Watkin Jones Regulatory News (WJG)

Watkin Jones plc

('Watkin Jones' or the 'Group')

Half year results for the six months to 31 March 2021

'Maintaining momentum as confidence returns'

Watkin Jones plc (AIM:WJG), the UK's leading developer and manager of residential for rent, with a focus on the build to rent ('BtR') and purpose built student accommodation ('PBSA') sectors, announces its results for the six months ended 31 March 2021 ('H1-2021' or the 'period').

Financial Highlights

Commenting on the interim results, Richard Simpson, Chief Executive Officer of Watkin Jones, said: "As we begin to emerge from the pandemic, we are seeing increasing investor confidence in our market sectors. We've maintained the momentum from the second half of last year and made further good progress in securing new forward sales, adding to our development pipeline and keeping all our construction activities on track.

"All parts of the business have continued to perform well, and whilst our profit for the first half of the year was slightly below last year, this was because the first half last year was largely before the onset of the disruption caused by the pandemic.

"The fundamentals supporting the markets for high quality build to rent and student accommodation assets remain strong, driving growing institutional demand, and combined with the continued progress we have made in the first half of the year, gives us confidence in our future trading."

Financial headlines

· £29.1 million operating profit, slightly below last year's pre-pandemic level

· 33% of revenue was from BtR, showing its increasing importance to the Group (H1-2020: 22%)

· 23.2% gross margin, up 0.4% points (H1-2020: 22.8%), with a robust performance across all our businesses

· £146.3 million total liquidity available, being cash and available debt facilities (H1-2020: £153.4 million)

· 2.6 pence per share interim dividend (H1-2020: nil pence)

Notes

1. The comparative results for H1-2020 have been restated for an adjustment to opening IFRS 16 lease assets and liabilities. Further details are provided in note 3 to the interim financial statements.

2. Net cash is stated after deducting site specific bank loans and other interest-bearing loans, but before deducting IFRS 16 lease liabilities.

Business Highlights

Operational resilience demonstrated across all parts of the Group

· Work is on track on all 15 BtR and PBSA developments currently being built

· 3,424 new student bed property management mandates for Fresh since the start of the year

· Residential sales momentum maintained

Continued progress in forward sales market

· 909 beds across three PBSA developments contracted in the period

· 462-bed PBSA development in Leicester contracted after the half year

· 722 BtR apartments in advanced legals for sale, these being Hove (216 apartments), Leicester (184 apartments) and Lewisham (322 apartments)

· 295-bed PBSA development in Edinburgh for delivery in FY23, sale terms agreed

Development pipeline further enhanced

· £1.6 billion future revenue value now in our secured development pipeline (up from £1.0 billion last year):

* Excluding the revenue delivered in the period.

· 542 BtR apartments and 599 PBSA beds added to our pipeline since our last update in January 2021:

· Planning secured for our first co-living scheme, for 133 beds in Exeter, in which tenants have a private studio with shared communal facilities

Market dynamics supportive

· Significant increase in institutional demand for PBSA; confidence returning in occupancy levels for 2021-2022 academic year

· Growing institutional demand for BtR

Affordable homes opportunity

· Pilot on track

Analyst meeting

A conference call for analysts and investors will be held at 09.30am today, 18 May 2021. A copy of the Half Year Results presentation will be available on the Group's website: http://www.watkinjonesplc.com

An audio webcast of the conference call with analysts will be available after 12pm today:

https://webcasting.buchanan.uk.com/broadcast/607d6a2c0386285386cc951a

For further information:

Media enquiries:

Notes to Editors

Watkin Jones is the UK's leading developer and manager of residential for rent, with a focus on the build to rent and student accommodation 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 43,000 student beds across 130 sites, making it a key player and leader in the UK purpose-built student accommodation market. In addition, Fresh, the Group's specialist accommodation management business, manages over 20,000 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 increasingly expanding its operations into the build to rent sector and is piloting an opportunity to re-focus its residential house building operation as a developer of affordable homes.

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

Review of Performance

Results for the six months to 31 March 2021

Revenues for the period were £178.4 million, compared to the pre-pandemic £185.7 million for H1-2020. Our developments in build are all progressing in line with expectations.

Gross profit was £41.3 million (H1-2020: £42.3 million), with an improvement in the gross margin to 23.2% from 22.8% last year. Margin performance was as expected, with the developments in build contributing strongly.

Operating profit for the period was £29.1 million (H1-2020: £29.6 million).

Net finance costs for the period amounted to £3.2 million (H1-2020: £2.9 million), reflecting the additional cost associated with the £40.0 million increase in our RCF limit in May last year. Finance costs include £2.4 million (H1-2020: £2.6 million) in respect of the finance cost of capitalised operating leases under IFRS16.

