DEVELOP NORTH PLC

Interim Report & Financial Statements for the six months ending 31 May 2022

Announcement of Interim Results

LEI: 213800EXPWANYN3NEV68

This announcement contains regulated information.

Chairman's Statement

Highlights

·  Net Asset Value total return of 0.2%

·  Dividend distributions totalling 1.0p (2021: 1.0p) for the first quarter

·  Ordinary share mid-price equivalent to a premium of 1.1% as at 31 May 2022

·  Gearing facility with Shawbrook Bank Limited renewed to May 2023

·  Change of name to reflect more accurately the nature of the Company's activities

Background

The Company entered its sixth year of trading during the period under report, set against a continuing background of economic disruption, sharply rising inflation, upwards pressure on interest rates and a prolonging of the Covid-19 pandemic albeit at less virulent levels than during earlier phases.

In such circumstances the changes made to the Company's investment and lending policies a year or more ago, with the effect of reducing portfolio volatility and risk, while maintaining higher liquidity, have proved prudent. In short, the decision to target somewhat lower investment returns - in the nearer term, at least - and to "cherry pick" new investment opportunities continues to offer the best risk/reward trade off as the way forward clears.

Net Asset Value

The Company's Net Asset Value per share decreased from 83.9p to 83.1p over the six months ended 31 May 2022. Taking the effects of dividend distributions into account, this was equivalent to a NAV Total Return of 0.2%.

This figure may be placed into context by the total return figures over the same period of the Association of Investment Companies' (AIC 's) "Property-Debt" sector, of which Develop North is a component member, of -1.2% and of the AIC's "Debt- Loans" sector of 2.7%. Meanwhile in a much broader context the FTSE 100 and FTSE All-Share Indices increased respectively by 9.8% and 6.2% over the same interval.

Dividends

An interim dividend of 1 penny per share will be paid on 30 June 2022. As set out in the Annual Report the Company expects to pay dividends at a rate of 1 penny per share per quarter, equivalent to 4 pence per share per year in aggregate.

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

Investment Portfolio

The total value of the Company's portfolio now stands at £23.9m, from 19 live projects, following growth of £6.7m in the gross value of loans and receivables.

New Investments - the Company agreed two new loans during the period, including a £2.2m, nine month facility to fund the construction of four family homes in Morpeth, Northumberland, and a £1.9m facility to fund the construction of executive homes across two sites in Darras Hall, Ponteland and Stocksfield, Northumberland. Further details are provided in the Investment Adviser's report.

In addition, further funds were invested in facilities created during the second half of last year. This has led to a significant increase in the total size of the loan book and which will support portfolio revenues over future months and years.

Exits - there were no portfolio exits, bar a small number of partial redemptions, during the period.

Impairments - there continue to be historic loans within the portfolio, which predate the formation of the Company, against which provisions have already been taken. These projects have now almost reached their conclusion and the directors expect the level of impairments to continue to reduce as the overall quality of the portfolio increases. The Directors, in conjunction with the Investment Adviser, continue to monitor the performance of all loans, and certain adjustments to impairments made to investments have consequently been made (although none at the scale of previous periods).

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

Gearing

The Company continues to benefit from a Gearing facility with Shawbrook Bank Limited, recently renewed for a further year until May 2023, with £2.7m drawn at the period end.

Outlook

Notwithstanding the testing backdrop described above, the Company is well positioned both to resist further economic headwinds and to deploy its considerable liquidity into the right projects at the right time.

Only a short time ago the country was amidst full or partial lockdown, characterised by deserted construction sites and empty travel depots. In this situation the much-lauded "working from home" initiative beloved of the UK public sector was quite useless and where productivity was forced towards zero.

We now see building sites coming to life, cranes moving, old projects re-starting and new schemes being placed on the drawing board. Under its much more dynamic and appropriate new name of Develop North PLC, the Company stands ready to move on to the next phase of its life.

John Newlands

Chairman

10 August 2022

Investment Adviser's Review

ABOUT THE ADVISER

Tier One Capital Ltd is a Newcastle upon Tyne based wealth management and property lending specialist providing financial advice services and bespoke tailored lending to the residential and commercial property development market.

INVESTMENT ADVISER'S REPORT - REVIEW OF THE 6 MONTHS TO 31 MAY 2022

Investment Adviser's highlights:

·     NAV Total Return of 0.2% for the 6 months to 31 May 2022.

·     Loan book, including interest receivable, increased from £18.1m at 30 November 2021 to £24.9m at 31 May 2021, an increase of 37.6%.

·     Payment of dividends totalling 1.0p for the first quarter, equivalent to an annualised dividend yield of 4.8%.

This Interim Report and Accounts covers the end of the fifth and the beginning of the sixth year of performance of the Company, since it's listing in January 2017.

The Company's primary purpose is to provide debt finance to the property sector. The Company also benefits from a number of equity positions attained at nil cost in a number of the borrowing entities which it supports.

The first six months of the financial year have seen the base rate increase above 1% for the first time since the global financial crisis of 2008. Market expectations see these increases continuing for the remainder of 2022 and into 2023 with some economists expecting a peak of 3%. This has been driven by inflation which reached 9.1% CPI for the twelve months to May 2022, primarily because of housing, water, electricity, gas and other fuels, transport and food and non-alcoholic beverages.

