Watkin Jones Regulatory News (WJG)

This announcement contains inside information

Watkin Jones plc

('Watkin Jones', the 'Group' or the 'Company')

Full year results for the year ended 30 September 2018

'Record results and continued momentum'

Watkin Jones plc (AIM:WJG), a leading UK developer and constructor of multi-occupancy residential property assets, with a focus on the student accommodation and build to rent sectors, announces its annual results for the year ended 30 September 2018 ('FY18'). The Board is pleased to report a successful financial year with revenues and underlying earnings (which excludes non-recurring profit items) slightly ahead of its previous expectations.

Financial Highlights

Notes

1. For FY18, adjusted operating profit, adjusted profit before tax and adjusted earnings per share are calculated before the impact of an exceptional gain of £4.3 million. This gain relates to compensation for the reduction in scope of services and early termination of management contracts for assets sold by the Curlew Student Trust (the 'Trust') and the Group's share of profit from the sale of the assets paid on its carried interest investment in the Trust. For FY17, there is no difference between the adjusted and unadjusted measures.

2. EBITDA comprises operating profit from continuing operations plus the Group's profit from joint ventures, adding back charges for depreciation and amortisation. For FY18, adjusted EBITDA is stated before the exceptional gain of £4.3 million. For FY17, there is no difference between EBITDA and adjusted EBITDA.

· Strong revenue and gross profit growth driven by student accommodation development

· Robust gross margin of 20.0% (FY17: 21.0%), in line with our expectations and reflecting the high-quality locations of our student accommodation developments

· Adjusted profit before tax1 increased by 15.7% to £50.1 million and adjusted basic earnings per share1 increased by 13.8% to 16.0 pence

· Proposed final dividend of 5.13 pence per share, to give a total dividend of 7.6 pence per share, up 15.2% and in line with our progressive dividend policy

· Good cash performance, with a net cash inflow from operating activities of £54.4 million (FY17: £19.2 million) contributing to net cash at the year end of £80.2 million (30 September 2017: £41.0 million)

Business Highlights

Student accommodation development

· Ten developments (3,415 beds) completed as scheduled in FY18

· Nine developments (4,490 beds) currently forward sold for delivery in FY19 and FY20

· Total secured development pipeline of 7,534 student beds across 17 sites, for delivery between FY19 and FY21

Build to rent development

· Entered into development agreements with investors to deliver apartment schemes in Reading and Wembley, for occupation in FY21

· Secured development pipeline, including Reading and Wembley, of approximately 1,500 apartments across seven sites, for delivery over the period FY20 to FY22

· The Board continues to explore ways to enhance shareholder returns from the build to rent opportunity, including the possibility of establishing a new investment vehicle

Residential

· Completed 175 sales (FY17: 94 sales), comprising homes and apartments in the North West

Accommodation management

· At the start of FY19, Fresh Property Group ('FPG') had 15,421 student beds and build to rent apartments under management across 56 schemes (FY18: 16,617 beds and apartments across 57 schemes)

· Strong underlying growth, including first contracts in Ireland, offset by the previously announced loss of 4,597 student beds following a portfolio sale by the Curlew Student Trust

· In total, FPG contracted to manage 18,258 student beds across 65 schemes by FY21

· Build to rent apartments under management contracted to increase from 546 across five schemes to 820 across six schemes by FY21

Board changes

· As previously announced, Richard Simpson joined the Board as Chief Executive Officer on 2 January 2019, with Mark Watkin Jones stepping down as CEO as of that date and as a Director of the Board on 15 January 2019

· Liz Reilly will join as an independent Non-Executive Director from 21 January 2019

Commenting on the results, Richard Simpson, Chief Executive Officer of Watkin Jones plc, said:

"Today Watkin Jones has reported a record set of full year results which show that the Group has performed strongly across all key financial metrics of the business. We continue to have excellent visibility of our future revenues and earnings, supported by the pipeline of forward sold and secured sites for student accommodation. The locations and forward sale values we have achieved for these schemes underpin our earnings expectations from this division over the next twelve months and beyond.

Our success in securing the significant build to rent development agreements in Reading and Wembley, together with our secured pipeline of sites, is highly encouraging. In addition, our residential and accommodation management divisions are well positioned to contribute to progressive earnings growth. As a result, we remain confident in the outlook for the Group.

On a personal note, having only recently joined the Group, I am very much looking forward to working closely with my new colleagues, stakeholders and shareholders to continue to deliver the excellent performance for which Watkin Jones is known."

CHAIRMAN'S STATEMENT

Performance and dividend

The Group's performance was driven by another excellent result in our core business, student accommodation development, with encouraging progress in build to rent. The accommodation management and residential businesses also did well in FY18 and increased their contribution. Overall, the Group delivered pleasing revenue growth, whilst maintaining a strong gross margin, resulting in a double-digit increase in earnings. The cash performance was also excellent, reflecting the favourable working capital profile of our business model and contributing to a robust balance sheet at the year end.

This year's performance was particularly pleasing in the context of a challenging market. The political environment in the UK has increased uncertainty and we are seeing more competition for our people. As an emerging sector, build to rent is also attracting new entrants. The outturn for the year is therefore a credit to the executive team and everyone in Watkin Jones.

