with the largest shareholders remaining long-term holders and new institutions joining the share register in the past twelve months. We feel the latter in part |
|
| • We host an analyst and investor site visit annually |
reflects improvements in the content and volume of our Investor | |
| • A Private Client Fund Manager programme is delivered during the year with support from Numis |
Relations programme • The step-up to premium list and admission to the FTSE index has |
|
| • There has been engagement by the Chairman with the largest shareholders following his appointment in March 2018 |
improved the profile of the Company's shares | |
| • There has been engagement with the largest investors and proxy advisory bodies on proposed revisions to our Remuneration Policy ahead of the 2019 AGM |
||
| CONTRACTORS AND SUPPLIERS | • All contractors, consultants and suppliers are subject to an initial "take-on" approvals process supervised by our Estates, Environment and Safety ("EES") team, which ensures a consistent vetting process. We assess all suppliers on merit, regardless of whether we have worked with them in the past |
• Relationships are managed by small groups of Harworth employees, which promotes strong personal relationships between Harworth personnel and their counterparts at our various suppliers |
| • Whilst we operate a long list of approved suppliers (see Challenges and scope for improvement), typically we engage small groups of trusted consultants and contractors on a repeat basis across multiple sites at any one time |
• We use overarching framework agreements for many of our trusted suppliers, with work orders for specific engagements. This promotes consistencies between engagements |
|
| • The frequency of engagement will depend on the identity and specialisms of the consultant, the type of works being undertaken, the stage works are at and the number of assignments being undertaken at any one time. For example, engagement with planning consultants will typically be dictated by planning promotion milestones, whereas there is routinely daily engagement with some of our direct development and engineering contractors and consultants |
• Payments are typically within 30 days of presentation of an invoice, provided a purchase order has been raised in a timely manner • Work has been undertaken with our legal advisors to produce "standard" consultant appointment documents which can be rolled out across the regions |
|
| • Where there is heavy use of certain suppliers, we have a regime of regular reporting and relationship management to enable performance monitoring and to highlight any issues early |
||
| FUNDERS | Banks | Banks |
| • There is regular engagement with our principal banks, with the provision of management information (quarterly) and requests for transaction consent. This is supplemented by relationship meetings at least every 6 months Infrastructure funders |
• We have a strong and well-established relationship with RBS and are well on our way to a similar relationship with Santander following its entry into RCF in 2018. These positive relationships reflect the transparency of our communication and the regularity |
|
| of our reporting, alongside consistent compliance with banking |
This identifies our key stakeholders, records how we engage with them, identifies the strengths in that engagement but also, importantly, the challenges we face and the improvements we can make. Second, we decided that the consideration of stakeholder interests needed to be embedded into Board decision-making in a more systematic way. We concluded that the best way to achieve that was to amend our Board transaction approval template to include two new sections on stakeholder interests. Clearly it is not enough merely for Board papers to reference stakeholder interest. It is those references which prompt discussion and form part of the decision-making process. From this year, the Board will undertake an annual review of the "stakeholder map" and the effectiveness with which it considers stakeholder interests in decision-making.
| STRENGTHS | CHALLENGES AND SCOPE FOR IMPROVEMENT | |
|---|---|---|
| • | Lines of communication with the Peel Group and the Pension • Protection Fund are strong given Board representation |
There is scope to improve our profile further with generalist investors |
| • | Improved profile amongst investors, with the largest shareholders • remaining long-term holders and new institutions joining the |
We must continue to implement a detailed and rigorous investor relations programme in conjunction with our brokers and |
| share register in the past twelve months. We feel the latter in part reflects improvements in the content and volume of our Investor • Relations programme |
communication advisers We will continuously improve the look and feel of our investor relations materials |
|
| • | The step-up to premium list and admission to the FTSE index has improved the profile of the Company's shares |
|
| • | Relationships are managed by small groups of Harworth • |
We are currently operating with a long "tail" of approved |
| employees, which promotes strong personal relationships between Harworth personnel and their counterparts at our various suppliers |
suppliers, whilst in practice we only use a small proportion of those on the approved list. We intend to rationalise our list of approved suppliers to reflect the smaller number of trusted |
|
| • | We use overarching framework agreements for many of our trusted suppliers, with work orders for specific engagements. • |
parties with whom we work We are looking to implement a more robust mechanism for |
| • | This promotes consistencies between engagements Payments are typically within 30 days of presentation of an invoice, provided a purchase order has been raised in a timely |
regular review of the ongoing status/suitability of suppliers. Work is planned to update our finance system so that it triggers regular reviews of supplier status |
| manner | • | Updates to our suite of precedent construction contracts are |
| • | Work has been undertaken with our legal advisors to produce | progressing |
| "standard" consultant appointment documents which can be • rolled out across the regions |
Our central functions (Planning, Engineering and Build) will need to ensure that, following regionalisation, a consistent approach is maintained to our engagement of consultants and contractors. This will be addressed as part of a wider initiative to evolve our internal controls and processes to reflect our new regional model |
|
| Banks | • | Discussions will continue with incumbent and additional funders |
| about site specific funding opportunities as and when these arise |
• We have a strong and well-established relationship with RBS and are well on our way to a similar relationship with Santander following its entry into RCF in 2018. These positive relationships reflect the transparency of our communication and the regularity of our reporting, alongside consistent compliance with banking covenants
• Our track record of effective delivery of schemes and repayment of loans means that we have a good reputation amongst public sector funders
• We have a strong track record with HCC as a result of our successfully delivering infrastructure works which are backed by HCC bonds
| STAKEHOLDER GROUP | ENGAGEMENT |
|---|---|
| REGULATORY BODIES | Environment Agency ("EA") |
| • Our Environmental Manager is in regular telephone contact with regional EA officers to discuss permit compliance, monitoring results, variations and surrenders |
|
| • We undertake regular site visits and inspections with EA representatives, hosted by our Environmental Manager |
|
| • We report monitoring results to the EA in a timely fashion to comply with permit conditions for certain sites |
|
| • When issues do arise (infrequently), our Environmental Manager is proactive in engaging with the EA |
|
| Health and Safety Executive ("HSE") | |
| • There is regular, informal engagement between our Operations Director and local HSE officers to discuss quarry and demolition operations |
|
| • Otherwise, engagement is reactive in the event of (infrequent) incidents |
|
| Forestry Commission | |
| • Our engagement is largely proactive, with regional officers, where we are in any doubt about our entitlement to fell trees pursuant to planning permission conditions. Engagement is typically via our retained ecologist for the site in question |
|
| LOCAL COMMUNITIES | • We engage early with local communities on all planning applications and maintain that engagement throughout all our planning promotion exercises. Once development begins, we actively engage with community groups on all our Major Development sites. For example, we meet monthly with the Cutacre (Logistics North) and Waverley residents' groups. A more detail explanation of our seven stage approach to local stakeholder engagement appears in the Social Responsibility section on pages 66 to 68 |
| • We have appointed the Lands Trust to manage the public open space at Waverley, our most mature residential development site. The public open space at all other residential development sites is managed internally by our management company function and steps are being taken to align our systems and service levels with those of the Lands Trust. For example, we have introduced welcome packs for existing and new occupiers on all sites and have established a more structured approach to service charge budgeting, invoicing and collection |
|
| JOINT VENTURE PARTNERS | • We operate three principal joint venture arrangements on our sites at Waverley (Waverley Square Limited), Gateway 45 (The Aire Valley Land LLP) and Logistics North (Multiply Logistics North LP). The forward funding arrangement with M&G Investments for the development and letting of units LN175 and LN225 at Logistics North has also operated in a similar manner. We tailor engagement with each of our joint venture partners to suit the project and partner. In most cases engagement is very structured, with scheduled Board and/or project meetings. Often, and particularly during periods of heightened activity, engagement is intensive, but informal, with regular (often daily) telephone and face-to-face contact as projects evolve and progress quickly |
| • At sites such as Cinderhill, we frequently work in collaboration (which can be formal or informal) with adjoining landowners who share a common purpose, typically the promotion of land for planning permission. In those circumstances, and in a similar way to our careful engagement with local communities, our planning managers work very closely with adjoining landowners and their agents every step of the way |
• Our Environmental Manager has established a strong relationship with local officers who, we believe, appreciate our openness and respect our professionalism and desire to "do the right thing"
• Similarly, we have had positive feedback from the HSE as to our expertise and openness
• The recent engagement by our environmental consultants with the EA has been sub-standard. We have recently appointed replacement consultants which should address this challenge
• There are inevitably instances on some joint venture projects where aspirations diverge. We will continue to work transparently and collaboratively with our partners where this arises. Clearly there may be strong and divergent characters and approaches amongst joint venture partners. We will continue to manage carefully our interface with all joint venture partners
| STAKEHOLDER GROUP | ENGAGEMENT | STRENGTHS | CHALLENGES AND SCOPE FOR IMPROVEMENT | ||
|---|---|---|---|---|---|
| PROFESSIONAL ADVISERS | • Our business model relies heavily on professional advisers and, as such, involves intensive engagement with many of them on a consistent basis |
• | We have long-standing relationships with our managing agents, letting agents, our legal panel firms, valuers, external auditors, insurance brokers and tax advisers, all of whom have a very |
||
| Corporate advisers | good understanding of the business, our sites and the way we | ||||
| • Auditors. Engagement with the external auditors includes but is not limited to: a review of audit strategy by the Audit Committee with the auditor every six months, ahead of preparation of the preliminary and interim results; an annual audit planning meeting between the auditor and the Finance team ahead of the year end audit; extensive engagement during the external audit of the year-end results and review of interim results; and lighter engagement throughout the year for the subsidiary company audits |
work • • |
business and to establish consistent working practices | Where relationships are less mature, such as with our current corporate brokers and remuneration advisers, we work hard to build relationships quickly, to help our advisers understand the Our advisers appreciate the "partnership" approach we adopt |
the 2021 renewal | |
| • Brokers. We have overarching engagements in place with Peel Hunt and Liberum. Our engagement with brokers is ad-hoc as the need for advice arises but is usually monthly. However, it is clearly more intensive ahead of the announcements of preliminary and interim results and during periods of capital markets activity |
• | with all of them. We are demanding but collaborative and appreciative of the work our advisers undertake |
We have narrowed the focus of our Head of Communications and Investor Relations who is now based in London. He has established effective working relationships with our brokers and |
with prospective replacements for PwC | |
| • Communication advisers. We have an overarching engagement agreement in place with FTI Consulting ("FTI"). Fortnightly calls are held with FTI to review the external communications tracker. There is more intensive engagement with FTI alongside stock market and media announcements |
communications advisers | advisers | |||
| Remuneration consultants. We have recently appointed Deloitte LLP • ("Deloitte") on a 3-year retainer. Our engagement with them has been intensive since appointment, as Deloitte is advising on the proposed revisions to the Remuneration Policy |
|||||
| Insurance brokers. We undertake annual relationship review meetings with • Marsh. Engagement is more intensive ahead of the insurance renewal. Otherwise, engagement is ad hoc when claims and/or queries arise and/or acquisitions are completed |
|||||
| • Tax advisers. Deloitte are the Company's retained tax advisers. There is intensive engagement ahead of the annual tax computations together with ad-hoc advisory instructions during the year. Deloitte also provides pension accounting advice |
|||||
| Operational advisers | |||||
| • Legal panel. There are framework agreements in place with our six panel firms. The panel is reviewed every 2 years. The Business Space team meets monthly with Keebles LLP, which undertakes all asset management legal work on our Business Space portfolio. Otherwise, relationship reviews with legal panel firms are typically ad hoc and largely reactive to issues identified by the business or firms |
|||||
| • Valuers. BNP Paribas and Savills are subject to annual appointments. There is extensive engagement ahead of publication of the year-end valuations. BNP Paribas and Savills are consulted on the half-year valuation review undertaken by management, but this is "lighter touch". There is also ad hoc engagement with BNP Paribas during the year when we consult it on planned acquisitions |
|||||
| • Agents. Monthly operational review meetings are held with LSH and Savills, our retained managing agents. Our sales and letting agents are subject to overarching appointments by region. Typically, monthly operational meetings are held with all agents in each region |
| STAKEHOLDER GROUP | ENGAGEMENT |
|---|---|
| LOCAL AND CENTRAL GOVERNMENT | • We engage with Local Government and Local Enterprise Partnerships principally via three methods: |
| • submission of, and all work related to, planning applications and discharge of planning conditions; |
|
| • bids for loan and/or grant monies to facilitate and/or accelerate infrastructure delivery; and |
|
| • promotion of key strategic opportunities at certain of our sites |
|
| • We engage with Central Government and MPs principally via three methods: |
|
| • bids for grant or loan monies, for example via Homes England; |
|
| • active participation in Central Government consultation exercises on key policy matters such as the National Planning Policy Framework ("NPPF"); and |
|
| • direct engagement and collaboration with MPs in connection with plans for, and initiatives at, certain of our sites |
|
| CUSTOMERS (SITE PURCHASERS AND TENANTS) | Capital Growth |
| • Our principal customers remain housebuilders and commercial developers/ occupiers. We maintain regular contact with housebuilders, both directly and via the residential agents, outside of the deal cycle |
|
| • Our engagement with existing and prospective commercial occupiers is principally through direct deal-making and typically via our professional advisors, including commercial agents |
|
| Income Generation | |
| • Our customers principally comprise Business Space, Natural Resources and agricultural tenants and power station operators |
|
| • Day-to-day engagement with Business Space and Natural Resources tenants is largely via our managing agents. We hold monthly meetings with our managing agents to identify where direct involvement and engagement with tenants by our Business Space and/or Natural Resources teams is needed |
|
| • Business Space site inspections (which often include some engagement with tenants) are undertaken by our site supervisor (fortnightly); our managing agents (monthly); and our asset managers (quarterly) |
|
| • There is regular (typically daily) engagement with power station operators, principally by our Director of Operations, to manage sales volumes |
• Our relationships with existing tenants is good, evidenced by the increased WAULT, reduced vacancy rate and comparatively little tenant churn across our Business Space and Natural Resources portfolios
• We plan to run tender processes for the Business Space managing agent role during 2019 and for the Natural Resources managing agent role in 2020
Harworth takes its responsibilities as a sustainable regeneration company extremely seriously. Working safely and with appropriate regard to our legal obligations forms a critical part of being socially responsible in our day-to-day delivery.
Health and safety has an extremely high profile in our business. Day-to-day review and management rests with our Estates, Environment and Safety ("EES") team, led by our Associate Director of EES. The EES team reports to our Company Secretary, who has a wider responsibility for governance, risk and compliance. Our Chief Executive has ultimate responsibility for all health and safety matters.
Harworth's Safety, Health and Environment Management System ("SHEMS") is based on the "Plan, Do, Check and Act" model advocated by the HSE. The EES team maintains a site risk register which rates each of our sites as "low risk", "medium risk" or "high risk", from a health and safety perspective. A medium or high risk rating recognises that action needs to be taken at the site, whether within a prescribed timetable (medium risk sites) or immediately (high risk sites). All our low and medium risk sites are inspected at least annually and our high risk-rated sites are inspected more regularly. At the date of this report, there were no "high risk" sites in the site risk register. The overall risk profile of our sites is reported to Board monthly. Material movements in this profile are fed into the quarterly reviews of the Group Risk Register (see the Managing Risk section of this report on pages 34 to 44).
Our EES team ensures that health and safety is embedded into all our activities. In 2018 mandatory health and safety training was delivered to all employees in the form of online tuition and testing. There was also targeted training for certain employees, such as training on The Construction (Design and Management) Regulations 2015 ("CDM") and asbestos handling which was delivered to our Major Developments and Operations teams. The team is scheduled to host a mandatory safety training day for all employees in June. This follows the success of a similar training day hosted in 2017. Further proactive safety initiatives are undertaken in the form of health and safety inspections and audits. The geographical spread of our sites is large and the type of sites is varied. Any issues reported, whether they are incidents or accidents, are logged and appropriate follow up action is undertaken and monitored by the EES team. This process is key to identifying areas for improvement across the portfolio.
We continue to engage JPW Consultancy Limited ("JPW"), an external health and safety consultant, to advise on health and safety issues across the business. JPW focuses on health and safety at our Major Development sites, including management of consortium meetings between Harworth and stakeholders at these sites, such as contractors and local authorities.
There were only three minor accidents recorded at our sites during the year. For completeness, this statistic includes
accidents involving contractors we have supervised. Where we have appointed a principal contractor under CDM they and their sub-contractors take responsibility for health and safety whilst works are ongoing, but we continue to monitor health and safety via JPW and/or our project managers.
There were no RIDDOR accidents or incidents or lost-time accidents reported by Harworth or any contractors working on Harworth sites during the year.
We are keen to ensure that the "health" in health and safety has equal prominence. Three of our employees now hold a mental health first aid qualification and those with traditional first aid qualifications have refreshed their training. Alongside this we have continued to promote ancillary measures designed to improve health and wellbeing amongst our staff, such as the construction of shower facilities at our Head Office for those who wish to exercise during the working day.
In terms of monitoring health and safety across our portfolio:
We are committed to having in place practices to safeguard respect for human rights, to combat slavery and human trafficking in our business and those of third party contractors, to ensure that no corruption or bribery takes place in our business or supply chain, and to ensure that our employees do not deliberately or inadvertently act in such a way as to facilitate tax evasion.
The Company has published Modern Slavery Statements in 2017 and 2018. A copy of the 2018 statement appears on the opening page of our website at www.harworthgroup.com. The Company will publish another statement before the end of June 2019, which will reflect the progress that has been made since
publication of the 2018 statement. In that regard, we can report that: (A) online training on tackling modern slavery and human trafficking has been delivered to all of our employees; (B) all new suppliers who have been approved during the year have committed to complying with our Supplier Code of Conduct on anti-slavery and human trafficking; and (C) our suite of precedent consultancy agreements are now in place, which impose obligations on our consultants in relation to anti-slavery and human trafficking.
The following policies are also in place:
They are available on the Group's shared drive and reminders are sent to employees periodically. Our policies on anti-corruption and bribery and anti-facilitation of tax evasion are also published on our website. During 2018 online training was delivered to all employees on the prevention of bribery and corruption. We also engaged Grant Thornton to run a workshop on the management and mitigation of risks associated with facilitating tax evasion.
The Gifts, Donations, Sponsorship and Hospitality policy imposes a regime for the approval of business development activity at all levels of the business and a register of all activity. At the start of 2019 it was updated to reflect the changes to our senior management structure effected in 2018. The register of business development activity is monitored regularly by the Company Secretary and annually by the Audit Committee.
We do not hold extensive amounts of personal data but recognise the importance of protecting the data that we do control. Workstreams were undertaken at the start of 2018 to ensure that the Group was, and remains, compliant with the GDPR, ahead of its coming into force on 25 May 2018. Those workstreams included:
Work is ongoing to embed a culture of GDPR compliance into the business. This will form part of a wider suite of initiatives designed to ensure appropriate information security across the business. These implement recommendations from a strategic review of information security undertaken by NCC Group ("NCC"). Further information on that review and NCC's recommendations can be found in the Audit Committee report on page 98. One of the recommendations was the appointment of an information security manager. That appointment has been made and he is leading the implementation of all other initiatives, which will include steps to embed the above-mentioned measures, monitor their effectiveness, and improve GDPR awareness amongst employees.
From 2019, the Audit Committee will undertake an annual review of the Group's ongoing compliance with GDPR.
As one of the UK's leading regeneration companies, we recognise that we influence the design and delivery of future communities. It is a serious responsibility and one that we are proud to deliver on in the way we: design and deliver our projects; and work with local communities during their build-out.
Our developments have helped to bring new life to former industrial areas, whilst also supporting a number of key community initiatives that have an effect beyond our dayto-day work. We've done this whilst also acting responsibly and consistently in the way we interact with local communities.
In our work over the past decade, we have helped to deliver thousands of new jobs and homes on our land across the North of England and the Midlands. Our sites at Waverley and Logistics North are leading examples of regeneration in the North of England, replacing many times over the jobs that were lost when mining ended. Three times as many people are now employed at the Advanced Manufacturing Park than were employed at Orgreave Coking Works when it closed in 1990. Over 1,500 new homes and more than 7m sq. ft of commercial space have been built out on land owned or prepared by Harworth. Over 8,500 people are now employed across Harworth's Major Developments and Business Space sites.
Using our land and property experience to deliver future schemes in the same vein as Waverley and Logistics North is essential to the regeneration of former industrial areas and supports the growth of UK plc. The recently published Industrial Strategy White Paper sets out a long-term plan for rebalancing and growth of a highly-skilled UK economy. Together with strategies to deliver the "Northern Powerhouse" and the "Midlands Engine", these provide the foundation for a step change in investment and growth across the North of England and Midlands. The provision of new residential and commercial land and property to facilitate that investment remains an essential ingredient for sustainable growth.
Nowhere is this better shown than at the 150-acre Advanced Manufacturing Park in Rotherham, where just under 1.5m sq. ft of commercial space has delivered over 1,500 skilled jobs in key sectors such as aerospace, automotive and energy, including hydrogen fuel cells and battery storage. Key occupiers (and employers) include Rolls-Royce, Boeing, McLaren Automotive and the University of Sheffield's Advanced Manufacturing Research Centre, renowned as the UK's leading centre of manufacturing excellence.
Housebuilding remains the UK's number one domestic political priority, driven by a continued shortfall in supply (300,000 required homes versus c.225,000 home starts in 2018). The Chancellor's 2018 Budget reflected this priority by including measures to support economic growth, including improvements to national infrastructure and initiatives to stimulate the provision of affordable housing arrangements and support smaller house builders. With a portfolio benefitting from outline consent for over 11,000 homes and a pipeline of several thousand more, Harworth will continue to make a
meaningful contribution to delivering this national priority in the long-term.
With sites extending across eleven LEP areas in the North of England and Midlands, economic consultancy firm, Ekosgen, has now estimated that our portfolio has the potential to accommodate over 66,000 jobs and generate £3.6bn of Gross Value Added (GVA) per annum, as well as significant levels of business rates income. More than 20,000 new homes could be built on Harworth sites, supporting up to £131.5m of income through the New Homes Bonus and up to £32.9m per annum in council tax receipts.
As referenced in the Our Partners section on pages 58 and 59, central to delivering this economic uplift through the regeneration of land is a mature approach to engaging with local stakeholders, including residents, statutory bodies and those with an interest in the intended end-use of our land.
We use a seven stage approach to stakeholder engagement to ensure the success of developments. The ultimate aim is for positive, meaningful and timely public engagement which encourages local stakeholders to take an active part in the process and add genuine value at all stages of the development lifecycle.
We are using this approach on our future Major Developments.
• Attendees to be split into groups to work through set questions on potential future land uses and to take part in a design workshop to explore specific uses.
This approach worked extremely well for the consultation at the former Thoresby colliery in 2015, where over 70 attendees attended both workshops to help guide a housing-led masterplan on a green belt site through the start of the planning process.
• Working with the appointed professional team, work closely with all key statutory bodies to critique the masterplan and supporting documentation to get the plan in a suitable form for formal public consultation.
• Promote consultation events at key local centres close to the site to encourage wide-ranging public feedback on plans. All plans to include background to site, proposed uses and rationale, and planned development mitigation measures including highways and proposed developer contributions. Request feedback via forms on the day and use of bespoke consultation website in order to gauge public opinion and to establish key areas of support or concern.
This approach worked particularly well at Thoresby, with over 400 attendees participating in a six-hour consultation onsite, and at Ironbridge in October 2018, with over 500 attendees in attendance. At both consultations, attendees toured the site in order for our plans to be put in proper context. At both sites, twothirds of attendees were in favour of our initial ideas for the respective sites.
We appraise the effectiveness of each engagement programme using four key indicators:
| Early engagement | To what extent was there an opportunity to influence and shape development? |
|---|---|
| Meaningful | Was it a "real" consultation? How did the project change as a result of the comments received? What tools and techniques were used? |
| Inclusive | Was the wider community involved? What steps were taken to "reach out" to those who would not normally be involved in planning consultations? |
| Effective (map, gap and take note) | Was it effective? Were the views expressed balanced and representative of the local area? Taking account that monitoring should reflect the geography and demography of the local area – was it reviewed and what action took place to address gaps? |
A key part of our ethos is supporting a range of community and charitable projects across the areas in which we work. This includes support for a range of local causes, such as: sponsorship for local football teams in Rotherham and Pontefract; making available commercial space for charitable uses; and supporting local events that promote community cohesion.
One major change we initiated towards the end of 2018 was to partner with two national charities. Following consultation with employees, the People Steering Group chose to partner with Land Aid and The Wildlife Trusts.
Land Aid is the "property industry charity", bringing together the industry to support life-changing projects for young people facing homelessness nationwide. Every year, Land Aid uses the donations and skills of its charity partners to provide accommodation and support for young people (aged 16-25) who are homeless. Land Aid is already supported by many of our partners including the British Property Federation, Carter Jonas, Cushman & Wakefield, Jones Lang LaSalle, Knight Frank, The Royal Institution of Chartered Surveyors and Savills. In total, it currently has 81 partners.
We will be making an annual financial donation to Land Aid as a corporate partner, whilst also holding two "open call" days per year for Harworth employees to assist with building, managing and maintaining a number of housing projects throughout the UK.
The Wildlife Trusts are a collection of 46 independent regional trusts that cover the whole of the UK. Each trust is formed to make a positive difference to local wildlife for future generations. Collectively, these trusts look after more than 2,300 nature reserves and operate over 100 visitor and education centres across the UK. Each trust relies heavily on financial donations, lottery contributions and volunteer support to continue their work.
We will be making an annual financial donation to The Wildlife Trusts as a corporate partner. We will nominate the regional projects we wish to support to tie in with our regional footprint. We have also offered two "open call" days per year for Harworth staff to donate their time to key Wildlife Trust projects, including tree planting and maintenance of nature reserves. In addition, the Wildlife Trusts will be working with us on a strategic basis to provide advice on wildlife projects on some of our sites, including the 558-acre Logistics North Country Park and the 200-acre public open space at Waverley
With over twenty years' experience in regenerating large and often complex development sites, Harworth has an established track record in managing the environmental impact of its operations. This includes: recycling materials from demolition and land remediation; tackling the environmental legacy of previous industrial site uses; and encouraging staff to take personal responsibility for reducing harmful emissions from our activities.
We continue to apply five key principles in reducing our environmental impact across our estate.
We work with trusted contractors to clean and remediate land and remove dangerous underground structures at a range of brownfield sites, preparing that land for redevelopment.
We believe that former industrial assets should be retained to support future development uses where practicable and Harworth has followed this principle across a number of its brownfield sites. Assets reconditioned and reused for new purposes include railheads, substations, access roads and enhanced public open spaces that surround our sites. At our Kellingley site in North Yorkshire, we were able to export over 500k tonnes of former colliery discard via rail for re-use at the Port of Hull.
We are experts in project managing complex demolition works in a safe and efficient manner. Over the past year we have successfully completed demolitions of the former Thoresby and Kellingley collieries in preparation for redevelopment, including the removal of pithead structures.
Whether it is coal slurry, metals, concrete or fill material, we have the capability to extract the maximum value from derelict land and property, raising revenue that can ultimately be put to preparing land for eventual redevelopment whilst also being environmentally responsible. The team has been able to extract and sell coal slurry to power station operators to produce electricity between 2011 and 2018 – a material previously considered as waste.
The team has been able to achieve all of this whilst minimising disruption to residents, businesses and other groups that are close to the sites we are working on. We pride ourselves in maintaining clear communication and professionalism through all stages of the development process, building on our track record as a responsible land and property regeneration company.
We continue to operate a Safety, Health and Environmental Management Policy ("SHEMS") to ensure the effective control of environmental risk and operate a management system to ensure environmental issues are considered at all levels. The policy advocates the promotion of sustainable and environmental opportunities by active resource management and waste minimisation, in line with our vision of becoming the leading regeneration company in the North of England and Midlands.
A range of smart working initiatives were instigated by Harworth in 2018 principally to reduce the number of journeys our staff make. These have included:
This has meant that even though we have had an increase in staff numbers, emissions from fuel use has decreased to 241 tonnes of CO2 e (2017: 254 tonnes of CO2 e).
Active management of our Business Space assets has also improved in 2018, resulting in another reduction in emissions from electricity usage on those sites. Proactive management has included isolating the electricity supply to buildings which are unoccupied, to ensure lighting or heating cannot be left on accidentally, and working with tenants to minimise electricity usage out of working hours. Emissions from electricity use decreased to 404 tonnes of CO2 e (2017: 632 tonnes of CO2 e).
Our Operations staff continue to minimise the use of yellow plant and other fuel intensive machinery where possible. Emissions from the operation of yellow plant increased during the year, attributable in large part to Harworth taking back control of the remediation of, and extraction of coal fines from, the former Prince of Wales spoil heap (previously operated by Hargreaves under licence), with a large proportion of coal fines sold in year being generated from Prince of Wales operations. Emissions from gas oil from plant increased to 3,371 tonnes of CO2 e (2017: 1,848 tonnes of CO2 e). This will need additional focus from management in 2019.
This statement outlines the greenhouse gas emissions arising from Harworth's activities during the financial year ended 31 December 2018. It follows the Environmental Reporting Guidelines set by the Department for Environment, Food and Rural Affairs (DEFRA).
Emissions are reported in tonnes of carbon dioxide equivalents ("CO2 e") and refer to three areas:
Scope 3 Electricity (non-rechargeable) usage on Harworth sites
| Scope | Emission Source | Tonnes of CO2 e (2017) |
Ratio (2017) |
Tonnes of CO2 e (2018) |
Ratio (2018) |
|---|---|---|---|---|---|
| 1 | Fuel for staff vehicles | 254 | 4.8:11 | 241 | 4.2:11 |
| 2 | Gas oil used in plant | 1,848 | 308:12 | 3,371 | 561:12 |
| 3 | Electricity usage | 632 | 37.2:13 | 404 | 22.4:13 |
| TOTALS | 2,734 | 4,016 |
1 Average employee numbers (2018: 58, 2017: 53).
2 Number of sites where gas oil is used in plant (2018: 7, 2017: 6).
3 Number of business parks that we operate (2018: 18, 2017: 17).
Whilst our business continues to grow, typified by an increased number of staff and Major Developments, we remain committed to improving our environmental performance on a per head and per site basis, taking forward the following principal actions across our portfolio.
We will continue to implement the smart working programme where staff plan efficiently to reduce their business miles. We will encourage employees to use the video conferencing facilities now installed at our head office and will maintain our commitment to flexible working across each of our regional offices.
The Strategic Report was approved by the Board and signed on its behalf by:
Owen Michaelson Chief Executive
16 April 2019
Our existing and future sites will continue to be managed actively to mitigate the environmental impact of our activities. In particular, we will continue (working with tenants) to seek to identify means of reducing electricity consumption on our business park sites.
We will continue to use well maintained yellow plant and periodically review operational techniques to reduce fuel consumption. In addition – and whilst out of the scope of our direct fuel usage – we will continue to promote the movement of discarded materials via any on-site rail connections rather than add vehicle movements to local road networks.
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 73
Term of office Joined the Board on 7 March 2018. Elected in May 2018. Chair of the Nomination Committee
1 year 1 month
Yes
Alastair is Non-Executive Chairman of Welsh Water, Vitality Health and AECS, Admiral's European holding company. He was Non-Executive Chairman of the Admiral Group from 2000 to 2017, Deputy Chairman of Bovis Homes from 2008 to 2018, Chairman of Serco from 2010 to 2015 and of Towergate Insurance from 2011 to 2015. Previously in his executive career, Alastair was Chief Executive of the National Provident Institution and the National and Provincial Building Society, Managing Director of the Insurance Division of Abbey National plc and Director of Corporate Projects at National Westminster Bank PLC. He has a broad base of business experience with a particular focus on mortgage lending and insurance industries. He was awarded the CBE in 2001 for services to social security having served as a Non-Executive director of the Department for Work and Pensions and the Department of Social Security
Chairman of Welsh Water (Dwr Cymru), Vitality Health and the European subsidiary of the Admiral Group
Term of office Joined the Board on 24 March 2015 having previously been Chief Executive of HEPGL from 28 September 2012 and of the Harworth Estates division of UK Coal since August 2010. Last re-elected in May 2018
Length of service
4 years 1 month (8 years 8 months including appointment to HEPGL and Harworth Estates division of UK Coal)
Skills and experience Owen has more than 27 years' experience in the remediation of brownfield land and has held executive roles at the Peel Group, Black Country Properties and Viridor. Prior to becoming the Chief Executive of Harworth Group plc, he took over the stand-alone operations of Harworth Estates at the commencement of the restructuring of the former UK Coal in August 2010. He established the business as a recognised developer of brownfield land, before being appointed to the Board of Harworth Group plc following its acquisition of Harworth Estates in 2015. Owen is a Non-Executive Director of Covanta Holding Corporation, a global provider of waste management services in the USA. He is also a Board member for the Sheffield City Region Local Enterprise Partnership and Chair of the British Property Federation's Regional Policy Committee
Non-Executive Director of Covanta Holding Corporation. Board member for Sheffield City Region Local Enterprise Partnership
Joined the Board on 1 January 2016. Last re-elected in May 2018
3 years 3 months*
Independent No
Prior to joining Harworth, Andrew was Finance Director of Viridor, the recycling and renewable energy subsidiary of Pennon Group plc, for five years. He has also previously held a number of other senior finance roles, including Chief Financial Officer at Balfour Beatty Capital and Global Head of Corporate Finance at Bovis Lend Lease. Andrew is a Fellow of the Institute of Chartered Accountants
Chairman Chief Executive Finance Director Senior Independent Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Group General Counsel
Length of service 7 years 4 months
Independent Yes
Lisa was formerly Chief Financial Officer of Sea Containers Limited, Managing Director of Capita Learning and Development and has held senior divisional roles at Cendant Inc and BPP Holdings plc
Term of office Joined the Board on 24 March 2015 having previously been a Non-Executive Director of HEPGL from 10 December 2012 and a Director of the Harworth Estates division of UK Coal from January 2011. Last re-elected in May 2018
4 years 1 month (8 years 3 months including appointment to HEPGL and Harworth Estates division of UK Coal)*
Independent Yes
After early finance roles with Scottish and Newcastle Breweries from 1986, Anthony joined Morrison Homes Limited as Finance Director in 1990. In 2000 he was appointed Managing Director of Scotland-based AWG Property Limited and was subsequently appointed Chairman. He has overseen the workout and extraction of value from an extensive commercial and residential property portfolio across the UK and Ireland and its transformation into a strategic and income generating portfolio
None
External appointments Director of Everything But The Cow Limited
Director of various private limited companies in the AWG Group
* If re-elected at the 2019 AGM Anthony will retire from the Board on 30 September 2019
* On 1 April 2019 the Company announced that Andrew had given notice of his resignation, which will take effect on 30 June 2019. Andrew will not, therefore, seek re-election at
the 2019 Annual General Meeting.
| Andrew Cunningham | Chris Birch | |||
|---|---|---|---|---|
| Group General Counsel | ||||
| and Company Secretary | ||||
| A | R A | |||
| Term of office | Term of office | Term of office | Term of office | Term of office |
| Joined the Board on 26 Joined the Board on |
Joined the Board on 1 April | Joined the Board on 2 | Joined the Board on 24 | Appointed on 6 June 2016 |
| in May 2018. Chair of the | ||||
| Non-Executive Director of | ||||
| month including | ||||
| appointment to HEPGL) | ||||
| Independent | Independent | Independent | Independent | |
| Yes | Yes | No, representative of the | No, representative of the | |
| Skills and experience | Skills and experience | |||
| Chris trained with | ||||
| chartered accountant with | Eversheds LLP, where he | |||
| qualified as a solicitor in 2005 and spent 12 years |
||||
| as a corporate restructuring | ||||
| made a corporate finance | lawyer, before joining | |||
| and audit partner. In 1996 | Harworth as Group | |||
| he was appointed Finance England. Prior to that, she |
at Morgan Sindall plc until | regeneration | leaving Barclays he has | General Counsel and |
| Director of Grainger plc, held senior finance and |
2013 and prior to that held | pursued a portfolio | Company Secretary in | |
| which was to become the resourcing roles at |
senior roles at the Tarmac | business career, which in | June 2016 | |
| Knightstone, a housing | Group, Premier Farnell plc | 2012 involved a takeover | ||
| residential investor, and | ||||
| then Chief Executive in | ||||
| Grainger plc at the end of | ||||
| 2015. Andrew is a Fellow of | ||||
| the Institute of Chartered has held a number of |
and is a member of the | |||
| Accountants and of the voluntary and non |
Audit Committee, and at | maintains other interests in | ||
| executive positions in the | Zotefoams plc, where she | debt advisory and | ||
| Chartered Surveyors social housing and |
chairs the Remuneration | healthcare | ||
| retirement community | Committee and is a | |||
| sector. She is an Associate | member of the Audit and | |||
| of the Institute of Chartered | Nomination Committees | |||
| Accountants and a | ||||
| Chartered Corporate Treasurer |
||||
| Non-Executive Director Andrew trained as a (a predecessor firm of PwC). In 1989 he was 2009. He retired from |
Ruth Cooke Non-Executive Director April 2016. Last re-elected 19 March 2019 Length of service Less than 1 month Skills and experience Ruth was Finance Director (from 2008 to 2012) and Deloitte Haskins and Sells then Chief Executive (from 2012 to 2018) of Midland Heart, the housing association group operating across Central association based in the South West, and Anchor Trust, a provider of housing and care to those aged 55 years old and above. Ruth |
Angela Bromfield Non-Executive Director 2019 Length of service Less than 1 month Skills and experience Angela has extensive commercial strategy, marketing and communications executive experience. She was Strategic Marketing & Communications Director and ICI plc. Angela is a Non-Executive Director at Churchill China plc, where she chairs the Remuneration Committee |
Steven Underwood Non-Executive Director August 2010. Last re-elected in May 2018 Length of service 8 years 8 months Peel Group Skills and experience Steven is Chief Executive of the Peel Group of companies and brings to the Board the extensive experience of the Peel Group in brownfield land remediation and |
Martyn Bowes Non-Executive Director March 2015 having previously been a HEPGL from 19 March 2013. Last re-elected in May 2018 Length of service 4 years 1 month (6 years 1 PPF Skills and experience Martyn has spent the majority of his career in banking, most recently from 2001 to 2007 with Barclays Capital as Managing Director, Real Estate Finance. Since with fellow Directors of the South of England based Welbeck Land real estate business. Martyn now acts as Finance Director for Welbeck Land and also |
Non-Executive Director of The Banks Group Limited, Cussins Limited, and Cussins (North East) Limited. Commissioner at The Port of Blyth
Chair of Connexus Housing and Member of West Midlands Housing Association Partnership
External appointments Non-Executive Director of Churchill China plc and
Zotefoams plc
External appointments Alternate Director of Intu Properties plc. Director of multiple private limited
companies, mostly connected to the Peel
Group
Director of multiple private limited companies in the Welbeck Land Group. Non-Executive Director at Clouston Group and Conger Finance Limited
On behalf of the Board, I am pleased to present the Company's Corporate Governance Report.