Profit before tax for the period was £25.8 million (H1-2020: £26.7 million). Basic earnings per share for the period were 8.11 pence, compared to 8.46 pence for H1-2020.

Segmental review

Build to Rent ('BtR')

The contribution from BtR increased further in the period, with revenues of £59.1 million, up £17.9 million (43.3%) on H1-2020. Revenues derived from the build of our forward sold developments in Reading, Sutton, Stratford and Wembley, which are progressing on track for completion in H2-2021.

BtR gross profit for the period was £12.4 million (H1-2020: £6.6 million), an increase of 87.8%. The margin for the period was 21.0% (H1-2020: 16.1%), reflecting a robust performance across all of the developments in build for FY21 as they near completion.

We are in advanced legals for the forward sale of our developments in Hove (216 apartments), Leicester (184 apartments) and Lewisham (322 apartments plus 43 affordable).

In the period we secured a site in Belfast (780 apartments) and subsequent to the period end a site in Edinburgh (524 apartments), both subject to planning. We are actively progressing with several other site acquisitions.

The current BtR development pipeline is as shown in the table below:

\* The change in the pipeline is compared to the previous update in January 2021.

The appraised future revenue value to the Group of the secured development pipeline, excluding the revenue delivered in H1-2021, is c.£950.0 million (H1-2020: £550.0 million).

Student accommodation ('PBSA')

Revenues from PBSA were 13.3% lower than last year at £104.8 million (H1-2020: £120.8 million), with the prior year revenues benefitting by £23.5 million from the recognition of the full sales value of a development completed in Chester, which had been sold on a turnkey basis. Forward sold development revenues were therefore a little ahead of last year, reflecting the continued good progress on site of all developments in build.

PBSA revenues include the letting income on our six historic leased PBSA assets and this has been reduced by approximately £4.3 million compared to H1-2020 as a result of the lower level of student occupancy this year. We have seen a number of students returning to their accommodation as lockdown restrictions have eased and we expect the full year reduction in revenues to be within the previously guided maximum of £10.0 million.

The gross margin for PBSA was 24.1%, a small decrease on the 24.5% gross margin for H1-2020.

In the period we forward sold three PBSA developments in Bristol (291 beds), Leicester (250 beds) and York (368 beds) for delivery in FY22. For each of these developments, the clients concerned acquired the land site directly. Subsequent to the period end we exchanged contracts for the sale on a turnkey basis of our 462-bed scheme in Leicester, for delivery this financial year. The combined revenue value to the Group of these four contracted sales is £101.1 million.

We have also agreed terms for the forward sale of a 295-bed development in Edinburgh, subject to the receipt of a planning amendment, which is targeted for delivery in FY23.

We secured two sites subject to planning since the start of the year, these being in Edinburgh (286 beds) and Swansea (350 beds).

The current PBSA development pipeline is as shown in the table below:

\* The change in the pipeline is compared to the previous update in January 2021.

The appraised future revenue value to the Group of the secured development pipeline, excluding the revenue delivered in H1-2021, is c.£625.0 million (H1-2020: c.£500.0 million).

Accommodation management (Fresh)

Fresh achieved revenues of £3.8 million (H1-2020: £4.1 million), reflecting the largely fixed nature of its management fee income. The reduction of 8% reflects the loss of some income that varies with student occupancy levels, partly offset by the higher number of student beds and BtR apartments under management at the start of the year (20,179), compared to the start of FY20 (17,721).

Operationally, Fresh has continued to support both its student customers and clients through the pandemic. Since the start of the year it has won new mandates for 3,424 student beds.

The reduction in Fresh's revenue for the period led to a modest decrease in gross profit to £2.2 million (H1-2020: £2.6 million), at a margin of 58.4% (H1-2020: 61.9%).

By FY 2023, Fresh is currently appointed to manage 22,981 student beds and BtR apartments across 71 schemes, including expected renewals, an increase of 1,191 beds since our update in January 2021.

Residential

The residential development business achieved 33 sales completions in the period, in line with its targets (H1-2020: 73 sales). H1-2020 sales included the completion of the 35-apartment scheme at Trafford Street, Chester, which had been sold on a turnkey basis. Excluding this sale, house completions for H1-2021 were at a similar level to last year. The momentum we reported in new sales being reserved during the summer months of 2020 has continued, with a further 55 reservations since the start of the year, adding to the 25 reservations with which we started the year.

Revenues for the division were £8.9 million lower than last year at £10.7 million. H1-2020 revenues included the revenue from the completion of the apartment scheme in Chester, as well as the remaining higher value sales of apartments at our Duncan House, Stratford development.