We look to reward shareholders through growing dividends and continue to target a payout which is twice covered by earnings by FY19. Having paid an interim dividend of 2.47 pence per share, the Board has recommended a final dividend of 5.13 pence per share, to give a total for the year of 7.6 pence per share. This represents 15.2% growth over the 6.6 pence per share paid in respect of FY17. The total dividend is 2.1 times covered by adjusted basic earnings per share.

The final dividend will be paid on 28 February 2019 to shareholders on the register at the close of business on 25 January 2019. The shares will go ex-dividend on 24 January 2019.

Board, management and people

In my statement last year I noted that, for personal reasons, Mark Watkin Jones had advised the Board of his intention to stand down as Chief Executive Officer. Once again, I want to thank Mark on behalf of the Board for his immense contribution to the Group, which has transformed Watkin Jones into the successful business it is today.

After a thorough search, we were delighted to appoint Richard Simpson, who joined the Board as CEO on 2 January 2019, to succeed Mark. Richard is highly regarded in the sector and has significant senior-level experience, most recently as Group Property Director of Unite plc, where he worked closely with Watkin Jones on several occasions. He also chaired the British Property Federation's cross-sector Student Accommodation Committee from 2013 to 2015. His knowledge and skills will be invaluable to the Group as we continue to grow.

Over the last year the transition arrangements have been put in place to ensure a smooth and orderly handover of CEO responsibilities. This has been possible through the work we did in strengthening the senior management structure in the previous year. This allowed us to broaden the leadership team's responsibilities, enable effective delegation and support the development of the team and the layers of management beneath. The leadership team has responded superbly and their combined strength has made the transition to a new CEO much easier. Given the strength of the broader management team and their ability to support Richard in taking the business forward, the Board and Mark have agreed that this was the right time for him to step back from the business and he stepped down from the Board on 15 January 2019. Mark and the Watkin Jones family remain highly supportive shareholders.

One of the Board's objectives for the year was to appoint an additional independent Non-Executive Director, who would become Chair of the Remuneration Committee. We were therefore delighted to announce that Liz Reilly will be joining the Board on 21 January 2019. She has an outstanding background in human resources and the real estate sector and is currently Group Human Resources Director at SEGRO plc, a FTSE 100 Real Estate Investment Trust. Liz adds valuable skills and experience on the Board and we look forward to working with her. Her appointment also means that the Non-Executive Directors will form a majority on the Board, including myself as Chairman.

We recognise the need to retain and motivate our senior leaders and after consultation with major shareholders, introduced a new long-term incentive plan this year. Details of the plan can be found in the Remuneration Committee report in the Group's FY18 Annual Report.

Looking forward

The Board remains confident in the Group's prospects. We will continue to grow the business through our focus on student accommodation, while making further progress in build to rent, which has the potential to become a second important income stream for Watkin Jones over the next few years.

Grenville Turner

Independent Non-Executive Chairman

14 January 2019

CHIEF EXECUTIVE OFFICER'S REVIEW

Performance

Revenue from continuing operations rose by 20.3% to £363.1 million (FY17: £301.9 million). Gross profit was 14.0% higher at £72.4 million (FY17: £63.5 million), contributing to a 16.2% increase in operating profit to £49.6 million (FY17: £42.7 million), before an exceptional gain of £4.3 million. The pre-exceptional operating margin was 13.7% (FY17: 14.1%). Our business continues to be strongly cash generative, reflecting the favourable cash profile of our forward sale model. The operating cash inflow for the year was £54.4 million (FY17: £19.2 million).

Revenues benefited by £42.6 million from the forward sale of a portfolio of four development sites, which completed on 30 September 2018. The benefit to margins was less significant, as the majority of the profit on these developments will flow through over the coming two years.

Student accommodation development generates the majority of our revenue and earnings and the business had another strong year, growing revenue by 22.1% to £312.7 million (FY17: £256.1 million). We completed all ten schemes on time (3,415 beds) and the pipeline of development sites remains robust, enabling us to maintain the high visibility of our future earnings.

We continue to make good progress in build to rent, both with acquiring sites for our own developments and working with institutions who are bringing opportunities to us. This allows us to leverage our development expertise for them and gives us another avenue for growth in this market. We entered into two significant development agreements with institutions during the year, to deliver a 315-apartment scheme for M&G in Reading and a 300-apartment scheme for Lum Chang Holdings Limited and Sin Heng Chang Private Ltd in Wembley. Our pipeline in this business is now around 1,500 apartments across seven sites, with several other opportunities in legal negotiations or under offer.

Fresh Property Group ('FPG') continues to perform well and its underlying growth was strong. As previously announced, FPG lost 4,597 student beds under management during the year, after our client the Curlew Student Trust ('CST') sold its Enigma property portfolio. Despite this, FPG saw a net drop in student beds and build to rent apartments under management of just 1,196 units, after winning 14 new student schemes to manage from the start of the 2018/19 academic year. FPG's compensation for the initial reduction in scope of services followed by early termination of the management contracts with CST, plus FPG's share of the profit from the proceeds of disposal of the assets, paid on its carried interest in CST, resulted in an exceptional income in the year of £4.3 million.

The residential business also had a good year, completing 175 sales (FY17: 94 sales). We see prospects for this business to grow by strategically acquiring attractive new small to medium-sized sites.