The Board is responsible, and accountable to all stakeholders, for the implementation and maintenance of good corporate governance. It recognises the importance of good governance as the foundation of long-term, sustainable growth and success and, as such, is committed to demonstrating high standards and continuous improvement.
The Company's Corporate Governance Report comprises the Statement of Corporate Governance, the Nomination Committee Report, the Audit Committee Report, the Directors' Remuneration Report (which, this year, includes proposed revisions to the Company's Remuneration Policy), the Directors' Report and the Statement of Directors' Responsibilities.
These reports explain the Company's governance framework and policies, which are subject to periodic review and refinement. They focus on the period under review but also reference work undertaken to ensure the Company's compliance with the revised UK Corporate Governance Code ("Code"), which was published in July 2018.
ln August 2018, the Company's shares moved from a standard listing to a premium listing on the London Stock Exchange. As a premium-listed business, the Company is now obliged to comply with the Code on a "comply or explain" basis. However, this has not required a material change to the Company's corporate governance framework since, as a standard-listed business, it aimed to comply with the Code and has reported on compliance in its last three annual reports. I am, therefore, able to report that, save as explained in the Statement of Corporate Governance on page 79, the Company has complied with the 2016 Code for the period under review. The revised 2018 Code applies to the Company's current accounting period, which commenced on 1 January 2019. Where necessary, changes have been or are being made to the Company's policies and procedures to ensure compliance with the 2018 Code. Some of these changes are explained in this Corporate Governance Report. As an indication that the Board is already focussed on compliance with the 2018 Code, this introduction and the Statement of Corporate Governance adopt the headings it adopts.
The Company has a clear purpose: to create sustainable new communities for people to live, work and play, and aims to be the leading land and property regeneration specialist in the North of England and Midlands. The Board and the wider Harworth team are rightly proud of the positive impact the Company's activities have on the communities within, and alongside which, it operates. This includes the supply of much needed housing, the establishment of advanced manufacturing and logistics hubs and, in some cases, the creation of new communities, typically on redundant, former industrial land.
In pursuing this purpose, the Company aims to generate for its shareholders a 10% average total return per annum, through the property cycle. To achieve that we set ourselves stretching strategic and financial objectives but with the foundations of: a
The Company has a clear purpose: to create sustainable new communities for people to live, work and play. We are rightly proud of the positive impact the Company's activities have on the communities within, and alongside which, it operates.
strong balance sheet; a resilient, recurring income stream; and a robust governance framework.
In September the Board and executive team undertook the annual review of the Group's strategy and in December the Board approved the latest five-year strategic plan for the business. The annual review re-affirmed the fundamentals of the Group's long-term strategy, which are reflected in the Strategic Report on pages 4 and 5. Clearly, the Company is not immune to the turbulent macro-economic and political climate which subsists currently and which may affect one or more of the markets in which the Company operates. Against that backdrop, the Company's strategic plan will remain subject to regular review by the executive team and the Board over the coming months. However, we believe the medium-term outlook for the business remains positive, given: the ongoing and forecast performance of the Company's core markets in the North of England and Midlands; the continued shortage of housing; the fundamentals underpinning the manufacturing and logistics markets; and the largely supportive backdrop of national and local Government policy and sentiment.
The Board recognises that a clear purpose and robust strategy must be supported by a strong, positive culture within the business. The Board is confident that this already exists but is keen for that culture to be well defined so that it can be preserved and promoted, as we grow and make changes to our operational design, such as the establishment of a regional structure in 2018. To this end, during 2019 our Head of HR and Organisation Development is working with representatives from across the business to formalise and define the Company's core values and culture.
A good deal of work has been undertaken over the last 12 months to: identify the Company's principal stakeholders; review how the Board and wider business engages with those stakeholders; and formalise the way in which stakeholder interests form part of the Board's discussions and decisionmaking process. This work is outlined in the Corporate, Social and Environmental Responsibility section of the Strategic Report on pages 48 to 71. I would particularly mention the steps we have taken to improve engagement with employees as detailed in the Our People section of the Strategic Report on pages 50 to 55.
The revised Code provides that at least half of the Board, excluding the chair, should be independent Non-Executive Directors and no longer includes an exception for smaller companies. When the Code was published in July 2018 we recognised that the composition of our Board would not be compliant with the revised Code because Steven Underwood and Martyn Bowes, who are representatives of our largest shareholders, the Peel Group and the Pension Protection Fund, respectively, are not independent. We have addressed that deficiency with the appointment of an additional independent Non-Executive Director, alongside a further appointment as part of our Board succession planning, as detailed below.
During 2018, as part of our preparatory work for the Company's step-up to the premium list, we established a Disclosure Committee comprising the Chief Executive, Finance Director and Group General Counsel and Company Secretary, which will liaise closely with myself as Chairman. This formalises what was already a robust review and decision-making process in respect of the Company's disclosure obligations. The terms of reference for our other Committees will also be reviewed and updated shortly to ensure alignment with the revised Code.
At an operational level, in conjunction with the regionalisation of the business, changes have been made to the structure and composition of the senior management team, with an Investment Committee and a Management Board replacing the Executive Committee. The new structure is set out on pages 80 and 85 of the Statement of Corporate Governance. The Company's Delegated Authorities Policy has been updated, both to reflect these changes to the senior management team and as part of our programme of continuous review and improvement.
Succession planning for the Board and Investment Committee remains a fundamental part of the Board's role on which the Nomination Committee takes the lead.
My appointment, as successor to Jonson Cox, took effect on 7 March 2018 immediately after the announcement of the Company's 2017 preliminary results. 2018 was another busy year for the Committee, culminating in the appointments announced, alongside the preliminary results, of two new Non-Executive Directors, Ruth Cooke and Angela Bromfield.
These appointments both ensure that the composition of the Board is compliant with the 2018 Code and provide succession for Tony Donnelly, whose tenure at Harworth is approaching nine years, reflecting the Company's practice of seeking to recruit for succession ahead of time. Whilst, therefore, Tony is seeking re-election at the 2019 AGM he will step down from the Board at the end of September after the announcement of the Company's interim results for the 2019 financial year. I would like to put on record my sincere thanks to Tony for the significant contribution he has made over his long tenure to the transformation of the business from the property division of a mining business into the well-established and respected listed property regeneration business it is today.
As regards our new appointments, Angela Bromfield will join both the Remuneration and Audit Committees whilst Ruth Cooke will join the Audit Committee. This enables Steven Underwood to step down from both Committees such that membership of those Committees will now comprise only independent Non-Executive Directors, in compliance with the Code. I thank Steven for his valuable contribution to the work of both Committees during his tenure. The Nomination Committee Report (pages 92 and 93) includes a detailed report on the process undertaken to recruit Angela and Ruth.
On 1 April 2019 the Company announced that Andrew Kirkman had notified the Board of his resignation, which will take effect on 30 June 2019. The Board has commenced a process to recruit Andrew's replacement. The Nomination Report (page 93) includes more information about that process.
Improving diversity at all levels of the business continues to be an important objective for the Board and executive team. With the appointment of Angela and Ruth, we have made good progress in improving diversity on the Board but we will not stop there and
we are very conscious that hard work remains to improve diversity amongst the senior management team and throughout the business. The Our People section of the Strategic Report (pages 50 to 55) outlines the steps we are continuing to take in this regard.
In the fourth quarter of 2018 an external Board evaluation was undertaken by an experienced independent Board assessor, Ian White. Whilst it was pleasing to see the positive feedback from that evaluation and its conclusion that we have an effective Board there is always room for improvement and action points have been agreed to implement Ian White's recommendations. A summary of the evaluation process and the recommendations can be found on pages 88 to 90 of the Statement of Corporate Governance.
We continue to adopt best practice of submitting all Directors for election or re-election at the Annual General Meeting.
We have maintained a strong focus on risk management and internal controls during this past year. The Audit Committee has overseen: the implementation of all the recommendations from the external review of internal financial controls towards the end of 2017; the financial position and prospects procedures (FPPP) external review undertaken in support of the Company's step-up to the premium list and the implementation of all the resulting recommendations; an external review of the Group's cybersecurity and an external, strategic review of our information security; and the Company's preparations for the implementation of the GDPR. The support of our advisers and consultants on all these workstreams has been invaluable. The Audit Committee Report on pages 94 to 98 contains further details on all of these reviews.
The Board is acutely aware that sustained growth and the introduction of a regional structure bear the risk of divergent and inconsistent practices across the business and reduced visibility for the executive team. Whilst Harworth is, and will remain, an entrepreneurial business at heart, the Board and executive team recognise the need for a framework of processes and controls, and a reporting regime, which ensures that the business operates in a controlled and, where appropriate, consistent manner across the regions, and that the executive team retains the necessary level of visibility on operations. This will mitigate risks and drive efficiencies, whilst enabling a consistent approach to the evaluation of new investment opportunities. To this end, our Group General Counsel and Company Secretary is leading an exercise to review all business workstreams to identify those that are already, and those that should be, standardised to ensure consistency, where appropriate, across the regions.
It has also been a busy period for our Remuneration Committee. In anticipation of the three-yearly review of our Remuneration Policy ("Policy"), the Committee undertook a tender process for the role of remuneration consultants. Four firms participated in that process, culminating in the appointment of Deloitte. With assistance from Deloitte, the Committee (and wider Board) has undertaken a detailed review of our Policy. A revised Policy will be tabled for approval at this year's AGM and appears at pages 103 to 111. Following extensive engagement with a number of our largest shareholders, ISS, Glass Lewis and IVIS, we are proposing the adoption of a Restricted Share Plan, which we feel better aligns with the very long-term and through the cycle nature of the business, in place of our existing Long-Term Incentive Scheme. A detailed explanation of the rationale for the proposed changes to the Remuneration Policy appears in Lisa Clement's introduction to the Directors' Remuneration Report (pages 100 to 103).
Our Annual General Meeting will be held at 2.00 p.m. on Tuesday 21 May 2019 at The Bessemer Conference Room, AMP Technology Centre, Advanced Manufacturing Park, Brunel Way, Waverley, Rotherham, S60 5WG. I encourage all shareholders to attend and look forward to welcoming them there.
Chairman 16 April 2019
During the period under review, the 2016 Code applied to all companies with a listing on the premium segment of the Official List. It is publicly available on the website of the Financial Reporting Council. The Company was listed on the standard segment of the Official List up to and including 31 July 2018 but still applied the main and supporting principles of the 2016 Code. The Company stepped up to the premium segment on 1 August 2018 from which point it became obliged to comply with the 2016 Code. The Company complied with the provisions of the 2016 Code throughout the year ended 31 December 2018, save in the following respects:
The 2018 Code applies to the Company from 1 January 2019.
The clarity of Harworth's purpose and vision is critical to its success. It informs our strategy and is the objective which motivates our team.
The Board engages in a robust process annually to review and approve the Group's strategy. The Board and executive team undertook a detailed review of strategy in September. The strategy will continue to be subject to internal, annual reviews, with external input periodically when appropriate. A draft budget and strategic plan, to implement the strategy over the next five years, is prepared by the executive team and presented to the Board in November each year. The Board provides comment and challenge and, ultimately, approves the plan subject to whatever consequent amendments are considered appropriate. The performance of the business is then assessed by the Board throughout the year against the approved budget and strategic plan, the Board satisfying itself as to the adequacy of management response to variations in performance against plan. The Chief Executive gives an operational update at each Board meeting with periodic assessment of performance against strategic objectives. The strategic plan has been, and is expected to continue to be, subject to particularly close and regular scrutiny by the executive team and Board during the course of 2019, given the turbulent political and economic backdrop resulting from the UK's ongoing negotiations to exit the European Union.
The Board places great emphasis on open and regular communications with shareholders. The Company benefits from there being representatives of its two largest shareholders on the Board. They provide ongoing shareholder feedback and perspective on key strategic decisions. The Chief Executive and Finance Director meet and present to large new investors, existing institutional shareholders and analysts after the publication of the Company's preliminary and interim results. Following his appointment in March, the Chairman has had introductory meetings with the Company's two largest shareholders and a number of the Company's other institutional shareholders, and he will continue to have regular meetings with shareholders. The Chairman of the Remuneration Committee, who is also the Senior Independent Director, has held a series of meetings with, and spoken to, certain of the Company's largest shareholders as part of the Company's engagement on the proposed revisions to its Remuneration Policy. Both the Chairman and Senior Independent Director are available to meet with the shareholders to discuss governance and strategy. The Company Secretary is also available and deals with shareholder queries throughout the year.
In June 2018, the Company also hosted an update briefing and accompanying site visits for institutional shareholders and analysts and a similar event is planned for June this year.
The Board regularly receives feedback from the Company's brokers and the Executive Directors on the views of existing and prospective shareholders, particularly after publication of annual and half-year results. It receives and reviews quarterly reports on the main changes to the composition of the Company's share register and copies of notes prepared by analysts.
The Company has a planned programme of announcements throughout the year, prepared by our Head of Communications and Investor Relations, with support from FTI Consultancy, and reviewed by the Board, to ensure that investors remain updated regularly on progress in the business. The annual and interim reports, together with the www.harworthgroup.com website, are the Company's principal means of communication with all shareholders during the year. Copies of all reports, shareholder presentations and communications are available on the investors' section of the website.
The Chairman, Senior Independent Director and/or Company Secretary will engage with shareholders in the event of a substantial vote against any resolution proposed at an AGM.
The Board recognises the importance of engagement by the Company with its stakeholders. The Corporate, Social and Environmental Responsibility section of the Strategic Report, on pages 48 to 71, identifies the Company's principal stakeholders and explains how the Company engages with them and how the Board considers stakeholder interests when making decisions. During 2018 the Board has, in particular, reviewed how it can improve engagement with employees and the output from that review is referenced in the Our People section of the Strategic Report on pages 50 to 55.
The Company's governance structure is headed by a Board of Directors. Its key responsibilities are summarised in the table below. The Group's delegated authorities policy, including matters reserved for the Board, was subject to a detailed review and updated in November 2018. Examples of Board reserved matters are also set out in the table below.
| Key responsibilities | Examples of reserved matters | |||||
|---|---|---|---|---|---|---|
| • | Establish the Company's purpose and strategy. | • | Group strategy and budgets. | |||
| • | Stewardship of the Group's resources and overall responsibility for management of the Group to ensure |
• | Constitution, and corporate and capital structure, of the Group. |
|||
| long-term and sustainable viability, and growth, of the business. |
• | Annual report and financial statements, and the declaration of dividends. |
||||
| • | Provide constructive challenge to management proposals and activity. |
• | The Group's principal banking facilities and hedging arrangements. |
|||
| • | Measure management performance against strategy and targets. |
• | Material sales, lettings, acquisitions and joint ventures. | |||
| • Determine risk appetite and review risk profile and management. |
• | Risk appetite and insurance programme. | ||||
| • | Appointment of Non-Executive Directors, Executive Directors and Company Secretary. |
|||||
| • | Promote a culture aligned to the Company's purpose and strategy and measure how embedded it is in the business. |
• | Policies relating to whistleblowing, anti-bribery, data | |||
| • | Ensure appropriate engagement with stakeholders and consideration of stakeholder interests in decision-making. |
protection, anti-facilitation of tax evasion, prevention of modern slavery and business continuity. |
||||
The Board has delegated certain responsibilities to the Remuneration, Audit, Nomination and Disclosure Committees. The terms of reference of those committees can be found on the Group's website at www.harworthgroup.com/investors/governance. The terms of reference for the Nomination, Audit and Remuneration Committees will be updated during 2019 to align with the 2018 Code.
The Board adds value through constructive dialogue with, and challenge to, the Executive Directors and wider executive team to create accountability and drive performance. To that end, all Non-Executive Directors must have a good knowledge of Harworth's business and the markets in which it operates. The Board timetable includes site visits, which help to improve knowledge and understanding of key sites and, at the same time, are an opportunity for Non-Executive Directors to get to know better the operational teams driving growth from the portfolio. The Board also receives detailed updates from each of the regional teams and the Income Generation division on a bi-annual basis. These updates focus on progress towards strategic objectives, typically covering: markets; activity by competitors; relationships with stakeholders and business partners; development of capabilities and resources; and the portfolio of projects needed to achieve those objectives. Board papers include a monthly report from our EES division on all health, safety and environmental matters and compliance, together with an annual update, in person, from the head of EES.
| Role/Committee | Key responsibilities |
|---|---|
| Chairman | • Leads the Board and is responsible for its overall effectiveness in directing the Company by facilitating a culture of openness and debate |
| Alastair Lyons | • Ensures that the company has a clear strategy and objectives, and that the Board receives regular transparent reporting as to the Company's progress in achieving its objectives |
| • Facilitates a constructive relationship between the Non-Executive Directors and the executive team |
|
| • Ensures that a fixed schedule of matters is maintained for the Board's review and approval |
|
| • With support from the Company Secretary, sets the annual Board programme and Board meeting agendas, ensures that directors receive accurate, timely and clear information, and that there is adequate time available for discussion of agenda items and an effective decision-making process in place |
|
| • Ensures there is ongoing and effective communication with shareholders |
|
| • Ensures that the Board identifies the Group's key stakeholders, that there is appropriate engagement with them, and their interests are considered when decisions are made |
|
| • With support from the Company Secretary, ensures that the effectiveness of the Board is subject to regular review including by an external evaluator on a periodic basis |
|
| Chief Executive | • Leads the establishment and maintenance of an appropriate culture for the Group |
| Owen Michaelson | • Responsible for the design of the Company's organisation and the appointment of appropriately skilled and experienced individuals to the resulting management structure |
| • Leads on the formulation of strategy which, once agreed by the Board, falls to him to implement |
|
| • Responsible for all operational matters within the parameters of the authorities delegated by the Board |
|
| • Leads and chairs the Investment Committee and Management Board |
|
| • Responsible for maintaining the Group's risk profile within the risk appetite determined by the Board, including health and safety and environmental policies, procedures and matters |
|
| • Ensures that the Board is appraised of all material matters |
|
| • Responsible for the Group's profile with shareholders and for engaging appropriately and effectively with the Group's key stakeholders |
|
| • Responsible for formulation and implementation of the People Strategy and for effective internal communication |
|
| Finance Director | • Supports the Chief Executive on strategy and risk |
| Andrew Kirkman | • Leads on all financial matters, including tax and treasury |
| • Responsible for leading the raising of any new equity and debt capital |
|
| • Leads on investor relations and responsible for designing the communication of the Group's performance to investors and external stakeholders |
|
| • Reviews the financial analysis of all major transactions including acquisitions, sales and capital investments • Leads on M&A and portfolio acquisitions |
|
| • Responsible for ensuring clear, effective, and timely measurement and reporting of commercial and financial key performance indicators to support Board and management decision-making |
|
| • Responsible for insurance, in conjunction with the Company Secretary, and pensions |
|
| • Responsible for internal financial controls, systems and processes, in conjunction with the Company Secretary |
|
| Senior Independent Director | • Provides a sounding board for the Chairman |
| Lisa Clement | • Acts as an intermediary with the Chairman for other Non-Executive Directors |
| • Available to shareholders if they have concerns where communication through the Chairman or Executive Directors is not successful or appropriate |
|
| • Leads the process for appointing a new Chairman |
|
| • Leads the annual appraisal of the Chairman's performance |
|
| Non-Executive Directors | • Help to formulate a strategy for the Group based on a proposal by the Chief Executive, agree strategic objectives and implementation plan |
| Lisa Clement Anthony Donnelly |
• Provide constructive challenge to the Executive Directors on matters referred to the Board |
| Andrew Cunningham | • Scrutinise the performance of the business against the strategy, agreed objectives and targets |
| Ruth Cooke | • Review and scrutinise commercial and financial key performance indicators and other information |
| Angela Bromfield | • Help to formulate the Group's risk appetite and monitor the Group's risk profile and risk management |
| Steven Underwood | framework |
| Martyn Bowes | • Available for meetings if requested by major shareholders |
| Role/Committee | Key responsibilities |
|---|---|
| Remuneration Committee | • Determines and agrees with the Board the Company's remuneration policy for the Executive Directors |
| Lisa Clement (chair) Anthony Donnelly |
• Determines the salaries, bonuses, long-term incentive arrangements, pension arrangements, other benefits and contract terms of the Executive Directors and members of the Investment Committee |
| Alastair Lyons | • Reviews the remuneration approach adopted for all employees |
| Steven Underwood (until 1 April 2019) |
• Will approve grant of options for Save-As-You-Earn Scheme and Share Incentive Plan, if both are approved by shareholders at the AGM |
| Angela Bromfield | • Carries out an annual review of benefits available to all Group employees |
| (from 1 April 2019) | • Responsible for changes to certain Group-wide employment policies |
| Nomination Committee Alastair Lyons (chair) Lisa Clement |
• Leads the process for Board appointments by making recommendations to the Board, both for filling Board vacancies and appointing additional persons to the Board, following evaluation of the balance of skills, knowledge and experience on the Board • Carries out regular (at least annually) review of succession planning for the Board and members of the |
| Andrew Cunningham | Investment Committee |
| • Leads on promoting and assessing the achievement of diversity across the business, particularly on the Board and at a senior management level |
|
| • Considers and makes recommendations to the Board on its composition, balance and membership and on the proposal of Directors for re-election at the AGM |
|
| *Note: the Chairman will not chair the Committee when it deals with the appointment of a successor to the chair. This process will be led by the Senior Independent Director (as it was in 2017) |
|
| Audit Committee Andrew Cunningham (chair) |
• Reviews the integrity of the Company's annual report, preliminary and interim results announcements and any other formal announcements relating to its financial performance |
| Anthony Donnelly | • Reviews the effectiveness of the Group's system of internal controls and processes |
| Steven Underwood | • Reviews the Group's insurance programme |
| (until 1 April 2019) Ruth Cooke (from 19 March 2019) |
• Reviews the terms of appointment, independence, effectiveness and remuneration of the Company's external auditors and makes recommendations to the Board on the reappointment of the external auditors. Leads the tender process for the appointment of external auditors, if applicable |
| Angela Bromfield (from 1 April 2019) |
• Reviews the Group's anti-bribery policy (including an annual review of the Group's hospitality register) and other policies relating to financial security, business ethics and compliance |
| • Reviews the Group's ongoing compliance with the GDPR |
|
| • Reviews the adequacy of the Group's cyber-security measures, information security and business continuity plans and procedures |
|
| • Reviews the Group's whistleblowing procedures and the appropriate investigation of cases referred through the process |
|
| Disclosure Committee Andrew Kirkman (chair) |
• Ensures a robust review and decision-making process in respect of the Company's disclosure obligations under the Market Abuse Regulation and the FCA's Listing Rules and Disclosure Guidance and Transparency |
| Owen Michaelson | Rules |
| Chris Birch | • Liaises closely with the Chairman |
| Group General Counsel and | • Secretary to the Board and its committees and to the Investment Committee and Management Board |
| Company Secretary Chris Birch |
• Ensures that all Board reserved matters are referred to the Board for review and approval and that all Board procedures are complied with |
| • Advises on regulatory compliance (including GDPR, Bribery Act, Modern Slavery Act, Criminal Finances Act) and corporate governance |
|
| • Prepares Board and committee agendas and collates and distributes papers |
|
| • Available to advise the Directors on all legal and compliance matters |
|
| • Assists the Chairman with Board evaluations and Director inductions and development |
|
| • Responsible for governance, both at Board and operational levels, including internal controls, systems and processes |
|
| • Responsible for insurance, in conjunction with the Finance Director, and risk |
|
| • Responsible for GDPR compliance |
|
| • Responsible for cyber-security, information security and business continuity planning and procedures |
|
| • Manages the Estates Environment and Safety ("EES") team |
The activities of the Board during the year ended 31 December 2018 included (operational approvals not listed):
| Month | Activities | Strategy | Delivery | Risk and governance |
Finance | Stakeholders |
|---|---|---|---|---|---|---|
| January | Acquisitions operational update Annual update from Associate Director of EES FYE 2017 preliminary review of investor messages |
✔ | ✔ | ✔ | ✔ | |
| Share price and share register analysis | ✔ | |||||
| February | FYE 2017 preliminary results and final dividend | ✔ | ✔ | |||
| Application to step-up to premium list: preliminary approval Annual employee survey results |
✔ | ✔ ✔ |
||||
| March | Income Generation operational update | ✔ | ||||
| Funding options: debt and equity | ✔ | ✔ | ||||
| People Steering Group | ✔ | |||||
| FYE 2017 Annual Report and Accounts | ✔ | ✔ | ||||
| Share price and share register analysis | ✔ | |||||
| April | Capital Growth operational update | ✔ | ||||
| Land Value Capture | ✔ | ✔ | ||||
| Extension of revolving credit facility | ✔ | ✔ | ||||
| Investor feedback from preliminary results roadshow | ✔ | |||||
| Feedback from internal Board evaluation | ✔ | |||||
| Application to step-up to premium list: update | ✔ | ✔ | ||||
| Infrastructure funding update | ✔ | |||||
| May | Annual General Meeting | ✔ | ||||
| Application to step-up to premium list: final approval | ✔ | ✔ | ||||
| Reforecast | ✔ | ✔ | ||||
| Move to regional structure GDPR update |
✔ | ✔ ✔ |
✔ | |||
| June | Share price and share register analysis | ✔ | ||||
| Feedback from investor and analyst site visits | ✔ | |||||
| People Steering Group | ✔ | |||||
| Modern slavery statement | ✔ | |||||
| July | Acquisitions operational update | ✔ | ||||
| FYE 2018 interim results: preliminary review | ✔ | ✔ | ||||
| September | FYE 2018 interim results: final sign-off | ✔ | ✔ | |||
| Strategy Day | ✔ | |||||
| Infrastructure funding update | ✔ | |||||
| October | Annual stakeholders review | ✔ | ||||
| People Steering Group | ✔ | |||||
| November | Budget and strategic plan: draft | ✔ | ✔ | |||
| Internal controls and processes, business continuity, cyber | ✔ | |||||
| security and information security | ||||||
| 2019 investor relations timetable | ✔ | |||||
| Briefing on Letwin review | ✔ | ✔ | ||||
| December | Budget and strategic plan: approval | ✔ | ✔ | |||
| Talent management and succession planning | ✔ | ✔ | ||||
| People Steering Group | ✔ | |||||
| Feedback from external Board evaluation | ✔ |
The Chief Executive has responsibility for proposing and then implementing the Group's strategy and leading the day-to-day management of the Group's business, with the agreement of the Board on reserved matters. The Chief Executive appoints the Investment Committee and Management Board to support him in this regard. The Investment Committee assists in the development of the Group's strategy and implementation plans, and provides peer review and scrutiny of material capital deployments (such as acquisitions and investment in site infrastructure) and matters of strategic importance. The Management Board provides leadership of the distinct elements of the management structure and, so as not to overburden the Investment Committee, undertakes peer review and scrutiny of other material transactions, such as sales and significant lettings.
The composition of the Investment Committee and Management Board are as follows:
| Investment Committee | Management Board |
|---|---|
| Chief Executive | All members of the Investment Committee |
| Finance Director | Regional Director – North East |
| Executive Director – Income Generation | Financial Controller |
| Executive Director – Central Functions | Associate Director, Estates Environment and Safety |
| Regional Director – Yorkshire and Central Region | Head of HR and Operational Development |
| Regional Director – North West | Associate Director, Business Space |
| Regional Director – Midlands | Associate Director, Natural Resources |
| Group General Counsel and Company Secretary (secretary to the Committee) |
References in this report to the executive team are to the Investment Committee. References to the senior management team are to the Management Board.
As well as ensuring that certain matters are reserved to the Board, the Group's delegated authorities policy ensures that operational decisions are made at the most appropriate level in the business.
Upon appointment, each Director is required to notify the Company of their external board appointments, other significant commitments and any actual or potential conflict of interest. Where a Director proposes to take on additional external responsibilities, the Board, with advice from the Company Secretary, considers the time commitment of such appointment and whether it could give rise to potential conflicts of interest. Each Director has an opportunity to disclose actual or potential conflicts of interests to the Board, either by way of general notice or at the beginning of each Board or Committee meeting. The Articles of Association provide that the Board can authorise actual and potential conflicts of interest of Directors. Where actual or potential conflicts of interest arise, the relevant Director does not receive Board papers and is excluded from discussions and voting on the subject matter that gives rise to the conflict.
Steven Underwood and Martyn Bowes are Board representatives of the Peel Group and the Pension Protection Fund respectively. The Board has approved any actual or potential conflicts of interest that may as a result arise.
Steven Underwood has previously declared by way of general notice, and the Board has approved, a potential conflict of interest arising from the fact that he is an Executive Director of certain Peel Group companies, one or more of which may deal with Harworth at an operational level from time to time. During the period under review the Group completed two material transactions with Peel Environmental Limited. The Board deliberations on those transactions took place ahead of the 2017 AGM, at which they were approved by shareholders. Steven Underwood did not receive Board papers on, was not present for any Board discussions relating to, and did not vote on, those matters.
Andrew Cunningham has previously declared by way of general notice, and the Board has approved, a potential conflict of interest arising from his appointment as a Non-Executive Director of The Banks Group Limited and the fact that Harworth Estates Limited has a joint venture with Banks Property Limited for the remediation, promotion and sale of land at the former Bates Colliery in Blyth. During 2018 Harworth acquired a site at Moss Nook in St Helens from the Banks Group. This represented an actual conflict of interest for Andrew and, as such, he did not have sight of any Board papers, and was not party to any Board discussions or decision-making, on this matter.
Andrew has also made a general declaration of interest in connection with his appointment as a Commissioner of The Port of Blyth but no conflict of interest has arisen in this regard.
Owen Michaelson is a member of the Board of the Sheffield City Region Local Enterprise Partnership. No conflicts arose as a result of this appointment during 2018.
During 2018, the Board approved Owen's appointment as a Non-Executive Director of Covanta Holding Corporation, a global operator of energy from waste and waste management facilities, headquartered in the United States. The Board was satisfied that such appointment would not compromise Owen's time commitment to Harworth and gives rise to no more than a low risk of a future conflict of interest.
Each Non-Executive Director is aware of the need to allocate sufficient time to the Company to discharge their responsibilities effectively. This includes Board and Committee meetings, attendance at the AGM, site visits, CPD, participation in evaluations, participation in the recruitment of Directors to the Board, and meetings with employees, shareholders and other stakeholders, where appropriate.
The Chairman and the Company Secretary are responsible for preparing and coordinating an induction programme when new Directors are appointed to the Board. Alastair Lyons undertook an extensive induction prior to his appointment in March 2018 and both Angela Bromfield and Ruth Cooke are undertaking a similar programme.
In terms of CPD: Board packs include external CPD briefings for Directors, with a short synopsis prepared by the Company Secretary; the Company Secretary provides written and verbal updates to the Board and its Committees, as appropriate, on governance and regulatory changes; and external advisers host CPD workshops for the Board, Remuneration Committee and Audit Committee annually. DLA Piper UK LLP ("DLA") hosted a full Board workshop in October, focussing on the changes introduced by the 2018 Code. Kepler Associates hosted a Remuneration Committee workshop in July on remuneration trends and developments in remuneration governance, ahead of the planned review of the Company's Remuneration Policy. PwC hosted an Audit Committee workshop in September on audit governance trends and recent changes to accounting standards. Detailed briefings were also given to the full Board by both DLA and Canaccord Genuity on the obligations of directors of a premium listed company, ahead of the Company's step-up to the premium list in August.
All Directors have access to the advice and services of the Company Secretary.
There were 11 regular Board meetings scheduled during 2018 and one additional meeting held by conference call in August (to consider specific operational items). Attendance by individual Directors at Board meetings is shown in the table opposite. There were also Board calls to sign-off the Company's 2017 preliminary results and 2018 interim results, site visits and a strategy review day offsite during the year.
| Number of meetings attended | Attendance | |
|---|---|---|
| Jonson Cox | 2/3 | 66% |
| Alastair Lyons | 10/10 | 100% |
| Owen Michaelson | 12/12 | 100% |
| Andrew Kirkman | 12/12 | 100% |
| Lisa Clement | 12/12 | 100% |
| Anthony Donnelly | 12/12 | 100% |
| Steven Underwood | 9/12 | 75% |
| Martyn Bowes | 12/12 | 100% |
| Andrew Cunningham | 11/12 | 92% |
Jonson Cox stepped down as Chairman on 6 March 2018 but resigned as a director on 31 March 2018. He did not attend the March Board meeting.
Steven Underwood was unable to attend three Board meetings during 2018 because of prior commitments in his capacity as Chief Executive of the Peel Group.
Andrew Cunningham was unable to attend a specially convened Board meeting in August but attended all scheduled meetings.
In the lead up to submission of the Company's application to have its shares moved from the standard segment to the premium segment of the Official List, authority was delegated to a sub-committee to approve final submission of the application. The subcommittee comprised Alastair Lyons, Owen Michaelson, Andrew Kirkman and Andrew Cunningham and met once in May. All sub-committee members were present.
Board and Committee papers are circulated not less than one full week prior to each meeting and are supplemented by reports and presentations, as appropriate. The papers include monthly reports from the Chief Executive, Finance Director (including monthly financial and operational management information to enable the Board to monitor performance against the approved budget and strategic plan) and Company Secretary.
The Company Secretary maintains "Action Schedules" for the Board and each Committee which records action points agreed at each meeting. That schedule, together with the minutes of each meeting are reviewed by the Chairman of the Board or the Chair of the relevant Committee (as appropriate) and then, at the following Board or Committee meeting, the wider Board or Committee (as appropriate).
The Board comprises the Chairman, Chief Executive, Finance Director and, at the date of this report, seven Non-Executive Directors although Anthony Donnelly will retire at the end of September (see further below). The Directors' biographies appear on pages 74 and 75.
*Note, Tony Donnelly will retire at the end of September.
The Board considers that its Non-Executive Directors bring the requisite balance of skills, experience and knowledge to the Board's deliberations. They have no financial or contractual interests in the Group, other than interests in Ordinary Shares as disclosed in the Directors' interests section of the Directors' Remuneration Report at page 119.
