Watkin Jones Regulatory News (WJG)

Watkin Jones plc

('Watkin Jones' or the 'Group')

Half year results for the six months to 31 March 2018

Watkin Jones plc (AIM:WJG), a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation and build to rent sectors, announces its half year results for the six months ended 31 March 2018. The Board is pleased to report a successful first six months of the financial year with trading in line with its expectations.

Financial Highlights

· Revenues for the half year up 18.4% on the prior half year, driven by student accommodation developments.

· Strong profit growth for the half year, with gross profit increased by 18.6% to £34.5 million (H1 2017: £29.1 million) and operating profit increased by 22.7% to £23.8 million (H1 2017: £19.4 million).

· Gross margin for the six months to 31 March 2018 maintained at 21.8% (H1 2017: 21.8%).

· 12.3% increase in the interim dividend to 2.47 pence per share (FY 2017: Interim dividend of 2.2 pence per share), in line with our progressive dividend policy.

· Strong cash performance in the first half of the year, with net cash at 31 March 2018 of £38.4 million (31 March 2017: £11.7 million).

Notes

1 Adjusted EBITDA comprises operating profit from continuing operations plus the Group's profit from joint ventures, adding back charges for depreciation and amortisation.

Business Highlights

Student Accommodation Development

· 15 developments (6,090 beds) currently forward sold.

· Total development pipeline of over 10,300 student beds across 25 sites.

· Delivery pipeline:

· FY 2018 deliveries - All ten student developments (3,415 beds) have been forward sold.

· FY 2019 deliveries - Six student developments (2,723 beds) scheduled for delivery. All sites are secured and have planning consents. Four developments currently forward sold (2,245 beds).

· FY 2020 deliveries - Seven student developments (approximately 3,000 beds) currently targeted for delivery, all of which have been secured. Five of the sites have planning (over 2,000 beds) and one development is forward sold.

· FY 2021 and FY 2022 deliveries - two sites secured (over 1,000 beds), with a number of additional site acquisitions progressing.

Build to Rent Development

· Development agreement entered into with M&G Real Estate to deliver a 315 apartment scheme in Reading for occupation in 2021.

· In the first half of the year, the Group secured a significant development site in Uxbridge, for which it is progressing the planning consent. In total, the Group is now in control of five build to rent development sites, three of which have planning, and remains in positive negotiations on several other opportunities.

· The Group expects to deliver over 1,500 build to rent apartments in the next five years.

· The Board is currently at an early stage of exploring ways to enhance shareholder returns from the longer term value creation opportunity of the Group's build to rent programme, which includes consideration of establishing a new investment vehicle to be managed by Watkin Jones.

Accommodation Management

· Student accommodation beds under management by Fresh Property Group ('FPG') increased from 12,117 beds in FY 2017 to 16,185 beds at the start of FY 2018.

· Following the previously announced sale by the Curlew Student Trust ('CST') of a portfolio of 14 student accommodation schemes (the 'Enigma' portfolio), comprising 5,124 beds, FPG have now been notified by the new owner that they will be retained to provide a reduced level of financial reporting only services for 13 of the schemes from 1 May 2018 until August 2018. However, for the 527 bed Mannequin House scheme in Walthamstow, FPG currently remain engaged to provide the full scope of letting services. FPG will be fully compensated for the loss of revenues arising from the reduction in the scope of services and early termination of contracts.

· Curlew Capital have successfully launched a second Fund, Curlew Student Trust 2 ("CST 2"), which has a similar strategy to CST to forward fund and hold good quality student accommodation assets in strong university towns and cities across the UK. FPG is the preferred property manager for CST 2, which creates the potential for longer-term business growth.

· FPG is currently contracted to manage 14,821 student beds across 52 schemes from the start of the 2018/19 academic year and is contracted to manage 17,053 student beds across 58 schemes by FY 2021.

· FPG has been appointed to manage two new student accommodation schemes in Dublin (576 beds), which will come on stream for the 2018/19 and 2019/20 academic years respectively.

· The number of build to rent apartments under management is contracted to increase from the current 532 apartments, across five schemes, to 806 apartments, across six schemes, by FY 2021, FPG having recently won a bid to manage a 274 apartment scheme in Manchester.

CEO Succession

· As announced on 18 May 2018, Richard Simpson has been appointed to succeed Mark Watkin Jones as CEO. Richard will be joining Watkin Jones from Unite Group plc ('Unite'), the FTSE250 manager and developer of purpose-built student accommodation, where he is Group Property Director. Richard will join the Board of Watkin Jones as CEO effective on 2 January 2019.