Operating review

Student accommodation

Performance

Revenues from student accommodation development rose strongly, with a 22.1% increase to £312.7 million (FY17: £256.1 million). The gross margin achieved on these sales was 19.4% (FY17: 22.1%). On 30 September 2018 we completed the forward sale of a portfolio of four student accommodation developments, with the purchaser entering into an option agreement to acquire a fifth scheme subject to receipt of planning. The revenue contribution from the forward sale of the four developments in FY18, which mainly constituted the land sales, was £42.6 million. The margin recognised on the initial sales value was 11.1%, with the profit on the development works to be recognised in FY19 and FY20. Adjusting for the impact of this forward sale, the gross margin for the year was 20.7% and was above the Group's target of 20%. The comparatively higher margin in FY17 reflects the exceptional margin contribution from certain developments completed in that year.

During the year, we completed ten student accommodation developments across the UK, with a total of 3,415 beds. In doing so, we maintained our track record of completing 100% of developments before they were due to be let.

We look to maintain a robust pipeline, for delivery over the following three years. For FY19, we are scheduled to deliver six schemes with 2,723 beds. Five of these schemes (2,646 beds) have been forward sold and the remaining scheme (77 beds) is secured.

For FY20, we expect to deliver seven schemes (2,606 beds), of which four schemes (1,844 beds) have been forward sold. The remaining three schemes (762 beds) are secured. We continue to build our delivery pipeline for FY21, with four development sites (circa 2,205 beds) already secured.

In total, at the year end we had a secured development pipeline of 17 sites, representing 7,534 beds, with an appraised development value of approximately £650 million.

Our expertise and in-house resource have enabled us to continue to make good progress with obtaining planning consents. During FY18, we achieved planning consent for six developments (2,932 beds). A further two of our secured sites (798 beds) are progressing through the planning process.

The market opportunity

The number of full-time students in the UK is a key determinant of demand for PBSA, since these students are more likely to live away from home than part-time students. The full-time student population has steadily grown, increasing by an average of 2% per year since 2004, to reach around 1.8 million in 2018.

Demand for university places remains substantially greater than supply. In 2017/18, there were 695,565 applications to UK universities, of which 533,360 were accepted, resulting in unfulfilled demand for 162,205 places. UCAS applicants in 2017/18 were 6.4% higher than in 2011/12, the year before tuition fees increased substantially.

The increase in the student population has occurred despite the decline in the number of 18 year olds in the UK over recent years. However, the demographic outlook is positive, with an upturn in this age group coming through from 2021. Trends in international students are also positive. Around 404,000 students are from outside the UK, representing 22.5% of the student population and an increase of 54% over the period 2006/7 to 2016/17.

Non-EU international student numbers increased by 20% over the eight years to 2016/17 and they make up circa 15.8% of the full‑time student population. International students from the EU are a relatively small proportion of the market at 6.7% and we do not believe that any changes in EU student numbers post-Brexit would have a noticeable impact on demand for PBSA.

For the start of the 2018/19 academic year, Cushman & Wakefield reported, in their UK Student Accommodation Report 2018/19, that 627,000 PBSA bed spaces were available. Significant scope remains for increased penetration of private PBSA, particularly as universities turn to the private sector for provision and more students than ever are studying away from home. New PBSA predominantly comes from the private sector. In 2018, 77% of new PBSA beds came from the private sector.

As a result of this growth, Cushman & Wakefield reported that, for the 2018/19 academic year, 47% of beds are operated by the private sector, up from 43% for 2017/18. The balance is operated by the universities themselves. It is estimated that 75% of university-operated accommodation was built pre-1999 and is no longer fit for purpose or meeting occupier expectation. This is contributing to a 'flight to quality', with students seeking modern, high-specification accommodation in the private sector.

A similar 'flight to quality' is also evident in the private sector, with students increasingly preferring the modern high-quality PBSA private sector offering to the more traditional private landlord-run houses of multiple occupation ('HMOs').

This trend is also being driven by the recent fiscal and planning barriers which make the acquisition of houses for student letting more costly and difficult for private landlords, which will lead to a reduction in the number of students living in HMOs.

This accords with the national and local government agendas, which recognise PBSA as a better solution for housing students and enables HMOs to be made available to help towards the shortage in residential accommodation.

PBSA investment

Institutional investors see UK PBSA as a mature, stable and income-producing asset class. This makes it a defensive investment and an attractive asset to hold in times of uncertainty. Investors also favour the continued headline rental growth in the sector, which Cushman & Wakefield reported stood at 2.8% for the 2018/19 academic year.

As a result of these factors, investor sentiment remains strong and they are willing to pay premiums for larger portfolios of PBSA assets, so they can quickly allocate their capital and build scale. Around £4.1 billion of stock was traded in 2017, with a further £2.45 billion traded in the first three quarters of 2018. An additional £0.65 billion of stock is believed to be under offer. Demand for this stock comes from both domestic and international institutions.

Competition

Watkin Jones operates across the entire PBSA development lifecycle. While there are other specialist PBSA developers in the UK, most do not construct their own developments, few provide asset management services, and their scale and geographical focus vary considerably. Some are owner/operators, who invest in assets and manage developments themselves. Some non-specialist developers have exposure to PBSA, offering procurement, planning and construction services. Typically, these firms are either housebuilders or commercial property developers providing student accommodation developments.

We believe our focus, market knowledge, geographical coverage and ability to work across the entire development cycle give us a competitive advantage. We also believe that we are the only developer that forward sells all its schemes to investors. This makes us an attractive conduit for institutions looking to increase exposure to PBSA and means we do not compete with our institutional clients by also being an asset owner. These factors make us well placed to compete effectively.