The composition of the Board is reviewed regularly by the Nomination Committee to ensure an effective balance. This is demonstrated by the work undertaken by the Committee in 2017, resulting in the appointment of Alastair Lyons as Chairman, in succession to Jonson Cox, and in 2018, culminating in the appointment of two new Non-Executive Directors, Angela Bromfield and Ruth Cooke. These appointments address Non-Executive Director succession and ensure that there are an appropriate number of independent directors on the Board. The process undertaken to make these latest appointments is explained in the Nomination Committee report on pages 93.
Following the Company's announcement on 1 April 2019 that Andrew Kirkman had notified the Board of his resignation, which will take effect on 30 June 2019, the Board has commenced a process to recruit his replacement. Further information on that process appears in the Nomination Committee Report on page 93.
The 2018 Code recommends that at least half of the Board, excluding the Chair, be independent.
During the year under review, the now former Chairman (Jonson Cox), who had previously held the role as an executive of the Company prior to the restructuring of the former UK Coal in 2012, was not considered independent. He stepped down as Chairman on 6 March 2018 and resigned as a Non-Executive Director on 31 March 2018. He was replaced as Chairman on 7 March 2018 by Alastair Lyons. The Board considers that Alastair Lyons is independent.
The Board also considers that Lisa Clement, Anthony Donnelly and Andrew Cunningham are independent. So too are Angela Bromfield and Ruth Cooke, who did not serve as directors during the period under review but were appointed prior to publication of this Report.
The Board recognises that Steven Underwood, who is a Director and representative of the Peel Group, which is a 26% shareholder in the Company, and Martyn Bowes, who is the representative of the Pension Protection Fund, which holds 25% of the issued capital, are not independent. The Board considers that their skills and experience are relevant to the business and they contribute to the realisation of the Group's strategy. Both shareholder relationships are governed by relationship agreements.
Following the appointments of Angela Bromfield and Ruth Cooke and the anticipated retirement of Anthony Donnelly in September 2019, there will be four independent and four non-independent directors on the Board, together with the Chairman, who is also independent. The Board considers this balance to be appropriate and it is compliant with the 2018 Code.
| Tenure | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Number of years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Alastair Lyons | 1 yr 1 mnth | |||||||||
| Owen Michaelson | 8 yrs 8 mnths | |||||||||
| Andrew Kirkman | 3 yrs 3 mnths | |||||||||
| Lisa Clement | 7 yrs 4 mnths | |||||||||
| Anthony Donnelly | 8 yrs 3 mnths | |||||||||
| Andrew Cunningham | 2 yrs 11 mnths | |||||||||
| Ruth Cooke | Less than 1 mnth | |||||||||
| Angela Bromfield | Less than 1 mnth | |||||||||
| Steven Underwood | 8 yrs 8 mnths | |||||||||
| Martyn Bowes | 6 yrs 1 mnth |
The Board recognises the benefit of having a diverse (in its widest sense) range of individuals on the Board and in senior executive and management positions. The appointments of two new female directors to the Board represent positive progress in this regard. However, the Board is also mindful that the two external appointments to the Investment Committee during 2018 were of white males, notwithstanding work undertaken with our recruitment consultants to promote diverse longlists for both roles. That said, there has been more gender diversity across the candidates we have recruited for new roles in our regional operating structure.
The Board has not, and will not, set numerical targets for diversity, and future appointments will continue to be made based on merit and objective criteria to ensure that the best candidates are appointed for all roles. However, diversity is an active and important consideration in all succession plans, not just at a senior level, and Harworth is committed to opening up opportunities to apply for, and be appointed to, the new and replacement roles for which we recruit. As the business continues to grow, Harworth will ensure that there are adequate measures in place to support everyone's progress and development within the organisation. Further information on the Group's diversity policy, which was updated during 2018, and initiatives, together with a summary of progress made on diversity during 2018, appears in the "Our People" section of this report on pages 51 to 53.
Since the Company's re-listing in 2015, two internal Board evaluations have been undertaken, led by the Chairman (then being Jonson Cox) and the Company Secretary. The Company aspires to membership of the FTSE 250 and, as such, the Board considers it good practice to carry out an externally facilitated Board evaluation at least every three years. In 2018 an external evaluation process was led by Ian White. Ian is an independent external consultant with experience of evaluating and making recommendations to improve Board effectiveness of listed companies. Other than doing some consultancy work for a small company within the Equiniti group, the Company's Registrars, Ian White has no other connection with the Group. The objectives of the evaluation were: to provide an assessment of the effectiveness of the Board; make recommendations to improve the Board process; and establish a clear set of actions and objectives for the Board to prioritise and focus on in 2019 and beyond.
A comprehensive questionnaire was circulated for completion by all Directors and members of the formerly constituted Executive Committee. The questionnaire considered:
Ian then held interviews with each respondent to the questionnaire, and meetings with members of the People Steering Group (as to which see the "Our People" section of the Strategic Report on page 50) and the Company's auditors. He also attended two Board meetings, a Remuneration Committee meeting and an Audit Committee meeting.
The results of the review were presented by Ian to the Board in December 2018. Overall, the review found that the Company has an effective Board and one which is continuously improving. It highlighted the following characteristics:
The following recommendations were identified as areas on which the Board might focus in 2019 and beyond in order to enhance the Board's effectiveness. Alongside each recommendation is an action point identified to implement the same:
| Keep diversity - defined in its widest term - under regular review and consider more innovative approaches to recruitment both at Board level and below |
An annual "diversity review" has been included as a standing agenda item for the Nomination Committee (October) and Board (November) |
|---|---|
| The Board should be absolutely clear on its purpose and what Non-Executive and Executive Directors are expecting from each other, their respective roles and how they can best support and work with each other |
The Board and Investment Committee met to discuss their respective roles and expectations and identified means of improving engagement between the two functions |
| The Non-Executive Directors should make further efforts to get | Certain Board dinners will be joined by wider management |
| to know employees better, to enhance their visibility and enhance their knowledge of the business – this is especially important in respect of new Non-Executive Directors |
Board to meet a wider group of employees informally over buffet lunch on Board days |
| Non-Executive Directors will be invited to attend quarterly staff breakfast briefings |
|
| Site visits will continue to be hosted by project teams | |
| An annual Employee AGM will be trialled | |
| The Non-Executive Directors should meet alone on a pre planned basis where appropriate |
Non-Executive Directors will advise the Chairman when they consider there is a topic that merits NED-only consideration |
| Once a year the Senior Independent Director should meet with the Non-Executive Directors without the Chair |
The Non-Executive Directors (excluding the Chair) met in March 2019 to appraise the Chairman's performance |
| The Board should keep the number of Board Meetings held in the annual cycle, previously 11, under review |
The meeting scheduled for December has been removed from the 2019 Board cycle |
| The membership of the Audit and Remuneration Committees should be in accordance with the Code and restricted to independent Non-Executive Directors. This is something the Board intends to rectify. |
Ruth Cooke has been appointed to Remuneration Committee and Angela Bromfield has been appointed to both the Remuneration and Audit Committees in place of Steven Underwood |
| Communication of the Committees should be enhanced to ensure all Board members are kept fully informed on their work |
Committee minutes are now included in the Board supplementary pack |
| The Board agenda now includes "Committee updates" as a standing agenda item |
|
| Succession planning should be a high priority on the Board and Nomination Committee's agenda |
Talent management is now a standing agenda item in the Board cycle. Succession planning for the Board and Investment Committee will remain a Nomination Committee matter and be subject to annual review and reporting back to the Board |
The Chief Executive appraises annually the performance of the members of the Investment Committee. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Board led by the Senior Independent Director. In addition to the feedback given on the Chairman's leadership during the external Board evaluation, the Senior Independent Director and other Non-Executive Directors met in March 2019 to review the Chairman's performance. Following that review, the Senior Independent Director considered and discussed with the Chairman the comments and feedback that had been received from the Directors and was able to confirm that the performance of the Chairman is considered effective and that he continues to demonstrate appropriate commitment to his role.
The Articles of Association of the Company provide that one third of the Directors should be subject to re-election by shareholders. The Board considers it good practice for all Directors to be subject to election or re-election at every AGM and, as such, all Directors will stand for election or re-election by shareholders at the 2019 AGM.
The Chief Executive and the Finance Director have service contracts, which may be terminated by the Company on not more than six months' notice. Termination of the Chairman's appointment is also subject to six months' notice, whilst the appointments of all other Non-Executive Directors are subject to three months' notice. There are no Directors on fixed term contracts. There are no contractual clauses that give any of the Directors an entitlement to compensation exceeding their due payment in lieu of notice.
The Board acknowledges its responsibility for identifying business risks, determining risk appetite and, in the context of that appetite, ensuring that the business maintains an appropriate risk profile and a robust framework of controls and processes to monitor and manage risk. Pages 36 to 44 of the Strategic Report identify the principal risks and uncertainties facing the Group, the current risk profile of the business and the anticipated movements in that profile over the next 12 months. Page 34 of the Strategic Report explains how the Board reviews its own risk appetite on an annual basis, undertakes regular (not less than quarterly) reviews of the Group's risk profile and monitors the Company's risk management framework. Based on its latest review, the Board is satisfied that there are in place effective systems for managing, and mitigating, strategic and operational risks.
The Company's delegated authorities policy determines matters reserved exclusively for the Board and also provides a framework for decision-making throughout the business. It was subject to a detailed review by the Board and updated in November 2018. It is supplemented by a framework of internal controls and processes which, alongside the delegated authorities policy, form the governance framework for the business. Responsibility for monitoring, and ensuring the ongoing effectiveness, of this framework, is delegated to the Audit Committee. This includes a review annually as to whether the Company should establish an internal audit function. To date, those reviews have concluded that the structure of, and processes within, the business are neither large, nor complex, enough to merit a separate internal audit function. The work undertaken by the Audit Committee on internal controls, processes and audit, as well as the external audit, is explained on pages 96 to 98 of the Audit Committee Report.
Responsibility for establishing and implementing an appropriate Remuneration Policy for Executive Directors, other members of the Investment Committee, and the Chairman falls in the first instance to the Remuneration Committee. Its work in implementing the existing policy during 2018, and the Board's proposals for revisions to the policy, are set out in the Directors' Remuneration Report on pages 100 to 103.
The Annual Report and Financial Statements, and Notice of AGM are sent to Shareholders at least 20 working days before the meeting. The Board encourages Shareholders to attend, participate and exercise their right to vote at the 2019 AGM.
The resolutions to be proposed at the AGM to be held on 21 May 2019, together with the explanatory notes, appear in the separate Notice of AGM accompanying this Annual Report. The Notice is also available on our website at www.harworthgroup.com/investors/ reports-presentations.
Separate resolutions are proposed on each substantially separate issue. All Directors attend the AGM and are available to answer questions, both formally during the meeting and informally both before and after the meeting. The Board encourages questions from Shareholders.
For each resolution the proxy appointment forms provide Shareholders with the option to direct their proxy vote either for or against the resolution or to withhold their vote.
All valid proxy appointments are properly recorded and counted. Information on the number of shares represented by proxy, the proxy votes for and against each resolution, and the number of shares in respect of which the vote was withheld for each resolution, together with the voting result, are given at the meeting and made available on the Company's website. A vote withheld will not be counted in the calculation of the proportion of the votes for and against a resolution.
The Statement of Corporate Governance has been approved by the Board on its behalf by:
Alastair Lyons Chairman 16 April 2019
Dear Shareholder,
I am pleased to present the Nomination Committee report for the year ended 31 December 2018.
During the period under review, the Committee comprised three Non-Executive Directors. Jonson Cox began the year as Chairman of the Committee until my appointment on 7 March 2018, at which point I succeeded him. The other members of the Committee have been Lisa Clement and Andrew Cunningham. At all times during the year, a majority of the Committee comprised independent Directors. The Company Secretary is secretary of the Committee. The minutes of meetings of the Committee are circulated to all Directors, where appropriate.
Typically, the Committee meets at least once a year to review succession and development planning for the Board and Investment Committee, which is informed by their existing balance of skills, knowledge and experience and diversity. All Non-Executive Directors are invited to attend meetings of the Committee, as is the Chief Executive where appropriate.
When necessary, the Committee leads the process for recruitment and appointment to the Board. Typically, this includes a series of formal and informal meetings of the Committee (in addition to those scheduled during the year) at which candidates are appraised before a recommendation is made to the Board.
During the year, there was a scheduled meeting in June at which the Committee considered: the composition of the Board and its Committees, in anticipation of the proposed changes to the Code on Board composition; succession planning for Tony Donnelly, who would cease to be independent under the Code at the end of 2019; and both initiatives and targets for improving diversity in the business.
Following that meeting, the Committee initiated and led a recruitment process for two new Non-Executive Directors: a successor to Tony Donnelly and an additional independent Non-Executive Director, culminating in the appointments of Angela Bromfield and Ruth Cooke in March this year. Angela's appointment to the Remuneration and Audit Committees is in replacement for Steven Underwood, resulting in those Committees being compliant with the Code, as they now comprise solely independent Non-Executive Directors.
The Committee's immediate focus has now turned to the process for recruiting a replacement for Andrew Kirkman, which is underway.
I will be available at the AGM to respond to any questions or discuss matters relating to the Committee's activities.
Chairman of the Nomination Committee 16 April 2019
| Members and attendance at meetings during the year ended 31 December 2018 |
|
|---|---|
| Jonson Cox* | 0(0) |
| Chairman of the Committee and the Board | |
| (until 6 March 2018) (not independent) | |
| Alastair Lyons | 1(1) |
| Chairman of the Committee and the Board | |
| (from 7 March 2018) (independent) | |
| Lisa Clement | 1(1) |
| Independent Non-Executive Director | |
| Andrew Cunningham | 1(1) |
| Independent Non-Executive Director | |
| *Jonson Cox retired as Chairman of the Board and the Committee on 6 March 2018 at |
which point he was succeeded into both roles by Alastair Lyons. The only scheduled meeting of the Committee took place in June 2018, after Jonson's retirement. The Committee met informally a number of times in the second half of the year in connection with the recruitment of new Non-Executive Directors
The Committee's terms of reference, which were last reviewed and updated in December 2018 are set out on the Company's website and can be found at www.harworthgroup.com/investors/governance. During 2019 the Committee's terms of reference will be updated to reflect the 2018 Code.
The Board undertakes an annual evaluation of the Committee's performance to ensure its continued ability to discharge its key responsibilities. In 2018 this took the form of an external Board evaluation undertaken by Ian White (further details are in the Statement of Corporate Governance on pages 88 to 90).
The activities of the Nomination Committee during the year ended 31 December 2018 comprised:
| Month | Activities | Composition Succession | App'ments | Diversity | |
|---|---|---|---|---|---|
| June | Succession planning for Non-Executive Directors | ✔ | ✔ | ||
| Board and Committee composition ahead of proposed revisions to the Code Diversity initiatives and targets |
✔ | ||||
| H2 2018 | Recruitment of Non-Executive Directors | ✔ |
The Committee is responsible for keeping under review the composition of the Board, to ensure that its membership comprises an appropriate balance of skills, knowledge and experience and includes the right number of independent Directors.
The 2016 Code provided that "smaller companies" (being those below the FTSE 350) should have at least two independent Non-Executive Directors. Whilst it was in force the Board included three independent Non-Executive Directors and so was compliant with the 2016 Code in this regard. The provisions in the 2018 Code have been aligned for companies inside and outside the FTSE 350 such that at least half of all boards, excluding the chair, should be directors whom the board considers to be independent.
Ahead of its coming into force on 1 January 2019, it became clear to the Committee that the composition of the Board would not be compliant with the 2018 Code because (at that time) the Board comprised the chair, three independent Directors and four Directors who are not independent. As such, an additional independent Non-Executive Director needed to be appointed to the Board to ensure compliance with the 2018 Code (as to which see further below).
It was noted in the 2017 Annual Report that, due to their lengths of service on the Board (factoring in Tony Donnelly's term of office as a director of the Harworth Estates division of UK Coal and then of HEPGL), Tony Donnelly will cease to be independent under the Code in January 2020 and Lisa Clement will cease to be independent in December 2020. That being so, the Committee's focus in the second half of 2018, following the appointment of Alastair Lyons as successor to Jonson Cox in March 2018, turned to identifying a successor for Tony (see further below).
At its scheduled meeting in June, bearing in mind the composition and succession points referred to above, the Committee resolved to commence a recruitment process with the objective of appointing two new Non-Executive Directors to the Board.
The Company subsequently appointed Warren Partners to conduct a search and recruitment process. The Company does not retain Warren Partners in any other capacity and it has no other connection with the Company. In conjunction with Warren Partners, the Non-Executive Directors prepared the selection criteria and specifications for the two roles.
Warren Partners identified a "long-list" of candidates. Following a review of that "long-list" by the Nomination Committee and a meeting with Warren Partners, a "short-list" of candidates was identified. Warren Partners interviewed and provided feedback on all "short-list" candidates, resulting in a refined "short-list". The Nomination Committee interviewed all these candidates pursuant to which they identified preferred candidates for each role. Those
preferred candidates then met with the other Non-Executive Directors, the Executive Directors and the Group General Counsel and Company Secretary.
This process culminated in the Committee recommending, and the Board resolving to make an offer, subject to references, to Angela Bromfield and Ruth Cooke for the two roles. Upon Angela and Ruth accepting the roles and the Board taking up references, the appointments were announced on 5 March 2019.
Angela and Ruth are undergoing extensive induction programmes which include: meetings with the Executive Directors, members of both the Investment Committee and Management Board and the external auditor; site visits; and corporate governance briefings.
The Committee undertakes a regular (typically annual) review of the succession plans for Executive Directors. Following the Company's announcement on 1 April 2019 that Andrew Kirkman had given notice of his resignation to join CLS Holdings plc as Chief Financial Officer, the Committee's focus has turned to the process of recruiting his replacement for which it has engaged Spencer Stuart. The Company does not retain Spencer Stuart in any other capacity and it has no other connection with the Company. The Company will make an announcement as soon as Andrew's successor has been selected and a full outline of the recruitment process will be set out in the Annual Report for the financial year ending 31 December 2019.
Talent management and succession planning for the whole business was reviewed by the Board in December following implementation of a regional structure and a business-wide process undertaken by the Head of HR and Organisation Development, in conjunction with the executive team. Going forward, the Committee's remit will extend to succession planning for the Investment Committee. Talent management and succession planning for the rest of the business will be considered by the full Board each year.
The Committee takes the lead in assessing the achievement of diversity (in its widest sense) in all parts of the business and in reviewing the effectiveness of initiatives for improving the same. Further information on the Group's diversity policy, which was updated during 2018; the Group's gender pay-gap at the end of 2018; the initiatives that have been introduced to improve diversity across the business; and the progress made in that regard since publication of the 2017 Annual Report, appears in the Our People section of the Strategic Report on pages 51 to 53.
The Nomination Committee Report has been approved by the Board and signed on its behalf by:
Chair of the Nomination Committee 16 April 2019
| Members and attendance at meetings during the year ended 31 December 2018 |
|
|---|---|
| Andrew Cunningham | 6(6) |
| Chair and Independent Non-Executive Director | |
| Anthony Donnelly | 6(6) |
| Independent Non-Executive Director | |
| Steven Underwood* | 5(6) |
| Non-Executive Director (not independent) |
*On 19 March 2019 and 1 April 2019, respectively, Ruth Cooke and Angela Bromfield, newly appointed Non-Executive Directors, joined the Committee. Steven Underwood stood down from the Committee with effect from 1 April 2019
The Committee's terms of reference, which were last reviewed and updated in December 2018 are set out on the Company's website and can be found at www.harworthgroup.com/investors/governance. During 2019 the Committee's terms of reference will be updated to reflect the 2018 Code.
The Board undertakes an annual evaluation of the Committee's performance to ensure its continued ability to discharge its key responsibilities. In 2018 this took the form of an external Board evaluation undertaken by Ian White (further details are in the Statement of Corporate Governance on pages 88 to 90).
Dear Shareholder,
I am pleased to present the Audit Committee Report for the year ended 31 December 2018.
During the period under review, the Committee comprised three Non-Executive Directors. I chaired the Committee and its other members were Tony Donnelly and Steven Underwood. Following their appointments as Non-Executive Directors, Ruth Cooke and Angela Bromfield joined the Committee on 19 March 2019 and 1 April 2019, respectively. On 1 April 2019, Steven Underwood stood down from the Committee. As such, at the date of this report, the Committee now comprises four independent Non-Executive Directors. Tony Donnelly will retire from the Board at the end of September at which point the Committee will revert to three members. I would like to thank both Steven and, in anticipation of his retirement from the Board, Tony for their contributions to the Committee over the last few years.
The experience of each member of the Committee is summarised on pages 74 and 75. The Board is satisfied that I have recent and relevant financial experience. I was a partner at the predecessor firm to PricewaterhouseCoopers LLP from 1989 to 1996 and then held the role of Finance Director at Grainger plc from 1996 until 2009. I am a chartered accountant. So too are Tony Donnelly and Ruth Cooke. Angela Bromfield is not a chartered accountant but is a member of the Audit Committees of both Churchill China plc, an AIM listed company, and Zotefoams plc, a premium-listed FTSE SmallCap company. The Board is also satisfied that the Committee has competence relevant to the real estate sector, given that the majority of members (both during the period under review and going forward) hold (or have held) senior positions in businesses operating in that sector.
The Company Secretary is secretary of the Committee. The Chairman, Chief Executive, Finance Director and the external auditors are invited to attend meetings when appropriate. The minutes of meetings of the Committee are circulated to all Directors.
During the year, the Committee held four scheduled meetings. There were two further meetings connected to the Company's application to step-up to the premium list and calls between the Chairman, Finance Director, Company Secretary and me on the days preceding the announcement of the Company's preliminary and interim results, so that we could authorise their release, having been delegated the authority to do so by the Board.
I will be available at the AGM to respond to any questions or discuss matters relating to the Committee's activities.
Audit Committee Chairman 16 April 2019
The activities of the Audit Committee during the year ended 31 December 2018 included:
| Month | Activities | Financial reporting |
Risk and internal controls |
Compliance w'blowing |
External audit |
|---|---|---|---|---|---|
| February | FYE 17 preliminary results and investor presentation | ✔ | ✔ | ||
| Categorisation of properties: development vs. investment | ✔ | ✔ | |||
| Risk register | ✔ | ||||
| Whistleblowing reports | ✔ | ||||
| April | Application to step-up to premium list: PricewaterhouseCoopers LLP ("PwC") working capital and Financial Position and Prospects Procedures ("FPPP") reports – preliminary review |
✔ | |||
| May | Application to step-up to premium list: PwC working capital and FPPP reports – final review and approval |
✔ | |||
| June | Year-end audit de-brief | ✔ | |||
| Internal controls and processes: update on implementation of recommendations from KPMG external review and PwC's FPPP review |
✔ | ||||
| Cyber security: review of NCC Group's ("NCC") report and recommendations | ✔ | ||||
| Annual review of hospitality register | ✔ | ||||
| September | FYE 18 interim results and investor presentation | ✔ | ✔ | ||
| Risk register | ✔ | ||||
| External auditors' feedback on audit and management (without management present) |
✔ | ✔ | |||
| Internal controls and processes: update on implementation of recommendations from KPMG external review and PwC's FPPP review |
✔ | ||||
| November | Information security: review of NCC strategic report and recommendations | ✔ | |||
| Internal controls and processes: update on implementation of recommendations from KPMG external review and PwC's FPPP review, including review of need for internal audit function |
✔ | ||||
| Business Continuity Plan and Incident Response Plan: review and approval | ✔ | ||||
| Insurance programme renewal | ✔ | ||||
| Interim results de-brief, year-end audit strategy and review of external auditors' appointment |
✔ |
The areas to which the Committee has given particular focus since publication of the 2017 Annual Report and Financial Statements are summarised below.
As with previous years, the property portfolio, which is composed of both investment and development properties as well as assets held for sale, joint ventures, overages and owner-occupied properties, comprises the vast majority of the total assets of the business. Harworth continues to use the same independent external valuers, BNP Paribas and Savills, to value the portfolio. However, given the significance of the property values, together with the different accounting treatment for different property categories, there remain a number of key judgements. These key judgements are primarily regarding the future intention and plans for the site as well as value per acre, rental amounts, yields and costs to bring the sites forward and the applicability of comparable sales evidence, recognising that the properties are at different stages of completion. The assumptions and methodology were reviewed for consistency and appropriateness.
The deductions from the expected land values primarily include the costs to complete from external firms. Given the increasing number of Major Developments, further validation and reconciliation work has been performed on the cost reports. The methodology for, and adequacy of, the cost report totals are reviewed by the Committee alongside the valuations. With regard to the surface mine sites which have been handed back, there is a provision for potential restoration costs which is included with the cost report totals and disclosed separately.
This is discussed on page 45 of the Strategic Report. The same methodology has been used as in previous years in terms of the 5-year forecast model which is produced and reviewed by the Committee and the Board. However, given heightened political and economic uncertainty, further downside sensitivity testing has been performed.
Harworth has an established policy for determining the categorisation of properties. This is discussed further in the Financial Review and Accounting Policy in Note 1 to the Financial Statements. The Committee again reviewed the appropriateness and timing of the re-categorisation of properties and the policy. It was concluded that the categorisation of the property portfolio was appropriate.
Harworth believes that the use of APMs alongside statutory measures is essential in communicating the performance of Harworth to its stakeholders, particularly investors. In the Financial Statements, Note 2 gives a full reconciliation to statutory measures. The Committee reviewed the prominence and appropriateness of APMs and concurred with their use.
| 2018 £'000 |
2017 £'000 |
|
|---|---|---|
| Audit services | ||
| Fees payable to the external auditors for: | ||
| – the audit of the Company and the consolidated financial statements | 50 | 40 |
| – the audit of the Company's subsidiaries financial statements | 121 | 111 |
| – the audit of the Company's joint ventures | 15 1 |
8 |
| Total | 186 | 159 |
| Non-audit services | ||
| Fees payable to the external auditors and its associates for non-audit services: | ||
| – audit related assurance services | 16 | 15 |
| – tax advisory services | – | 7 |
| – tax compliance services | – | 6 |
| – fees in relation to transactions* | 331 | – |
| Total | 357 | 28 |
| Total fees payable to external auditors and associates for audit and non-audit services | 543 | 187 |
| Ratio of audit to non-audit fees paid to external auditor | 0.5:1 | 5.7:1 |
| Fees payable to non-audit firms for non-audit services | ||
| – audit related assurance services | 16 | 22 |
| – tax advisory services | 148 | 69 |
| – tax compliance services | 51 | 19 |
| – fees in relation to transactions* | 5 | – |
| – pension accounting | 6 | 5 |
| – remuneration services 5 |
20 1 |
– |
| Total | 246 | 115 |
*Note, in 2018 this included the work undertaken by PwC to support the Company's application to transfer its shares from the standard segment to the premium segment of the Official List
The Committee has reviewed the controls which are in place to ensure the completeness and accuracy of the Company's financial records. These were also subject to external review by PwC ahead of the Company's application to step-up to the premium segment of the Official List during 2018. The Committee has also noted (i) the reviews that are undertaken during this process by the various parties, including the external auditor and valuers, to ensure consistency and balance in the presentation of the Annual Report and Financial Statements and (ii) the internal verification exercise which is undertaken in respect of the financial metrics referred to in the Strategic Report and Directors' Report.
As a result, the Committee has concluded that the Annual Report and Financial Statements for the year ended 31 December 2018, when taken as a whole, is fair, balanced and understandable, and provides the information necessary for Shareholders to assess the Company's position, performance, business model and strategy. The Committee has reported to the Board and the Board's conclusions are set out in the Statement of Directors' Responsibilities included in the Directors' Report on page 124.
The Committee is responsible for making recommendations to the Board on the appointment, reappointment and removal of the external auditor. The year-end audit strategy and the external auditor's appointment are subject to review annually at the Committee's scheduled meeting in November each year. The effectiveness of the external audit is reviewed by the Committee in June.
Having reviewed:
the Committee has recommended the re-appointment of PwC at the forthcoming AGM for the external audit of the Company's financial statements for the financial year ending 31 December 2019.
PwC, then known as Coopers and Lybrand, was first appointed as the Company's auditors before 17 June 1994 and the Committee intends to undertake a tender ahead of the audit of the financial statements for the financial year ending 31 December 2020. This means that the audit of the financial statements for the financial year ending 31 December 2019 will be PwC's last as the Company's external auditor, coinciding with the expiry of Andy Ward's term as lead audit partner. The Company intends to commence the tender process in the second half of 2019 with the aim of appointing a new external auditor in the first quarter of 2020. There are no contractual obligations which restrict the Committee's choice of external auditor.
The Board recognises the importance of safeguarding auditor objectivity and has taken the following steps to ensure that auditor independence is not compromised:
During 2018, and following a tender, the Company instructed PwC to undertake reviews of the Group's working capital and FPPP to support the Company's application to transfer its shares to the premium segment of the Official List. PwC's engagement was reviewed and approved by the Chair of the Committee, Finance Director and Company Secretary, given PwC's previous work during the Company's standard listing process in 2015. PwC's appointment was also endorsed by Canaccord Genuity Limited, which acted as sponsor in connection with the step-up.
Resolutions to re-appoint PwC as the Company's external auditors and to authorise the Directors to determine its remuneration will be proposed at the forthcoming AGM.
During the year, the Committee undertook reviews of the Group Risk Register in February and September, ahead of the announcements of the Company's preliminary and interim results. With effect from the start of 2019 it has been agreed that risk
review and management will revert to the full Board which will undertake quarterly reviews of the same, together with an annual review of Board risk appetite. The outcome of the Board's latest risk review is explained in detail in the "Managing Risk" section of the Strategic Report on pages 34 to 44.
In the 18 months prior to publication of this Report, the Group's internal controls and processes have been subject to the following external reviews:
All of the recommendations from both external reviews have been implemented.
The Group does not currently have an internal audit function but the Committee reviews, at least annually, whether such a function ought to be established, most recently at its scheduled meeting in November 2018. The Committee maintained its view that the structure of, and processes within, the business were neither sufficiently large, nor complex, to merit a separate internal audit function. The Committee did, however, conclude that the rolling programme of annual external reviews of controls ought to be maintained. During 2018 this extended to reviews of cyber and information security undertaken by NCC (see further below) and in 2019 this will include an external review of the Group's half-year and year-end valuation processes. The absence of an internal audit function was noted, but rated as low risk, by PwC during its FPPP review, due to the Group's ongoing programme of external reviews and scrutiny.
Ahead of the Company's step-up to the premium segment of the Official List and in accordance with recommendations in PwC's FPPP report, the Company implemented certain measures to formalise policies and procedures for compliance with its disclosure obligations under MAR. These included the establishment of an inside information policy and a Disclosure Committee, comprising the Chief Executive, Finance Director and Company Secretary (in close liaison with the Chairman) who had hitherto monitored and reviewed the Company's disclosure obligations on a regular but informal basis.
The Audit Committee remains responsible for monitoring the effectiveness of, and compliance with, the Group's policies and procedures for combating modern slavery, bribery and corruption, and preventing the facilitation of tax evasion. This includes an annual review of the Group's register of gifts, sponsorship and hospitality, undertaken at the Committee's scheduled meeting in June.
The Committee also took the lead in reviewing the policies, procedures and agreements implemented by the Group to ensure its compliance with the GDPR, ahead of its coming into force on 25 May 2018. From 2019, the Committee will undertake an annual review of the Company's ongoing compliance with the GDPR.
Further information on these policies, procedures and initiatives appear in the Strategic Report at pages 64 and 65.
A revised whistleblowing policy and process were approved by the Committee in May 2018 ahead of the Company's step-up to the premium list. There were no whistleblowing claims reported to the Committee during 2018.
As trailed in the 2017 Annual Report and Financial Statements, external reviews were undertaken in 2018 of the Group's cyber and information security resilience. Both reviews were undertaken by NCC, a global expert in cyber security. The cyber security review, which included a simulated penetration test, was undertaken in the second quarter of 2018. The results, including technical recommendations for improving the resilience of the Group's IT network, were presented at the Committee's scheduled meeting in June. All recommendations have been implemented or, in the case of certain low risk measures and following further consultation with NCC, marked as closed. The strategic review of the Group's information security and IT function was undertaken in the third quarter of 2018 and the results were presented at the Committee's meeting in November. NCC's report made a series of recommendations, including the appointment of an information security manager, initially on an interim basis. That appointment has now been made and the information security manager is taking the lead in implementing all other recommendations from NCC's report. Updates are given at each of the Committee's meetings on the Group's progress in implementing these recommendations. This will continue until all recommendations have been addressed.
During 2018 the Group instructed:
Those plans were presented to, and approved by, the Committee in November. Copies of the plans, and briefings, have been given to those with a role to play under each plan. A desktop test of the BCP will be undertaken during the first half of 2019. A desktop test of the IRP will be undertaken in the second half of 2019 once progress has been made in implementing the recommendations from NCC's strategic report.
Following detailed reviews of the Group's insurance programme ahead of the 2017 and 2018 renewals, which led to a series of insurance cover extensions, the Group's insurance programme was renewed on 1 January 2019, with the following minor changes:
The Audit Committee Report has been approved by the Board and signed on its behalf by:
Chair of the Audit Committee 16 April 2019
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 99
| Members and attendance at meetings during the year ended 31 December 2018 |
|
|---|---|
| Lisa Clement | 7(7) |
| Chair and Senior Independent Director | |
| Anthony Donnelly | 7(7) |
| Independent Non-Executive Director | |
| Steven Underwood* | 5(7) |
| Non-Executive Director (not independent) | |
| Alastair Lyons** | 5(5) |
| Chairman (independent) | |
| Jonson Cox** | 2(2) |
| Chairman (not independent) | |
| *On 1 April 2019 Angela Bromfield, a newly appointed Non-Executive Director, joined | |
| the Committee and Steven Underwood stood down from the Committee | |
| **Jonson Cox retired as Chairman of the Board and stepped down from the | |
| Committee on 6 March 2018. On 7 March 2018 Alastair Lyons succeeded him as | |
| Chairman and joined the Committee |
The Committee's terms of reference, which were last reviewed and updated in December 2017, are set out on the Company's website and can be found at www.harworthgroup.com/investors/governance. During 2019 the Committee's terms of reference will be updated to reflect the 2018 Code. The Board undertakes an annual evaluation of the Committee's performance to ensure its continued ability to discharge its key responsibilities. In 2018 this took the form of an external Board evaluation undertaken by Ian White (further details are in the Statement of Corporate Governance on pages 88 to 90).
Dear Shareholder,
On behalf of the Board, I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2018.
This report is divided into 3 sections: this Chair's introduction, the proposed Directors' Remuneration Policy ("Policy") for which we will be seeking shareholder approval at the 2019 AGM and the Annual Remuneration Report, which explains how the Policy was implemented in 2018 and how it will be implemented in 2019.
This report has been prepared in accordance with the provisions of the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Report) (Amendment) Regulations 2013 (the "Regulations"). It also meets the requirements of the UK Listing Authority's Listing Rules, the Disclosure and Transparency Rules and the principles of the 2016 Code (which applied during the year under review) on a comply or explain basis.
In accordance with the Regulations, the following sections of the Annual Remuneration Report are subject to audit: the single total figure of remuneration for Directors and accompanying notes (pages 112 and 113); scheme interests awarded during the year (page 116); payments to past Directors (page 117); and the statement of Directors' shareholdings and share interests (page 119). The remaining sections of the report are not subject to audit.
The Company's current Policy, introduced in 2016, was designed to support the Group's strategy and help retain and incentivise a management team with the requisite skills, knowledge and experience to deliver strong, long-term, sustainable growth for shareholders.
Whilst the fundamental strategy of the Group has remained relatively unchanged over the last three years, the Committee believes that amendments to our Policy would better support our core reward principles (set out in the table below). Our business thrives on long-term decision making with strategies in place and decisions made today which will benefit Shareholders over a much longer timeframe than is reflected over a typical three-year performance period under a classic "LTIP". The setting of appropriate long-term performance targets is a challenge given the cyclical nature of Harworth's business. So too is finding an appropriate comparator group for TSR purposes given the unique nature of the business, even within the real estate sector. Whilst the Committee does not consider the existing Policy to be "broken" per se, it does consider that the classic LTIP structure is not the best approach for long-term incentivisation. With that in mind, the Committee undertook a detailed review of the existing Policy in the second half of 2018. A key objective was to identify an approach which can be cascaded throughout our senior management team, so that we may be consistent in the way we use share awards to incentivise our business leaders for the long-term. We concluded that a Restricted Share Plan is a far better mechanism to support our Group strategy, culture and core reward principles. As illustrated below, in-flight LTIP awards are expected to vest at a similar level and we are, therefore, not turning to a Restricted Share Plan because of poor vesting outcomes.