· Mark Watkin Jones has committed to providing ongoing support to the Group as CEO for as long as is needed, and to work with Richard for a transitional period following his start to ensure an orderly handover.

Commenting on the results, Mark Watkin Jones, Chief Executive Officer of Watkin Jones plc, said: "We are delighted to report strong growth in revenue and profits in the first six months of the financial year. Results were in line with our expectations, reflecting good build progress on forward sold student accommodation developments. We are continuing to see strong demand for our student accommodation developments and are pleased that demand from institutional investors, keen to acquire scale in this maturing asset class, remains robust. We have an excellent development pipeline and we are excited about several other opportunities expected to be added to the pipeline in the second half of the year.

We are also highly encouraged by the recent development funding agreement with M&G which highlights our continued progress in the build to rent sector. The M&G agreement represents an important addition to Watkin Jones' build to rent strategy, alongside the Group's growing owned site pipeline. The Group is now in control of five build to rent development sites and remains in positive negotiations on several other opportunities. We remain optimistic about the scale of opportunities this sector offers.

The fundamentals for each of our business segments remain positive and the market dynamics strongly support the Group's forward sale model, providing us with good future visibility on earnings and cashflows. On behalf of the Board I would like to thank all our staff for helping us deliver an excellent first half year performance. The Board is confident in the outlook for the Group."

Chief Executive's Statement

Results for the six months to 31 March 2018

The Board is pleased to report a strong growth in revenue and profits for the six months to 31 March 2018, compared to the same period last year.

Revenues for the half year were in line with management's expectations, up 18.4% on the prior half year to £158.3 million, reflecting the good build progress on forward sold student accommodation developments in the first half of the year. Gross profit increased by £5.4 million to £34.5 million (H1 2017: £29.1 million). The gross margin for the period of 21.8% has been maintained at the same level as for the prior half year, and continues to be driven by the location and quality of student accommodation schemes in development, as well as further growth in the profits earned by FPG.

Overhead costs for the period amounted to £10.7 million, compared to £9.7 million for H1 2017. The increase is largely personnel related and reflects both salary increases and the cost of additional personnel to support the growth in the business.

Operating profit increased by 22.7% to £23.8 million (H1 2017: £19.4 million).

The Group made a profit on the disposal of its joint venture interest in Rufus Estates Limited in the period of £0.1 million. This was a legacy joint venture interest relating to a development site in Chester. The consideration for the sale amounted to £0.4 million.

After accounting for net finance costs of £0.3 million, the Group's profit before tax for the period amounted to £23.6 million, compared to £21.1 million for the prior half year, an increase of 11.9%.

Adjusted EBITDA for the period, including the profits from the Group's joint venture interests, was £24.5 million (H1 2017: £21.9 million).

Basic earnings per share were 7.53 pence for the period, an increase of 12.5% compared to the 6.69 pence per share for H1 2017.

Segmental review

Student accommodation

Revenues from student accommodation development amounted to £142.2 million for the period, compared to £115.2 million for the comparative period last year, an increase of 23.5%. This strong growth in revenues was in line with management's expectations and reflects the good build progress in the period on the forward sold developments which are for delivery in FY 2018 and FY 2019.

The gross margin for the period on student accommodation developments amounted to 20.7%, compared to 21.7% for H1 2017. The student accommodation margin has remained strong on the mix of developments in progress, with the slight drop being more a reflection of a particularly high margin contribution from certain developments that were completed in FY 2017.

The Group has a strong student accommodation development pipeline, currently comprising 25 development sites which will deliver over 10,300 beds to the market with an appraised net development value of approximately £900 million. This compares to a development pipeline of 31 development sites delivering 11,200 beds, with a development value of £920 million, reported in the Group's interim report last year. The Group is currently in negotiation on a number of other opportunities which it is expected will further add to this pipeline in the second half of the year.

All developments for completion in the current financial year are sold (3,415 beds).

Six developments (2,723 beds) are scheduled for delivery in FY 2019 and of these, four have so far been forward sold (2,245 beds). This delivery schedule reflects a recent commercial agreement with one of our clients, at their request, to defer the completion of one development until FY 2020. Although the Group will see a smaller number of beds delivered in FY 2019, the overall value of schemes in build during FY 2019 for delivery in FY 2019 and FY 2020 is expected to be in line with previous guidance.

Looking ahead to FY 2020, seven developments (approximately 3,000 beds) are currently targeted for delivery, all of which are secured. Five of the sites have planning (over 2,000 beds) and one of the developments is forward sold.

The Group currently has two development sites secured for FY 2021 and FY 2022 delivery (over 1,000 beds).

Build to Rent development

The Group has continued to make good progress with its build to rent development pipeline.