Build to rent

Performance

In FY18, we continued to make good progress with our build to rent development pipeline, as well as securing development funding agreements with institutional investors.

In May 2018, we entered into a development funding agreement with M&G Real Estate to deliver a build to rent scheme in Reading. Under the agreement, we will receive £68.5 million for the development works we are to carry out, with completion targeted for FY21. The scheme is in the Thames Quarter, close to the railway station and town centre, and comprises 315 high-specification studio, one, two and three-bed apartments. Residents will benefit from outstanding facilities, including a triple height atrium, cinema room, multiple private dining facilities, tenant lounges and a selection of rooftop terraces, providing views of the River Thames.

In August 2018, we announced a development agreement with Kelaty Propco Limited, a joint venture ultimately owned by Singapore incorporated Lum Chang Holdings Limited and Sin Heng Chang Private Ltd. The 300-apartment scheme is in Wembley, London and is adjacent to a 599-bed student accommodation site we acquired from the joint venture. The development is targeted for completion in FY21.

During the year, we secured planning consents for 147 units at Holdenhurst Road, Bournemouth, and we also secured consent for 165 units at our site in Sutton.

The other notable event in the year was securing a significant development site in Uxbridge. We are progressing planning consent for the site, on which we expect to deliver around 260 units.

Including the developments in Reading and Wembley, we now have a secured delivery pipeline of approximately 1,500 apartments across seven sites, which we are targeting to deliver between FY19 and FY22. In addition, we have several other site opportunities which are in legal negotiations to acquire or are under offer.

The market opportunity

Build to rent represents an exciting opportunity and continues to have growing momentum as an asset class.

There is well-known structural supply and demand imbalance in the UK residential property market, with the supply of new homes in the UK failing to keep up with demand. Factors driving this demand include rising life expectancy, an increase in one-person households and immigration. The government is targeting 300,000 new dwellings each year but only 195,000 were delivered in 2017/18, continuing a trend established over many years of delivery falling short of requirements. In their 2017 House Building Report, Knight Frank reported that the UK's population is growing at a rate of 200,000-250,000 additional households every year, whilst over the previous 15 years the supply of new homes has averaged only 160,000, clearly demonstrating the sustained shortage in new homes.

The shortage of new builds contributes to high house prices in parts of the country with the strongest local economies, pricing many people out of the market. As a result, many people are renting for the medium to long term instead. Young people are increasingly seeing property renting as a better lifestyle choice, providing quality of living, whilst maintaining flexibility, in the expectation of changing jobs more frequently than in the past.

These trends mean that young adults between the ages of 20 to 30, accustomed to the benefits of all-inclusive PBSA, make up a significant share of the build to rent market. Renters are also getting older and, across the private rented sector, people in their late 20s and early 30s make up 46% of renters, up from 27% in 2006.

Rented housing now accounts for 20% of the UK's total housing stock, but the market is fragmented and dominated by small buy-to-let landlords, with little over 3% being owned by institutions. This compares with around 25% in the USA, which is a more mature institutional market. The proportion of UK rented homes owned by institutions is therefore expected to rise, as build to rent offers them an attractive income stream that correlates strongly with inflation and is considered highly sustainable through the economic cycle. Investment in the build to rent sector is estimated to total £3 billion in 2018, up 50% since 2017, and is forecast to reach £70 billion by 2022.

Accommodation management

Fresh Property Group ('FPG') is a key part of our end-to-end solution for clients, which spans sourcing of sites to managing the completed developments. FPG operates under the Fresh Student Living brand in student accommodation and the Five Nine Living brand in build to rent.

FPG can take on all aspects of accommodation management for clients, including mobilising, marketing and letting, managing the building and tenants, collecting rent and providing the operational financial reporting for the asset. The business has invested significant amounts in best-in-class systems and processes, which makes it highly scalable, with efficient processing of back-office functions, freeing our people to focus on providing excellent service.

The business continued to grow strongly in FY18, generating revenue of £7.3 million (FY17: £6.1 million) and gross profit of £4.5 million (FY17: £3.8 million), representing a gross margin of 61.8% (FY17: 61.9%).

As previously announced, during the year the Curlew Student Trust ('CST') sold a portfolio of student accommodation assets managed by FPG (the Enigma portfolio).

This resulted in FPG providing a reduced level of service from 1 May 2018 to August 2018, when the management agreements were finally terminated. FPG was fully compensated for its loss of revenue associated with the reduced scope of services and early termination of the management agreements, as discussed in the financial review. The sale reduced FPG's number of student beds under management for the 2018/19 academic year by 4,597.

Following the successful sale of the Enigma portfolio, Curlew Capital has set up a new fund, CST2, to continue to develop and acquire student accommodation assets across the UK. FPG remains the property manager for the remaining eight assets in CST (1,714 beds) and is preferred manager for CST2, which has already secured a portfolio of over 1,300 beds, with a further 1,300 beds in solicitors' hands, and has ambitious growth plans. This presents the potential for further long-term growth in FPG.

FPG had a good year for winning new management contracts, picking up 14 student accommodation schemes with effect from the start of the 2018/19 academic year. As a result, FPG saw a net drop in beds under management of only 1,196, despite the CST sale. Excluding the beds under management associated with the properties sold by CST, FPG's beds under management were increased by 3,740 beds, or 23%, compared to the start of the 2017/18 academic year.