The activities of the Remuneration Committee during the year ended 31 December 2018 included:
| Month | Activities | Policy | Remuneration | All employees |
Advisers |
|---|---|---|---|---|---|
| January | 2018 bonus: financial targets and personal objectives | ✔ | |||
| February | 2017 bonus scoring LTIP: vesting and awards SAYE |
✔ ✔ |
✔ | ||
| July | Initiation of tender for appointment of recruitment consultants | ✔ | |||
| September | Appointment of recruitment consultants | ✔ | |||
| October | Remuneration Policy review | ✔ | |||
| November | Remuneration Policy review | ✔ | |||
| December | Annual salary review Annual review of Group-wide benefits |
✔ ✔ |
Core reward principles
| Rewarding long-term value creation in a cyclical business | Bringing into focus sustainable growth via our strategic priorities. Recognising the extended timeframes of our business model and long-term effects of our decision making, delivered in a way which reduces the impact of cyclical volatility on reward outcomes and, therefore, facilitates retention through the cycle |
|---|---|
| Supporting stewardship | Encouraging and enabling substantial long-term share ownership for all employees, supporting the long-term nature of our business and its returns |
| Supporting our culture | Focusing incentives on Group performance to create collective accountability and delivering a reward structure across all levels of management |
| Simplification | A simple and transparent framework which can be readily cascaded |
Following a detailed review and a Shareholder consultation, the Committee is proposing the following changes to the Policy to support our core reward principles.
| Changes to Policy | Rationale |
|---|---|
| Introduction of a Restricted Share Plan to replace the current Long Term Incentive Plan for future awards |
To reflect our overarching reward principle of rewarding long-term value creation in a cyclical business and to support stewardship |
| Introduction of overarching Remuneration Committee discretion to Restricted Share Plan rules |
To reduce vesting outcomes where the Committee considers that they would not otherwise be representative of the underlying business performance over the vesting period |
| Increase shareholding guidelines for Executive Directors from 100% to 200% of salary |
To emphasise alignment with shareholders and the importance of long-term share ownership |
| Introduction of a post-employment shareholding requirement |
To support stewardship and the quality of the long-term decision making of our executives |
| Flexibility to increase the normal annual bonus policy maximum from 100% to 150% of salary (and only with suitably stretching targets) |
Annual bonus opportunity for 2019 will be equal to 100% of salary. Although the Committee has no intention of increasing maximum opportunity currently, flexibility has been provided in order to support succession planning and potential changes to business needs |
| Extension of malus and clawback provisions | To reflect current best practice and our adoption of the provisions of the 2018 Code with respect to the ability to recover variable remuneration |
| Introduction of a Group SIP | To encourage wider share ownership across all our employees and support stewardship |
We engaged widely with Shareholders as part of this process and their feedback was substantially supportive with an understanding of our rationale for change and a recognition of how the new Policy is more suited to our business profile.
The proposed Restricted Share Plan has the following design features:
The Restricted Share awards will be subject to underpins which reflect performance over the vesting periods. Further details are provided on page 118. Furthermore, the Committee has discretion to reduce vesting outcomes where it considers that they would not otherwise be representative of the underlying business performance over the vesting period. The Committee will disclose how performance underpins and underlying business performance over the vesting period has been taken into account at the time of vesting.
Conventional best practice share plan provisions regarding leaver and change of control arrangements have been included in addition to the extension of malus and clawback provisions, as discussed above.
As announced on 1 April 2019, Andrew Kirkman will leave the business on 30 June 2019. Andrew's remuneration arrangements in respect of his cessation of employment are as follows:
| Salary pension and benefits |
Andrew will continue to receive his salary, benefits and pension provision until 30 June 2019 |
|---|---|
| 2019 bonus | Andrew will not be eligible to earn a bonus for the period of his service in 2019 |
| Unvested LTIP awards | Andrew was employed for the entirety of the three-year performance period in respect of his 2016 LTIP award and he will leave the business after 25 May 2019, being the vesting date. Therefore, the vesting outcome of his 2016 LTIP awards will be determined as normal based on achievement against the relevant performance metrics (see pages 115 and 116). Andrew's 2017 and 2018 LTIP awards will lapse in full on 30 June 2019 |
|---|---|
| 2019 share awards | Andrew will not be eligible to be granted an award in 2019 under either the Restricted Share Plan or the Share Incentive Plan |
The salaries of the Chief Executive and the Finance Director have been increased by 2.5% to £316,250 and £240,880 respectively, in line with the median salary increases applied across the wider workforce.
The annual bonus will continue to operate on the basis of a combination of financial performance (including NNNAV growth, sales volume, acquisitions and profit excluding value gains) and personal objectives. The financial performance targets and personal objectives for the 2019 bonus will be reported in the 2020 Annual Report. The bonus entitlement for the Chief Executive was exceptionally set at 125% last year. The bonus entitlement for the Chief Executive will be 100% in 2019. As noted above, the Finance Director will not be eligible to earn a bonus for the period of his service in 2019.
As explained above, subject to approval of the new Policy and the Restricted Share Plan Rules at our 2019 AGM, awards under the Restricted Share Plan will be made to our Chief Executive and other members of the senior management team. As noted above, the Finance Director will not be granted an award under the Restricted Share Plan. Details are set out on pages 118 and 119.
The fees for the Chairman (£160,000) have remained unchanged. The basic fees for Non-Executive Directors have increased from £42,500 to £45,000 from the start of 2019, having not been reviewed since 2015. Andrew Cunningham received an additional fee of £7,500 for chairing the Audit Committee, and I received additional fees of £7,500 for chairing the Remuneration Committee and £7,500 as Senior Independent Director. The Committee considers that NED fees appropriately reflect the work and responsibilities associated with each role.
Although not obliged to publish a gender pay gap report, the Company acknowledges the challenge it faces to improve gender and ethnic diversity at all levels of the business and wants to be transparent about the extent of that challenge and the progress it is making in meeting it. As such, we have again decided to report voluntarily on the Company's gender pay gap within the Our People section of this Report at pages 52 and 53.
The Committee ensures it is aware of the remuneration and benefits of the wider workforce when setting remuneration packages of Executive Directors and Investment Committee members.
Over half of our employees currently participant in the Group's all-employee SAYE plan. We are also seeking shareholder approval at the AGM to implement an all-employee SIP to encourage more employee share ownership.
The Committee currently operates a deferred share bonus plan for the senior management team outside of the Investment Committee. If approved at the AGM, those individuals will instead participate in the Restricted Share Plan.
The Board recognises the importance of engaging with, and
considering the interests of, the Group's employees in its decisions. To that end, we have been implementing a series of measures to encourage and improve engagement, such as the establishment of the People Steering Group. Further details on employee engagement can be found in the Our People section of this report on pages 50 and 51.
I hope that Shareholders are supportive of our new Policy, which takes into account the 2018 Code provisions, and particularly the adoption of our Restricted Share Plan and SIP. I will be available at the AGM to respond to questions and discuss any aspect of the new Policy, Annual Remuneration Report or the Committee's activities.
Chair of Remuneration Committee 16 April 2019
This section of the report sets out the Policy for Executive Directors which will be put to a binding shareholder vote at the 2019 AGM. Subject to shareholder approval, the Policy will come into effect from the close of the 2019 AGM.
| Function | Operation | Opportunity | Performance metrics |
|---|---|---|---|
| Base salary To recognise the individual's skills and experience and to provide a competitive base reward. |
Base salaries are ordinarily reviewed annually, with reference to: salary levels for similar roles at comparable companies; to individual contribution to performance; and the experience of the Executive. Any adjustments will typically be effective 1 January in the year following review. |
Any base salary increases are applied in line with the outcome of the review as part of which the Committee also considers average increases across the Group. Salary increases will generally be in line with the range of increases awarded to salaried employees (in percentage terms). In exceptional circumstances (including, but not limited to, a material increase in job size or complexity) the Committee has discretion to make appropriate adjustments to salary levels to ensure they remain market competitive. |
None |
| Pension To provide an opportunity for executives to build up income on retirement. |
All executives are either members of the Group pension scheme or receive a cash pension allowance. Salary is the only element of remuneration that is pensionable. Executives may be permitted to sacrifice other elements of remuneration and receive an equivalent contribution to a pension scheme. Should any Executive elect to do so, any employer social security saving for the Group may also be contributed to a pension arrangement on behalf of the Executive. |
10% of salary, plus the amount of any employer social security saving if an Executive sacrifices any other element of remuneration as referred to in the "Operation" column. |
None |
| Benefits To provide benefits which are competitive in the market in which the Executive is employed. |
Executives receive benefits which consist primarily of the provision of a car allowance and fuel, although can include any such benefits that the Committee deems appropriate, and the Company may make a payment in respect of any associated tax liability where the Committee considers this to be appropriate. |
Benefits vary by role and individual circumstances: eligibility and cost is reviewed periodically. The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside the Company's control have changed materially (e.g. increases in insurance premiums). |
None. |
Annual bonus
To incentivise and reward strong performance against financial and personal annual targets, thus delivering value to shareholders and being consistent with the delivery of the strategic plan.
Performance measures, targets and weightings are set at the start of the year. The scheme is based on a combination of financial performance and personal objectives. At the end of the year, the Remuneration Committee determines the extent to which targets have been achieved.
Bonus payments are ordinarily delivered in cash. However, if a bonus in excess of 100% of salary is earned, the Remuneration Committee has the discretion to defer any bonus above 100% of salary into shares in the Company for up to three years, subject to malus provisions. The Remuneration Committee also has discretion to require (or to permit) the deferral into shares of any other part of a bonus.
Malus (of deferred shares) and clawback (of any bonus paid) may be applied during employment or for two years post-termination in the event of misconduct, material financial misstatement, error in calculation of outcomes, a significant health and safety event or environmental incident, material corporate failure or in any other circumstance that the Committee considers appropriate.
If a deferred bonus award is granted on the basis the Executive is not entitled to acquire the shares until the end of the deferral period, an additional payment (in cash or shares) may be made in respect of dividends that would have been paid on the shares subject to the award during the period beginning with the date of grant and ending with the date on which the shares can first be acquired (this payment may assume that dividends had been reinvested in Harworth shares on such basis as the Committee determines).
For Executive Directors, the normal maximum annual bonus opportunity is 100% of base salary, although the Committee has discretion to award a bonus opportunity of up to 150% of salary.
For FY2019, the maximum annual bonus opportunity will be 100% of salary for each Executive Director.
50% of maximum annual bonus opportunity will be paid at Target and 100% at Maximum, with straight-line vesting between each. The Committee may set a Threshold level of performance for which no more than 10% of maximum would be paid.
Performance is assessed on an annual basis, as measured against specific objectives set at the start of each year. The measures will include financial measures and may also include personal and/ or strategic performance objectives.
Financial measures will be weighted appropriately each year according to business priorities. Measures may include, but are not limited to, growth in net assets, acquisitions, sales and profit excluding value gains. No less than 75% of the annual bonus will be based on financial measures.
Strategic and personal objectives are set annually to reflect the Group's annual strategic plan and individual contribution to that plan, developed in line with shareholder expectations. No more than 25% of the annual bonus will be based on strategic and/or personal objectives. Any strategic and/ or personal element shall not pay out unless there is a payout under the financial element.
Overall payout under the annual bonus may be subject to additional underpins, determined by the Committee at the start of the financial year.
The Committee has discretion to adjust the formulaic bonus outcomes in exceptional circumstances to ensure alignment of pay with performance. Any such adjustments would be fully explained in future Remuneration Reports.
To encourage and enable substantial long-term share ownership and to reflect our ethos of long term stewardship.
Annual share awards will be made in the form of conditional share awards or nil-cost options. The awards will be subject to a performance underpin explained further in the column headed "Performance metrics". An award will vest in three equal tranches following the assessment of the relevant performance underpin, which will be assessed following the end of a period of no less than three years as regards the first tranche, no less than four years as regards the second tranche and no less than five years as regards the third tranche.
The first and second tranches of an award will be subject to a holding period which begins on the relevant vesting date and lasts until the vesting date of the third tranche, with the award not "released" until the end of the holding period; no holding period will apply to the third tranche of an award. The holding period will be structured as either (1) the participant not being able to acquire the shares until the end of the holding period; or (2) the participant being able to acquire shares following vesting but that, other than as regards the sale of shares to cover tax liabilities associated with the vesting or acquisition, the participant not being able to dispose of or otherwise deal with the shares acquired until the end of the holding period.
If a holding period is structured on the basis that the participant is unable to acquire shares until its end, dividend equivalents (in cash or shares) may be paid on vested shares in respect of dividends that would have been paid on those shares between vesting and the date on which the shares can first be acquired. The dividend equivalents may assume the reinvestment of dividends into shares on such basis as the Committee determines.
A tranche of an award under the RSP may be cancelled (if shares have not been delivered to satisfy it) or recovered from a participant (if shares have been delivered) up to the second anniversary of vesting in the event of misconduct, material financial misstatement, error in calculation of outcomes, a significant health and safety event or environmental incident, material corporate failure or in any other circumstance that the Committee considers appropriate.
The RSP provides for a normal annual award of up to 50% of salary for Executive Directors. In exceptional circumstances, such as on recruitment, awards of up to 100% of salary may be made.
Function Operation Opportunity Performance metrics Although no formal performance measures apply to any awards under the RSP, the extent to which a tranche of an award vests may be reduced by the Committee if a performance underpin assessed to the end of the financial year preceding the date of vesting is not achieved.
In addition, the Committee may reduce the extent to which a tranche vests if it believes this better reflects the underlying performance of the group or participant over the relevant period, or if the Committee considers that the vesting level is not appropriate in the context of circumstances that were unexpected or unforeseen at the grant date or other relevant circumstances.
| Function | Operation | Opportunity | Performance metrics |
|---|---|---|---|
| Share Incentive Plan ("SIP") and Save-As You-Earn plan ("SAYE") To motivate and to facilitate share ownership on an all-employee basis. |
These plans are reviewed annually and if offered are offered to all eligible employees in accordance with their terms and applicable legislation. |
An Executive Director may contribute up to £500 per month (or such other limit as may be permitted under the relevant legislation) (SAYE) and £1,800 per annum (or such other limit as may be permitted under the relevant legislation) (SIP) into these tax advantaged all-employee schemes. Under the SAYE, the per share option exercise price is set at a discount of up to 20% (or such other amount as may be permitted under the relevant legislation) to the share price when participation is offered. Under the SIP the Company may match the shares up to a 2 for 1 basis (or on such other basis as may be permitted under the relevant legislation). Under the SIP the Company may also make an award to an Executive Director of up to £3,600 of free shares in any year. |
N/A |
The measures used under the annual bonus plan are selected annually to reflect the Group's main objectives for the year and reflect both financial and personal contribution to the strategic plan, developed in line with shareholder expectations. Additional underpins may be set, for example to ensure appropriate consideration of all relevant aspects of health and safety.
The terms of the underpins will be determined on an annual basis taking into account the Committee's assessment of the metrics which will best reflect overall business health over the applicable vesting periods. Underpins will ordinarily be qualitative, and the Committee will use its judgement to assess "in the round" whether the level of vesting is appropriate having regard to the underpins and business performance. The underpins applying for the RSP awards to be granted in respect of the Company's FY2019 are set out on pages 118 and 119.
SAYE options and awards under the SIP are not subject to performance conditions in line with the treatment of such awards for all employees and in accordance with the applicable tax legislation.
The Committee may vary or substitute any performance measure or RSP underpin if an event occurs which causes it to determine that it would be appropriate to do so, provided that any such variation is fair and reasonable and (in the opinion of the Committee) the change would not make the measure or underpin less demanding. If the Committee were to make such a variation, an explanation would be given in the next Remuneration Report.
The Committee will operate its current and legacy share plans in accordance with their rules. Share awards may be made in the form of conditional share awards, options (including nil cost options) or forfeitable share awards. Awards granted over shares may be settled in cash. The Company does not intend to settle awards, or dividend equivalents on awards, granted to Executive Directors in cash and would do so only where the particular circumstances make that appropriate, for example where there is a regulatory restriction on the delivery of shares. In the event of a variation of the Company's share capital or a demerger, special dividend or other event which, on the Committee's opinion may affect the price of shares, the Committee may alter the terms of awards under its share plans and the number of shares subject to those awards in accordance with the terms of the relevant plan.
Harworth's approach to annual salary reviews is consistent across the Group, with consideration given to the level of experience, responsibility, individual performance and salary levels in comparable companies.
The majority of employees are eligible to participate in an annual bonus scheme with similar metrics to those used for the Executive Directors. Opportunities and specific performance conditions vary by organisational level with business area-specific metrics incorporated where appropriate.
Subject to its approval by shareholders, senior managers will be eligible to participate in the RSP. The terms on which they will participate, including award sizes, may vary from the terms on which Executive Directors participate, including having regard to organisational level, but will be consistent with the terms of the RSP approved by shareholders.
The Committee continues to recognise the importance of aligning Executive Directors' interests with shareholders' through building up a significant shareholding in the Company. Shareholding guidelines are in place that require Executive Directors to acquire a holding equivalent to 200% of base salary. Until the relevant shareholding levels are acquired, 50% of any shares vesting to the relevant Director under the RSP (post-payment of tax) are required to be held. Shares subject to LTIP or RSP awards which have vested but which remain subject to a holding period and shares subject to any deferred bonus award count towards the guidelines on a net of assumed tax basis. Details of the Executive Directors' current personal shareholdings are provided in the Annual Report on Remuneration.
Reflecting best practice, the Committee has adopted, with effect from 1 January 2019, a post-cessation shareholding requirement. This requires that for the first 12 months following cessation, an Executive Director must retain such number of his or her "relevant shares" as have a value (as at cessation) equal to half of the shareholding guideline that applies during service (currently 100% of base salary, based on a guideline during service of 200% of salary), with that requirement tapering down to 0% over the following 12 months. If the Executive Director holds less than the required number of "relevant shares" at any time, he or she must retain the "relevant shares" he or she holds. Shares which the Executive Director has purchased or which have been acquired pursuant to awards granted before 1 January 2019 are not "relevant shares" for these purposes. Shares subject to RSP awards which have vested but not been released, shares subject to released RSP awards which have not been exercised, and shares subject to deferred bonus awards count towards the post-cessation guideline on a net of assumed tax basis. Unless the Committee determines otherwise, when considering the extent to which this requirement is satisfied, an Executive Director or former Executive Director shall be deemed to have disposed of shares which are not "relevant shares" before any "relevant shares" that person holds.
Non-Executive Directors are appointed for an initial term of three years which rolls forward on an annual basis, subject to the Non-Executive Directors' re-election at each Annual General Meeting. The appointment and re-appointment and the remuneration of Non-Executive Directors are matters reserved for the full Board.
Details of the Non-Executive Directors' appointments are set out on pages 74 and 75.
The Non-Executive Directors are not eligible to participate in the Company's performance related bonus plan, long-term incentive plans or pension arrangements.
Full terms and conditions for each of the Non-Executive Directors are available at the Company's registered office during normal business hours and will be available at the AGM for 15 minutes prior to the meeting and during the meeting.
| Function | Operation | Opportunity | Performance metrics |
|
|---|---|---|---|---|
| Fees and benefits To attract and retain Non Executive Directors of the highest calibre with broad commercial and other |
Fee levels are ordinarily reviewed annually, with any adjustments typically effective 1 January in the year following review. The fees of the Chairman are determined by the Committee, whilst the fees of the other |
Non-Executive Director fee increases are applied in line with the outcome of the annual fee review. Fees for the year commencing 1 January 2019 are set out in the Annual Remuneration Report. |
None. | |
| experience relevant to the Company. |
Non-Executive Directors are determined by the Board. Additional fees are payable for acting as Senior Independent Director and as Chair of any of the Board's Committees. Fee levels are benchmarked against similar roles at comparable companies. Time commitment and responsibility are taken into account when reviewing fee levels. The Non-Executive Directors may be eligible to receive benefits linked to the performance of their duties, including but not limited to travel and other expenses, and the Company may make a payment in respect of any associated tax liability where the Committee considers this to be appropriate. |
Fee levels will next be reviewed during 2019, with any increase effective from 1 January 2020. It is expected that increases to Non Executive Director fee levels will be in line with salaried employees over the life of the policy. However, in the event that there is a material misalignment with the market or a change in the complexity, responsibility or time commitment required to fulfil a Non-Executive Director role, the Board has discretion to make an appropriate adjustment to the fee level. Where benefits are provided to Non-Executive Directors they will be provided at a level considered to be appropriate taking into account the individual circumstances. |
The chart below provides an illustration of the potential future reward opportunities for Owen Michaelson, and the potential split between the different elements of remuneration under three different performance scenarios: 'Minimum', 'On-target' and 'Maximum', along with an illustration assuming a 50% increase in the share price for the purposes of the RSP award.
Potential reward opportunities are based on Harworth's remuneration policy, applied to Mr Michaelson's base salary effective 1 January 2019. The annual bonus and RSP are based on the level of maximum opportunities applied in 2019. RSP values are based on the face value at award rather than vesting (other than as regards that element of the charts assuming a 50% increase in the share price for the purposes of the RSP award).
No chart has been included in respect of Andrew Kirkman, recognising that he will leave the business on 30 June 2019 and will not stand for re-election at the 2019 Annual General Meeting.
The "minimum" scenario reflects base salary, pension and benefits (i.e. fixed remuneration) which are the only elements of Mr Michaelson's remuneration package not linked to performance. Base salary and pension (10% of salary) as at 1 January 2019 as set out on page 118, benefits are based on the value of such benefits in FY2018 which are taken from the single total figure remuneration table on page 112.
The "on-target" scenario reflects fixed remuneration as above, plus bonus payout of 50% of maximum annual bonus opportunity (50% of salary for FY2019) and RSP vesting in full (50% of salary for FY2019).
The "maximum" scenario reflects fixed remuneration as above, plus full payout of all incentives (annual bonus of 100% of salary and RSP vesting in full 50% of salary for FY2019).
The final scenario is based on the same assumptions as the "maximum" scenario, but also assumes, for the purposes of the RSP element of the chart, that the share price increases by 50%.
In the cases of hiring or appointing a new Executive Director from outside the Company, the Remuneration Committee may make use of all the existing components of remuneration, as follows:
| Component | Approach | Maximum annual grant value |
|---|---|---|
| Base salary | The base salaries of new appointees will be determined by reference to relevant market data, experience and skills of the individual, internal relativities and current basic salary. Where new appointees have initial basic salaries set below market, any shortfall may be managed with phased increases subject to the individual's development in the role |
|
| Pension | New appointees will receive pension contributions or an equivalent cash supplement in line with the existing policy |
|
| Benefits | New appointees will be eligible to receive benefits which may include (but are not limited to) the provision of a company car or cash alternative and fuel allowance and any necessary relocation expenses |
|
| Annual bonus | The structure described in the policy table will apply to new appointees with the relevant maximum being pro-rated to reflect the proportion of employment over the year. Targets for the personal element will be tailored to each executive |
150% of salary in the first year following recruitment |
| RSP | New appointees will be eligible to participate in the RSP, as described in the policy table |
100% of salary in the first year following recruitment |
In determining appropriate remuneration, the Remuneration Committee will take into consideration all relevant factors (including quantum, nature of remuneration and the jurisdiction from which the candidate was recruited) to ensure that arrangements are in the best interests of both Harworth and its shareholders. The Committee may make an award in respect of a new appointment to 'buy out' remuneration arrangements forfeited on leaving a previous employer, which may be awarded in addition to the remuneration structure outlined in the table above. The Committee will generally seek to structure 'buy-out' awards on a comparable basis to the remuneration arrangements forfeited and will consider relevant factors including time to vesting, any performance conditions attached to these awards and the likelihood of those conditions being met. Any such 'buy-out' awards will typically be made under the annual bonus or RSP, although in exceptional circumstances the Committee may exercise the discretion available under Listing Rule 9.4.2 R to make awards using a different structure. Any 'buy-out' awards would have a fair value no higher than the awards forfeited (as determined by the Committee).
Other elements of remuneration may be included in appropriate circumstances, such as:
However, this discretion will not be used to offer non-performance related incentive payments (for example a "guaranteed sign-on bonus") and the maximum level of variable remuneration which may be granted (excluding any "buy-out" award) is 250% of salary.
In cases of appointing a new Executive Director by way of internal promotion, the Remuneration Committee and Board will be consistent with the policy for external appointees detailed above. Where an individual has contractual commitments made prior to their promotion to Executive Director level, the Company will continue to honour these arrangements. The Remuneration policy for other employees is set out on page 107. Incentive opportunities for below Board employees are typically no higher than Executive Directors, but measures may vary.
In recruiting a new Non-Executive Director, the Remuneration Committee will utilise the policy as set out in the table on page 107. A base fee in line with the prevailing fee schedule would be payable for Board membership, with additional fees payable for acting as Senior Independent Director and /or as Chair of a Board Committee.
Executive Director service contracts, including arrangements for early termination, are carefully considered by the Committee. Each of the current Executive Directors has a rolling service contract requiring six months' notice of termination on either side. Such contracts contain no specific provision for compensation for loss of office, other than an obligation to pay for any notice period waived by the Company, where pay is defined as salary plus benefits only. Executive Director service contracts are available to view at the Company's registered office. The Remuneration Committee may offer a notice period of up to 12 months (on either side) for any incumbent Executive Director or any Executive Director appointed after the date on which this Policy becomes effective.
When considering exit payments, the Committee reviews all potential incentive outcomes to ensure they are fair to both shareholders and participants. The table below summarises how the awards under the annual bonus and RSP are typically treated in specific circumstances, with the final treatment remaining subject to the Committee's discretion:
| Reason for leaving | Calculation of vesting/payment | ||||
|---|---|---|---|---|---|
| Annual Bonus | |||||
| Leaving other than as a | Bonus for year of departure: No annual bonus payable | ||||
| "Good Leaver"1 | Deferred bonuses: Lapse | ||||
| "Good Leaver"1 | Bonus for year of departure: Cash bonuses will typically be paid to the extent that financial and individual objectives set at the beginning of the plan year have been met. Any resulting bonus will typically be pro-rated for time served during the year. The Committee retains discretion to waive time pro-rating in appropriate circumstances. |
||||
| Deferred bonuses: Typically vest on the normal vesting date subject, if the Committee so determines, to a reduction to reflect the proportion of the deferral period that has elapsed at cessation. The Committee has discretion to vest the awards earlier. |
|||||
| Change of Control | Bonus for year of relevant event: Cash bonuses will typically be paid to the extent that financial and individual objectives set at the beginning of the plan year have been met. Any resulting bonus will typically be pro-rated for time to the relevant event. The Committee retains discretion to waive time pro-rating in appropriate circumstances. |
||||
| Deferred bonuses: Vest on occurrence of the relevant event. | |||||
| RSP | |||||
| Leaving before vesting other than as a "Good Leaver"1 |
If a participant holding an unvested tranche of an RSP award resigns or leaves for another reason which is not a "good leaver" reason, it will ordinarily lapse |
||||
| "Good Leaver"1 before vesting |
If a participant ceases employment as a "good leaver" while holding an unvested tranche of an RSP award, that tranche will continue and vest following the end of the ordinary vesting period, subject to the application of the underpin in the ordinary way and, unless the Committee determines otherwise, a reduction to reflect the proportion of the first three years of the underpin assessment period that has elapsed at the date of cessation. The unvested tranche will ordinarily be released following the end of the holding period. The Committee has discretion to vest and release any unvested tranche at cessation or to release any unvested tranche as soon as it vests. |
||||
| Cessation after vesting | If a participant ceases employment while holding a tranche of an RSP award which is subject to a holding period, it will ordinarily continue and be released following the end of the holding period. The Committee has discretion to release the tranche at cessation. However, if a participant ceases employment due to dismissal for misconduct during the holding period applying to a tranche, that tranche will lapse. |
||||
| Change of control | In the event of a change of control of the Company or other relevant corporate event, unvested share awards under the RSP will usually vest. In the case of any unvested tranche of an RSP award, the number of shares in respect of which the tranche vests shall be determined by the Committee taking into account whether it is appropriate to reduce vesting to reflect the extent to which the underpin is not satisfied at the date of the relevant event, or the extent to which the Committee determines it would have been satisfied at the end of the ordinary assessment period, and, unless the Committee determines otherwise, the proportion of the first three years of the underpin assessment period that has elapsed at the date of the relevant event. Any tranche of an RSP award which has vested but which remains subject to a holding period will be released in full. |
1 "Good leaver" is defined as a participant ceasing to be employed by the Group by reason of death, disability, ill health, redundancy, retirement or any other reason that the Committee determines in its absolute discretion
Options under the SAYE plan and awards under the SIP may vest and, where relevant, be exercised in the event of a cessation of employment or change of control in accordance with the rules of the relevant plan. The plans do not permit the exercise of discretion and, accordingly, the treatment for Executive Directors will be the same as for all other participants.
The terms applying to any "buy-out" award on cessation of employment would be determined when the award was granted.
The Committee reserves the right to make any other payments in connection with a director's cessation of office or employment where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the cessation of a director's office or employment. Any such payments may include but are not limited to paying any fees for outplacement assistance and/or the director's legal and/or professional advice fees in connection with his cessation of office or employment.
The Board will consider any request by an Executive Director to take potential non-executive appointments on a case by case basis, taking account of the overriding requirements of the Group and the extent to which the NED opportunity supports the agreed personal development objectives of the Executive.
The Committee reserves the right to make remuneration payments and payments for loss of office, and to exercise any discretion available to in relation to any such payment, notwithstanding that they are not in line with the Policy set out above:
For these purposes, 'payments' includes the satisfaction of variable remuneration and, in relation to an award over shares, the terms of the payment are 'agreed' no later than the time the award is granted.
Any such payment shall include the satisfaction of any awards granted under the Company's LTIP.
When making decisions on Executive Director remuneration, the Committee considers pay and conditions across the Group. Prior to the annual salary review, the Head of HR and Organisation Development provides the Committee with a summary of the proposed level of increase for overall employee pay. The Remuneration Committee does not formally consult with employees on the executive remuneration policy and framework.
The Remuneration Committee maintains a regular dialogue with its major shareholders. In late 2018 and early 2019, we conducted a shareholder consultation regarding this Policy. Shareholders have been substantially supportive of the proposals for executive directors' remuneration and the introduction of a new RSP in place of the existing LTIP. The Committee will continue to monitor trends and developments in corporate governance, market practice and shareholder views to ensure the structure of the executive remuneration remains appropriate.
Membership, attendance, key responsibilities and activities of the Committee are summarised in the Chair's introduction.
The Company Secretary is secretary to the Committee. The following individuals may be invited to attend Committee meetings on certain occasions to provide advice and to help the Committee to make informed decisions:
No individuals are involved in decisions relating to their own remuneration. The minutes of Committee meetings are circulated to all Directors, where appropriate.
During the year under review, the Committee received advice on executive remuneration matters from Deloitte LLP ("Deloitte") and Kepler Associates. Deloitte was appointed by the Committee on 18 October 2018 as its independent adviser following a competitive selection process. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its Code of Conduct in relation to executive remuneration matters in the UK. Prior to Deloitte's appointment, the Committee retained the services of Kepler Associates, a brand of Mercer and part of the MMC Group of companies, which is a signatory to the Code of Conduct. The Committee has satisfied itself that both Deloitte and Kepler Associates provided objective and independent advice during 2018.
Deloitte's fees in relation to remuneration advice provided to the Committee during 2018 were £20,000 plus VAT, charged on a time and expenses basis. Deloitte also provided advice to the Group during 2018 in relation to corporate tax, pensions, accounting and share plans. The Committee did not consider that these engagements impaired Deloitte's independence.
The fees of Kepler Associates in relation to remuneration advice provided to the Committee during 2018 were £18,570 plus VAT, charged on a time and expenses basis. Kepler Associates provided no other services to the Group during 2018. However, the Company does retain Marsh, which is also a member of the MMC Group of companies, as its insurance brokers. The Committee considered that appointment and concluded that it did not impair the independence of Kepler Associates during their tenure.
On 26 September 2018, Owen Michaelson was appointed as a Non-Executive Director of Covanta Holding Corporation, which is listed on the New York Stock Exchange. He is entitled to retain his fees for this Directorship. The Board was satisfied that such appointment would not compromise his time commitment to Harworth. Owen Michaelson is also a member of the Board of the Sheffield City Region Local Enterprise Partnership. He receives no fee for this appointment, it requires a limited time commitment, and it helps to promote both the profile and relationships of the Group. Both appointments were approved by the Board at the time.
The table below sets out remuneration received by each Executive Director of the Company for the year ended 31 December 2018 with a comparison to the previous year, representing payments received in respect of the period during which each individual was a Director of the Company.
| Owen Michaelson |
Andrew Kirkman |
|||
|---|---|---|---|---|
| 2018 £ |
2017 £ |
2018 £ |
2017 £ |
|
| Salary | 308,525 | 301,000 | 235,000 | 205,000 |
| Taxable benefits(1) | 15,339 | 12,810 | 13,070 | 13,669 |
| Single-year variable(2) | 330,122 | 242,681 | 198,600 | 128,600 |
| Multiple-year variable(3)(4) | 193,136 | 805,475 | 131,586 | 175,740 |
| Pension benefit(5) | 30,853 | 30,100 | 23,500 | 20,500 |
| Total | 29,355 21,375 877,975 |
2,667 1,392,066 |
13,614 601,756 |
543,509 |
(1) Taxable benefits consist primarily of car and fuel allowance. For 2018 these were £13,959 for Owen Michaelson (£11,826 for 2017) and £12,002 for Andrew Kirkman (£12,879 for 2017). Other benefits included life assurance and health insurance.
(2) Annual bonus payments for performance during 2018 were received by Owen Michaelson and Andrew Kirkman, details of which are included below in "Incentive outcomes for year ended 31 December 2018". The annual bonus for 2018 was paid in March 2019.
(3) The Harworth Estates 2012 LTIP, which was a cash-based LTIP scheme implemented in 2013 with a five year performance period, vested on the approval of the financial statements for the year ended 31 December 2017. Payments were made in March 2018. This was a one-off scheme and no previous or future payments have been or will be made under the scheme.
(4) The 2016 LTIP awards will vest based on performance periods ending during 2018, details of which are included below in "LTIP awards vesting in respect of the year ended 31 December 2018". Awards will vest on 25 May 2019.
(5) Owen Michaelson and Andrew Kirkman participated in the Company's defined contribution scheme, in relation to which the Company contributed 10% of salary.
The table below sets out remuneration received by each Non-Executive Director of the Company for the year ended 31 December 2018 with a comparison to the previous year, representing payments received in respect of the period during which each individual was a Director of the Company.
| Committee Base fee chair fees |
SID fee | Total | ||||||
|---|---|---|---|---|---|---|---|---|
| 2018 £ |
2017 £ |
2018 £ |
2017 £ |
2018 £ |
2017 | 2018 £ |
2017 £ |
|
| A. Lyons CBE(1) | 131,077 | – | – | – | – | – | 131,077 | – |
| J. Cox(2) | 40,000 | 160,000 | – | – | – | – | 40,000 | 160,000 |
| L. Clement | 42,500 | 42,500 | 7,500 | 7,500 | 7,500 | 3,000 | 57,500 | 53,000 |
| S. Underwood(3) | 42,500 | 42,500 | – | – | – | – | 42,500 | 42,500 |
| A. Donnelly | 42,500 | 42,500 | – | – | – | – | 42,500 | 42,500 |
| M. Bowes | 42,500 | 42,500 | – | – | – | – | 42,500 | 42,500 |
| A. Cunningham | 42,500 | 42,500 | 7,500 | 7,500 | – | – | 50,000 | 50,000 |
(1) Appointed as Chairman of the Board, with effect from 7 March 2018.
(2) Stepped down from the Board, with effect from 31 March 2018.
(3) The fees for Steven Underwood are paid to Peel Management Limited.
Annual bonuses for 2018 were paid to both Executive Directors based on a combination of financial performance and personal objectives. Maximum annual bonus opportunities were 125% of salary for Owen Michaelson and 100% of salary for Andrew Kirkman. Performance was measured based 76% on financial and 24% on personal performance for Owen Michaelson, and 75% on financial and 25% on personal performance for Andrew Kirkman. Performance against targets and subsequent vesting of 2018 annual bonuses are set out in the tables below.