As announced on 18 May 2018, Watkin Jones has entered into a development funding agreement with M&G Real Estate ('M&G') to deliver a 315 apartment build to rent scheme in Reading. Under the agreement, the Group will receive £68.5 million for the development works which it is to carry out. Construction works will commence immediately, with completion of the development targeted for 2021. The purpose-designed build to rent scheme, which is located at the Thames Quarter, close to the rail station and town centre, 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 overlooking the River Thames. The Reading scheme is a significant addition to the Group's build to rent pipeline.

In the first half of the year the Group secured a significant development site in Uxbridge, for which it is progressing the planning consent. In total, the Group is in control of five build to rent development sites and remains in positive negotiations on several other opportunities. Including Reading, the Group expects to deliver over 1,500 build to rent apartments in the next five years.

Following an initial marketing exercise for the Group's scheme in Sutton, keen expressions of interest have been received from several parties. However, it has not yet been possible to progress this interest further pending a satisfactory conclusion to discussions with the Greater London Authority and the London Borough of Sutton as to the level of affordable housing provision for the scheme. The Sutton scheme is one of the first to be negotiated in London since the Affordable Housing and Viability Supplementary Planning Guidance was issued by the Mayor of London in August 2017 and this is providing some initial practical application difficulties which have yet to be resolved.

Residential

In the six months to 31 March 2018, the residential development business achieved 28 sales completions, as compared to 31 in H1 2017. The low level of sales completions in the first half is consistent with last year and reflects the current seasonality of the business, with sales heavily weighted to the second half as new developments in build come on stream. As at 31 March 2018, 67 sales were legally exchanged or reserved for completion in the second half of the year providing us with good visibility for the remainder of the year (H1 2017: 31 sales exchanged/reserved).

Revenues for the residential development business amounted to £5.3 million, compared to £5.7 million for the equivalent prior period. The lower sales value is attributable to sales from legacy sites at nil margin, which amounted to £1.9 million in H1 2018, compared to £2.9 million in H1 2017.

Accommodation management

For the six months ended 31 March 2018, the Fresh Property Group ('FPG') increased its revenues to £3.7 million (H1 2017: £3.0 million) and its gross profit to £2.4 million (H1 2017: £1.9 million), giving a gross margin of 65.3% (H1 2017: 63.2%). The further improvement in the gross margin reflects the benefit of the increase in scale of FPG's operations.

FPG had 16,185 student accommodation beds under management across 53 schemes at the start of FY 2018, compared to 12,117 beds across 43 schemes at the start of FY 2017.

Following the previously announced sale by the Curlew Student Trust ('CST') of a portfolio of 14 student accommodation schemes (the 'Enigma' portfolio), comprising 5,124 beds, FPG have now been notified by the new owner that they will be retained to provide a reduced level of financial reporting only services for 13 of the schemes from 1 May 2018 until August 2018, when the management agreements will be terminated. However, for the 527 bed Mannequin House scheme in Walthamstow, FPG currently remain engaged to provide the full scope of letting services. FPG will be fully compensated for the loss of revenues arising from the reduction in the scope of services and early termination of contracts.

Curlew Capital have successfully launched a second Fund, Curlew Student Trust 2 ('CST 2'), backed again by clients of CBRE Global Investment Partners, and which has a similar strategy to CST to forward fund and hold good quality student accommodation assets in strong university towns and cities across the UK. FPG is the preferred property manager for CST 2.

From the start of the 2018/19 academic year FPG is currently contracted to manage 14,821 student beds across 52 schemes and this number is contracted to increase to 17,053 student beds under management across 58 schemes by FY 2021.

The number of build to rent apartments under management is contracted to increase from the current 532 apartments across five schemes to 806 apartments across six schemes by FY 2021, FPG having recently won a bid to manage a 274 apartment scheme in Manchester.

FPG is in active discussions regarding opportunities to secure new management contracts in both the student accommodation and build to rent sectors under the Fresh Student Living and Five Nine Living brands. This includes opportunities in Dublin, where FPG has recently been appointed to manage two new student accommodation schemes (576 beds) which will come on stream for the 2018/19 and 2019/20 academic years respectively. It is also expected that the recent successful launch of CST2 will provide an additional opportunity for future business growth. FPG is working with CST2 in appraising several new schemes.

Balance sheet and cashflow

The Group had net cash at 31 March 2018 of £38.4 million, comprising cash of £61.6 million less borrowings of £23.2 million. This compares to net cash at 31 March 2017 of £11.7 million and at 30 September 2017 of £41.0 million.