The gross profit achieved by the division was £1.5 million (H1-2020: £3.7 million), at a margin of 14.0% (H1-2020: 19.0%). The reduction in margin reflects the mix of sales, with last year's margin benefiting in particular from the apartment sales at Duncan House.

Affordable homes pilot

We made good progress with the launch of the North West affordable homes pilot in the period.

Pipeline

We completed the acquisition of the site in Crewe for 245 units and exchanged contracts on a site for 51 units in Llay, Wrexham. We are also in advanced legal negotiations to secure a further site in the North West for 189 units, which will bring the current affordable homes pipeline to 485 units for delivery over the period FY22 - FY25. All of these sites have planning. Given the encouraging initial progress, a number of further site opportunities are also under review.

Forward sales

Subsequent to the period end we exchanged forward sale contracts with Adra for 23 units at the site in Llay and we expect to exchange contracts imminently for the forward sale of 159 units at the site in Crewe. We are also progressing heads of terms for the forward sale of 133 units at the further new site that we are in the process of acquiring. All forward sale values are in line with our financial appraisals.

Balance sheet and liquidity

Our financial position and liquidity remains strong. We had a cash balance at 31 March 2021 of £88.7 million (31 March 2020: £72.4 million), whilst net cash stood at £31.7 million (31 March 2020: £37.5 million), before deducting IFRS 16 lease liabilities.

The Group had undrawn headroom of £47.6 million on its revolving credit facility ('RCF') with HSBC at 31 March 2021 and an unutilised overdraft facility of £10.0 million, giving total cash and available facilities of £146.3 million (31 March 2020: £153.4 million).

We have continued to secure opportunities in the land market during the pandemic. We have also been able to progress the development of our BtR and PBSA schemes in Leicester for completion in FY21. This investment, combined with our normal annual cash profile, which sees a utilisation of cash in the first half of the year, resulted in a reduction in our net cash balance of £63.1 million since the start of the year. Our inventory and work in progress balance has similarly increased by £63.3 million in the period to £189.0 million. Of this balance, £42.3 million relates to the work in progress cost of the two developments in Leicester.

Contract assets and receivables at 31 March 2021 stood at £38.7 million and £23.5 million respectively and were broadly unchanged from the position at 30 September 2020. The contract assets relate primarily to the final payments to be received on completion of the forward sold developments in build. Contract and trade liabilities amounted to £98.1 million at 31 March 2021 and were also at a similar level to the FY20 year-end position.

Environmental, Social and Governance ('ESG')

We continue to evolve our ESG framework. Our work in the period has centred on identifying the key initiatives for the business, determining the targets against which we will measure and report our performance and how the initiatives will be integrated as part of our day to day operations. As part of this work we are engaging with our key stakeholders to identify what is important to them and to help inform our approach.

The health and safety of our employees, supply chain partners and tenants of the properties we manage is our number one priority. We continue to deploy strict Covid-19 working practices on our sites and through Fresh to ensure that the wellbeing of students and our BtR consumers is catered for. Whilst we have continued to operate highly effectively, this is against the backdrop of the pandemic and our employees have continued to work tirelessly in exceptionally difficult circumstances. Their efforts and commitment have been exemplary and I would again like to thank them all personally.

Cladding update

In our FY20 results we made a provision of £15.0 million to cover the cost of cladding remedial works on previous high-rise residential buildings we had developed, working with the property owners concerned to ensure the safety of tenants, even though we are not legally liable. These works are progressing in line with our previous guidance.

£5.1 million of the cost of the works was incurred in FY20, with a further £0.9 million incurred in H1-2021. The remaining provision of £9.0 million is expected to be incurred over the remainder of FY21 and FY22.

The Government has recently announced that it intends to levy a tax on the profits of residential developers, combined with a planning gain levy on future developments, in order to recoup the cost of its high-rise cladding replacement support scheme. The precise scope and detail of the residential developer tax have not yet been concluded and will be the subject of a consultation process over the coming months. We are currently preparing our response and will actively participate in the consultation process.

Dividend

The Board has declared an interim dividend for the period of 2.6 pence per share, which will be paid on 30 June 2021 to shareholders on the register at close of business on 9 June 2021. The shares will go ex-dividend on 8 June 2021.

Outlook

The underlying market fundamentals supporting residential for rent remain strong, as evidenced by increasing investor appetite for both BtR and PBSA as we emerge from the pandemic. This, combined with the growth in our development pipeline, operational capabilities and financial strength, underpins our confidence in the future prospects for the Group.