As was reported in last year's Remuneration Report, Owen Michaelson's bonus opportunity was increased to 125% of salary for 2018 only to reflect the additional stretch in the targets. Andrew Kirkman's bonus opportunity was increased to 100% of salary in recognition of his additional responsibilities for M&A and large-scale (portfolio) acquisitions.
No bonus was paid for achieving below Target, 50% of bonus was paid for achieving Target, increasing on a straight-line basis to 100% of bonus paid for achieving Stretch performance.
| O. Michaelson | Performance targets (£'000s) |
||||
|---|---|---|---|---|---|
| Measure | Weight (% of financial performance) |
'Target' | 'Stretch' | Actual performance | Vesting outcome |
| NNNAV gains | 47% | 42,500 | 57,950 | 58,100(1) | 100% |
| Sales volume | 12% | 63,900 | 70,290 | 95,300(2) | 100% |
| Acquisitions (strategic development of the business) |
12% | HY – 30,000 FY – 60,000 |
Target plus 5-year strategic plan demonstrating stretch in forecast returns(3) |
HY – 52,588(4) FY – 61,150(4) |
73% |
| Profit excluding value gains | 8% | 2,200 | 3,000 | 3,050(5) | 100% |
| Acquisitions – super-stretch performance | 21% | HY – 35,000 FY – 70,000 |
HY – 52,588(4) FY – 61,150(4) |
50%(6) | |
| Total vesting on financial performance outcomes |
76% weighting | 86.3% |
| A. Kirkman | Performance targets (£'000s) |
||||
|---|---|---|---|---|---|
| Measure | Weight (% of financial performance) |
'Target' | 'Stretch' | Actual performance | Vesting outcome |
| NNNAV gains | 60% | 42,500 | 57,950 | 58,100(1) | 100% |
| Sales volume | 15% | 63,900 | 70,290 | 95,300(2) | 100% |
| Acquisition (strategic development of the business) |
15% | 60,000 | Target plus 5-year strategic plan demonstrating stretch in forecast returns(3) |
HY – 52,588(4) FY – 61,150(4) |
73% |
| Profit excluding value gains | 10% | 2,200 | 3,000 | 3,050(5) | 100% |
| Total vesting on financial performance outcomes |
75% weighting | 96% |
(1) This NNNAV figure includes the promote fee of £6.8m paid by M&G to Harworth upon the letting of LN175 at Logistics North. Whilst accounting treatment of this fee recognised it within PEVG, the deal structure was put in place to secure additional profit share by the delivery of a direct development with M&G and, as such, it is more appropriate to treat it as a value gain for the purpose of bonus performance outcomes
(2) This sales figure includes internal sales for direct development and sales by joint ventures
(3) This stretch in this objective was designed to incentivise the executive and wider senior management team to identify initiatives for elevating forecast returns over the strategic plan period. The forecasts in the strategic plan approved by the Board are commercially sensitive and so not disclosed here. The Committee exercised its judgement to award 73% for this bonus performance outcome
(4) The figures cited for acquisitions include deferred consideration payable for certain sites subject to delivery of residential plot numbers
(5) This PEVG figure excludes the promote fee of £6.8m paid by M&G to Harworth upon the letting of LN175 at Logistics North – see note (1) above for further explanation
(6) Given the importance of site acquisitions to the overall business strategy, the Committee considered it appropriate to include an additional element within Owen Michaelson's annual bonus subject to the delivery of exceptional acquisition performance. Targets were set on a half-year and full-year basis to recognise that acquiring sites earlier in the year creates scope for a more positive impact on NNNAV performance during the year. Taking into account half-year and full-year performance against targets, the Committee considered that a vesting outturn of 50% against this element was appropriate
| Executive Director | Objectives during the year | Performance against objectives during the year | Vesting of component |
|---|---|---|---|
| O. Michaelson (24% weighting) | • Operational structure: establishment of a regional operating structure • 2019 budget: identification of initiatives to stretch forecast returns(1) |
• Regional operating structure implemented effectively. Effective internal communication and engagement with staff on the operational restructuring. Good progress made on recruitment for new regional roles • Forecast returns in the 2019 budget increased when compared to strategic plan approved by the Board in December 2017(1) |
83% |
| A. Kirkman (25% weighting) | • Strategic portfolios: identify and secure a game changing site, strategic portfolio or corporate target • Funding strategy: optimise gearing and secure necessary covenant changes to facilitate an increase in overall gearing • Fundraising: work with advisors to be transaction ready for an equity raise which also increases liquidity • Premium listing: work with advisors to secure premium listing and index inclusion • Capital allocation and appraisal: present a standard form of appraisal including sensitivity analysis with an emphasis on acquisitions |
• No portfolio or corporate target secured • RCF increased to £100m with bank appetite for further lending demonstrated • Transaction ready but no equity fundraise required • Premium listing and index inclusion achieved • Plan was presented but did not meet H1 timescale and further embedding needed in the business |
50% |
(1) This objective was designed to incentivise the Chief Executive to identify initiatives for stretching forecast returns in 2019. The forecasts in the 2019 budget approved by the Board are commercially sensitive and so not disclosed here. The Committee exercised its judgement based on the forecast returns in the 2019 budget when compared to those in the strategic plan approved by the Board in December 2017
| Financial | Personal vesting | Overall bonus outcome Sum product of weighting and vest% |
||||
|---|---|---|---|---|---|---|
| Executive | Weighting | Vesting | Weighting | Vesting | % of bonus | % of salary |
| O. Michaelson | 76% | 86.3% | 24% | 83% | 85.6% | 107.0% |
| A. Kirkman | 75% | 96.0% | 25% | 50% | 84.5% | 84.5% |
The overall bonus payments were also subject to additional underpins based on the Company's health and safety record, no deficiencies or material adverse issues which materially damage the reputation or performance of the business and no covenant breach or financial irregularity. The Committee reviewed performance against these underpins and considered the underlying performance of the Group during the performance period and concluded the overall bonus outcomes to be appropriate.
Payment for that element of the Chief Executive's bonus that is attributable to 2019 forecast returns, which represents 18.69% of the overall bonus awarded to the Chief Executive, has been deferred into shares for 12 months. This will be subject to clawback if the business materially underperforms against the 2019 budget. In addition, in accordance with the Policy, the regular clawback provisions will apply to the deferred and cash elements of the annual bonus for two years following the determination of the bonus outcome.
Awards granted on 25 May 2016 were subject to the following performance conditions over the three year period ended on 31 December 2018:
A summary of the LTIP targets and actual performance is summarised below.
| Performance | Actual | Vesting (% of | |||||
|---|---|---|---|---|---|---|---|
| condition | Weighting % award | Threshold(1) | Target(2) | Maximum | performance | maximum) | |
| ATR | 50% | 8% | 10% | 14% | 13.2% | 85% | |
| TSR vs peer group | 35% | Median | n/a | Median + 9% growth p.a. |
Below median | 0% | |
| TSR vs Index | 15% | Index median | n/a | Index median + 9% growth p.a. |
Median + 4.46% | 62.17% |
Straight-line vesting occurs between defined levels of performance
(1) 10% of maximum opportunity vests in relation to the proportion of the awards subject to ATR performance. 25% of maximum opportunity vests in relation to the proportion of the award subject to TSR performance
(2) 25% of maximum opportunity vests in relation to the proportion of the award subject to ATR performance
Vesting was also subject to the additional underpins that 30% of value created comes from disposal proceeds and that dividends are sustainable. The Committee reviewed performance against these underpins, considered the underlying performance of the Group during the performance period and concluded the proposed vesting outcome of 51.83% of maximum to be appropriate. Awards will vest on 25 May 2019. 50% of vested shares (post tax) will be subject to a two-year post-vesting holding period.
| Number of shares | Number of shares | |||
|---|---|---|---|---|
| Director | granted | Overall vesting | vesting | Face value(1) |
| O. Michaelson | 313,957 | 51.83% | 162,723 | £193,136 |
| A. Kirkman | 213,903 | 51.83% | 110,865 | £131,586 |
(1) The number of shares expected to vest multiplied by the average share price over the three-month period ending 31 December 2018 (118.69p). The LTIP awards did not accrue dividend equivalents over the vesting period
LTIP awards of 100% of salary were made in 2018 to Owen Michaelson and Andrew Kirkman under the LTIP.
| Executive Director | Type of award | Date of award | Number of shares granted |
Face value(1) | % receivable at threshold(2) |
End of performance period |
|---|---|---|---|---|---|---|
| O. Michaelson | 2018 LTIP | 5 April 2018 | 280,477 | £308,525 | 17.5% | 31 December 2020 |
| A. Kirkman | 2018 LTIP | 5 April 2018 | 213,636 | £235,000 | 17.5% | 31 December 2020 |
(1) Face value based on the average share price on the three trading days immediately preceding the date of grant (110p)
(2) 25% vesting for threshold performance of 50% of the award based on TSR performance and 10% vesting for threshold performance of 50% of the award based on ATR performance For all participants, awards will vest after three years in accordance with the performance conditions outlined in the table below, subject to achieving the additional underpins that 30% of value created comes from disposal proceeds and that dividends are sustainable.
| 50% weighting | 35% weighting | 15% weighting | ||||
|---|---|---|---|---|---|---|
| Vesting schedule | ATR | % element vesting |
TSR vs peer group(1) |
% element vesting |
TSR vs Index(2) | % element vesting |
| Threshold | 8% | 10% | Median | 25% | Index | 25% |
| Target | 10% | 25% | ||||
| Maximum | 12% | 100% | Median + 9% growth p.a. |
100% | Index + 9% growth p.a. |
100% |
(1) The peer group consists of: Henry Boot, Inland Homes, St. Modwen, U+I, Urban and Civic
(2) The FTSE All Share Real Estate Investment Services Index
For Executive Directors, 50% of any vested shares (post-tax) will be subject to a minimum two-year post-vesting holding period. No award will vest below threshold performance and vesting will increase on a straight-line basis between defined levels of performance.
The table below shows how the percentage change in the Chief Executive's salary, benefits and bonus between 2017 and 2018 compares with the percentage change in the average of each of those components of pay for the employees of the Group as a whole.
| Salary £'000 |
Taxable benefits(1) £'000 Percentage |
Percentage | Bonus £'000 |
||||||
|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | change | 2018 | 2017 | change | 2018 | 2017 | Percentage change |
|
| CEO Pay | 309 | 301 | 2.5% | 12.5 | 10 | 25% | 330 | 243 | 36% |
| Average per employee | 2.5% | 0% | 25% |
(1) Car allowance only, as fuel and insurance benefits fluctuate according to personal circumstances
| Total employee pay expenditure | Distributions to Shareholders | |||||
|---|---|---|---|---|---|---|
| 2018 | 2017 | % change | 2018 | 2017 | % change | |
| £7.846m | £7.849m | 0% | £2.9m 0.911p per share |
£2.7m 0.828p per share |
10% |
Staff costs slightly decreased between 2017 and 2018 due to a reduction from the cash-based Harworth Estates LTIP which was a one‑off scheme with a five-year performance period ending on 31 December 2017 offset by an increase in the size of the workforce. Total dividends for the year ended 31 December 2017 were 0.828p per share, resulting in total dividends of £2.7m. Total dividends for the year ended 31 December 2018 were 0.911p per share, resulting in total dividends of £2.9m. This increase reflects the Company's progressive dividend policy. The percentage change is shown above on a per share basis.
The following chart shows the TSR of the Company and the FTSE Small Cap Index over the period from the Company's relisting on 24 March 2015 to 31 December 2018. The FTSE Small Cap Index represents the most appropriate broad index comparison for a Company of Harworth's size. The table below shows the Chief Executive's 'single-figure' remuneration over the same period.
Growth in the value of a hypothetical £100 holding (including re-investment of dividends) over the period from re-listing on 24 March 2015 to 31 December 2018:
| 2015 £ |
2016 £ |
2017 £ |
2018 £ |
|
|---|---|---|---|---|
| CEO single figure remuneration (£'000) | 480 | 599 | 1,392 | 878 |
| Short term incentive award as a % of maximum opportunity | 85.6% | 90% | 80.6% | 85.6% |
| Long term incentive award as a % of maximum opportunity | n/a | n/a | n/a(1) | 51.8% |
(1) Excludes vesting of Harworth Estates LTIP as this was a one-off scheme put in place by HEPGL in 2013.
During the year, no payments were made to past Directors.
No exit payments were paid to former Directors during the year.
The Committee approved the following base salary increases for 2019:
| Executive Director | Annual base salary at 1 January 2018 |
Annual base salary at 1 January 2019 |
Percentage increase |
|---|---|---|---|
| O. Michaelson | £308,525 | £316,250 | 2.5% |
| A. Kirkman | £235,000 | £240,880 | 2.5% |
A typical salary increase of 2.5% was awarded across the Group at the annual pay review, effective 1 January 2019.
Executive Directors will continue to receive a pension contribution of 10% of salary or an equivalent cash allowance.
For 2019 the Committee has approved annual bonus opportunities equal to 100% of salary for the Chief Executive, based 75% on financial measures and 25% on personal objectives. As noted on page 102, the Finance Director will not be eligible to earn a bonus for the period of his service 2019.
The Committee has reviewed the financial performance measures to ensure they are appropriately aligned with the Company's strategic plan for the coming year. Financial performance for 2019 will be measured against the following financial performance measures:
| Executive | Weight (% of financial bonus opportunity) |
|---|---|
| NNNAV gains | 50% |
| Acquisitions (strategic development of business) | 25% |
| Sales volume | 15% |
| Profit excluding value gains | 10% |
Payment of the personal element is subject to the Committee's discretion in the event of material under-performance against the financial element. The overall payment of the bonus will be subject to additional underpins based on the Company's health and safety record during the year, no deficiencies or material adverse issues arising which materially damage the reputation or performance of the business and no covenant breach or financial irregularity.
Performance targets are considered to be commercially sensitive at this time but the Committee intends that they will be disclosed in the 2019 Annual Remuneration Report.
Subject to shareholder approval at the 2019 AGM it is proposed that Restricted Share awards will be granted to the Chief Executive at 50% of salary in 2019. Vesting will be phased over a five-year period, with 33% vesting after three years, 33% after four years and 33% after five years, although all vested shares must be held to the end of year five. As noted on page 102, the Finance Director will not be granted a Restricted Share award.
The Restricted Share awards will be subject to performance underpins which take into account the Group's financial health, the underlying performance of the business relative to the real estate market and the quality of corporate governance over the vesting periods.
| Performance underpin | Description | Detail(1) |
|---|---|---|
| Financial health | Financial stability of the business | A breach of financial covenants in the Group's principal banking facilities |
| Underlying performance | Sustainability in the Group's underlying performance in a cyclical market |
A material deterioration in the Group's underlying performance which departs significantly from any deterioration across the real estate sector including, but not limited to, by reference to share price, dividend and/or EPRA NNNAV |
| Corporate governance | Avoidance of governance and health and safety failures |
A material failure in governance or an act resulting in significant reputational damage and/ or material financial loss to the Group. This includes giving consideration to any successful prosecutions in relation to health and safety |
Furthermore, the Committee has discretion to reduce the vesting outcome if it is not deemed to reflect appropriately underlying business performance over the vesting period.
The Committee will disclose how performance underpins and underlying business performance over the vesting period have been taken into account at the time of vesting.
A table setting out the beneficial interests of the Directors and their connected persons in the share capital of the Company as at 31 December 2018 (or earlier, if the Director has resigned) is set out below. None of the Directors has a beneficial interest in the shares of any other Group Company. Details of Directors' share options are also set out in the tables below. Current shareholding as a percentage of salary is based on the middle market closing price for the shares on 31 December 2018 of 114p.
| Shares held | Options held | Current shareholding Requirement % salary/fee met? |
|||||
|---|---|---|---|---|---|---|---|
| Beneficially owned |
Vested but subject to holding period |
Vested but not exercised |
Unvested and subject to perf. conditions |
Shareholding requirement(3) % salary/fee |
|||
| O. Michaelson | 399,768 | – | – | 904,690 | 100% | 148% | Y |
| A. Kirkman | 200,000 | – | – | 638,843 | 100% | 97% | N |
| J. Cox(1) | 716,504 | – | – | – | n/a | n/a | n/a |
| L. Clement | – | – | – | – | n/a | n/a | n/a |
| A. Donnelly | – | – | – | – | n/a | n/a | n/a |
| A. Cunningham | 17,333 | – | – | – | n/a | n/a | n/a |
| S. Underwood | 38,385 | – | – | – | n/a | n/a | n/a |
| M. Bowes | – | – | – | – | n/a | n/a | n/a |
| A. Lyons(2) | 90,000 | – | – | – | n/a | n/a | n/a |
(1) Jonson Cox resigned on 31 March 2018. The holding cited is at the date of resignation
(2) Alastair Lyons was appointed on 7 March 2018
(3) From 1 January 2019 subject to approval of the Policy at the 2019 AGM, the shareholding guidelines for the Executive Directors will be increased to 200% of salary
There have been no changes in the Directors' interests between 31 December 2018 and the date of signing of these financial statements.
The table below shows the results of votes at the Harworth Group plc Annual General Meeting on 29 May 2018 on the resolution relating to the approval of the Annual Remuneration Report:
| Votes | ||||||
|---|---|---|---|---|---|---|
| For and | For and discretion as a percentage of |
Against as a percentage of |
||||
| discretion | votes cast | Against | votes cast | Withheld | ||
| Resolution 11: | 184,146,824 | 99.78% | 405,369 | 0.22% | 34,123 | |
| Approval of Annual Remuneration report |
The table below shows the results of votes at the Harworth Group plc Annual General Meeting on 26 April 2016 on the resolution relating to the approval of the Remuneration Policy:
| Votes | ||||||
|---|---|---|---|---|---|---|
| For and discretion |
For and discretion as a percentage of votes cast |
Against | Against as a percentage of votes cast |
Withheld | ||
| Resolution 6: Approval of Remuneration Policy |
1,575,091,080 | 99.96% | 633,272 | 0.04% | 267,524 |
The Directors' Remuneration Report has been approved by the Board and signed on its behalf by:
The Directors present their report and the audited consolidated financial statements for the year ended 31 December 2018. In accordance with legislation, some of the matters required to be included in this Directors' Report have been included instead in the Strategic Report, on pages 4 to 71, because the Board considers them to be of strategic importance, such as the Group's strategic priorities, business model, markets and principal risks. Others are included in the wider Statement of Corporate Governance on pages 79 to 91.
As such, the Directors' Report should be read in conjunction with the Strategic Report (pages 4 to 71) and the wider Statement of Corporate Governance (pages 79 to 91) which are incorporated by reference into this Directors' Report. The information required to be disclosed in the Directors' Report can be found in this Annual Report on the pages listed below.
| Reference | |
|---|---|
| Agreements with Shareholders | Statement of Corporate Governance, p87 |
| Amendment of the Articles | Directors' Report, p122 |
| Annual General Meeting | Statement of Corporate Governance, p91 |
| Appointment and replacement of Directors | Directors' Report, p122 |
| Board of Directors | Board of Directors and Company Secretary, pp74-75 Directors' Report, p122 |
| Charitable donations | Directors' Report, p123 |
| Change of control | Directors' Report, p123 |
| Composition and operation of administrative, management and supervisory bodies and committees |
Statement of Corporate Governance, pp80-85 |
| Directors' insurance and indemnities | Directors' Report, p122 |
| Disclosure of information to auditors | Statement of Directors' Responsibilities, p124 |
| Diversity | Strategic Report: Our People, pp51-53 |
| Employee numbers | Strategic Report: Our People, p53 |
| Employee engagement | Strategic Report: Our People, p50-51 |
| Employees with disabilities | Strategic Report: Our People, p53 |
| Employee share scheme | Strategic Report: Our People, p53 Directors' Remuneration Report, p103 |
| Future developments of the business | Strategic Report, pp4-9 |
| Going concern and viability | Strategic Report, p45 |
| Greenhouse gas emissions | Strategic Report, p71 |
| Independent auditors | Audit Committee Report, pp96-97 |
| Political donations | Independent auditors' Report, pp126-131 Directors' Report, p123 |
| Post-Balance sheet events | Strategic Report: Chief Executive's Statement, p19 Financial Statements, Note 32, p175 |
| Powers for the Company to issue or buy back shares | Directors' Report, pp121-122 |
| Powers of the Directors | Directors' Report, p122 |
| Profit/loss and dividends | Strategic Report, Financial Review, pp28-29 Directors' Report, p122 |
| Restrictions on transfer of securities | Directors' Report, p121 |
| Rights attaching to shares | Directors' Report, p121 |
| Risk management and internal controls | Strategic Report, pp34-35 Audit Committee Report, p97-98 |
| Risk management – financial risks and use of financial instruments to mitigate risk | Strategic Report, Financial Review, pp29-30 Directors' Report, p123 Financial statements, Note 24, pp167-168 |
| Share capital | Directors' Report, p121 |
| Significant related party agreements | Financial statements, Note 31, pp174-175 |
| Significant Shareholders | Directors' Report, p123 |
| Statement of corporate governance including compliance with corporate governance code |
Statement of Corporate Governance, p79 |
| Voting rights | Directors' Report, p121 |
The liabilities of the Directors in connection with this Report are subject to the limitations and restrictions provided by English Company law.
Harworth Group plc is a Company incorporated in England with Company number 02649340. All subsidiaries and associated undertakings are listed in Note 16 to the Financial Statements.
The Group's consolidated income statement set out on page 132 shows Group profit before taxation of £32.8m (2017: £41.8m). The net assets attributable to shareholders of the Group increased to £441.9m (2017: £409.3m) over the financial year to 31 December 2018. The Group's NAV per share and EPRA NNNAV per share rose by 7.9% and 12.6% respectively during the year. The results for the Group are reviewed in the Chairman's Statement, the Chief Executive's Statement and Financial Review and the detailed results are set out in the Financial Statements on pages 132 to 175 which accompany this report.
The Company's issued share capital as at 31 December 2017 was 321,496,760 Ordinary Shares of 10 pence each. There were no changes to the Company's issued share capital during the financial year ended 31 December 2018 and, as such, as at 31 December 2018, the Company's issued share capital was 321,496,760 Ordinary Shares of 10 pence each.
On 7 February 2019 11,786 shares were issued to satisfy an option exercised by one of the Company's former employees pursuant to the Company's Save-As-You-Earn scheme. Those shares were issued at a price of 80.6 pence, representing a discount of approximately 31.7% to the closing mid-market price of the Company's shares on the day before the issue of shares. There have been no further changes to the issued share capital of the Company. As such, the issued share capital of the Company at 15 April 2019 (being the latest date prior to publication of this Report) was 321,508,546 Ordinary Shares of 10 pence each. The ISIN of the shares is GB00BYZJ7G42.
All shares carry equal rights to dividend, voting and return of capital on the winding up of the Company, as set out in the Company's Articles of Association, and are fully paid. No person holds shares carrying special rights with regard to control of the Company.
As at 15 April 2019 (being the latest date prior to publication of this Report), there were no restrictions on the transfer of securities in the Company, save for the power of the Board to refuse to transfer shares in certain circumstances prescribed by the Articles of Association, and there were no restrictions on any voting rights or deadlines, other than those prescribed by law, nor was the Company aware of any other arrangement between holders of shares which may result in restrictions on the transfer of securities or voting rights, nor any arrangement whereby a shareholder has waived or agreed to waive dividends (other than the EBT – see below).
The Harworth Group plc Employee Benefit Trust ("EBT") holds shares for the purposes of satisfying awards that may vest under the Company's share-based incentive schemes. The EBT may purchase shares in the Company from time to time to satisfy awards granted to Executive Directors, members of the Investment Committee and Management Board and certain other senior employees, subject to the achievement of performance targets and/or underpins under the Company's incentive schemes. At 31 December 2018, the EBT held 181,771 Ordinary Shares of 10 pence each in the Company in respect of future incentive awards under the Company's employee share schemes. Details of outstanding awards to the Executive Directors are set out in the Directors' Remuneration Report on page 119. The EBT has waived its right to receive dividends on shares that it holds beneficially in respect of future awards. The trustee of the EBT exercises any voting rights on such shares in accordance with the Directors' recommendations.
Section 551 of the Companies Act 2006 ("CA06") provides that the Directors may not allot shares (subject to certain exceptions, including allotments pursuant to an approved employee share scheme) unless empowered to do so by shareholders. In conjunction with the Share Capital Management Guidelines published by the Investment Association, a resolution was passed at the 2018 AGM giving the Directors authority to allot shares up to an aggregate nominal value of one-third of the Company's issued share capital plus a further one-third (i.e. two-thirds in all) where the allotment is in connection with a rights issue. The Company has not utilised that authority in the period since the 2018 AGM. At the 2019 AGM, the Directors propose to renew the authorities granted to them at the 2018 AGM.
Under Section 561 of the CA06, if the Directors wish to allot unissued shares for cash (subject to certain exceptions, including allotments pursuant to an approved employee share scheme) they must first offer them to existing shareholders in proportion to their holdings (a pre-emptive offer). By a special resolution at the 2018 AGM, the shareholders gave authority to the Directors to dis-apply the abovementioned pre-emption and to allot shares for cash other than by way of rights to existing shareholders, provided that the aggregate nominal value of such shares does not exceed 5% of the Company's total issued equity capital. This authority was compliant with the Pre-Emption Group's Statement of Principles ("PEG Principles").
The Directors have not made use of this authority since the 2018 AGM. The Directors propose to renew this authority at the 2019 AGM. The Directors have no current plans to make use of the renewed authority should it be granted, although they consider its renewal appropriate in order to retain maximum flexibility to take advantage of business opportunities as they may arise. That said, the PEG Principles request that in any rolling three-year period a Company does not make non-pre-emptive issues for cash exceeding 7.5% of the Company's issued share capital without prior consultation with shareholders. The Directors intend to comply with that guidance.
The Company has authority under a shareholders' resolution passed at the 2018 AGM to purchase up to 32,149,675 of the Company's Ordinary Shares, representing approximately 10% of the Company's total issued share capital (at the date of the 2018 AGM), in the market during the period expiring at the 2019 AGM. No shares have been purchased by the Company under that authority.
A special resolution will be proposed at the 2019 AGM to renew this authority. Although the Directors have no immediate plans to do so, they believe it is prudent to seek general authority from shareholders to be able to act if circumstances were to arise in which they considered such purchases to be desirable. This power will only be exercised if and when, in the light of market conditions prevailing at that time, the Directors believe that such purchases would increase earnings per share and would be for the benefit of shareholders generally. Any shares purchased under this authority will be cancelled (unless the Directors determine that they are to be held as treasury shares) and the number of shares in issue will be reduced accordingly.
The Articles of Association may be amended by special resolution of the shareholders and were so amended by a special resolution passed at the 2018 AGM.
The Board is recommending a final dividend of 0.633 pence per share which, together with the interim dividend of 0.278 pence per share paid in October 2018, makes a combined dividend of 0.911 pence (2017: 0.828 pence) per share. Payment of the final dividend, if approved at the 2019 AGM, will be made on 31 May 2019 to shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019.
The dividend paid in the year to 31 December 2018 and disclosed in the Statement of Changes in Equity is 0.853 pence (2017: 0.776 pence) per share, comprising the final dividend of 0.575 pence per share for the year ending 31 December 2017 and the interim dividend of 0.278 pence per share for the year ending 31 December 2018. These were paid on 1 June 2018 and 19 October 2018 respectively.
A list of the Company's Directors who were in office during the year ended 31 December 2018 and up to the date of signing the Financial Statements, along with their biographies, appears on pages 74 and 75.
Details of the Directors' remuneration are set out in the Directors' Remuneration Report at page 112 (Executive Directors) and page 113 (Non-Executive Directors). Details of the Directors' beneficial interests in, and options to acquire, Ordinary Shares in the Company as at 31 December 2018 and as at 15 April 2019 (being the latest practical date prior to publication of this Report) are set out in the Directors' Remuneration Report on page 119. The Directors do not have any interest in any other Group Company, other than as Directors. Save as set out on page 85 of the Statement of Corporate Governance no Director has, or has had, a material interest, directly or indirectly, at any time during the year under review in any contract significant to the Company's business.
The appointment and replacement of Directors is governed by the Articles of Association.
The Board must comprise not less than two Directors with no maximum number of Directors. Directors may be appointed by shareholders (by ordinary resolution) or by the Board.
Under the Company's Articles of Association, any Director appointed by the Board since the last AGM may only hold office until the date of the following AGM, at which time that Director must stand for election by shareholders. Angela Bromfield and Ruth Cooke will, therefore, be standing for election at the 2019 AGM.
The Articles of Association also require one-third of the Directors to retire by rotation at each AGM. Any Director who has not retired by rotation must retire at the third AGM after his or her last election or re-election. However, the Board has again decided that all other Directors will also be subject to re-election at the 2019 AGM, save for Andrew Kirkman who is leaving the business on 30 June 2019. The Directors may exercise all the powers of the Company, subject to compliance with relevant laws, the Company's Memorandum and Articles of Association and any directions given by special resolution of shareholders. These include specific restrictions regarding the Company's power to borrow money.
As permitted by the Articles of Association, qualifying third-party indemnities have been in place throughout the period under review and remain in force at the date of this Report in respect of liabilities suffered or incurred by each Director. The deeds of indemnity are available for inspection by shareholders at the Company's registered office.
The Company also maintains an appropriate level of Directors' and Officers' liability insurance in respect of legal actions against the Directors. Neither the qualifying third-party indemnities nor the insurance provide cover where a Director has acted fraudulently or dishonestly.
The Board has established a procedure by which any Director, for the purpose of furthering his or her duties, may take independent professional advice at the Company's expense. No Director had reason to use this facility in 2018.
No political donations were made during the year (2017: £nil). It remains the Company's policy not to make any cash donations to political parties. This policy is strictly adhered to and there is no intention to change it. However, the definitions of 'political donation' and 'political expenditure' used in the CA06 remain very broad, which may have the effect of covering some normal business activities that would not be considered political donations or political expenditure in the usual sense. These could include support for bodies engaged in law reform or governmental policy review or involvement in seminars and functions that may be attended by politicians. To avoid any possibility of inadvertently contravening the CA06, the Directors obtained authority from shareholders at the 2018 AGM for certain political donations and expenditure, subject to financial limits. The Directors will seek to renew this authority at the 2019 AGM.
The Group made charitable donations during 2018 in the aggregate sum of £4,350 (2017: £22,735).
The Group's exposure to, and management of capital, liquidity, credit and interest rate risk, are set out within Note 24 of the Financial Statements.
An AGM must be called on at least 21 days' clear notice, although the Company gives not less than 20 working days' notice of its AGM following the latest edition of the Guidance on Board Effectiveness.
All other general meetings are also required to be held on at least 21 days' clear notice unless the Company offers shareholders an electronic voting facility. A special resolution reducing the period of notice for general meetings (other than AGMs) to not less than 14 days was passed at the 2018 AGM. The Directors are proposing to seek renewal of that authority at the 2019 AGM. It is intended that this shorter notice period will only be used for non-routine business and where merited in the interests of shareholders as a whole.
As at the date of this report the Company had been notified, pursuant to paragraph 5 of the FCA's Disclosure and Transparency Rules, of the following notifiable voting rights in its Ordinary Share capital:
| Name of holder | Number of Ordinary Shares |
Percentage of total voting rights |
|---|---|---|
| Goodweather Holdings Limited* | 83,582,667 | 25.997% |
| Pension Protection Fund | 80,374,189 | 24.999% |
| Invesco Perpetual | 31,993,428 | 9.951% |
| Pelham Capital Management | 27,480,851 | 8.547% |
| London and Amsterdam Trust Company | 19,902,272 | 6.190% |
* Goodweather Holdings Limited is a member of the Peel Holdings Group Limited.
Under the terms of the revolving credit facility agreement entered between RBS and HEPGL in February 2015 and amended in August 2016, December 2016, August 2017, February 2018 and April 2018 (to which Santander is also now a party), if any person or Group of persons acting in concert gains direct or indirect control of HEPGL the facility is capable of being cancelled in which event all outstanding loans and bonds, guarantees or letters of credit together with accrued interest shall become immediately due and payable. The rules governing the LTIP provide for the treatment of awards under the LTIP in the event of a takeover of the Company. A summary of those rules was included in the Notice of the 2016 AGM, a copy of which is available on the Company's website at www.harworthgroup.com/investors.
Peel Group is a related party by virtue of its shareholding in the Company and Steven Underwood being Chief Executive of the Group. Certain joint venture agreements with the Peel Group were varied during 2017, with the approval of shareholders at the 2017 AGM. By virtue of those variations, options were granted by the Group to Peel Environmental Limited ("PEL") in respect of three sites and the terms of a surrender of an existing option over one site were agreed. During 2018: one of those options was exercised (the other two having been exercised in 2017), resulting in a sale of land to PEL; and the surrender was completed, resulting in payment of a surrender premium by the Group to PEL.
Banks Group is a related party by virtue of Andrew Cunningham's appointment as a Non-Executive Director. During 2018 Harworth acquired a site at Moss Nook in St Helens from two Banks Group companies, Banks Property Limited and HJ Banks and Company Limited.
The Directors' Report was approved by the Board of Directors and signed on its behalf by:
Group General Counsel and Company Secretary 16 April 2019
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared both the Group and the Company Financial Statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. Under Company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and of the Company for that period.
In preparing the Financial Statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the Financial Statements and the Directors' Remuneration Report comply with CA06 and Article 4 of the IAS Regulation. They are responsible for such internal controls as they determine are necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.
The Directors are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website www.harworthgroup.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors who were in office during the year ended 31 December 2018 and up to the date of this Report considers that the 2018 Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Group's and Company's position and performance, business model and strategy.
Each of the Directors who were in office during the year ended 31 December 2018 and up to the date of this Report confirms, to the best of their knowledge, that:
Each of the Directors who were in office during the year ended 31 December 2018 and up to the date of this Report also confirms that:
This confirmation is given and should be interpreted in accordance with the provisions of section 418 CA06.
The Directors' Report, prepared in accordance with the requirements of CA06, the FCA's Listing and Disclosure and Transparency Rules and the Code, was approved by the Board and signed on its behalf by:
Group General Counsel and Company Secretary 16 April 2019
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 125
In our opinion, Harworth Group plc's group financial statements and company financial statements (the "financial statements"):
We have audited the financial statements, included within the Annual Report and Financial Statements 2018 (the "Annual Report"), which comprise: the Balance sheets as at 31 December 2018; the Consolidated income statement and Consolidated statement of comprehensive income, the Statements of cash flows, and the Consolidated statement of changes in equity and Company statement of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the company.