The reduction in net cash for the period of £2.6 million (H1 2017: £20.5 million) reflects the Group's normal cashflow profile which, depending on the timing of forward development sales, sees a cash utilisation in the first half of the year, followed by cash generation in the second half of the year as development sites for delivery in future years are forward sold and the significant final payments due on completion of the current year's developments are received. The low net cash utilisation in H1 2018 compared to H1 2017 reflects the timing benefit of the receipt of £22.8 million of cash relating to forward sales of the Group's development sites at Pittodrie Street, Aberdeen and Midland Road, Bath, which were agreed during FY 2017, but could not be contractually completed until the beginning of FY 2018.

The Group generated a cash inflow from operating activities for the period of £7.0 million (H1 2017: £19.9 million cash outflow), after accounting for tax paid of £8.3 million. The Group's cash position also benefitted from a partial distribution from the Curlew Student Fund of £1.7 million resulting from the sale of the Enigma portfolio. The cash cost of the FY 2017 final dividend paid in the period amounted to £11.2 million.

The Group's investment in joint ventures was reduced by £0.3 million in the period as a result of the disposal of the Group's interest in Rufus Estates Limited, whilst other financial assets were reduced by £1.6 million to £1.1 million after accounting for the distribution from the Curlew Student Fund referred to above.

Inventory and work in progress increased by £20.3 million in the period to £145.5 million, reflecting a modest level of investment in new student accommodation and build to rent sites, as well as an increase in work in progress for the residential business relating to the new developments in build. This trend is expected to reverse in the second half of the year as the forward sales of the sites currently in legal negotiation complete and the targeted residential sales are achieved.

Dividend

In announcing the Group's FY 2017 full year results, the Board stated its intention of aiming to pay dividends at a level that will be two times covered by annual earnings and that it would fully implement this policy by FY 2019. Therefore, in line with this intention, the Board has declared an interim dividend for the period of 2.47 pence per share, which is a 12.3% increase on the interim dividend paid last year. It will be paid on 29 June 2018 to shareholders on the register at close of business on 8 June 2018. The shares will go ex-dividend on 7 June 2018.

Outlook

The Board is confident in the outlook for the Group, with the fundamentals for each of its business segments remaining positive.

The Group continues to see strong demand for its student accommodation developments from both UK and international clients. The UK student accommodation market is continuing to attract institutional investors keen to acquire scale in this maturing asset class, which remains supported by the growth in student numbers and the progressive move to high quality purpose-built accommodation. There have been a number of new international funds entering the market, with increasing momentum from investors located in the Far East, as well as UK funds repositioning themselves to be competitive in acquiring new assets. The depth of institutional demand continues to have a positive effect on development values, with yields continuing to sharpen, and investors increasingly willing to partner with Watkin Jones to acquire portfolios of assets on a forward fund basis. The market dynamics strongly support the Group's forward sale model and this, combined with the secured pipeline of development sites continues to provide the Group with excellent visibility on future earnings and cash flow.

The Board is encouraged by the progress the Group has made in the build to rent sector. The completion of the development funding agreement with M&G for the market leading scheme in Reading represents a significant addition to the Group's build to rent pipeline and the Board is optimistic that this will lead to similar development opportunities. In view of the scale of opportunity that the burgeoning build to rent sector offers, the Group is currently at an early stage of exploring ways to enhance shareholder returns from the sector, which includes consideration of establishing a new investment vehicle ('NewCo') to be managed by Watkin Jones. The NewCo, which may be listed, would act as a prospective acquirer of the Group's build to rent developments on a forward fund basis. Watkin Jones would consider taking a minority stake in the NewCo, which would allow the Group to further benefit from the long term value proposition in the build to rent sector, alongside an incremental fee stream from the management of the NewCo and the opportunity for Fresh Property Group to provide the accommodation management services.

The residential development business has several promising new developments in build, including apartment schemes in Bath and Stratford, which should see the division making an increasing contribution to the Group's results.

The prospects for the student accommodation management business remain positive. Whilst the loss of student beds under management from the sale of the Enigma portfolio of assets by the Curlew Student Fund will result in a modest drop in the total beds under management for the 2018/19 academic year, the longer term growth prospects remaining encouraging, especially as Fresh Property Group is well placed to capitalise on the growing opportunity in the build to rent sector.

The fundamentals for each of the Watkin Jones' business segments remain positive and the market dynamics strongly support the forward sale model, providing good future visibility on earnings and cashflows. The Board is confident in the outlook for the Group.