This led to FPG having 15,421 student beds and build to rent apartments under management at the start of FY19 across 56 schemes. Of these schemes, 48% were developed by Watkin Jones and 52% by third parties, showing the broad attraction of FPG's offer to institutional clients. By FY21, FPG is currently contracted to manage 18,258 student beds across 65 schemes.

The new business won in the year included FPG's first contracts in Ireland. It was awarded the management of two schemes in Dublin for the 2018/19 academic year (369 beds) and another two schemes (595 beds) for the 2019/20 academic year. FPG has established Fresh Property Group Ireland Limited to pursue further opportunities in Ireland, including in build to rent. The establishment of the Irish business utilises FPG's existing management systems and represents a low-cost way to enter a new market.

FPG continues to grow its presence in the build to rent sector. For FY18, it managed five schemes with 546 apartments between them. During the year, it also won a contract to manage a 274-apartment scheme in Manchester, which is scheduled for delivery in 2020, taking the total number of build to rent apartments under management to 820. A key initiative for FPG in the year was developing a service offering for smaller build to rent developments, without communal facilities. This broadens its addressable market in build to rent.

FPG has also taken on the management of its first fully mixed-use scheme, Avon Studios in Bath. This is a single block incorporating 94 student beds, ten build to rent units and four affordable housing units.

FPG's single infrastructure, sitting across both student and build to rent, allows it to deliver a unified management service for the client, capturing economies of scale across the whole block while providing a service tailored to the individual tenant groups within the building.

To support its operational effectiveness, FPG has equipped its accommodation teams with the Salesforce CRM system, to maximise the conversion of enquiries into bookings. The system will lead to improved analysis of marketing spend and return on investment, to enable targeted spend that generates the best returns. It will also give FPG a single view of the customer.

The quality of FPG's service was again recognised through the industry awards it received in the year. These included the National Student Housing Survey International Quality Mark 2018, and the Best Private Halls of Residence and Unsung Hero awards at the Property Week Student Accommodation Awards 2018.

All of FPG's accommodation teams have completed mental health training with charity partner Young Minds. This is of particular significance, given the increasing prevalence of stress and mental health issues among students.

Residential

The residential business had a good year, completing 175 sales against 94 in the prior year. This resulted in revenues of £30.0 million (FY17: £18.1 million). The business continues to make sales at nil margin at its legacy development site at Droylsden, Manchester. These sales totalled £10.2 million in the year (FY17: £6.0 million). Sales from this site are ongoing and will continue to release cash from inventory. The gross margin for the business was 14.6%, down from 16.7% in FY17, as a result of these nil-margin sales.

Excluding the nil-margin sales, the gross margin achieved for the business was 22.2% (FY17: 25.0%).

The business is well placed to achieve sustained profitable growth going forward. We will look to acquire small to medium sized housing sites in the North West, whilst also acquiring attractive sites suitable for small apartment schemes identified by the Group's national site acquisitions team. For example, in FY18 we commenced the development of a 44-apartment scheme in Bath which will be completed in FY19.

In addition, the planning consents for PBSA sites often include a residential element. An example of this is our current mixed-use development in Stratford, which includes 44 residential apartments, also for delivery in FY19.

However, we do not intend to acquire a substantial land bank in this business and our intention is to manage the working capital requirements so that, as far as possible, the business is self-funding. At the year end, we had a land bank of 657 plots (30 September 2017: 589 plots).

Strategy

The Group is following a consistent strategy, based on the four pillars of our business. Student accommodation development remains core and the Board is committed to continuing to drive that business forward, while we develop a second substantial revenue stream in the build to rent market and benefit from increasing contributions from the FPG and residential businesses.

We continue to look at ways to enhance shareholder returns from the longer-term value creation opportunity in build to rent. This may include establishing an independent new investment vehicle, which would be able to attract third-party capital and would acquire the Group's build to rent developments on a forward-sale basis, thereby not changing the Group's business model. We will update shareholders on our plans as appropriate.

As we look for development opportunities for student accommodation and build to rent, we are identifying smaller sites suitable for our residential business to develop apartments. We will carefully manage the working capital required for this part of the business.

People and culture

The Group has seen real benefits from the changes we made last year to our senior management structure. This included establishing an Executive Committee, to provide leadership to the Group below Board level. We also invested in and empowered the Operational Board, which comprises the members of the Executive Committee plus the managing directors of the delivery divisions, and the management teams below them throughout the Group. This work has helped the teams to achieve an excellent performance across our businesses. As part of the succession process, the Executive Committee and Operational Board have assumed increasing responsibility over the year for the day to day management of the Group. The success of this transition has given me confidence that this is the right time for me to step away from the Group and allow Richard and the team to take the business forward.

Watkin Jones is a specialised business with a highly structured delivery process, which allows our people to develop a deep understanding of their roles. This is enabling us to tackle our development schemes earlier, making it easier to deliver them and contributing directly to our people's job satisfaction and the Group's financial performance.

This is my last report as Chief Executive Officer and I want to thank all of my colleagues around the Group for helping to make Watkin Jones the success it is today.