Richard Simpson

Chief Executive Officer

18 May 2021

Consolidated Statement of Comprehensive Income

for the six month period ended 31 March 2021 (unaudited)

Consolidated Statement of Financial Position

as at 31 March 2021 (unaudited)

Consolidated Statement of Changes in Equity

for the six month period ended 31 March 2021 (unaudited)

Consolidated Statement of Cash Flows

for the six month period ended 31 March 2021 (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 7-9 Swallow Street, London, W1B 4DE.

The principal activities of the Company and its subsidiaries (collectively the 'Group') are the development and management of multi-occupancy residential rental properties.

The consolidated interim financial statements of the Group for the six month period ended 31 March 2021 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 2021 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 20 which has been prepared in accordance with international accounting standard in conformity with the requirements of the Companies Act 2006. 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 498(2) of the Companies Act 2006.

This report was approved by the directors on 17 May 2021.

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 2021. To the extent that IFRS at 30 September 2021 does 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 2020. 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 2020.

Restatement of results for six months to 31 March 2020

After the release of the half year results to 31 March 2020, several changes were made in relation to the initial application of the new accounting standard, IFRS 16, and incorporated into the audited full year results for the year ending 30 September 2020. The comparative figures to 31 March 2020 have now been restated to reflect these amendments, which relate to the Group's six historic student accommodation sale and leaseback properties. These assets had been reported in the H1-2020 consolidated statement of financial position as 'right of use' assets, but have been reclassified as 'investment property (leased) assets' at 30 September 2020. This better reflects the asset classification requirements of IAS 40 'Investment Property' when applied in conjunction with IFRS 16. In addition, a change was made to the Incremental Borrowing Rates ("IBRs") used to calculate the initial values for the investment property (leased) assets and associated lease liabilities, which had the effect of reducing their opening values. The IBRs were increased to better reflect the likely borrowing rate which would be paid over a similar term to the underlying long leases. Presentational changes have also been made to the consolidated statement of financial position at 31 March 2020 in relation to provisions for onerous leases, which are now reported within investment property (leased) assets as impairment provisions; and to prepayment and accrual balances relating to the leases which are now included in the lease asset and liability values.

The restatements for these changes are immaterial on total comprehensive income, reduce net equity by £0.5 million and have no impact on cash. The detailed changes to each affected financial statement line items are as follows:

Impact on consolidated statement of comprehensive income due to increase in IBR:

Impact on basic and diluted earnings per share (EPS) due to the correction relating to the IBR:

Impact on consolidated statement of financial position as at 31 March 2020:

Impact on consolidated statement of cash flows due to the correction relating to the increase in IBR:

4. Segmental reporting

The Group has identified four segments for which it reports under IFRS 8 'Operating segments', as follows:

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 residential property for sale; and

D 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.

Performance is measured by the Board based on gross profit as reported in the management accounts. Apart from inventory and work in progress, no other assets or liabilities are analysed into the operating segments.

The comparative information for the 6 months to 31 March 2020 has been re-presented in a way which is consistent with the internal reporting provided to the chief operating decision-maker. Revenue of £4,698,000 and gross profit of £689,000 has been transferred from the residential to the build to rent segment.

5. Disaggregated revenue information

6. Exceptional costs

7. Income taxes

The tax expense for the period has been calculated by applying the estimated effective tax rate for the financial year ending 30 September 2021 of 19.6 % to the profit for the period.

8. 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.

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

9. Dividends

An interim dividend of 2.6 pence per ordinary share will be paid on 30 June 2021. This dividend was declared after 31 March 2021 and as such the liability of £6,660,000 has not been recognised at that date. At 31 March 2021 the Company had distributable reserves available of £81,990,000.

10. Leases

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

12. Analysis of net cash/(debt)

13. Employee Benefits - long-term incentive plans

In January 2021, 1,230,560 share awards were made under the Watkin Jones plc Long-Term Incentive Plan (the Plan). The awards have an exercise price of one penny per share and become exercisable after three years from the date of grant subject to continued employment and the Company's Earning per Share (EPS) and Total Shareholder Return (TSR) performance as follows:

1Vesting on a straight-line basis between target levels

The fair value of share awards granted subject to EPS conditions is 194.8 pence and has been estimated as the market price of an ordinary share of the Company at the date the award was granted less the one penny exercise price for the award. The fair value of the share awards subject to TSR performance conditions has been estimated at the grant date using a Monte Carlo valuation model using the following assumptions:

This resulted in an estimated fair value for an award with TSR performance conditions of 63.78 pence. For the six months ended 31 March 2021, the amount charged to the statement of comprehensive income and credited to share based payment reserve was £167,575 (31 March 2020: (£47,765)).

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