Other than those disclosed in note 8 to the financial statements, we have provided no non-audit services to the group or the company in the period from 1 January 2018 to 31 December 2018.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to UK tax legislation, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006 and Listing Rules. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to the posting of inappropriate journal entries to increase revenue or reduce expenditure, and management bias in accounting estimates. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
| Key audit matter | How our audit addressed the key audit matter |
|---|---|
| Valuation of investment property (£254.4m) (Refer to note 15 of the financial statements) (Group) We focused on this area because the Group's investment property assets represent a significant proportion of the assets in the group balance sheet and the level of judgement involved in the valuation of such assets. The Group's portfolio includes properties at varying stages of completion, across various sectors, including mixed-use, industrial and retail. Property valuations are subject to a high degree of judgement as they are calculated from a number of different assumptions specific to each individual property. These include actual and estimated rental values, yields, costs to complete and expected land values per acre. The Group engaged independent external valuers to value its investment properties in accordance with the Royal Institution of Chartered Surveyors ("RICS") Valuation – Professional Standards. For the majority of properties, the residual appraisal method was used, by estimating the fair value of the completed project using a capitalisation method based on expected land values per acre less estimated costs to completion and a risk premium. Completed properties were valued on an income approach basis, taking into consideration assumptions for yields and estimated market rent. A relatively small percentage change in the valuations of individual properties, in aggregate, could result in a material impact on the financial statements. |
We read the third party property valuation reports obtained by the Directors and considered if the overall approach and methodology adopted was appropriate given the nature of the properties being valued and whether they were in line with market practice. We also considered the extent to which the approach and methodology were consistent with prior years. For a sample of properties representing 65% of the value of the property portfolio, we discussed the valuation approach on a property by property basis directly with the third party valuer. We considered the specific assumptions used by the valuer for each property, including the expected land values per acre, costs to complete, estimated rental values and yields, and considered whether these were consistent with market evidence and, where relevant, actual sale proceeds on properties disposed of during the year. For properties where further investment property spend is forecast to be incurred, we obtained management estimates for the costs to completion and for a sample of costs agreed to supporting documentation, such as tenders or agreements, to check the accuracy of the forecast costs. We found the methodologies used by the third party valuers to be consistent across the portfolio of properties and with prior years. We also found that the assumptions used were within the ranges typically used for similar valuations. |
| Key audit matter | How our audit addressed the key audit matter |
|---|---|
| Carrying value of development property (£204.2m) (Refer to note 17 of the | Management received internal and external third party valuations on |
| financial statements) (Group) | each individual site. We read the third party property valuation reports |
| We focused on this area because the Group's development | obtained by management and considered if the overall approach and |
| property assets represent a significant proportion of the assets in the | methodology adopted was appropriate given the nature of the properties |
| group balance sheet and the level of judgement involved in the valuation | being valued and whether they were in line with market practice. Where |
| of such assets. | applicable due to the advanced stage of the development, we also |
| The Group's development properties were valued at £204.2m as at | agreed to third party documentation supporting the book value through |
| 31 December 2018. These properties are held at the lower of cost and | a review of pre-letting agreements, forward sales, quantity surveyor cost |
| net realisable value, in accordance with IAS 2 – Inventory. As qualifying | to complete estimates, board minutes and planning consent forms. |
| costs are incurred on existing developments, these are added to the | Additionally, we performed a look-back test, comparing historic book |
| asset balance. | values of assets to disposal proceeds following their sale. There have |
| The Group's portfolio consists of a variety of assets at varying stages | been no significant losses made on disposals in recent years, including |
| of completion, across various sectors, located throughout the UK. | assets previously subject to write-downs. |
| While during the year there was several disposals recorded, the | We also found that the assumptions used were within the ranges |
| portfolio includes certain assets transferred during the previous year | typically used for similar valuations. |
| from investment properties where they were held at fair value which | Using the third party valuations, management performed an assessment |
| could indicate a higher risk that the carrying value is higher than the | of the net realisable value for each individual asset, including producing |
| net realisable value. In addition, there are assets subject to significant | and reviewing development appraisals. We assessed the competence |
| judgements as a result of costs to complete the development site ahead | and capabilities of management and were satisfied that the individuals |
| of a future sale. | are sufficiently qualified. We met with management to understand the |
| The UK property market has varying capital values and Estimated | status and future plans for each asset and challenge key assumptions |
| Rental Values ("ERVs") across many sectors and geographic locations, | inherent in the appraisals. We also visited a sample of assets with |
| increasing the risk of impairment across the portfolio due to market | management. |
| conditions. A change in conditions for specific assets or a relatively small | Based on this work we are satisfied with the evidence that development |
| percentage change in either the property or construction markets could | and trading properties are held at the lower of cost and net realisable |
| result in a material impact to the financial statements. | value. |
| Carrying value of investments and intercompany receivables (£208.4m) (Refer | We compared the carrying value of the investments to the subsidiary's |
| to note 16 of the financial statements) (Parent) | net assets and assessed the future cash flows of the subsidiaries. We |
| We focused upon this area because the underlying value in the | noted no concerns with the carrying value. |
We focused upon this area because the underlying value in the Company is represented by balances due from the wider group and the investment held by the Company in its subsidiaries.
The key judgement is the underlying cash generation and profitability of the wider group which can be affected by market conditions and unexpected events.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.
Overall group materiality: £5.7 million (2017: £5.0 million), based on 1% of total assets.
Overall company materiality: £2.4 million (2017: £2.4 million), based on 1% of total assets.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Group financial statements | Company financial statements | |
|---|---|---|
| Overall materiality How we determined it Rationale for benchmark applied |
£5.7 million (2017: £5.0 million). 1% of total assets. The key driver of the business and determinant of the Group's value is direct and indirect property investments. Due to this, the key area of focus in the audit is the valuation of investment properties and carrying value of development properties. On this basis, we set an overall Group materiality level based on total assets, which is a generally accepted auditing benchmark. |
£2.4 million (2017: £2.4 million). 1% of total assets. The principal activity of the company is a holding company of the subsidiaries in the group. Due to this, the key area of focus in the audit is the carrying value of the investments in subsidiaries. On this basis, we set an overall materiality level based on total assets, which is a generally accepted auditing benchmark. |
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £1.4 million and £4.6 million. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £289,000 (Group audit) (2017: £196,000) and £240,000 (Company audit) (2017: £236,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
In accordance with ISAs (UK) we report as follows:
| Reporting obligation | Outcome |
|---|---|
| We are required to report if we have anything material to add or draw attention to in respect of the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors' identification of any material uncertainties to the group's and the company's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. |
We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group's and company's ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the group's trade, customers, suppliers and the wider economy. |
| We are required to report if the directors' statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially |
We have nothing to report. |
inconsistent with our knowledge obtained in the audit.
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors' Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors' Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors' Report. (CA06)
We have nothing material to add or draw attention to regarding:
We have nothing to report having performed a review of the directors' statement that they have carried out a robust assessment of the principal risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the "Code"); and considering whether the statements are consistent with the knowledge and understanding of the group and company and their environment obtained in the course of the audit. (Listing Rules)
We have nothing to report in respect of our responsibility to report when:
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06)
As explained more fully in the Statement of Directors' responsibilities set out on page 124, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors' report.
This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Following the recommendation of the audit committee, we were appointed by the members on 22 February 1992 to audit the financial statements for the year ended 31 December 1992 and subsequent financial periods. The period of total uninterrupted engagement is 27 years, covering the years ended 31 December 1992 to 31 December 2018.
Andy Ward (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Leeds 16 April 2019
Note Year ended 31 December 2018 £'000 Year ended 31 December 2017 £'000 Revenue 3 78,055 53,673 Cost of sales 3 (53,612) (37,678) Gross profit 24,443 15,995 Administrative expenses 3 (12,870) (12,020) Other gains 3 22,066 35,658 Other operating (expense)/income 3 (70) 98 Operating profit before exceptional items 33,569 39,731 Exceptional income 5 – 414 Exceptional expense 5 (590) (83) Operating profit 32,979 40,062 Share of profit of joint ventures 16 3,791 4,039 Net finance costs 7 (3,962) (2,261) Profit before tax 32,808 41,840 Tax credit 9 1,294 7,843 Profit for the financial year 34,102 49,683
All activities in the year are derived from continuing operations.
Earnings per share from continuing operations attributable to the owners of the Group during the year
| Note | pence | pence | |
|---|---|---|---|
| Basic earnings per share | 12 | 10.6 | 15.8 |
| Diluted earnings per share | 12 | 10.5 | 15.7 |
The Notes on pages 138 to 175 are an integral part of the consolidated financial statements.
for the year ended 31 December 2018
| Note | Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
|---|---|---|---|
| Profit for the financial year Other comprehensive (expense)/income – items that will not be reclassified to profit or loss: |
34,102 | 49,683 | |
| Actuarial loss in Blenkinsopp Pension Scheme | 25 | (18) | (105) |
| Revaluation of Group occupied property | 13 | – | 12 |
| Deferred tax on other comprehensive (expense)/income items | 9 | (1) | (51) |
| Other comprehensive income – items that may be reclassified subsequently to profit or loss: | |||
| Fair value of financial instruments | 23 | 13 | 244 |
| Total other comprehensive (expense)/income | (6) | 100 | |
| Total comprehensive income for the financial year | 34,096 | 49,783 |
| Group | Company | ||||
|---|---|---|---|---|---|
| Note | As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| ASSETS | |||||
| Non-current assets | |||||
| Property, plant and equipment | 13 | 794 | 802 | – | – |
| Other receivables | 14 | – | 2,666 | – | – |
| Investment properties | 15 | 254,409 | 216,560 | – | – |
| Investment in subsidiaries | 16 | – | – | 208,400 | 207,896 |
| Investment in joint ventures | 16 | 25,830 | 18,838 | – | – |
| Retirement asset | 25 | – | – | 462 | 563 |
| Trade receivables | 18 | – | 5,250 | – | – |
| Deferred income tax asset | 9 | – | – | 1,926 | 250 |
| 281,033 | 244,116 | 210,788 | 208,709 | ||
| Current assets | |||||
| Inventories | 17 | 207,009 | 211,618 | – | – |
| Trade and other receivables | 18 | 66,699 | 25,165 | 30,219 | 33,268 |
| Assets classified as held for sale | 19 | 10,956 | 7,688 | – | – |
| Cash | 20 | 8,595 | 8,371 | 1,116 | 1,267 |
| 293,259 | 252,842 | 31,335 | 34,535 | ||
| Total assets | 574,292 | 496,958 | 242,123 | 243,244 | |
| LIABILITIES | |||||
| Current liabilities | |||||
| Borrowings | 21 | (5,291) | (6,145) | – | – |
| Trade and other payables | 22 | (52,555) | (38,497) | (5,502) | (3,536) |
| Current tax liabilities | 9 | (928) | (1,538) | – | – |
| (58,774) | (1,885) (46,180) |
(1,885) (5,502) |
(3,536) | ||
| Net current assets | 234,485 | 206,662 | 25,833 | 30,999 | |
| Non-current liabilities | |||||
| Borrowings | 21 | (67,747) | (34,501) | – | – |
| Trade and other payables | 22 | (300) | (760) | – | – |
| Derivative financial instruments | 23 | (109) | (122) | – | – |
| Deferred income tax liabilities | 9 | (4,964) | (5,521) | – | – |
| Retirement benefit obligations | 25 | (462) | (563) | (462) | (563) |
| – | – (73,582) |
(41,467) | (462) | (563) | |
| (563) Total liabilities |
– | – (132,356) |
(87,647) | (5,964) | (4,099) |
| (4,099) Net assets |
(563) | (563) 441,936 |
409,311 | 236,159 | 239,145 |
| SHAREHOLDERS' EQUITY | |||||
| Capital and reserves | |||||
| Called up share capital | 27 | 32,150 | 32,150 | 32,150 | 32,150 |
| Share premium account | 28 | 24,351 | 24,351 | 24,351 | 24,351 |
| Investment in own shares | 27 | (194) | (263) | (194) | (263) |
| Fair value reserve | 99,825 | 85,109 | – | – | |
| Capital redemption reserve | 257 | 257 | 257 | 257 | |
| Merger reserve | 45,667 | 45,667 | 45,667 | 45,667 | |
| Current year profit/(loss) | 34,102 | 49,683 | (1,396) | (5,759) | |
| Retained earnings Retained earnings/(deficit) |
205,778 | 172,357 | 135,324 | 142,742 | |
| Total equity | 441,936 | 409,311 | 236,159 | 239,145 |
The financial statements on pages 132 to 175 were approved by the Board of Directors on 16 April 2019 and were signed on its behalf by:
| Called up | Share | Investment | Capital | ||||||
|---|---|---|---|---|---|---|---|---|---|
| share | premium | in own | Fair value | redemption | Merger | Retained | Total | ||
| Note | capital £'000 |
account £'000 |
shares £'000 |
reserve* £'000 |
reserve £'000 |
reserve £'000 |
earnings £'000 |
equity £'000 |
|
| Balance at 1 January 2017 | 29,227 | – | – | 58,279 | 257 | 45,667 | 201,493 | 334,923 | |
| Profit for the financial year | – | – | – | – | – | – | 49,683 | 49,683 | |
| Net fair value gains | – | – | – | 32,636 | – | – | (32,636) | – | |
| Transfer of unrealised loss | 17 | – | – | – | (5,818) | – | – | 5,818 | – |
| Other comprehensive (expense)/income: | |||||||||
| Actuarial loss in Blenkinsopp pension scheme | 25 | – | – | – | – | – | – | (105) | (105) |
| Revaluation of Group occupied property | 13 | – | – | – | 12 | – | – | – | 12 |
| Fair value of financial instruments | 23 | – | – | – | – | – | – | 244 | 244 |
| Deferred tax on other comprehensive (expense)/income items |
9 | – | – | – | – | – | – | (51) | (51) |
| Total comprehensive income for the year ended 31 December 2017 |
– | – | – | 26,830 | – | – | 22,953 | 49,783 | |
| Transactions with owners: | |||||||||
| Share issue less costs | 27 | 2,923 | 24,142 | – | – | – | – | – | 27,065 |
| Other transaction costs | 28 | – | 209 | – | – | – | – | – | 209 |
| Purchase of own shares | 27 | – | – | (263) | – | – | – | 86 | (177) |
| Dividends paid | 11 | – | – | – | – | – | – | (2,492) | (2,492) |
| Balance at 31 December 2017 | 32,150 | 24,351 | (263) | 85,109 | 257 | 45,667 | 222,040 | 409,311 | |
| Profit for the financial year | – | – | – | – | – | – | 34,102 | 34,102 | |
| Net fair value gains | – | – | – | 19,483 | – | – | (19,483) | – | |
| Transfer of unrealised loss | 17 | – | – | – | (4,767) | – | – | 4,767 | – |
| Other comprehensive (expense)/income: | |||||||||
| Actuarial loss in Blenkinsopp pension scheme | 25 | – | – | – | – | – | – | (18) | (18) |
| Fair value of financial instruments | 23 | – | – | – | – | – | – | 13 | 13 |
| Deferred tax on other comprehensive (expense)/income items |
9 | – | – | – | – | – | – | (1) | (1) |
| Total comprehensive income for the year ended 31 December 2018 |
– | – | – | 14,716 | – | – | 19,380 | 34,096 | |
| Transactions with owners: | |||||||||
| Share based payments | 26 | – | – | 69 | – | – | – | 1,200 | 1,269 |
| Dividends paid | 11 | – | – | – | – | – | – | (2,740) | (2,740) |
| Balance at 31 December 2018 | 32,150 | 24,351 | (194) | 99,825 | 257 | 45,667 | 239,880 | 441,936 |
*The fair value reserve relates to unrealised gains and losses arising primarily from the revaluation of investment properties and historical gains/losses from investment property that has now been transferred to development property.
| Called up | Share | Investment | Capital | |||||
|---|---|---|---|---|---|---|---|---|
| share | premium | in own | redemption | Merger | Retained | Total | ||
| capital | account | shares | reserve | reserve | earnings | equity | ||
| Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Balance at 1 January 2017 | 29,227 | – | – | 257 | 45,667 | 145,235 | 220,386 | |
| Loss for the financial year | – | – | – | – | – | (5,759) | (5,759) | |
| Actuarial loss in Blenkinsopp pension scheme | 25 | – | – | – | – | – | (105) | (105) |
| Deferred tax on actuarial loss on pension scheme | – | – | – | – | – | 18 | 18 | |
| Total comprehensive expense for the year ended 31 December 2017 |
– | – | – | – | – | (5,846) | (5,846) | |
| Transactions with owners: | ||||||||
| Share issue less costs | 27 | 2,923 | 24,142 | – | – | – | – | 27,065 |
| Other transaction costs | 28 | – | 209 | – | – | – | – | 209 |
| Purchase of own shares | 27 | – | – | (263) | – | – | 86 | (177) |
| Dividends paid | 11 | – | – | – | – | – | (2,492) | (2,492) |
| Balance at 31 December 2017 | 32,150 | 24,351 | (263) | 257 | 45,667 | 136,983 | 239,145 | |
| Loss for the financial year | – | – | – | – | – | (1,396) | (1,396) | |
| Actuarial loss in Blenkinsopp pension scheme | 25 | – | – | – | – | – | (18) | (18) |
| Deferred tax on actuarial loss on pension scheme | – | – | – | – | – | 3 | 3 | |
| Total comprehensive expense for the year ended 31 December 2018 |
– | – | – | – | – | (1,411) | (1,411) | |
| Transactions with owners: | ||||||||
| Share based payments | – | – | 69 | – | – | 1,096 | 1,165 | |
| Dividends paid | 11 | – | – | – | – | – | (2,740) | (2,740) |
| Balance at 31 December 2018 | 32,150 | 24,351 | (194) | 257 | 45,667 | 133,928 | 236,159 |
for the year ended 31 December 2018
| Group | Company | ||||
|---|---|---|---|---|---|
| Note | Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
| Cash flows from operating activities | |||||
| Profit/(loss) before tax for the financial year | 32,808 | 41,840 | (2,995) | (2,937) | |
| Net interest payable/(receivable) | 7 | 3,962 | 2,261 | (581) | (501) |
| Other gains | 3 | (22,066) | (35,658) | – | – |
| Share of profit of joint ventures | 16 | (3,791) | (4,039) | – | – |
| Depreciation of property, plant and equipment | 13 | 9 | 8 | – | – |
| Pension contributions in excess of charge | (120) | (144) | (120) | (144) | |
| Operating cash inflows/(outflows) before movements | |||||
| in working capital | 10,802 | 4,268 | (3,696) | (3,582) | |
| Decrease in inventories | 4,609 | 18,232 | – | – | |
| (Increase)/decrease in receivables | (36,284) | (5,970) | 3,049 | (23,714) | |
| Increase in payables | 13,598 | 8,394 | 3,235 | 1,787 | |
| Cash (used in)/generated from operations | (7,275) | 24,924 | 2,588 | (25,509) | |
| Interest paid | (1,581) | (1,277) | – | – | |
| Corporation tax received | 99 | 175 | – | – | |
| Cash (used in)/generated from operating activities | (8,757) | 23,822 | 2,588 | (25,509) | |
| Cash flows from investing activities | |||||
| Interest received | 4 | 16 | 1 | – | |
| Investment in/acquisition of joint ventures | (2,843) | (4,250) | – | – | |
| Net proceeds from disposal of investment properties, assets held | 47,801 | 24,434 | – | – | |
| for sale and overages | |||||
| Loan arrangement fees paid | (566) | (214) | – | – | |
| Expenditure on properties | (64,124) | (60,431) | – | – | |
| Expenditure on property, plant and equipment | (1) | (9) | – | – | |
| Cash (used in)/generated from investing activities | (19,729) | (40,454) | 1 | – | |
| Cash flows from financing activities | |||||
| Net proceeds from issue of ordinary shares | – | 27,065 | – | 27,065 | |
| Proceeds from other loans | 8,650 | 6,502 | – | – | |
| Repayment of bank loans | (46,730) | (57,000) | – | – | |
| Proceeds from bank loans | 81,739 | 43,000 | – | – | |
| Repayment of other loans | (12,209) | (5,111) | – | – | |
| Investment in own shares | – | (177) | – | (177) | |
| Other transaction costs | 28 | – | 209 | – | 209 |
| Dividends paid | 11 | (2,740) | (2,492) | (2,740) | (2,492) |
| Cash generated from/(used in) financing activities | 28,710 | 11,996 | (2,740) | 24,605 | |
| Increase/(decrease) in cash | 224 | (4,636) | (151) | (904) | |
| At 1 January | |||||
| Cash | 8,371 | 13,007 | 1,267 | 2,171 | |
| Increase/(decrease) in cash | 224 | (4,636) | (151) | (904) | |
| At 31 December | |||||
| Cash | 8,595 | 8,371 | 1,116 | 1,267 |
The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Harworth Group plc (the 'Company') is a company limited by shares, incorporated and domiciled in the United Kingdom. The address of its registered office is Advantage House, Poplar Way, Catcliffe, Rotherham, South Yorkshire, S60 5TR.
The Company is a listed public company on the London Stock Exchange.
The Group and Company financial statements of Harworth Group plc have been prepared on a going concern basis and in accordance with EU adopted International Financial Reporting Standards ("IFRS"), IFRS IC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and therefore complies with Article 4 of the EU IAS regulations. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties and financial assets and liabilities at fair value through profit or loss.
These financial statements are prepared on the basis that the Group is a going concern. In forming its opinion as to going concern, the Board prepares cash flow forecasts based upon its assumptions with particular consideration to the key risks and uncertainties as summarised in the 'Managing Risk' section of this annual report, as well as taking into account the available borrowing facilities in line with the Treasury Policy disclosed on pages 167 and 168.
The key factor that has been considered in this regard is:
The Group has a £100m revolving credit facility with National Westminster Bank PLC and Santander UK plc, for a term of five years, on a non-amortising basis. The facility is in the form of a debenture security whereby there is no charge on the individual assets of the Group. The facility is subject to financial and other covenants.
The covenants are based upon gearing, tangible net worth, loan to property values and interest cover. Property valuations affect the loan to value covenants. Breach of covenants could result in the need to pay down in part some of these loans, additional costs, or a renegotiation of terms or, in extremis, a reduction or withdrawal of facilities by the banks concerned.
The Directors confirm their belief that it is appropriate to use the going concern basis of preparation for these financial statements.
The Group did not early adopt any new or amended standards and does not plan to early adopt any standards issued but not yet effective.
Revenue comprises rental and other land related income arising on investment properties, income from construction contracts and promote fees on the letting of forward funded units, the sale of coal fines and the sale of development properties.
Rentals are accounted for on a straight-line basis over the lease term.
Income from construction contracts is recognised in line with the accounting policy for construction contracts. Revenue is recognised when the Group is acting as a principal under a contract with primary responsibility for the contract.
Revenue from PPAs and overages are recognised when it is highly probable that all performance obligations have been completed.
Revenue from the sale of coal fines is recognised at the point of despatch.
Following the adoption of IFRS 15 'Revenue from contracts with customers', revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the goods of service. In respect of the sale of development property, control is typically passed to a customer at the point of legal completion and when title has passed.
Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. All such revenue is reported net of discounts, and value added and other sales taxes.
Contracts for the construction of substantial assets are accounted for as construction contracts. Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion. The assessment of the stage of completion is dependent on the nature of the contracts but will generally be based on the estimated proportion of the total contract costs which have been incurred to date. If a contract is expected to be loss making, a provision is recognised for the entire cost.
Interest income and expense are recognised within 'finance income' and 'finance costs' in the income statement using the effective interest rate method.
The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or financial liability.
Other receivables relate to overages. An overage is the right to receive future payments following the sale of investment properties if specified conditions relating to the site are satisfied. The conditions may be the granting of planning permission for development on the site or practical completion of a development. Overages are recognised when they are highly probable to be received and are recorded as revenue if related to previous development sales and profit on sale if related to previous investment property sales.
Inventories comprise development properties, land held for development, options to purchase land, planning promotion agreements and coal slurry that has been processed and is ready for sale.
Development properties are included in the consolidated balance sheet at the lower of cost and net realisable value. Net realisable value is the expected net sales proceeds of the developed property in the ordinary course of business less estimated costs to complete and anticipated selling costs. Properties re-categorised to development properties from investment properties are transferred at deemed cost, being the fair value at the date of re-categorisation. Properties are re-categorised as development properties once planning is secured and the intention to bring those properties forward for development and sale has been agreed.
Land held for development is land that has planning permission and is being developed for onward sale.
Options to purchase land are agreements that the Group has entered into with the landowners whereby the Group has the option to purchase the land within a limited timeframe. The landowners are not generally permitted to sell to any other party during this period, unless agreed by the Group. All costs, including the cost of entering the option, are capitalised. At each reporting date, the recoverability of the costs are considered by management and where required provisions are made such that the agreements are held at the lower of cost and net realisable value.
Planning promotion agreements are agreements that the Group has entered into with the landowners whereby the Group acts as an agent to the landowners in exchange for a fee of a set percentage of the proceeds or profit of the eventual sale. The Group promotes the land through the planning process at its own expense. If the land is sold the Group will receive a fee for its services.
The Group incurs various costs in promoting land held under promotion planning agreements, in some instances the agreements allow for the Group to be reimbursed certain expenditure following the conclusion of a successful sale. These costs are held in inventory at the lower of cost and net realisable value. Upon reimbursement, inventory is reduced by the value of the reimbursed cost.
Coal fines that have been processed and are ready for sale are stated at the lower of cost and estimated net realisable value. Inventories comprise all of the direct costs incurred in bringing the coal fines to their present state.
Investment held by the Company in subsidiary undertakings are carried at cost less impairments to write them down to their recoverable amount.
Joint ventures are those entities over whose activities the Group has joint control established by contractual agreement. Interests in joint ventures through which the Group carries on its business are classified as jointly controlled entities and accounted for using the equity method. This involves recording the investment initially at cost to the Group and then, in subsequent years, adjusting the carrying amount of the investment to reflect the Group's share of the joint venture's results less any impairment in carrying value and any other changes to the joint venture's net assets such as dividends.
Investments in subsidiaries are reviewed for impairment if there is any indication that the carrying amount may not be recoverable.
When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of 'value in use' (being the present value of expected future cash flows of the relevant cash generating unit) or 'fair value less costs to sell'. Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Company could receive for the cash generating unit in an arm's length transaction.
The impairment testing is carried out under the principles described in IAS 36 'Impairment of assets' which includes a number of restrictions on the future cash flows that can be recognised in respect of restructurings and improvements related to capital expenditure.
Investment properties are those properties which are not occupied by the Group and which are held for long term rental yields, capital appreciation or both. Investment property also includes property that is being developed or constructed for future use as investment property by the Group. Investment properties comprise freehold land and buildings and are measured at fair value. At the end of a financial year the fair values are determined by obtaining an independent valuation prepared in accordance with the current edition of the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. External,
independent valuation firms having appropriate, recognised professional qualifications and recent experience in the location and category of property being valued are used.
Investment properties are re-categorised as development properties and moved to inventory once planning is secured and the intention to bring those properties forward for development and sale has been agreed.
A transfer from the fair value reserve to retained earnings is made if any net realisable value provision is required on any development property where gains had previously been recorded as an investment property.
At each subsequent reporting date, investment properties are re-measured to their fair value. Movements in fair value are included in the income statement.
Where specific investment properties have been identified as being for sale within the next twelve months, a sale is considered highly probable and the property is immediately available for sale, their fair value is shown under assets classified as held for sale within current assets, measured in accordance with the provisions of IAS 40 'Investment Property'.
Disposals are accounted for when control of the investment property has been passed to a customer, typically at the point of legal completion and when title has passed. Profits or losses on disposal arise from deducting the asset's net carrying value, selling costs and where appropriate a proportion of future costs attributable to the development of the overall land area from the net proceeds (being net purchase consideration less any clawback liability arising on disposal) and is recognised in the income statement. Net carrying value includes valuation in the case of investment properties.
In the case of investment properties, any fair value reserve for the property disposed of is treated as realised on disposal of the property and transferred to retained earnings.
Directly attributable costs incurred in the course of constructing a property, not including interest, are capitalised as part of the cost of the property. Any resultant change in value is therefore recognised through the next revaluation.
A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current.
Financial assets include cash received from the sale of certain development properties but held in separate bank accounts over which third party infrastructure loan providers have a charge.
Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Gains or losses arising from changes in the fair value of financial assets are presented in the income statement within 'other gains' in the year in which they arise.
Interest income is recognised on financial assets by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
Liabilities within the scope of IFRS 9 are classified as financial liabilities at fair value through profit or loss or other liabilities, as appropriate.
A financial liability is de-recognised when the obligation under the liability is discharged, or cancelled or expires.
All loans and borrowings are classified as other liabilities. Initial recognition is at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.
Financial liabilities included in trade and other payables are recognised initially at fair value and subsequently at amortised cost. The fair value of a non-interest bearing liability is its discounted repayment amount. If the due date of the liability is less than one year, discounting is omitted.
The Group contributes to defined contribution schemes for its current employees. The cost of this is charged to the consolidated income statement as incurred.
Following the 2012 Restructuring the Group's only defined benefit pension liability was for the Blenkinsopp Section of the Industry-Wide Mineworkers Pension Scheme.
During the years to 31 December 2018 and 31 December 2017 all contributions have been paid to the pension fund by the Company.
The Company recognises a net liability equal to the IAS 19 (revised) liability and an equal amount within non-current assets, due to its ability to call upon an indemnity from Harworth Estates Mines Property Limited for this liability if required.
Equity-settled share-based payments to employees of the Company and its subsidiary undertakings are measured at fair value of the equity instruments at the date of grant and are expensed on a straight line basis over the vesting period in the consolidated income statement. The fair value of the equity instruments is determined at the date of grant taking into account any market based vesting conditions attached to the award. Non-market based vesting conditions are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed regularly and the expense charged adjusted accordingly.
Management has determined the operating segments based upon the operating reports reviewed by the Investment Committee that are used to assess both performance and strategic decisions. Management has identified that the Investment Committee is the Chief Operating Decision Maker in accordance with the requirements of IFRS 8 'Operating Segments'.
The Group is organised into two operating segments: Income Generation and Capital Growth. Group costs are not a reportable segment. However, information about them is considered by the Investment Committee in conjunction with the reportable segments.
The Income Generation segment focuses on generating rental returns from the business space portfolio, rental returns and royalties from energy generation, environmental technologies and the agricultural portfolio, and income generating streams from recycled aggregates and secondary coal products. The Capital Growth segment focuses on delivering value by developing the underlying investment and development property portfolios, and includes planning and development activity, value engineering, proactive asset management and strategic land acquisitions.
All operations are carried out in the United Kingdom.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, and liabilities and contingent liabilities, assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets.
Acquisition-related costs are capitalised as incurred.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated.
Exceptional items are significant non-recurring items excluded from management's assessment of profit because by their nature they could distort the Group's underlying quality of earnings. These are excluded to reflect performance in a consistent manner and in line with how the business is managed and measured on a day to day basis.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Where shares are issued in direct consideration for acquiring shares in another company, and following which the Group holds at least 90% of the nominal share capital of that company, any premium on the shares issued as consideration is included in a merger reserve rather than share premium.
Land and buildings relate to group occupied properties. These properties are stated at their fair value, based on market values, less any subsequent accumulated depreciation or accumulated impairment loss. Depreciation is provided where it is considered
significant having regard to the estimated remaining useful lives and residual values of individual properties. Surpluses on revaluations are transferred to the revaluation reserve. Deficits on revaluations are charged against the revaluation reserve to the extent that there are available surpluses relating to the same asset and are otherwise charged to the Statement of Comprehensive Income.
Office equipment is stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged on these assets so as to write off the cost or valuation of assets over their estimated useful lives of 3 to 4 years, using the straight line method.
Derivative financial instruments such as interest rate swaps are entered into in order to manage interest rate risks arising from long-term debt. Such derivative instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting, and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedge item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedge risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated.
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.
If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs.
When a derivative is held as an economic hedge for a period beyond twelve months after the end of the reporting period, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item. A derivative instrument that is a designated and effective hedging instrument is classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if: 1) a reliable allocation can be made; and 2) it is applied to all designated and effective hedging instruments.
The charge or credit for current tax is based on the results for the year adjusted for items that are either not subject to taxation or for expenditure which cannot be deducted in computing the tax charge or credit. The tax charge or credit is calculated using taxation rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax is recognised using the balance sheet liability method on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax is recognised in respect of all taxable temporary timing differences, with certain limited exceptions:
Deferred tax is calculated at the tax rates that are expected to apply in the years in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited to the income statement, except where it applies to items credited or charged to equity, in which case the deferred tax is also dealt with in equity.
The carrying value of the Group's investment property is assumed to be realised by sale at the end of use. The capital gains tax rate applied is that which would apply on a direct sale of the property recorded in the Balance Sheet regardless of whether the Group would structure the sale via the disposal of the subsidiary holding the asset, to which a different tax rate may apply.
The deferred tax is then calculated based on the respective temporary differences and tax consequences arising from recovery through sale.
Changes in accounting policy and disclosures
The new standards, amendments or interpretations effective for the first time for the financial year beginning on or after 1 January 2018 are:
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2019 and have not been applied in preparing this preliminary financial information. None of these are expected to have a significant effect on the financial statements of the Group including the following:
• IFRS 16, 'Leases' addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 'Leases', and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted, subject to EU endorsement and the entity adopting IFRS 15 'Revenue from contracts with customers' at the same time. The full impact of IFRS 16 continues to be assessed, however, the Group does not believe it will have a significant impact.
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
In preparing these financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty are as follows:
The fair value of investment property reflects, amongst other things, rental income from our current leases, assumptions about rental income from future leases and the possible outcome of planning applications, in the light of current market conditions. The valuation has been arrived at primarily after consideration of market evidence for similar property, although in the case of those properties where fair value is based on their ultimate redevelopment potential, development appraisals have been undertaken to estimate the residual value of the landholding after due regard to the cost of, and revenue from, the development of the property.
The Group has also estimated the extent to which former mining tenants on investment property owned by the Group would perform their obligations to remediate land at the conclusion of mining activity and therefore the impact of any restoration obligations which may revert to the Group. The potential shortfall has been estimated at £3.2m (2017: £3.2m) and has been treated as a reduction in the valuation of the properties which these former tenants occupied.
The values reported are based on significant assumptions and a change in fair values could have a material impact on the Group's results. This is due to the sensitivity of fair value to the assumptions made as regards to variances in development costs compared to management`s own estimates.
Investment properties are disclosed in note 15.
For the purposes of calculating net realisable value for both EPRA reporting and ensuring that development properties are stated at the lower of cost and net realisable value, the Group obtains an independent valuation of these properties, prepared in accordance with the current edition of the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors.
If the net realisable value of the property is lower than cost, a provision is made, to reduce the value of the property.
During 2017, £229.1m of property was re-categorised from investment to development property. This re-categorisation was triggered by the evolution of Harworth's business model, including the March 2017 capital raise, as well as the consideration of site and market opportunities. In 2018 no new properties were re-categorised from investment to development property as a result of planning permissions. There were some minor movements from investment to development properties, and vice-versa, as a result of sub-dividing some sites and the intentions for these smaller parcels.
The recognition of tax losses and deferred tax assets has continued to be reviewed and re-assessed during the year. This has resulted in the recognition of £2.4m (2017: £nil) of previously unrecognised tax losses due to increased certainty of their availability to the Group. In 2017, deferred tax assets of £19.1m were recognised based upon the certainty of recoverability. In addition, during 2017, £5.9m was recognised due to the execution of a contract which resulted in increased certainty that the losses would not be lost and £13.2m was due to the crystallisation of chargeable gains and losses as a result of a number of investment property disposals and the re-categorisation of properties from investment to development properties. These gains were offset against tax losses that were previously not recognised from a deferred tax perspective.
The Group has applied the June 2015 European Securities and Markets Authority ("ESMA") guidance on APMs and the November 2017 Financial Reporting Council ("FRC") corporate thematic review of APMs in these results. An APM is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS.
The Directors believe that APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs assist our stakeholder users of the accounts, particularly equity and debt investors, through the comparability of information. APMs are used by the Directors and management, both internally and externally, for performance analysis, strategic planning, reporting and incentive-setting purposes.
APMs are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including peers in the real estate industry. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.
The primary differences between IFRS statutory amounts and the APMs that we use are as follows:
The key APMs that the Group focuses on are as follows:
There have been no changes to the Group's APMs in the year with the same APMs being defined, calculated and used on a consistent basis.
Set out below is a reconciliation of the APMs used in these results to the statutory measures.