The Company used the first six months to protect shareholder value, deploying funds into the most recent portfolio loans while positioning some of the older loans for exit. There was a continued focus on liquidity, with the gearing facility renewed for a further twelve months in May 2022.

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

The Company agreed two new facilities during the period:

·     Fairmoor, North East England - £2.2m 9-month facility

·     Moor Lane, North East England - £1.9m 18-month facility

During the year a total of £8.2m was deployed into six projects including the two new projects mentioned above.

Portfolio Exits

There were no portfolio exits during the period, leaving the number of exits since inception at twelve.

Partial Redemptions Update

During the period there were £1.6m of partial redemptions across five of the portfolio projects.

Impairments

The Company, in accordance with IFRS 9, recognises the gross interest receivable on all its loans, and then recognises an impairment charge if that interest is not paid by the borrower and there is not a clear expectation that this can be recovered subsequently. During the year, three projects were unable to meet their interest requirements.

IFRS 9 also requires the Company to consider various credit loss scenarios and assign a risk weighting to these. This calculation generates a provision which is taken as a further impairment. In this period the Company has set the provision at £33,000, the same amount in place as at 30 November 2021. This provision is based on forward looking statements to withstand market-related shocks including those caused by the ongoing Covid-19 pandemic.

Gearing

In May 2022, the Company renewed the committed revolving credit facility with Shawbrook Bank for a further year. Again the key driver was headroom and liquidity and its renewal for a fifth year demonstrates the support that the Company has from its lender, and the growing confidence in future deployment given the current strength of pipeline.

Profit Share Projects

There are currently 6 Profit Share projects in the portfolio (Nov 2021: 6).

OUTLOOK

Economic Outlook

Residential

As at 31 May 2022, 70.5% of deployed funds were invested across 14 projects with a residential focus with a further £1.9m committed to live projects.

The housing market has continued to grow during 2022, continuing the strong performance of 2021. There are now strong indications that a slow down is coming with Savills' five year forecast, updated in May 2022, suggesting increases across the UK of 12.9%, a significantly slower rate of growth than the 20.5% over the five years predicted in November 2021. The slower growth is largely because stretched affordability, combined with interest rate rises, will limit the capacity for further growth in property values. The North East and Scotland are forecast to see rises of 17.4% and 15.7% respectively with London and the south of England falling below the UK average. It's important to note that most of the forecast growth is in 2022, with flat or even slightly negative numbers in 2023 before a return to 2-3% growth in 2024-26.

Supply chain issues for both availability and pricing of labour and materials reached unprecedented levels in 2021 and continued into 2022. There are now anecdotal signs that the material availability issues for most products is returning to normal but both pricing and labour shortage issues remain, and it will take the rest of 2022 to stabilise.

The Company's residential exposure is predominantly in the North East (91.2%). This region continues to have the best affordability with loan to income ratios remaining lower allowing the potential for greater price growth in the future. We continue to appraise projects using the views of market experts for sales values and build cost and delivery, with all assumptions stress tested.

Commercial

As at 31 May 2022, 29.5% of deployed funds were invested across five projects with a commercial focus.

The Company continues to be selective in the level of exposure to commercial developments. We believe our selective approach to the Company's deployment in the commercial property sector will continue to create shareholder value. The sectors within the commercial property space that the Company currently has exposure to are:

· bereavement (crematorium);

· strategic land; and

· shared office space.

Each of the above sub-sectors offer downside protection in the current uncertain economic times with the latter two also giving flexibility for the borrowers as and when trends change. We will continue to identify and support professional, experienced, and reliable management teams who have a clear vision and robust plan.

PIPELINE

There is currently £3.5m at various stages of due diligence across two projects in the North East.

The quality and experience of each management team that we are in discussions with will continue to enhance the Company's portfolio and strengthen its reputation in the market. This should lead to the creation of shareholder value that is sustainable in the longer term.

Ian McElroy

Tier One Capital

10 August 2022

THE INVESTMENT PORTFOLIO AS AT 31 MAY 2022

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

Interim Management Report

The principal and emerging risks and uncertainties that could have a material impact on the Company's performance have not changed from those set out on pages 15 and 16 of the Company's Annual Report for the year ended 30 November 2021.

The Directors consider that the Chairman's Statement and the Investment Adviser's Review on pages 2 to 7 of this Interim Report, the above disclosure on related party transactions and the Statement of Directors' Responsibilities below, together constitute the Interim Management Report of the Company for the six months ended 31 May 2022 and satisfy the requirements of the Disclosure Guidance and Transparency Rules 4.2.3 to 4.2.11 of the Financial Conduct Authority.

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

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

Directors' Responsibilities Statement

We confirm that to the best of our knowledge:

·  The condensed set of financial statements has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit of the Company, as at 31 May 2022, as required by the Disclosure Guidance and Transparency Rule 4.2.4R;

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

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

On Behalf of the Board

John Newlands

Chairman

10 August 2022

INCOME STATEMENT

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with UK adopted International Financial Reporting Standards ("UK adopted IFRS") in conformity with the requirements of the Companies Act 2006. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations. There is no other comprehensive income as all income is recorded in the statement above.

Statement of Financial Position

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

The financial statements were approved by the Board of Directors of Develop North PLC (a public limited company incorporated in England and Wales with company number 10395804) and authorised for issue on 10 August 2022.

They were signed on its behalf by:

John Newlands

Chairman