Sustainability

Watkin Jones is a business that thinks for the long term and we therefore look to ensure we can deliver sustainably, benefiting all of our stakeholders along the way. This means understanding and managing the needs of our stakeholders, which include our people, clients, supply chain and shareholders. Our view is that their success is our success, and we aim to work with them to maintain high levels of trust, loyalty and respect. The Group's stakeholders also include our communities and the local and global environment, and we take their needs into account in the way we operate. More information about our approach to sustainability can be found in the Group's FY18 Annual Report.

Brexit

Whilst the outcome of negotiations surrounding the UK's exit from the European Union remain uncertain, the Group is carrying out a review with its supply chain to establish the potential risks that might arise from a 'no deal' Brexit on the supply of materials and labour required for our developments. Whilst the responsibility for maintaining continuity of supply rests predominantly with our supply chain, we are focussed on ensuring that the appropriate contingency measures are put in place to ensure that our development activities will continue without material interruption.

Outlook

I believe that the Group is in the best shape it has ever been. We continue to have excellent visibility of our future revenues and earnings, supported by the pipeline of forward-sold and secured sites for student accommodation. Despite delivering fewer student beds in FY19, the locations and forward sale values we have achieved for these schemes underpin our earnings expectations from this division over the next twelve months and beyond.

Our success in securing the significant build to rent development agreements in Reading and Wembley, together with our secured pipeline of sites, is highly encouraging. In addition, our residential and accommodation management divisions are well positioned to contribute to progressive earnings growth. As a result, we remain confident in the outlook for the Group.

Mark Watkin Jones

Chief Executive Officer (until 2 January 2019)

14 January 2019

FINANCIAL REVIEW

Highlights

Revenue

Revenue from continuing operations increased from £301.9 million in FY17 to £363.1 million in FY18, representing growth of 20.3%. Student accommodation development remains the primary driver of our top line, with revenue growth of £56.6 million or 22.1% in FY18. This result benefited from the completion of the forward sale of four PBSA developments on 30 September 2018, which accounted for £42.6 million of the revenue in the year and primarily represents the initial land sales values achieved. These forward sales also had an impact on the gross margin in our student business, as discussed further below.

Build to rent generated revenues of £3.8 million in FY18 (FY17: £1.2 million), with this business expected to make an increasing contribution to the Group's performance from FY19.

Our accommodation management business, Fresh Property Group, showed good growth, with revenue up 19.2% to £7.3 million (FY17: £6.1 million).

The residential business also had a strong year, with revenues up by £11.9 million, or 65.8%, to £30.0 million.

In addition to the four primary businesses, the Group generated revenue from the development of commercial property associated with our mixed-use planning consents. This is reported within our corporate segment and accounted for £9.3 million of revenue in FY18 (FY17: £20.4 million). In both years, this revenue related to a hotel and offices at our development site at Christchurch Road, Bournemouth. These properties were forward sold in FY17 and completed in FY18.

Gross profit

Gross profit increased from £63.5 million in FY17 to £72.4 million in FY18. This represented growth of 14.0% and a gross margin of 20.0% (FY17: 21.0%).

The gross margin for the student accommodation development business was 19.4% (FY17: 22.1%). The forward sales that completed on 30 September 2018, discussed above, were at comparatively low margins as they primarily related to the land, with the development and construction margin due to flow through over the next two years. Adjusting for the impact of these sales, the underlying gross margin for this business in FY18 was 20.7% and remained above our 20% hurdle rate for these developments. The comparatively higher margin in FY17 reflects the exceptional margin contributions from certain developments completed in that year.

Build to rent generated a gross profit of £1.0 million (FY17: £0.7 million). Fresh Property Group contributed gross profit of £4.5 million (FY17: £3.8 million) and maintained its high gross margin of 61.8% (FY17: 61.9%). Gross profit from residential sales was £4.4 million, up from £3.0 million in FY17. The gross margin of 14.6% (FY17: 16.7%) reflects the impact of a further £10.2 million of nil margin sales at the legacy development site at Droylsden, Manchester. Excluding these legacy site sales, the gross margin was 22.2% (FY17: 25.0%). Gross profit from commercial property was £1.8 million, compared with a loss of £0.5 million in FY17.

Administrative expenses

Administrative expenses include the costs of Group support services as well as head office costs, and totalled £22.8 million for FY18 (FY17: £20.8 million). The growth of 9.5% reflects an underlying rise in salary costs, with an average salary increase of approximately 5% across the Group, and additional resources to support the growth of the business, including new development directors and technical specialists.

Operating profit before exceptional items

Operating profit before exceptional items was £49.6 million (FY17: £42.7 million), up 16.2%. The operating margin was 13.7% (FY17: 14.1%).

Exceptional items

Curlew Student Trust's sale of a portfolio of assets, and the subsequent reduction in scope and early termination of Fresh Property Group's contracts to manage the majority of these assets, resulted in an exceptional gain for the Group of £4.3 million. Of this, £3.0 million was received as compensation for the reduction in scope of the management contracts and their early termination. The Group also holds a carried interest in the Curlew Student Trust and made an exceptional profit of £1.3 million by way of its share of the profit arising from the portfolio sale.

There were no exceptional items in FY17.

Cash flows

Profit on disposal of interest in joint venture

During the year, the Group sold its legacy interest in Rufus Estates Limited, a joint venture relating to a development site in Chester. The sale generated a profit of £0.1 million. In FY17, the Group realised a profit of £0.9 million after disposing of its joint venture interest in Athena Hall (Jersey) Limited, which owned a student accommodation property previously developed by the Group.