Mark Watkin Jones

Chief Executive Officer

22 May 2018

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Notes to Editors

Watkin Jones is a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation and build to rent sectors. The Group has strong relationships with institutional investors, and a reputation for successful, on-time-delivery of high quality developments. Since 1999, Watkin Jones has delivered more than 34,500 student beds across 107 sites. In addition, Fresh Property Group, the Group's specialist accommodation management company, manages more than 16,000 student beds on behalf of its institutional clients. Watkin Jones has also been responsible for over 50 residential developments, ranging from starter homes to executive housing and apartments. The Group is now expanding its development and management 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 six month period ended 31 March 2018 (unaudited)

Consolidated Statement of Financial Position

as at 31 March 2018 (unaudited)

for the six month period ended 31 March 2018 (unaudited)

Consolidated Statement of Cash Flows

for the six month period ended 31 March 2018 (unaudited)

Notes to the consolidated financial information

1. General information

Watkin Jones plc (the 'Company') is a limited company incorporated in the United Kingdom under the Companies Act 2006 (Registration number 09791105). The Company is domiciled in the United Kingdom and its registered address is Units 21-22, Llandygai Industrial Estate, 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 interim financial statements of the Group for the six month period ended 31 March 2018 comprises the Company and its subsidiaries. The basis of preparation of the consolidated interim financial statements is set out in note 2 below.

The financial information for the six months ended 31 March 2018 is unaudited. It does not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006. The consolidated interim financial statements should be read in conjunction with the financial information for the year ended 30 September 2017, which has been prepared in accordance with IFRSs as adopted by the European Union. The report of the auditors on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 434 of the Companies Act 2006.

This report was approved by the directors on 21 May 2018.

2. Basis of preparation

The interim financial statements have been prepared based on IFRS that are expected to exist at the date on which the Group prepares its financial statements for the year ended 30 September 2018. To the extent that IFRS at 30 September 2018 do not reflect the assumptions made in preparing the interim financial statements, those financial statements may be subject to change.

The interim financial statements have been prepared on a going concern basis and under the historical cost convention.

The interim financial statements have been presented in pounds sterling and all values are rounded to the nearest thousand (£'000), except when otherwise indicated.

The preparation of financial information in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual events may ultimately differ from those estimates.

The interim financial statements do not include all financial risk information and disclosures required in the annual financial statements and they should be read in conjunction with the financial information that is presented in the Company's audited financial statements for the year ended 30 September 2017. There has been no significant change in any risk management policies since the date of the last audited financial statements.

3. Accounting policies

The accounting policies used in preparing these interim financial statements are the same as those set out and used in preparing the Company's audited financial statements for the year ended 30 September 2017.

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;

b. Residential - the development of traditional residential property; and

c. 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 attributable to any one division.

The build to rent segment was introduced for the first time in FY17. This is a new segment in which the Group is to commence development activities. During FY17 and the six months ended 31 March 2018, several build to rent opportunities were secured, leading to a holding of inventory and work in progress for this segment at 31 March 2017 and 31 March 2018.

All revenues arise in the UK.

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

5. Disposal of interest in joint venture

On 29 March 2018 the Group disposed of its joint venture interest in Rufus Estates Limited, realising a profit on the disposal of 121,000. The proceeds received from the disposal amounted to £400,000, of which £250,000 was received on 29 March 2018 and £150,000 is to be paid by 30 June 2018.

6. Income taxes

The tax expense for the period has been calculated by applying the estimated tax rate for the financial year ending 30 September 2018 of 18.62% to the profit for the period.

7. Earnings per share

Basic 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 ordinary shares in issue during the year.

There is no difference between basic earnings per share and diluted earnings per share as there are no dilutive share option arrangements in place.

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

8. Dividends

An interim dividend of 2.47 pence per ordinary share will be paid on 30 June 2018. This dividend was declared after 31 March 2018 and as such the liability of £6,305,000 has not been recognised at that date.

9. Other financial assets

The available-for-sale financial assets at fair value comprise units held in the Curlew Student Trust, A Guernsey registered unitised fund established to invest in student accommodation (the "Fund"). The Group has invested a total of £2,150,000 (2017 £2,150,000) in the Fund, including £150,000 invested by Fresh Student Living Limited prior to its acquisition by the Group, as part of an agreement to develop student accommodation properties for the Fund, which were completed in the years ending 30 September 2014 and 30 September 2015. As at 31 March 2018, the Group held 1,839,991 units (H1 2017: 1,839,991 units) in the Fund.

In the period ended 31 March 2018, the Group received £1,670,000 from the Fund, by way of a partial distribution of cash following the sale by the Fund of a portfolio of assets. Further cash distributions are expected to be made by the Fund in connection with the sale once the Fund's accounts have been completed and audited.

10. Reconciliation of operating profit to net cash flows from operating activities

11. Analysis of net cash

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