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
||
|---|---|---|---|
| a. Revaluations gains | Note | £000 | £000 |
| Increase in fair value of investment properties | 3 | 21,483 | 32,133 |
| (Decrease)/increase in fair value of other receivables | 3 | (2,000) | 586 |
| Decrease in fair value of assets classified as held for sale | 3 | – | (83) |
| Other gains | 3 | 45 | – |
| Share of profit of joint ventures | 3 | 3,791 | 4,039 |
| Net realisable value provision of development properties | 3 | (4,767) | (5,818) |
| Reversal of previous net realisable value provision of development properties | 3 | 3,031 | – |
| Amounts derived from statutory reporting | 21,583 | 30,857 | |
| Unrealised gains on development properties | 22,945 | 5,846 | |
| Unrealised gains on overages | 3,541 | – | |
| Revaluation gains | 48,069 | 36,703 | |
| b. Profit on sale | |||
| Profit on sale of investment properties | 3 | 2,374 | 2,919 |
| Profit on sale of assets classified as held for sale | 3 | 164 | 103 |
| Profit on sale of development properties | 3 | 3,469 | 7,690 |
| Amounts derived from statutory reporting | 6,007 | 10,712 | |
| Unrealised gains on development properties released on sale in the year | (2,794) | – | |
| Profit on sale | 3,213 | 10,712 | |
| c. Value gains | |||
| Statutory reporting revaluation gains | 21,583 | 30,857 | |
| Statutory reporting profit on sale | 6,007 | 10,712 | |
| Amounts derived from statutory reporting | 27,590 | 41,569 | |
| Unrealised gains on development properties | 22,945 | 5,846 | |
| Unrealised gains on overages | 3,541 | – | |
| Gains on development properties released on sale in the year | (2,794) | – | |
| Value gains (including development properties and overages) | 51,282 | 47,415 | |
| d. Profit excluding value gains (PEVG) | |||
| Operating profit before exceptional items | 3 | 33,569 | 39,731 |
| Add pension charge | 70 | 39 | |
| Less other gains | 3 | (22,066) | (35,658) |
| Less gross profit from development properties | 3 | (1,733) | (1,872) |
PEVG 9,840 2,240
for the year ended 31 December 2018: continued
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
||
|---|---|---|---|
| e. Total property sales | Note | £000 | £000 |
| Revenue from development properties | 3 | 44,825 | 29,765 |
| Revenue from other property activities | 3 | 7,629 | 5,671 |
| Revenue from income generation activities | 3 | 25,601 | 18,237 |
| Amounts derived from statutory reporting | 78,055 | 53,673 | |
| Less revenue from other property activities | 3 | (7,629) | (5,671) |
| Less revenue from income generation activities | 3 | (25,601) | (18,237) |
| Add proceeds from sales of investment properties, assets held for sale and overages | 48,338 | 25,008 | |
| Total property sales | 93,163 | 54,773 | |
| f. Operating profit before exceptional items contributing to growth in EPRA NNNAV | |||
| Operating profit before exceptional items | 3 | 33,569 | 39,731 |
| Share of profit of joint ventures | 3 | 3,791 | 4,039 |
| Unrealised gains on development properties | 22,945 | 5,846 | |
| Unrealised gains on overages | 3,541 | – | |
| Less gains on development properties released on sale in the year | (2,794) | – | |
| Operating profit before exceptional items contributing to growth in EPRA NNNAV | 61,052 | 49,616 | |
| g. Portfolio value | |||
| Land and buildings | 13 | 787 | 787 |
| Other receivables | 14 | – | 2,666 |
| Investment properties | 15 | 254,409 | 216,560 |
| Investments in joint ventures | 16 | 25,830 | 18,838 |
| Assets classified as held for sale | 19 | 10,956 | 7,688 |
| Development properties | 17 | 204,157 | 210,471 |
| Amounts derived from statutory reporting | 496,139 | 457,010 | |
| Cumulative unrealised gains on development properties as at year end | 25,997 | 5,846 | |
| Cumulative unrealised gains on overages as at year end | 3,541 | – | |
| Portfolio value | 525,677 | 462,856 | |
| h. Net debt | |||
| Gross borrowings | 21 | (73,038) | (40,646) |
| Cash | 20 | 8,595 | 8,371 |
| Net debt | (64,443) | (32,275) | |
| i. Net loan to portfolio value | |||
| Net debt | (64,443) | (32,275) | |
| Portfolio value | 525,677 | 462,856 | |
| Net loan to portfolio value (%) | 12.3% | 7.0% | |
| j. Net loan to income portfolio value | |||
| Net debt | (64,443) | (32,275) | |
| Income portfolio value (business space and natural resources) | 187,648 | 154,877 | |
| Net loan to income portfolio value (%) | 34.3% | 20.8% |
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
||
|---|---|---|---|
| k. Gross loan to portfolio value | Note | £000 | £000 |
| Gross borrowings | 21 | (73,038) | (40,646) |
| Portfolio value | 525,677 | 462,856 | |
| Gross loan to portfolio value (%) | 13.9% | 8.8% | |
| l. Gross loan to income portfolio value | |||
| Gross borrowings Income portfolio value |
21 | (73,038) 187,648 |
(40,646) 154,877 |
| Gross loan to income portfolio value (%) | 38.9% | 26.2% | |
| m. Per share | |||
| Number of shares in issue at 31 December | 27 | 321,496,760 | 321,496,760 |
| Employee Benefit Trust Shares (own shares) at 31 December | 27 | (181,771) | (246,010) |
| Number of shares used for per share calculations | 27 | 321,314,989 | 321,250,750 |
| n. NAV per share | |||
| NAV £'000 | 441,936 | 409,311 | |
| Number of shares used for per share calculations | 321,314,989 | 321,250,750 | |
| NAV per share (p) | 137.5 | 127.4 | |
| 2) Reconciliation to EPRA measures a. EPRA NNNAV |
Note | Year ended 31 December 2018 £000 |
Year ended 31 December 2017 £000 |
| Net assets | 441,936 | 409,311 | |
| Cumulative unrealised gains on development properties | 25,997 | 5,846 | |
| Cumulative unrealised gains on overages | 3,541 | – | |
| Notional deferred tax on unrealised gains | (5,021) | (994) | |
| EPRA NNNAV | 466,453 | 414,163 | |
| b. EPRA NAV | |||
| EPRA NNNAV | 466,453 | 414,163 | |
| Notional deferred tax on unrealised gains | 5,021 | 994 | |
| Deferred tax liability Mark to market valuation of financial instruments |
9 | 4,964 109 |
5,521 122 |
| EPRA NAV | 476,547 | 420,800 | |
| c. EPRA NNNAV per share | |||
| EPRA NNNAV £'000 Number of shares used for per share calculations |
27 | 466,453 321,314,989 |
414,163 321,250,750 |
| EPRA NNNAV per share (p) | 145.2 | 128.9 | |
| d. EPRA NAV per share | |||
| EPRA NAV £'000 | 476,547 | 420,800 | |
| Number of shares used for per share calculations | 27 | 321,314,989 | 321,250,750 |
| EPRA NAV per share (p) | 148.3 | 131.0 |
for the year ended 31 December 2018: continued
| Year ended | Year ended |
|---|---|
| 31 December | 31 December |
| 2018 | 2017 |
| e. EPRA NNNAV growth and total return £000 |
£000 |
| 128.9 Opening EPRA NNNAV / share (p) |
114.6 |
| Closing EPRA NNNAV / share (p) 145.2 |
128.9 |
| Movement in the year 16.3 |
14.3 |
| EPRA NNNAV growth 12.6% |
12.5% |
| Dividends paid per share (p) 0.9 |
0.8 |
| 17.2 Total return per share |
15.1 |
| Total return as a percentage of opening NNNAV 13.3% |
13.2% |
| f. Net loan to EPRA NNNAV | |
| Net debt £'000 (64,443) |
(32,275) |
| EPRA NNNAV £'000 466,453 |
414,163 |
| Net loan to EPRA NNNAV 13.8% |
7.8% |
31 December 2018
| Capital Growth | |||||||
|---|---|---|---|---|---|---|---|
| Note | Sale of Development Properties £'000 |
Other Property Activities £'000 |
Income Generation £'000 |
Central overheads £'000 |
Total £'000 |
||
| Revenue | 44,825 | 7,629 | 25,601 | – | 78,055 | ||
| Cost of sales | (43,092) | (1,922) | (8,598) | – | (53,612) | ||
| Gross profit(1) | 1,733 | 5,707 | 17,003 | – | 24,443 | ||
| Administrative expenses | – | (2,473) | (2,171) | (8,226) | (12,870) | ||
| Other gains(2) | – | 8,658 | 13,408 | – | 22,066 | ||
| Other operating expense | – | – | – | (70) | (70) | ||
| Operating profit/(loss) before exceptional items | 1,733 | 11,892 | 28,240 | (8,296) | 33,569 | ||
| Exceptional expense | 5 | – | – | – | (590) | (590) | |
| Operating profit/(loss) | 1,733 | 11,892 | 28,240 | (8,886) | 32,979 | ||
| Share of profit of joint ventures | 16 | – | (5) | 3,796 | – | 3,791 | |
| Net finance costs | 7 | – | – | – | (3,962) | (3,962) | |
| Profit/(loss) before tax | 1,733 | 11,887 | 32,036 | (12,848) | 32,808 | ||
| (1) Gross profit Gross profit is analysed as follows: |
|||||||
| Gross profit excluding sales of development properties | – | 5,707 | 17,003 | – | 22,710 | ||
| Gross profit on sale of development properties | 3,469 | – | – | – | 3,469 | ||
| Net realisable value provision on development properties | (4,767) | – | – | – | (4,767) | ||
| Reversal of previous net realisable value provision on development properties |
3,031 | – | – | – | 3,031 | ||
| 1,733 | 5,707 | 17,003 | – | 24,443 | |||
| (2) Other gains | |||||||
| Other gains are analysed as follows: | |||||||
| Increase in fair value of investment properties | – | 9,859 | 11,624 | – | 21,483 | ||
| Decrease in the fair value of other receivables | – | (2,000) | - | – | (2,000) | ||
| Profit on sale of investment properties | – | 799 | 1,575 | – | 2,374 | ||
| Profit on sale of assets classified as held for sale | – | – | 164 | – | 164 | ||
| Other gains | – | – | 45 | – | 45 | ||
| – | 8,658 | 13,408 | – | 22,066 | |||
| Note | Capital Growth £'000 |
Income Generation £'000 |
Central overheads £'000 |
Total £'000 |
|||
| Non-current assets | |||||||
| Property, plant and equipment | 13 | – | – | 794 | 794 | ||
| Investment properties | 15 | 55,019 | 199,390 | – | 254,409 | ||
| Investments in joint ventures | 16 | 1,087 | 24,743 | – | 25,830 | ||
| 56,106 | 224,133 | 794 | 281,033 | ||||
| Current assets | |||||||
| Inventories | 17 | 206,635 | 374 | – | 207,009 | ||
| Trade and other receivables | 18 | 42,976 | 22,076 | 1,647 | 66,699 |
Financial liabilities and derivative financial instruments are not allocated to the reporting segments as they are managed and measured on a Group basis.
Assets classified as held for sale 19 2,775 8,181 – 10,956 Cash 20 – – 8,595 8,595
Total assets 308,492 254,764 11,036 574,292
252,386 30,631 10,242 293,259
for the year ended 31 December 2018: continued
31 December 2017
| Capital Growth | ||||||
|---|---|---|---|---|---|---|
| Group | Note | Sale of Development Properties £'000 |
Other Property Activities £'000 |
Income Generation £'000 |
Central Overheads £'000 |
Total £'000 |
| Revenue | 29,765 | 5,671 | 18,237 | – | 53,673 | |
| Cost of sales | (27,893) | (4,396) | (5,389) | – | (37,678) | |
| Gross profit(1) | 1,872 | 1,275 | 12,848 | – | 15,995 | |
| Administrative expenses | – | (1,927) | (1,752) | (8,341) | (12,020) | |
| Other gains(2) | – | 26,924 | 8,734 | – | 35,658 | |
| Other operating income | – | – | 17 | 81 | 98 | |
| Operating profit/(loss) before exceptional items | 1,872 | 26,272 | 19,847 | (8,260) | 39,731 | |
| Net exceptional items | 5 | – | – | – | 331 | 331 |
| Operating profit/(loss) | 1,872 | 26,272 | 19,847 | (7,929) | 40,062 | |
| Share of profit of joint ventures | 16 | – | 26 | 4,013 | – | 4,039 |
| Net finance costs | 7 | – | – | – | (2,261) | (2,261) |
| Profit/(loss) before tax | 1,872 | 26,298 | 23,860 | (10,190) | 41,840 | |
| (1) Gross profit | ||||||
| Gross profit is analysed as follows: | ||||||
| Gross profit excluding sales of development properties | – | 1,275 | 12,848 | – | 14,123 | |
| Gross profit on sale of development properties | 7,690 | – | – | – | 7,690 | |
| Net realisable value provision on development properties | (5,818) | – | – | – | (5,818) | |
| 1,872 | 1,275 | 12,848 | – | 15,995 | ||
| (2) Other gains | ||||||
| Other gains are analysed as follows: | ||||||
| Increase in fair value of investment properties | – | 26,139 | 5,994 | – | 32,133 | |
| (Decrease)/increase in fair value of assets classified as held for sale | – | (113) | 30 | – | (83) | |
| Increase in fair value of overages | – | 586 | – | – | 586 | |
| Profit on sale of investment properties | – | 216 | 2,703 | – | 2,919 | |
| Profit on sale of assets classified as held for sale | – | 96 | 7 | – | 103 | |
| – | 26,924 | 8,734 | – | 35,658 |
| Capital Growth |
Income Generation |
Central Overheads |
Total | ||
|---|---|---|---|---|---|
| Note | £'000 | £'000 | £'000 | £'000 | |
| Non-current assets | |||||
| Property, plant and equipment | 13 | – | – | 802 | 802 |
| Investment properties | 15 | 43,132 | 173,428 | – | 216,560 |
| Investments in joint ventures | 16 | 1,042 | 17,796 | – | 18,838 |
| Trade receivables | 18 | 5,250 | – | – | 5,250 |
| Other receivables | 14 | 2,666 | – | – | 2,666 |
| 52,090 | 191,224 | 802 | 244,116 | ||
| Current assets | |||||
| Inventories | 17 | 211,535 | 83 | – | 211,618 |
| Trade and other receivables | 18 | 16,516 | 6,762 | 1,887 | 25,165 |
| Assets classified as held for sale | 19 | 2,782 | 4,906 | – | 7,688 |
| Cash | – | – | 8,371 | 8,371 | |
| 230,833 | 11,751 | 10,258 | 252,842 | ||
| Total assets | 282,923 | 202,975 | 11,060 | 496,958 |
Financial liabilities and derivative financial instruments are not allocated to the reporting segments as they are managed and measured on a Group basis.
| Note | Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
|---|---|---|---|
| Operating profit before tax is stated after charging: | |||
| Net realisable value provision on development properties | 17 | 1,736 | 5,818 |
| Staff costs | 6 | 7,846 | 7,849 |
| Depreciation of property, plant and equipment | 13 | 9 | 8 |
| Year ended 31 December |
31 December | |
|---|---|---|
| 2018 | 2017 | |
| £'000 | £'000 | |
| Exceptional income: | ||
| Settlements from the administration of legacy companies | – | 414 |
| Total exceptional income | – | 414 |
| Exceptional expense: | ||
| Sundry costs relating to legacy activities | – | (83) |
| Costs associated with the step-up from standard to premium listing | (590) | – |
| Total exceptional expense | (590) | (83) |
| Net exceptional items | (590) | 331 |
The monthly average number of persons (including Executive Directors) employed by the Group during the year was:
| Group | Company | |||
|---|---|---|---|---|
| Year ended 31 December 2018 Number |
Year ended 31 December 2017 Number |
Year ended 31 December 2018 Number |
Year ended 31 December 2017 Number |
|
| Administration | 58 | 53 | 3 | 4 |
| Total | 58 | 53 | 3 | 4 |
Remuneration details of these persons was as follows:
| Group | Company | |||
|---|---|---|---|---|
| Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
| Wages and salaries | 6,934 | 6,650 | 2,198 | 2,749 |
| Social security costs | 544 | 884 | 143 | 379 |
| Other pension costs | 368 | 315 | 53 | 61 |
| 7,846 | 7,849 | 2,394 | 3,189 |
Key management are Statutory Directors of the Company and its subsidiaries. Remuneration details for key management of the Group (including Directors' remuneration) is detailed below:
| Group | ||
|---|---|---|
| Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
| Short term employee benefits | 5,086 | 4,361 |
| Post employment benefits | – | 120 |
| 5,086 | 4,481 |
Detailed information relating to Directors' remuneration is disclosed in the Directors' remuneration report on pages 100 to 119 and forms part of these financial statements.
| Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|---|---|
| Total finance income 51 |
16 |
| Finance costs | |
| – Bank interest (1,888) |
(994) |
| – Facility fees (1,507) |
(807) |
| – Other interest (618) |
(476) |
| Total finance costs (4,013) |
(2,277) |
| Net finance costs (3,962) |
(2,261) |
During the year no interest has been capitalised in investment or development properties (2017: £nil).
During the year the Group obtained the following services from its auditors, PwC, at costs as detailed below:
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| Audit services | ||
| Fees payable to the Company auditors and its associates for the audit of the Company and the consolidated financial statements |
50 | 40 |
| Fees payable to the Company auditors and its associates for other services: | ||
| – The audit of the Company's subsidiaries pursuant to legislation | 121 | 111 |
| – Audit related assurance services | 16 | 15 |
| – The audit of the Group's joint ventures | 15 | 8 |
| – Tax advisory services | – | 7 |
| – Tax compliance services | – | 6 |
| – Fees relating to transaction* | 331 | – |
| 533 | 187 | |
* This includes the work undertaken by PwC to support the Company's application to transfer its shares from the standard segment to the premium segment of the Official List.
From time to time, the Group employs PwC on assignments additional to their statutory audit duties where their expertise and experience with the Group are important. They are awarded assignments on a competitive basis. The Audit Committee reviews non-audit assignments quarterly and pre-approves all non-audit services above a predetermined trivial cost threshold.
for the year ended 31 December 2018: continued
| Year ended | Year ended | |
|---|---|---|
| 31 December 2018 |
31 December 2017 |
|
| Analysis of tax credit in the year | £'000 | £'000 |
| Current tax | ||
| Current year | (922) | (1,874) |
| Adjustment in respect of prior periods | 1,804 | 336 |
| Total current tax credit/(charge) | 882 | (1,538) |
| Deferred tax | ||
| Current year | 49 | 15,036 |
| Adjustment in respect of prior periods | 366 | (3,898) |
| Effect of changes in tax rates | (3) | (1,757) |
| Total deferred tax credit | 412 | 9,381 |
| Tax credit | 1,294 | 7,843 |
| Year ended | Year ended | |
| 31 December | 31 December | |
| Other comprehensive income items | 2018 £'000 |
2017 £'000 |
| Deferred tax – current year | (1) | (51) |
| Total | (1) | (51) |
| The tax for the year is lower than the standard rate of corporation tax in the UK of 19.00% | ||
| (2017: 19.25%). The differences are explained below: | Year ended 31 December |
Year ended 31 December |
| 2018 | 2017 | |
| £'000 | £'000 | |
| Profit before tax | 32,808 | 41,840 |
| Profit before tax multiplied by rate of corporation tax in the UK of 19.00% (2017: 19.25%) | (6,234) | (8,054) |
| Effects of: | ||
| Adjustment in respect of prior periods – deferred taxation | 366 | (3,898) |
| Adjustment in respect of prior periods – current taxation | 1,804 | 336 |
| Non-taxable income | 828 | 841 |
| Expenses not deducted for tax purposes | (471) | (1,395) |
| Revaluation gains | 2,404 | – |
| Changes in tax rates | (3) | (1,757) |
| Re-assessment of recognition of recoverability of deferred tax assets | – | 6,600 |
| Deferred tax not recognised | (80) | – |
| Utilisation of unrecognised deferred tax | – | 15,170 |
| Losses not previously recognised | 2,432 | – |
| Share options | 248 | – |
| Total tax credit | 1,294 | 7,843 |
The revaluation gains in the tax reconciliation of £2.4m (2017: £nil) relate to deferred tax recognised on chargeable gains of investment property.
The tax losses, not previously recognised of £2.4m (2017: £nil), have been recognised during the year, as a result of increased certainty regarding their availability to the Group.
The movement within the tax reconciliation of £nil (2017: £15.2m) relating to the utilisation of unrecognised deferred tax was a result of the crystallisation of a number of gains in respect of investment property due to the disposal or transfer of these properties to development property (held in inventory). The gains on which deferred tax liabilities were recognised and were crystallised in 2017 were offset against previously unrecognised tax losses.
The tax losses remaining at the end of 2017 have largely been recognised as a result of the execution of a contract that related to increased certainty that the losses would not be lost. As such these losses have been recognised in the year to reflect an increased deferred tax asset carried forward. This gave rise to the £6.6m disclosed in the tax reconciliation in 2017.
As part of the filing of the prior year tax computations and returns, tax attributes were utilised to shelter chargeable gains arising on the disposal of properties and the transfer of properties held for sale. This gave rise to a current tax credit of £1.8m (2017: £0.3m) and a deferred tax credit of £0.4m (2017: deferred tax charge of £3.9m) compared to the original tax provision prepared for inclusion within the prior year financial statements.
The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated Balance Sheet:
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| Deferred tax liabilities | (12,312) | (13,067) |
| Deferred tax assets | 7,348 | 7,546 |
| (4,964) | (5,521) |
The movement on the deferred income tax account is as follows:
| Investment properties |
Tax losses |
Other temporary differences |
Total | |
|---|---|---|---|---|
| £'000 n |
£'000 | £'000 | £'000 | |
| At 1 January 2017 | (23,352) | 8,427 | 74 | (14,851) |
| Recognised in consolidated income statement | 10,353 | (2,522) | 1,550 | 9,381 |
| Recognised in consolidated statement of comprehensive income | (68) | – | 17 | (51) |
| At 31 December 2017 and 1 January 2018 | n (13,067) |
5,905 | 1,641 | (5,521) |
| Recognised in consolidated income statement | 1,276 | 52 | (916) | 412 |
| Recognised in consolidated statement of comprehensive income | – | – | (1) | (1) |
| Recognised in consolidated statement of equity | – | – | 146 | 146 |
| At 31 December 2018 | n (11,791) |
5,957 | 870 | (4,964) |
There are UK corporation tax losses carried forward of £6.0m (2017: £5.9m); these may be carried forward indefinitely as there is no time limit in respect of using these deferred tax assets.
Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17% (2017: 17%). A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020), was enacted as part of the Finance Act 2015. The deferred tax liabilities are shown at 17% (2017: 17%) being the rate expected to apply to the reversal of the liability.
Deferred tax assets and liabilities are offset when there is a legally enforced right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same fiscal authority.
Deferred tax assets of £5.5m at 31 December 2018 have not been recognised owing to the uncertainty as to their recoverability. Deferred tax assets of £6.1m were not recognised at 31 December 2017.
The Company has recognised a deferred tax asset in 2018 of £1.9m (2017: £0.3m) and has a potential deferred tax asset of £nil (2017: £nil) in respect of unused tax losses.
As permitted by section 408 of the Companies Act 2006, the Company's income statement and statement of comprehensive income have not been included separately in these financial statements. The loss for the financial year was £1.4m (2017: £5.8m) and the total comprehensive expense for the financial year was £1.4m (2017: £5.8m).
| 2018 | 2017 | |||
|---|---|---|---|---|
| Per share pence |
Total £'000 |
Per share pence |
Total £'000 |
|
| Full year dividend for financial year ended 31 December 2017 | 0.58 | 1,847 | – | – |
| Interim dividend for the six months ended 30 June 2018 | 0.28 | 893 | – | – |
| Full year dividend for financial year ended 31 December 2016 | – | – | 0.52 | 1,680 |
| Interim dividend for the six months ended 30 June 2017 | – | – | 0.25 | 812 |
| 2,740 | 2,492 |
The proposed final dividend for the year ended 31 December 2018 of 0.63 pence per share makes a total dividend for the year of 0.91 pence (2017: 0.83 pence).
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
Earnings per share has been calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of shares in issue and ranking for dividend during the year. The weighted average number of shares for 31 December 2017 includes the adjustments necessary to reflect the new shares issued on 17 March 2017 (see note 27).
| Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|
|---|---|---|
| Profit from continuing operations attributable to owners of the parent | 34,102 | 49,683 |
| Weighted average number of shares used for basic earnings per share calculation | 321,284,013 | 315,296,192 |
| Basic earnings per share (pence) | 10.6 | 15.8 |
| Weighed average number of shares used for diluted earnings per share calculation | 323,754,853 | 316,918,340 |
| Diluted earnings per share (pence) | 10.5 | 15.7 |
The difference between the weighted average number of shares used for the basic and diluted earnings per share calculation is the effect of share options of 2,470,840 (2017: 1,622,148).
| Group | Land and Buildings £'000 |
Office equipment £'000 |
Total £'000 |
|---|---|---|---|
| Net book value at 1 January 2017 | 766 | 23 | 789 |
| Additions at cost | 9 | – | 9 |
| Increase in fair value | 12 | – | 12 |
| Depreciation charge | – | (8) | (8) |
| Net book value at 31 December 2017 and 1 January 2018 | 787 | 15 | 802 |
| Additions at cost | – | 1 | 1 |
| Depreciation charge | – | (9) | (9) |
| Net book value at 31 December 2018 | 787 | 7 | 794 |
| At 31 December 2018 | |||
| Cost or fair value | 787 | 26 | 813 |
| Accumulated depreciation | – | (19) | (19) |
| Net book value | 787 | 7 | 794 |
| At 31 December 2017 | |||
| Cost or fair value | 787 | 25 | 812 |
| Accumulated depreciation | – | (10) | (10) |
At 31 December 2018, the Group had entered into contractual commitments for the acquisitions of property, plant and equipment amounting to £0.1m (2017: £nil).
Net book value 787 15 802
Information about the valuation of land and buildings is provided in note 15.
| Year ended | Year ended |
|---|---|
| 31 December | 31 December |
| 2018 | 2017 |
| £'000 | £'000 |
| Other receivables – |
2,666 |
Investment property at 31 December 2018 and 31 December 2017 has been measured at fair value. The Group holds five categories of investment property being agricultural land, natural resources, business space, major developments and strategic land in the UK, which sit within the operating segments of Income Generation and Capital Growth.
| Income Generation | Capital Growth | |||||
|---|---|---|---|---|---|---|
| Agricultural land £'000 |
Natural resources £'000 |
Business space £'000 |
Major developments £'000 |
Strategic land £'000 |
Total £'000 |
|
| At 1 January 2017 | 20,106 | 29,489 | 96,709 | 215,650 | 17,236 | 379,190 |
| Transfers between divisions | – | 277 | 11,686 | 4,137 | (16,100) | – |
| Direct acquisitions | – | – | 5,536 | 15,281 | 5,198 | 26,015 |
| Subsequent expenditure | 1,684 | 1,154 | 8,960 | 13,100 | 4,261 | 29,159 |
| Increase in fair value | 3,660 | 1,438 | 896 | 13,072 | 13,067 | 32,133 |
| Net transfer to assets classified as held for sale | (1,160) | (276) | (3,500) | (8,492) | (350) | (13,778) |
| Re-categorisation as other receivables | – | – | – | (666) | – | (666) |
| Re-categorisation as development property in inventories |
– | – | – | (229,118) | – | (229,118) |
| Disposals | (1,963) | (782) | (486) | (2,964) | (180) | (6,375) |
| At 31 December 2017 | 22,327 | 31,300 | 119,801 | 20,000 | 23,132 | 216,560 |
| Direct acquisitions | – | – | 43,651 | – | 10,771 | 54,422 |
| Subsequent expenditure | – | 2,014 | 5,365 | 73 | 2,244 | 9,696 |
| Disposals | – | (1,429) | – | (19,336) | (120) | (20,885) |
| (Decrease)/increase in fair value | (308) | 8,713 | 3,219 | 3,001 | 6,858 | 21,483 |
| Net transfers between divisions | (1,401) | 5,533 | (12,528) | 6,159 | 2,237 | – |
| Re-categorisation as development properties | 220 | 182 | (1,384) | (8) | – | (990) |
| Net transfer (to)/from assets classified as held for sale |
(9,096) | (834) | (15,955) | – | 8 | (25,877) |
| At 31 December 2018 | 11,742 | 45,479 | 142,169 | 9,889 | 45,130 | 254,409 |
Included within investment properties (agricultural land) is a provision of £3.2m (2017: £3.2m) relating to the restoration liability on sites formerly rented to mining tenants. This provision is treated as a reduction of the individual property valuations.
During the year £1.0m net (2017: £229.1m) of investment property was re-categorised to development properties. Properties that have obtained planning permission and are being taken forward for development are now held in inventory. Until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should thus be held as investment property.
Investment property is transferred between divisions to reflect a change in the activity arising from the asset.
The properties were valued in accordance with the Royal Institution of Chartered Surveyors (RICS) Valuation – Professional Standards (the 'Red Book') by BNP Paribas Real Estate and Savills. Both are independent firms acting in the capacity of external valuers with relevant experience of valuations of this nature. The valuations are on the basis of Market Value as defined by the Red Book, which RICS considers meets the criteria for assessing Fair Value under International Financial Reporting Standards. The valuations are based on what is determined to be the highest and best use. When considering the highest and best use a valuer will consider, on a property by property basis, its actual and potential uses which are physically, legally and financially viable. Where the highest and best use differs from the existing use, the valuer will consider the cost and the likelihood of achieving and implementing this change in arriving at its valuation. Most of the Group's properties have been valued on the basis of their development potential which differs from their existing use.
At each financial year end, management:
The different valuation levels are defined as:
Level 1: valuation based on quoted market prices traded in active markets.
Level 2: valuation based on inputs other than quoted prices included within Level 1 that maximise the use of observable data either directly or from market prices or indirectly derived from market prices.
Level 3: where one or more inputs to valuation are not based on observable market data.
The Directors determine the applicable hierarchy that each investment property falls into by assessing the level of unobservable inputs used in the valuation technique. As a result of the specific nature of each investment property, valuation inputs are not based on directly observable market data and therefore all investment properties were determined to fall into Level 3.
The Group's policy is to recognise transfers into and out of fair value hierarchy levels as at the date of the event or change in circumstance that caused the transfer. There were no transfers between hierarchy levels in the year ended 31 December 2018 (2017: none).
Valuation techniques underlying management's estimation of fair value are as follows:
Most of the agricultural land is valued using the market comparison basis, with an adjustment made for the length of the remaining term on the tenancy and the estimated cost to bring the land to its highest and best use. Where the asset is subject to a secure letting, this is valued on a yield basis, based upon sales of similar types of investment.
Natural resource sites in the portfolio are valued based on a discounted cash flow for the operating life of the asset.
The business parks and individual business space properties are valued on the basis of market comparison with direct reference to observable market evidence including rental values, yields and capital values and adjusted where required for the estimated cost to bring the property to its highest and best use. The evidence is adjusted to reflect the quality of the property assets, the quality of the covenant profile of the tenants and the reliability/volatility of cash flows.
Major development sites are generally valued using residual development appraisals, a form of discounted cash flow which estimates the current site value from future cash flows measured by observable current land and/or completed built development values, observable or estimated development costs, and observable or estimated development returns.
Where possible development sites are valued by direct comparison to observable market evidence with appropriate adjustment for the quality and location of the property asset, although this is generally only a reliable method of measurement for the smaller development sites.
Strategic land is valued on the basis of discounted cash flows, with future cash flows measured by current land values adjusted to reflect the quality of the development opportunity, the potential development costs estimated by reference to observable development costs on comparable sites, and the likelihood of securing planning consent. The valuations are then benchmarked against observable land values reflecting the current existing use of the land, which is generally agricultural and, where available, observable strategic land values.
The discounted cash flows across the different property categories utilise Value per acre, which takes account of the future expectations of sales over time discounted back to a current value, and Cost report totals, which take account of the cost, as at today's value, to complete remediation and provide the necessary site infrastructure to bring the site forward.
| At 31 December 2018 | Agricultural land |
Natural resources |
Business space |
Major developments |
Strategic land |
|
|---|---|---|---|---|---|---|
| Reversionary rental yield % | weighted average | – | – | 9.76 | – | – |
| low | – | – | 4.84 | – | – | |
| high | – | – | 14.16 | – | – | |
| Land value per acre £'000 | weighted average | 3 | 25 | 346 | 218 | 33 |
| low | 1 | 4 | 117 | 213 | 2 | |
| high | 155 | 239 | 2,811 | 220 | 326 | |
| Cost report totals* | £'000 | – | 15,000 | – | 8,282 | 167,637 |
| At 31 December 2017 | Agricultural land |
Natural resources |
Business space |
Major developments |
land | |
| Reversionary rental yield % | weighted average | – | – | 9.66 | – | – |
| low | – | – | 4.86 | – | Strategic – |
|
| high | – | – | 16.86 | – | – | |
| Land value per acre £'000 | weighted average | 4 | 6 | 95 | 196 | 10 |
| low | 1 | 1 | 26 | 196 | 1 | |
| high | 32 | 115 | 2,360 | 196 | 449 |
* Cost report totals represent the estimated cost to bring investment properties to their highest and best use. There is £205.5m (2017: £184.3m) of cost report totals that now relate to development properties (shown in inventories at deemed cost) and therefore are not disclosed in this note.
The table below shows some possible sensitivities to the key valuation metrics and the resultant changes to the valuations.
| Valuation metric | +/– change | +/– effect on valuation | ||||
|---|---|---|---|---|---|---|
| Agricultural land |
Natural resources |
Business space |
Major developments |
Strategic land |
||
| Value per acre | 5% | 587 | 2,274 | 7,108 | 494 | 2,257 |
| Rental | 5% | – | – | 6,540 | – | – |
| Yield (e.g. 11% to 10%) | 1% | – | – | 17,099 | – | – |
| Cost report totals | 5% | – | 750 | – | 414 | 8,382 |
| Valuation metric | +/– change | +/– effect on valuation | ||||
|---|---|---|---|---|---|---|
| Agricultural land |
Natural resources |
Business space |
Major developments |
Strategic land |
||
| Value per acre | 5% | 1,116 | 1,565 | 5,990 | 1,000 | 1,156 |
| Rental | 5% | – | – | 4,872 | – | – |
| Yield (e.g. 11% to 10%) | 1% | – | – | 12,564 | – | – |
| Cost report totals | 5% | – | – | 597 | 424 | 158 |
The property rental income earned by the Group from its occupied investment property, all of which is leased out under operating leases amounted to £12.2m (2017: £9.1m). Direct operating expenses arising on investment property generating rental income in the year amounted to £4.9m (2017: £3.5m).
The bank and other loans are secured by way of fixed equitable charges over investment and development properties.
Investment in subsidiaries
| Company | Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|---|---|---|
| Cost and net book amount: | ||
| At 1 January | 207,896 | 207,896 |
| Grant of equity instruments to employees of subsidiaries | 504 | – |
| At 31 December | 208,400 | 207,896 |
Investments in subsidiaries are stated at cost less provision for impairment. As permitted by section 616 of the Companies Act 2006, where the relief afforded under section 612 of the Companies Act 2006 applies, cost is the aggregate of the nominal value of the relevant number of the Company's shares and the fair value of any other consideration given to acquire the share capital of the subsidiary undertakings.
| Year ended 31 December 2018 £'000 |
Year ended 31 December 2017 £'000 |
|---|---|
| At 1 January 18,838 |
10,549 |
| Investment in joint ventures 3,201 |
4,250 |
| Share of profit of joint ventures 3,791 |
4,039 |
| At 31 December 25,830 |
18,838 |
The Group holds investments in the following joint ventures:
The details of ownership of these joint ventures is disclosed on page 162.
The Group received £nil (2017: £nil) of dividends from these joint ventures during the year.
Summarised financial information in respect of each of the Group's material joint ventures is set out below:
| The Aire Valley Land LLP | Multiply Logistics North LP | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Investment property | 16,000 | 14,500 | 9,992 | 4,047 |
| Current assets | 1,124 | 685 | 174 | 419 |
| Total assets | 17,124 | 15,185 | 10,166 | 4,466 |
| Current liabilities | (1,857) | (1,796) | (70) | (59) |
| Non-current liabilities | – | – | (620) | – |
| Net investment | 15,267 | 13,389 | 9,476 | 4,407 |
| Share of profits after tax | 1,879 | 3,708 | 1,917 | 305 |
Aggregate information of the Group's share of assets, liabilities and results of joint ventures, that are not individually material are:
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
|---|---|---|
| Investment property | 252 | 193 |
| Current assets | 846 | 1,492 |
| Total assets | 1,098 | 1,685 |
| Current liabilities | (11) | (643) |
| Net investment | 1,087 | 1,042 |
| Share of (losses)/profits after tax | (5) | 26 |
The risks associated with these investments are as follows:
• Decline in the availability, and/or an increase in the cost, of credit for residential and commercial buyers; and
• Decline in market conditions and values.
Particulars of the Group undertakings (including joint ventures) at 31 December 2018 are as follows:
| Description of shares |
Proportion of nominal value of issued share capital held by the Company |
||
|---|---|---|---|
| Company name | Activity | held | % |
| Coalfield Estates Limited (1) | Non-trading | Ordinary | 100 |
| Harworth Guarantee Co. Limited (1) | Non-trading | Limited by guarantee | 100 |
| Harworth Trustees Limited (1) | Dormant | Ordinary | 100 |
| Harworth Secretariat Services Limited (1) | Non-trading | Ordinary | 100 |
| Harworth Estates Property Group Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates Group Limited (1) | Non-trading | Ordinary | 100 |
| Harworth No. 3 Limited (1) | Non-trading | Ordinary | 100 |
| Harworth Services Limited (1) | Non-trading | Ordinary | 100 |
| Harworth Estates Limited (1) | Trading | Ordinary | 100 |
| Bates Regeneration Limited (2) | Trading | Ordinary | 50 |
| EOS Inc Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates (Agricultural Land) Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates (Waverley Prince) Limited (1) | Trading | Ordinary | 100 |
| Waverley Community Management Company Limited (1) | Trading | Limited by guarantee | 100 |
| Harworth Estates Curtilage Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates Investments Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates Mines Property Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates No 2 Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates Overage Limited (1) | Trading | Ordinary | 100 |
| Harworth Estates Warwickshire Limited (1) | Trading | Ordinary | 100 |
| Harworth TRR Limited (1) | Trading | Ordinary | 100 |
| Logistics North MC Limited (1) | Trading | Ordinary | 12.18 |
| POW Management Company Limited (1) | Trading | Limited by guarantee | 100 |
| Rossington Community Management Company Limited (1) | Trading | Limited by guarantee | 100 |
| Harworth Regeneration Limited (1) | Dormant | Ordinary | 100 |
| Mapplewell Management Company Limited (1) | Trading | Limited by guarantee | 100 |
| Gateway 45 No.1 Limited (1) | Dormant | Ordinary | 50 |
| The Aire Valley Land LLP (1) | Trading | Partnership | 50 |
| Flass Lane Management Company Limited (1) | Trading | Limited by guarantee | 100 |
| Harworth Surface Water Management (North West) Limited (1) | Trading | Ordinary | 100 |
| Multiply Logistics North Holdings Limited (1) | Trading | Ordinary | 20 |
| Multiply Logistics North LP (1) | Trading | Partnership | 20 |
| Waverley Square Limited (3) | Trading | Ordinary | 50 |
| Simpson Park Management Company Limited (1) | Dormant | Limited by guarantee | 100 |
All of the above companies are incorporated in England and Wales.