Share of profit in joint ventures

The Group has several joint ventures with Lacuna Developments Limited, based in Northern Ireland, allowing us to develop student accommodation sites in Belfast. Our share of profit in these joint ventures in FY18 was £1.0 million (FY17: £0.5 million).

Finance costs

Our finance costs are primarily fees associated with the availability of our revolving credit facility ("RCF") with HSBC, and the interest cost of the loans we have with Svenska Handelsbanken AB (see bank facilities below). The net finance cost for the year was £0.7 million, down from £0.8 million in FY17, as a result of increased interest received on our cash balances.

Taxation

The tax charge for the year was £10.1 million (FY17: £7.5 million). This represents an effective tax rate of 18.7%, broadly in line with the standard rate of corporation tax of 19%. The effective tax rate in FY17 was 17.3%, reflecting the benefit of a prior year adjustment of £0.8 million.

Earnings per share

Basic earnings per share from continuing operations were 17.3 pence (FY17: 14.0 pence). Adjusted basic earnings per share, which exclude the impact of the exceptional gains discussed above, were 16.0 pence (FY17: 14.0 pence).

Dividends

As discussed in the Chairman's Statement, the Board has recommended a final dividend of 5.13 pence per share, giving a total dividend for the year of 7.6 pence. The cash cost of the final dividend will be £13.1 million.

At 30 September 2018, the Company had distributable reserves of £135.2 million available to pay the final dividend.

EBITDA

EBITDA is an important measure of underlying performance for the Group. It is calculated as operating profit plus profit from joint ventures, before interest, tax, depreciation and amortisation.

EBITDA increased by 24.6% to £56.3 million (FY17: £45.2 million).

Adjusted EBITDA, which excludes exceptional items, increased by 15.1% to £52.0 million (FY17: £45.2 million), representing an adjusted EBITDA margin of 14.3% (FY17: 15.0%).

Statement of financial position

At the year end, inventory and work in progress stood at £132.8 million (30 September 2017: £125.2 million), with the increase of £7.6 million due to expenditure on the residential and academic elements of the mixed-use development site at Stratford. The year end balance included £43.5 million in relation to our build to rent development sites and operational assets, which we are targeting to sell in the coming year. We were also carrying £18.9 million of work in progress relating to the residential and academic elements of the Stratford mixed-use scheme, which we are also looking to convert into sales in FY19.

Trade and other receivables decreased by £9.3 million to £27.0 million, primarily as a result of the receipt of the proceeds from the completion of the sale of the hotel at Christchurch Road, Bournemouth, for which the Group had a receivable balance of £11.8 million at the end of FY17.

Trade and other payables increased by £10.5 million in the year to £99.1 million, reflecting the increase in the Group's activity level.

Other financial assets reduced by £1.3 million to £1.4 million, as a result of the distribution of portfolio sales proceeds by the Curlew Student Trust.

Cash flows

The Group continued to generate strong cash flow, with a net cash flow from operating activities of £54.4 million. This performance benefited from a receipt of £38.8 million from the forward sale of the four assets on 30 September 2018. Cash flow in the year was also enhanced by the receipt of £22.8 million of cash relating to forward sales agreed in FY17 which were contractually completed in FY18.

The working capital decrease of £11.3 million reflects the movements in inventory and work in progress, receivables and payables, discussed above.

Dividends paid in the year amounted to £17.5 million, while tax payments totalled £11.1 million.

The settlement from the reduction in scope of services and early termination of the Fresh Property Group management contracts, together with the distributions from the Group's investment in the Curlew Student Trust, following the portfolio sale, resulted in cash receipts of £6.0 million for the Group.

Fresh Property Group used £0.3 million of these receipts to make a similar carried interest investment in Curlew Student Trust 2, which was launched in the year, recognising the importance of Fresh Property Group's role as property manager for the Fund.

These movements contributed to a cash balance of £106.6 million at the year end and a net cash position of £80.2 million, after deducting borrowings of £26.4 million. At 30 September 2017, the Group had cash of £65.3 million, borrowing of £24.3 million and net cash of £41.0 million.

The Group's cash balance typically peaks around the year end, as in the last weeks of the financial year we receive the final payments on student accommodation developments completing ahead of the new academic year, as well as the initial proceeds from the latest forward sales. The Group is then a net utiliser of cash during the first half of the following year, as a result of outflows such as tax and dividend payments, overhead costs and land purchases. We therefore see the cash balance at the year end as an appropriate level for funding our day-to-day cash requirements and to put the Group in a position of strength when bidding for new sites.

Bank facilities

The Group's bank facilities comprise a £40 million five-year RCF, which matures on 15 March 2021, and a £10 million on-demand working capital facility, both with HSBC Bank plc. At 30 September 2018, we had drawn £17.4 million against the RCF (30 September 2017: £13.3 million), while the working capital facility was undrawn, giving us total undrawn facilities of £32.6 million.

The RCF is available to support our land procurement and development opportunities and can be used for strategic land acquisitions or to fund discrete development activities, primarily the residential or commercial elements of certain larger mixed-use developments, alongside the forward sale model. We used the RCF to assist with several site acquisitions during the year and to fund the build of the residential and academic facilities at our development site in Stratford.