Notes
(1) Registered office at Advantage House, Poplar Way, Rotherham, South Yorkshire, S60 5TR. (2) Registered office at Inkerman House, St. Johns Road, Meadowfield, Durham, County Durham, DH7 8XL.
(3) Registered office at Dransfield House, 2 Fox Valley Way, Fox Valley, Sheffield, S36 2AB.
The following entities were incorporated post year end:
| Group | ||
|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Development properties | 204,157 | 210,471 |
| Planning promotion agreements | 1,773 | 1,064 |
| Option agreements | 705 | – |
| Finished goods | 374 | 83 |
| Total inventories | 207,009 | 211,618 |
The total cost of inventory recognised as an expense within cost of sales in the year is £42.6m (2017: £28.1m) comprised of: £41.4m (2017: £22.1m) relating to the sale of development properties; £1.7m (2017: £5.8m) net realisable value provision against development properties; and a credit of £0.3m (2017: £0.2m charge) relating to finished goods stocks. Finished goods are stated after a provision of £0.3m (2017: £0.3m).
The movement in the development properties is as follows:
| Group | |||
|---|---|---|---|
| Note | As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| At 1 January | 210,471 | – | |
| Acquisitions | 3,451 | – | |
| Subsequent expenditure | 23,320 | 2,424 | |
| Disposals | (32,339) | (15,253) | |
| Net realisable value provision | (1,736) | (5,818) | |
| Re-categorisation from investment properties | 15 | 990 | 229,118 |
| At 31 December | 204,157 | 210,471 |
The movement in the net realisable value provision on development properties is as follows:
| Group | |||
|---|---|---|---|
| As at | As at | ||
| 31 December | 31 December | ||
| 2018 | 2017 | ||
| £'000 | £'000 | ||
| At 1 January | 5,818 | – | |
| Net realisable value provision for the year | 4,767 | 5,818 | |
| Released on disposals | (124) | – | |
| Reversal of previous net realisable provision | (2,907) | – | |
| At 31 December | 7,554 | 5,818 |
The bank and other loans are secured by fixed equitable charges over development and investment properties. A transfer from the fair value reserve to retained earnings of £4.7m (2017: £5.8m) was undertaken as the development property requiring the net realisable provision stated above had, when previously classified as investment property, a revaluation gain in excess of this balance.
| Group | Company | |||
|---|---|---|---|---|
| Current | As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
| Trade receivables | 43,004 | 7,941 | – | – |
| Less: provision for impairment of trade receivables | (142) | (207) | – | – |
| Net trade receivables | 42,862 | 7,734 | – | – |
| Other receivables | 21,492 | 16,030 | 62 | 284 |
| Prepayments and accrued income | 2,345 | 1,401 | 93 | – |
| Amounts owed by subsidiary undertakings (note 31) | – | – | 30,064 | 32,984 |
| 66,699 | 25,165 | 30,219 | 33,268 | |
| Non-current | ||||
|---|---|---|---|---|
| Trade receivables | – | 5,250 | – | – |
The carrying amount of trade and other receivables approximate to their fair value due to the short time frame over which the assets are realised. All of the Group's and Company's receivables are denominated in sterling.
Included within trade receivables are £19.2m (2017: £12.2m) of deferred consideration on the sale of investment and development property.
The non-current trade receivable of £5.3m in 2017 related to deferred consideration on the sale of a development property due in more than one year.
Included within other receivables are £12.7m (2017: £9.6m) of cash held in accounts over which third party infrastructure loan providers have a charge.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables as disclosed in note 23. The Group and Company do not hold any collateral as security.
The amounts owed to the Company by subsidiary undertakings are repayable on demand. Interest is payable at LIBOR +2%.
Movements on the Group provisions for impairment of trade receivables are as follows:
| Group | ||
|---|---|---|
| 2018 £'000 |
2017 £'000 |
|
| At the beginning of the year | (207) | (221) |
| Receivables written off during the year as uncollectable | 39 | 10 |
| Released in the year | 26 | 4 |
| At the end of the year | (142) | (207) |
Trade receivables can be analysed as follows:
| Group | |||
|---|---|---|---|
| As at | As at | ||
| 31 December | 31 December | ||
| 2018 | 2017 | ||
| £'000 | £'000 | ||
| Amounts receivable not past due | 42,492 | 11,943 | |
| Amounts receivable past due but not impaired | 370 | 1,041 | |
| Amounts receivable impaired (gross) | 142 | 207 | |
| Less impairment | (142) | (207) | |
| 42,862 | 12,984 |
Ageing of past due but not impaired trade receivables:
| Group | ||
|---|---|---|
| As at | As at | |
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| 31 – 60 days | 79 | 824 |
| 61 – 90 days | 117 | 193 |
| 91 – 120 days | 43 | 24 |
| 120+ days | 131 | – |
| 370 | 1,041 |
| Group | ||
|---|---|---|
| As at | As at | |
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| 31 – 60 days | – | – |
| 61 – 90 days | – | 7 |
| 91 – 120 days | 142 | 200 |
| 142 | 207 |
| Note | Group | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|||
| Investment properties | ||||
| At 1 January | 7,688 | 8,350 | ||
| Net transfer from investment properties | 15 | 25,877 | 13,778 | |
| Subsequent expenditure | 6 | 159 | ||
| Decrease in fair value | – | (83) | ||
| Disposals | (22,615) | (14,516) | ||
| At 31 December | 10,956 | 7,688 |
The assets classified for sale at each year end relate to investment properties expected to be sold within twelve months.
| Group | Company | |||
|---|---|---|---|---|
| As at | As at | As at | As at 31 December |
|
| 31 December | 31 December | 31 December | ||
| 2018 | 2017 | 2018 | 2017 | |
| £'000 | £'000 | £'000 | £'000 | |
| Cash | 8,595 | 8,371 | 1,116 | 1,267 |
| Group | ||
|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Current: | ||
| Secured – other loans | (5,291) | (6,145) |
| (5,291) | (6,145) | |
| Non-current: | ||
| Secured – bank loans | (58,745) | (23,437) |
| Secured – other loans | (9,002) | (11,064) |
| (67,747) | (34,501) | |
| Total borrowings | (73,038) | (40,646) |
for the year ended 31 December 2018: continued
| 21. Borrowings: continued |
Group | ||
|---|---|---|---|
| As at 31 December 2018 |
As at 31 December 2017 |
||
| Net loan £'000 |
Net loan £'000 |
||
| Infrastructure loans | |||
| Sheffield City Region JESSICA Fund | Gateway 36/Rockingham | – | (2,353) |
| Homes and Communities Agency | Village Farm | – | (141) |
| Leeds LEP | Prince of Wales | – | (396) |
| Homes and Communities Agency | Waverley | (4,875) | (7,205) |
| Sheffield City Region JESSICA Fund | Advanced Manufacturing Park, Waverley | (2,766) | (5,108) |
| North West Evergreen Limited Partnership | Units C4 and C5 R-evolution at Logistics North | (2,691) | (2,006) |
| Homes and Communities Agency | Simpson Park | (3,961) | – |
| (14,293) | (17,209) | ||
| Bank borrowings | |||
| Revolving credit facility | (58,745) | (23,437) | |
| (73,038) | (40,646) |
The infrastructure loans are provided by public bodies in order to promote the development of major sites. These loans are secured by way of fixed equitable charges over certain assets of the Group. These loans have all-in funding rates of between 3.2% and 4.0%. The bank borrowings are part of a £100m (2017: £75.0m) revolving credit facility from National Westminster Bank PLC and Santander. The term of the facility was extended for two years on 13 February 2018 and is now repayable on 13 February 2023 (five year term). The facility was also increased from £75m to £100m on 30 April 2018, when Santander joined the facility.
The facility is non-amortising and subject to financial and other covenants. The interest rate on the RCF is ICE Libor Rate plus 2.1% These loans are stated after the deduction of unamortised borrowing costs of £0.4m (2017: £0.8m).
| Group | Company | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Trade payables | 2,318 | 2,668 | 100 | 6 |
| Amounts owed to subsidiary undertakings (note 31) | – | – | 4,737 | 53 |
| Taxation and social security | 9,740 | 2,294 | – | 45 |
| Other creditors | 4,160 | 3,196 | 3 | 18 |
| Accruals and deferred income | 36,337 | 30,339 | 662 | 3,414 |
| 52,555 | 38,497 | 5,502 | 3,536 |
| Group | Company | |||
|---|---|---|---|---|
| As at | As at | As at | As at | |
| 31 December | 31 December | 31 December | 31 December | |
| 2018 2017 |
2018 | 2017 | ||
| £'000 | £'000 | £'000 | £'000 | |
| Amounts in accruals include amounts relating to parcels of land that have been sold | 15,753 | 17,200 | – | – |
| but where infrastructure costs are yet to be incurred |
| Group | Company | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Other liabilities | 300 | 760 | – | – |
| 300 | 760 | – | – |
Non-current liabilities relate to deferred payments due on land purchases.
On 20 July 2018, Harworth cancelled its existing £30m fixed rate interest swap with National Westminster Bank PLC which was due to expire on 30 June 2020 (incurring total break costs of £18.5k) and in its place entered into a 4-year, £45m fixed rate interest swap with Santander at an all-in cost of 1.235% (including fees) on top of the existing 210bps margin paid under the RCF. The interest rate swap is hedge accounted with any unrealised movements going through reserves.
The fair value of the interest rate swap at 31 December 2018 was a loss of £0.1m (2017: £0.1m).
During the year the following gain was recognised in the other comprehensive income statement in relation to the interest rate swap:
| 2018 £'000 |
2017 £'000 |
|
|---|---|---|
| Gain on interest rate swap - cash flow hedge | 13 | 244 |
The Group's principal financial instruments include trade and other receivables, cash, interest bearing borrowings and trade and other payables.
| 31 December 2018 | 31 December 2017 | ||||
|---|---|---|---|---|---|
| Group | Book value £'000 |
Fair value £'000 |
Book value £'000 |
Fair value £'000 |
|
| Assets | |||||
| Cash | 8,595 | 8,595 | 8,371 | 8,371 | |
| Trade and other receivables | 64,354 | 64,354 | 28,741 | 28,741 | |
| Liabilities | |||||
| Bank and other borrowings | 73,038 | 73,038 | 40,646 | 40,646 | |
| Trade and other payables | 43,115 | 43,115 | 34,612 | 34,612 | |
| 31 December 2018 | 31 December 2017 | ||||
| Company | Book value £'000 |
Fair value £'000 |
Book value £'000 |
Fair value £'000 |
|
| Assets | |||||
| Cash | 1,116 | 1,116 | 1,267 | 1,267 | |
| Trade and other receivables | 30,219 | 30,219 | 32,994 | 32,994 | |
| Liabilities | |||||
| Trade and other payables | 5,502 | 5,502 | 3,491 | 3,491 |
In accordance with IFRS 9, the Group classifies the assets and liabilities in the analysis above as 'loans and receivables' and 'other financial liabilities', respectively. At the 2018 and 2017 year ends, the Group did not have any 'held to maturity' or 'available for sale' financial assets or 'held for trading' financial assets and liabilities as defined by IAS 39.
The fair value of bank and other borrowings equals their carrying amount, as the impact of discounting is not significant. The fair values are within Level 2 of the fair value hierarchy.
The Group's overall risk management programme focuses on credit and liquidity risks to minimise potential adverse effects on the Group's financial performance.
Risk management is carried out centrally under policies approved by the Board of Directors. The Board discusses and agrees courses of action to cover material risk management areas, including credit risk and investment of excess liquidity.
The Group is subject to credit risk arising from outstanding receivables and committed cash and cash equivalents and deposits with banks and financial institutions. The Group's policy is to manage credit exposure to trading counterparties within defined trading limits.
The Group is exposed to counterparty credit risk on cash and cash equivalent balances. The Group and Company hold all of their cash deposits with their principal bankers.
The Group's interest rate risk arises from external borrowings. These are charged at LIBOR plus 2.1%. From 13 February 2018 the rate increased from 2.0% to 2.1%, following the two year extension to the facility. On 20 July 2018 the Group entered into a four-year swap with Santander to fix £45m (2017: £30m) of borrowing at an all in rate of 1.235% on top of the existing 210bps margin paid under the RCF (2017: 0.955% plus 200bps margin), including fees. The swap is hedge accounted with any unrealised movements going through reserves.
The Group also has four (2017: six) infrastructure loans with all in funding rates of between 3.2% and 4.0% (2017: 2.5% and 4.7%).
The Group is subject to the risk that it will not have sufficient liquid resources to fund its on-going business. The Group manages its liquidity requirements with the use of both short and long-term cash flow forecasts.
The Group had net debt at 31 December 2018 of £64.4m; (2017: £32.3m). The Group utilised cash from operating activities and investing activities for the year of £28.5m (2017: utilised £16.6m).
The table below analyses the Group's financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the gross contractual undiscounted cash flows.
| Less than 1 year £'000 |
Between 1 and 2 years £'000 |
Between 2 and 5 years £'000 |
|
|---|---|---|---|
| At 31 December 2018 | |||
| Trade and other payables | 52,555 | 100 | 200 |
| Bank and other borrowings (including interest payable) | 5,291 | 5,041 | 62,706 |
| At 31 December 2017 | |||
| Trade and other payables | 33,852 | 760 | – |
| Bank and other borrowings (including interest payable) | 6,145 | 5,158 | 29,343 |
The Group is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Group's objectives when managing capital are:
The Group manages and monitors its cash balances to ensure it has sufficient capital to manage and maintain its business activities. Cash balances are disclosed in note 20.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to Shareholders, return capital to Shareholders, issue new shares or sell assets to reduce debt.
The Group monitors capital on the basis of net debt to equity. Net debt is total debt less cash and at 31 December 2018 this was £64.4m (2017: £32.3m).
The Group has in place a £100m (2017: £75.0m) revolving credit facility from National Westminster Bank PLC and Santander. The facility is a five-year term facility which ends in February 2023 (after being extended for two years from 13 February 2018). It is on a non-amortising basis and is subject to financial and other covenants.
The facility provided by the banks is subject to covenants over loan to market value of investment and development properties, gearing, and minimum consolidated net worth.
The Group comfortably operated within these requirements throughout the year.
The Group pays defined contribution payments to pension insurance plans. Contributions to defined contribution schemes in the year amounted to £0.4m (2017: £0.3m). The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an expense when they are due.
The Group and Company has defined benefit obligations in respect of the Blenkinsopp Section of the Industry-Wide Mineworkers' Pension Scheme (the Blenkinsopp scheme). This scheme is closed to new members.
The Balance sheet amounts in respect of retirement benefit obligations are:
| Group | Company | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Relating to continuing activities Blenkinsopp |
462 | 563 | 462 | 563 |
Contributions to the Blenkinsopp scheme of £0.2m were made by the Group during 2018 (2017: £0.2m). It is expected that contributions of a similar amount will be paid in 2019. At December 2018, no contributions remained unpaid (2017: £nil).
The pension scheme is valued annually by a qualified independent actuary for the purposes of IAS 19 (revised) and the preparation of financial statements. The assumptions which usually have the most significant effect on the results of the valuation are the discount rate, which is based on bond yields, and the rates of increase in pensions. There are no active members of this scheme. The main assumptions underlying the valuation of the Blenkinsopp scheme were:
| As at 31 December 2018 |
As at 31 December 2017 |
|
|---|---|---|
| Discount rate | 2.80% p.a. | 2.50% p.a. |
| Rate of pension increases | 2.25% p.a. | 2.15% p.a. |
| Rate of price inflation (RPI) | 3.20% p.a. | 3.10% p.a. |
| Rate of price inflation (CPI) | 2.20% p.a. | 2.10% p.a. |
| Rate of cash commutation | 25.00% of | 25.00% of |
| pension at | pension at a | |
| a rate of | rate of | |
| £9:£1 | £9:£1 | |
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
|
| Life expectancy at age 65 for current pensioners (years) | ||
| Male | 19.5 | 19.6 |
| Female | 22.8 | 22.8 |
| Life expectancy at age 65 for future pensioners currently aged 45 (years) | ||
| Male | 21.0 | 21.1 |
| Female | 24.1 | 24.4 |
The assumed pension increases depend on the period of service accrual (before April 1997: no increases, after 1997: in line with statutory minimum increases based on consumer price inflation).
The amounts recognised in the Balance Sheet:
| 2018 £'000 |
2017 £'000 |
2016 £'000 |
2015 £'000 |
2014 £'000 |
|
|---|---|---|---|---|---|
| Fair value of plan assets | 2,249 | 2,228 | 2,117 | 1,727 | 1,740 |
| Present value of funding obligations | (2,711) | (2,791) | (2,719) | (2,162) | (2,304) |
| Net liability recognised in the Balance Sheet | (462) | (563) | (602) | (435) | (564) |
The Blenkinsopp scheme does not own any shares in the Company.
The amounts recognised in the Consolidated Income Statement are:
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| Expenses | (43) | (32) |
| Past service cost | (15) | – |
| Interest cost | (13) | (13) |
| (71) | (45) |
The past service cost of £15k relates to GMP Equalisation.
A further cost of £0.0m (2017: £0.1m) has been reflected in the Statement of Comprehensive Income in the year. This represents the net effect of experience and actuarial gains and losses on the scheme in the year.
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| Change in assets | £'000 | £'000 |
| Fair value of plan assets at the start of the year | 2,228 | 2,117 |
| Interest income | 57 | 55 |
| Actual return on scheme assets excluding interest income | (99) | (19) |
| Employer contributions | 189 | 189 |
| Expenses | (43) | (32) |
| Benefits paid | (83) | (82) |
| Fair value of plan assets at the end of the year | 2,249 | 2,228 |
Plan assets are comprised as follows:
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| £'000 | £'000 | |
| Gilts | 1,301 | 1,352 |
| Corporate bonds | – | 1 |
| Diversified and multi-asset growth funds | 183 | 543 |
| Sterling liquidity fund | 379 | 327 |
| Other | 386 | 5 |
| Total | 2,249 | 2,228 |
| Year ended | Year ended | |
|---|---|---|
| 31 December | 31 December | |
| 2018 | 2017 | |
| Change in defined benefit obligations | £'000 | £'000 |
| Present value of defined benefit obligations at the start of the year | (2,791) | (2,719) |
| Past service cost | (15) | – |
| Interest cost | (69) | (68) |
| Remeasurements: | ||
| – Gain/(loss) arising from changes in demographic assumptions | 20 | (117) |
| – Loss arising from changes in experience | (7) | (10) |
| – Gain arising from changes in financial assumptions | 68 | 41 |
| Benefits paid | 83 | 82 |
| Present value of defined benefit obligation at the end of the year | (2,711) | (2,791) |
| At the start of the year | (563) | (602) |
|---|---|---|
| Total amounts recognised in the Income Statement | (70) | (45) |
| Employer contributions Net actuarial loss recognised in the year |
189 (18) |
189 (105) |
| At the end of the year | (462) | (563) |
The maturity of the defined benefit obligation is c.18 years (2017: c.19 years).
| Remeasurements: | ||
|---|---|---|
| Actual return on scheme assets excluding interest income | (99) | (19) |
| Experience gains and losses | 2018 £'000 |
2017 £'000 |
| 31 December | 31 December | |
| Year ended | Year ended | |
| At the end of the year | (180) | (162) |
| Net actuarial loss in the year | (18) | (105) |
| At the start of the year | (162) | (57) |
| Cumulative actuarial gains and losses recognised in equity | £'000 | £'000 |
| 2018 | 2017 | |
| Year ended 31 December |
Year ended 31 December |
– Loss arising from changes in experience (7) (10)
– Gain/(loss) arising from changes in financial and demographic assumptions 88 (76)
Contributions are determined by a qualified actuary on the basis of a triennial valuation, using the projected credit unit method. The most recent valuation for the purpose of determining contributions was at 31 December 2015, which was agreed in September 2017. This showed an estimated past service deficit of £1.2m. The next valuation has yet to be finalised.
The sensitivity of the defined benefit obligations to changes in the weighted principal assumptions is:
| Year ended 31 December |
Year ended 31 December |
|
|---|---|---|
| 2018 £'000 |
2017 £'000 |
|
| Change in discount rate by 0.1% | 40 | 45 |
| Change in price inflation (and associated assumptions) by 0.1% | 35 | 40 |
| Increase in life expectancy by 1 year | 100 | 110 |
The above sensitivity analysis are based on a change in an assumption while holding all other assumptions constant. In practice some of the assumptions may be correlated. No changes have been made to the method and types of assumptions from those in the previous year.
The Scheme exposes the Group to actuarial risks such as: investment risk, interest rate risk and longevity risk.
At 31 December 2018 there were three classes of equity-settled share incentive plans outstanding:
Share options granted under the DSBP and LTIP are exercisable no later than the tenth anniversary of the grant date. Share options granted under the SAYE are exercisable for a six month period after the end of the three year savings period.
The movements in the number of share options outstanding and their weighted average exercise prices are as follows:
| Number of shares | Weighted average exercise price | |||
|---|---|---|---|---|
| DSBP | 2018 | 2017 | 2018 | 2017 |
| Outstanding at beginning of the year | 241,283 | – | £0.00 | £0.00 |
| Granted during the year | 185,283 | 241,283 | £0.00 | £0.00 |
| Forfeited during the year | – | – | n/a | n/a |
| Exercised during the year | (64,239) | – | £1.25 | n/a |
| Outstanding at end of the year | 362,327 | 241,283 | £0.00 | £0.00 |
| Exercisable at end of the year | – | – | n/a | n/a |
| Weighted average remaining contractual life | 8.78 years | 8.79 years |
| LTIP | Number of shares | Weighted average exercise price | ||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Outstanding at beginning of the year | 1,698,754 | 812,953 | £0.00 | n/a |
| Granted during the year | 826,691 | 885,801 | £0.00 | £0.00 |
| Forfeited during the year | (459,430) | – | n/a | n/a |
| Exercised during the year | – | – | n/a | n/a |
| Outstanding at end of the year | 2,066,015 | 1,698,754 | £0.00 | £0.00 |
| Exercisable at end of the year | – | – | n/a | n/a |
| Weighted average remaining contractual life | 8.31 years | 8.85 years |
| Number of shares | Weighted average exercise price | |||
|---|---|---|---|---|
| SAYE | 2018 | 2017 | 2018 | 2017 |
| Outstanding at beginning of the year | 383,881 | – | £0.00 | n/a |
| Granted during the year | 68,827 | 383,881 | £0.00 | £0.00 |
| Forfeited during the year | – | – | n/a | n/a |
| Exercised during the year | – | – | n/a | n/a |
| Outstanding at end of the year | 452,708 | 383,881 | £0.00 | £0.00 |
| Exercisable at end of the year | – | – | n/a | n/a |
| Weighted average remaining contractual life | 2.11 | 3.09 |
The fair values of the share options granted under the DSBP, LTIP (subject to the Total Return performance condition) and SAYE during the year were determined using Black-Scholes valuation methodology.
The fair values of the share options granted under the LTIP (subject to the Total Shareholder Return performance conditions) were determined using Monte Carlo valuation methodology, as this incorporates the probability of achieving the Total Shareholder Return performance conditions within the fair values at the grant date.
The significant inputs to the valuation models were as follows:
| DSBP | LTIP | SAYE | |
|---|---|---|---|
| Share price at date of grant | £1.090 | £1.090 | £1.105 |
| Exercise price | £0.00 | £0.00 | £0.876 |
| Dividend yield | 0.76% | 0.76% | 0.75% |
| Expected volatility | 23.4% | 23.4% | 23.6% |
| Risk free interest rate | 0.90% | 0.90% | 0.88% |
| Expected term | 3 years | 3 years | 3.35 years |
| Weighted average fair value | £1.07 | £0.78 | £0.28 |
The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome.
One of the DSBP Schemes vested in the year with a weighted average share price on exercise of £1.25 (2017: £nil).
The total charge for the year relating to employee share based payment plans was £1.2m, all of which related to equity-settled share based payment transactions.
On 17 March 2017, the Company issued 29,226,974 ordinary shares at 95 pence each, with a nominal value of 10 pence each.
| 2018 | 2017 | |||
|---|---|---|---|---|
| Group and Company | Number of shares |
£'000 | Number of shares |
£'000 |
| Issued and fully paid | ||||
| At 1 January | 321,496,760 | 32,150 | 292,269,786 | 29,227 |
| Shares issued | – | – | 29,226,974 | 2,923 |
| At 31 December | 321,496,760 | 32,150 | 321,496,760 | 32,150 |
| Own shares held | (181,771) | (194) | (246,010) | (263) |
| At 31 December 2017 | 321,314,989 | 31,956 | 321,250,750 | 31,887 |
The own shares represent the number and cost of shares purchased in the market and held by the Harworth Group plc Employee Benefit Trust to satisfy Long Term Incentive Plan awards for Executive Directors and Senior Executives.
The Directors' remuneration report which forms part of these financial statements provides details of all incentive plans.
| Year ended 31 December |
Year ended 31 December |
|
|---|---|---|
| Group and Company | 2018 £'000 |
2017 £'000 |
| At 1 January | 24,351 | – |
| Premium on shares issued | – | 24,842 |
| Costs relating to share issue | – | (700) |
| Other transaction costs | – | 209 |
| At 31 December | 24,351 | 24,351 |
Future spend required to bring our investment and development properties to their highest and best use is disclosed in note 15, and includes section 106 obligations. Capital commitments for the acquisition of property, plant and equipment are disclosed in note 13.
for the year ended 31 December 2018: continued
The Group leases a number of vehicles, office equipment and office facilities under operating leases. The leases run between one year and three years.
At 31 December 2018, the future minimum lease payments under non-cancellable leases were payable as follows:
| Group | Company | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Less than one year | 49 | 34 | – | – |
| Between one and five years | 6 | 17 | – | – |
| 55 | 51 | – | – | |
| Amounts recognised in the Income Statement | ||||
| Lease cost | 77 | 64 | – | – |
As set out in note 15 property rental income earned during the year was £12.2m (2017: £9.1m).
At 31 December 2018, the Group had contracted with tenants for the following future minimum lease payments:
| Group | Company | |||
|---|---|---|---|---|
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
|
| Less than one year | 11,587 | 8,342 | – | – |
| Between one and five years | 31,505 | 25,001 | – | – |
| More than five years | 98,899 | 34,814 | – | – |
| 141,991 | 68,157 | – | – |
The Group carried out the following transactions with related parties.
The remuneration of Directors and key management is given in note 6.
Details of the Company's intercompany balances and interest at 31 December 2018 are set out below:
| As at | As at | |
|---|---|---|
| 31 December 2018 |
31 December 2017 |
|
| PEEL GROUP | £'000 | £'000 |
| Revenue | ||
| Sale of land | 1,600 | 3,100 |
| Resultant profit on sale from above land sales | 1,078 | 1,200 |
| Cost of sales/administrative expenses | ||
| Recharges in respect of fees for Steven Underwood, a non-executive director | (43) | (43) |
| Recharges in respect of expenses for Steven Underwood, a non-executive director | (1) | – |
| Recharges of shared costs | (27) | – |
| Payment in respect of a deed of release at Logistics North | (148) | (800) |
| Payment for the surrender of option to facilitate grant of new lease to third party | (934) | – |
| Receivables | ||
| Trade receivables | 1,920 | – |
| As at | As at | |
|---|---|---|
| 31 December | 31 December | |
| MULTIPLY LOGISTICS NORTH HOLDINGS LIMITED & MULTIPLY LOGISTICS NORTH LP | 2018 £'000 |
2017 £'000 |
| Revenue | ||
| Sale of land | – | 8,100 |
| Recharges of costs | 256 | 600 |
| Development management fee | 37 | 200 |
| Asset management fee | 348 | – |
| Water charges | 48 (5) |
– |
| Payables | ||
| Trade payables | (5) | – |
| Shareholder loan made during the year | 2,793 | 3,793 |
| As at | As at | |
| 31 December | 31 December | |
| BANKS GROUP | 2018 £'000 |
2017 £'000 |
| Acquisition of land | ||
| Acquisition of land at Moss Nook | 3,000 | – |
| Trade payables | ||
| Deferred payment for the acquisition of land at Moss Nook | (1,000) | – |
| As at | As at | |
| 31 December | 31 December | |
| WAVERLEY SQUARE LIMITED | 2018 £'000 |
2017 £'000 |
| Shareholder loan made during the year | 50 | 225 |
The Company carried out the following transactions with subsidiary undertakings.
Details of the Company's intercompany balances and interest at 31 December 2018 are set out below:
| As at 31 December 2018 £'000 |
As at 31 December 2017 £'000 |
||||
|---|---|---|---|---|---|
| Net Interest receivable/ (payable) in the year £'000 |
Net amounts due from/(to) £'000 |
Net Interest receivable/ (payable) in the year £'000 |
Net amounts due from/(to) £'000 |
||
| EOS Inc Limited | 585 | 21,008 | 308 | 22,774 | |
| Harworth Estates Limited | (20) | (1,004) | 17 | 709 | |
| Harworth Estates Investments Limited | (9) | (1,559) | – | – | |
| Harworth Guarantee Co. Limited | 4 | (49) | (1) | (53) | |
| Harworth Estates Mines Property Limited | – | 7,000 | – | 7,000 | |
| Harworth Estates Curtilage Limited | 56 | 2,056 | – | 2,000 | |
| Harworth Estates Waverley Prince Limited | (4) | (254) | – | – | |
| Harworth Estates Property Group Limited | (32) | (1,842) | 172 | 277 | |
| Coalfield Estates Limited | – | (29) | 5 | 224 | |
| 580 | 25,327 | 501 | 32,931 |
During the year the Company received dividends of £nil (2017: £nil) from subsidiary undertakings.
There are no post balance sheet events to disclose that have not been disclosed publicly by a regulatory news announcement.
for the year ended 31 December 2018: continued
Chairman Alastair Lyons
Chief Executive Owen Michaelson
Finance Director Andrew Kirkman
Lisa Clement Anthony Donnelly Andrew Cunningham Angela Bromfield Ruth Cooke Steven Underwood Martyn Bowes
Registered Office Christopher Birch Advantage House Poplar Way Rotherham, S60 5TR
PricewaterhouseCoopers LLP Central Square, 29 Wellington St, Leeds, LS1 4DL
DLA Piper UK LLP 1 St Paul's Place Sheffield, S1 2JX
Peel Hunt LLP Moor House 120 London Wall London, EC2Y 7QR
Liberum Group Limited Ropemaker Place 25 Ropemaker Street London, EC2Y 9LY
Equiniti Limited Aspect House Spencer Road, Lancing West Sussex, BN99 6DA
National Westminster Bank PLC (RBS) 3rd Floor 2 Whitehall Quay Leeds, LS1 4HR
Santander UK plc 44 Merrion Street Leeds, LS2 8JQ
Company Registered Number 02649340
The Company's Ordinary Shares are traded on the London Stock Exchange. SEDOL number BYZJ7G4 ISIN number GB00BYZJ7G42 Reuters ticket HWG.L Bloomberg ticker HWG:LN
213800R8JSSGK2KPFG21
| Ex-Dividend Date | Announced | 2 May 2019 |
|---|---|---|
| Record Date for Dividend | Announced | 3 May 2019 |
| Annual General Meeting Bessemer Room, AMP Technology Centre, Waverley, Rotherham, S60 5WG |
Announced | 21 May 2019 |
| Dividend Payment Date | Announced | 31 May 2019 |
| Proposed date for Interim Results Announcement 2019 Interim Results to be published at www.harworthgroup.com/investors |
10 September 2019 | |
| Proposed Record date for Interim Dividend | 20 September 2019 | |
| Proposed date for payment of Interim Dividend | 18 October 2019 |
All administrative enquiries relating to shareholdings should, in the first instance, be directed to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA (telephone: 0371 384 2301) and should clearly state the registered Shareholder's name and address.
Any shareholder wishing dividends to be paid directly into a bank or building society should contact the Registrars for a dividend mandate form. Dividends paid in this way will be paid through the Bankers' Automated Clearing System (BACS).
The Group has a website (www.harworthgroup.com) that gives further information on the Group.
177 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Standards
| 2012 Restructuring | The restructuring of the former UK Coal in December 2012 |
IRP | Incident Response Plan |
|---|---|---|---|
| 2016 Code | the 2016 edition of the Code | JPW | JPW Consulting Limited |
| 2018 Code | the 2018 edition of the Code | KPI | Key Performance Indicator |
| AGM | Annual General Meeting | KPMG | KPMG LLP |
| AMP | Advanced Manufacturing Park, | LCPF | Lancashire County Pension Fund |
| Rotherham | LEP | Local Enterprise Partnership | |
| APM | Alternative Performance Measure | LTIP | Harworth Group Plc Long Term Incentive Plan |
| ATR | Absolute Total Return | LTV | Loan To Value |
| BCP | Business Continuity Plan | Marsh | Marsh Risk Consulting |
| bps | basis points | NAV | Net Asset Value |
| CA06 | Companies Act 2006 | NBV | Net Book Value |
| CDM | The Construction (Design and | NCC | NCC Group |
| Management) Regulations 2015 | NPPF | National Planning Policy Framework | |
| Code | UK Corporate Governance Code | parent entity | Harworth Group Plc |
| Company | Harworth Group plc | PEG Principles | The Pre-emption Group Principles |
| CO2 e |
Carbon dioxide equivalents | Peel Group | The Peel group of companies |
| CPD | continuing professional development | PEL | Peel Environmental Limited |
| Deloitte | Deloitte LLP | PEVG | Profit excluding Value Gains |
| DLA | DLA Piper UK LLP | Policy | Remuneration Policy |
| EA | Environment Agency | PPAs | Planning Promotion Agreements |
| EBT | The Harworth Group Plc Employee Benefit Trust |
PPF | The Pension Protection Fund |
| EES | Estates, Environment and Safety team | psf | Per square foot |
| EfW | Energy from Waste | PSG | People Steering Group |
| EPRA | European Public Real Estate | PwC | PricewaterhouseCoopers LLP |
| Association | RBS | The Royal Bank of Scotland plc | |
| EPRA NAV | EPRA NNNAV excluding deferred tax, | RCF | Revolving Credit Facility |
| notional deferred tax on the mark to market value of development properties and the mark to market movement on financial instruments |
Regulations | Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 |
|
| EPRA NNNAV or NNNAV | NAV plus the mark to market value of development properties less notional deferred tax on this mark to market |
RIDDOR | Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 |
| EPS | Earnings Per Share | RSP | Restricted Share Plan |
| ESMA | European Securities and Markets | RNS | Regulatory News Service |
| Authority | Santander | Santander UK plc | |
| FCA | Financial Conduct Authority | SAYE | Save As You Earn scheme |
| FPPP | Financial Position and Prospects Procedures |
SHEMS | Safety, Health and Environment Management System |
| FRC | Financial Reporting Council | TSR | Total Shareholder Return |
| FTI | FTI Consulting | WAMITAB | Waste Management Industry Training |
| FYE | Financial year ending | and Advisory Board (UK) | |
| GDPR | General Data Protection Regulation | WAULT | Weighted Average Unexpired Lease |
| GRR | Group Risk Register | Term | |
| Harworth Estates | Harworth Estates Property Group Limited and its subsidiaries |
||
| Harworth or Group | Harworth Group plc and its subsidiaries |
||
| HEPGL | Harworth Estates Property Group Limited |
||
| HSE | Health and Safety Executive | ||
| IFRSs | International Financial Reporting |
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