The Group also has loan facilities with Svenska Handelsbanken AB, which are used to fund the Group's operating build to rent stock in Sheffield and Droylsden. These facilities run to March 2022. The outstanding balance at 30 September 2018 was £7.3 million (30 September 2017: £8.4 million).

Philip Byrom

Chief Financial Officer

14 January 2019

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Notes to Editors

Watkin Jones is a leading UK developer and constructor of multi occupancy residential property assets, with a focus on the student accommodation and Build to Rent sectors. The Group has strong relationships with institutional investors, and a good reputation for successful, on-time-delivery of high quality developments. Since 1999, Watkin Jones has delivered 38,000 student beds across 117 sites, making it a key player and leader in the UK purpose built student accommodation market. In addition, the Fresh Property Group, the Group's specialist accommodation management company, manages over 15,000 student beds and Build to Rent apartments on behalf of its institutional clients. Watkin Jones has also been responsible for over 80 residential developments, ranging from starter homes to executive housing and apartments. The Group is now expanding its operations into the Build to Rent sector.

The Group's competitive advantage lies in its experienced management team and business model, which enables it to offer an end-to-end solution for investors, delivered entirely in-house with minimal reliance on third parties, across the entire life cycle of an asset.

Watkin Jones was admitted to trading on AIM in March 2016 with the ticker WJG.L. For additional information please visit: www.watkinjonesplc.com

Consolidated statement of comprehensive income

for the year ended 30 September 2018

Consolidated statement of financial position

as at 30 September 2018

Consolidated statement of changes in equity

for the year ended 30 September 2018

Consolidated statement of cash flowsfor the year ended 30 September 2018

Notes to the consolidated financial statementsfor the year ended 30 September 2018

1. General information

Watkin Jones plc (the "Company") is a public limited company incorporated in the United Kingdom under the Companies Act 2006 (registration number 9791105). The Company is domiciled in the United Kingdom and its registered address is 21‑22 Llandygai Industrial Estate, Llandygai, Bangor, Gwynedd LL57 4YH.

The principal activities of the Company and its subsidiaries (collectively the "Group") are those of property development and the management of properties for multiple residential occupation.

The consolidated financial statements for the Group for the year ended 30 September 2018 comprise the Company and its subsidiaries. The basis of preparation of the consolidated financial statements is set out in note 2 below.

2. Basis of preparation

The preparation of the financial statements in conformity with the Group's accounting policies requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reported period. Whilst these estimates and assumptions are based on the Directors' best knowledge of the amount, events or actions, actual results may differ from those estimates.

The financial information set out above does not constitute the Group's statutory accounts for the years ended 30 September 2018 or 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies, and those for 2018 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Whilst the financial information included in this announcement has been computed in accordance with IFRS as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to send its 2018 Annual Report to shareholders on 21 January 2019.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods for which the financial information included in this announcement has been presented. The financial information included in this announcement is prepared on the historical cost basis except as disclosed in these accounting policies. The financial information is presented in pounds sterling and all values are rounded to the nearest thousand (£'000), except when otherwise indicated.

3. Accounting policies

The results for the year have been prepared on a basis consistent with the accounting policies set out in the Watkin Jones plc Annual Report for the year ended 30 September 2018.

4. Segmental reporting

The Group has identified four segments for which it reports under IFRS 8 'Operating Segments'. The following represents the segments that the Group operates in:

a. Student accommodation - the development of purpose built student accommodation;b. Build to rent - the development of build to rent accommodation;c. Residential - the development of traditional residential property; andd. Accommodation management - the management of student accommodation and build to rent property.

Corporate - revenue from the development of commercial property forming part of mixed use schemes and other revenue and costs not solely attributable to any one operating segment.

All revenues arise in the UK.

Performance is measured by the Board based on gross profit as reported in the management accounts.

Apart from Inventory and WIP, no other assets or liabilities are analysed into the operating segments.

5. Exceptional income

Following the sale of a portfolio of properties by the Curlew Student Trust ("CST"), Fresh Property Group ("FPG") was compensated for the initial reduction in the scope of management services and subsequent termination of the accommodation management contracts for those properties by the new owner. In addition, FPG holds a carried interest investment in CST associated with its role as preferred property manager and received a share of the profit realised by CST on the sale of the property portfolio.

6. Income taxes

Reconciliation of total tax expense

7. Earnings per share

Basic and diluted earnings per share ("EPS") amounts are calculated by dividing the net profit or loss for the year attributable to ordinary equity holders of the parent by the weighted average number of shares in issue during the year. For the years ending 30 September 2018 and 30 September 2017, all profits arise from continuing operations.

The following table reflects the income and share data used in the basic and diluted EPS computations:

8. Dividends

The final dividend proposed for the year ended 30 September 2018 is 5.13 pence per ordinary share. This dividend was declared after 30 September 2018 and as such the liability of £13,095,293 has not been recognised at that date. At 30 September 2018, the Company had distributable reserves available of £135,248,000 (30 September 2017: £152,784,000).

9. Reconciliation of profit before tax to net cash flows from operating activities

Major non-cash transactions

There were no major non-cash transactions during the period.

10. Analysis of net cash/(debt)

11. Annual report

Copies of this announcement are available from the Company at Units 21‐22 Llandygai Industrial Estate, Llandygai, Bangor, Gwynedd, LL57 4YH. The Group's annual report for the year ended 30 September 2018 will be posted to shareholders shortly and will be available on our website at www.watkinjones.com.

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