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
|
|
H1 2018 |
H1 2017 |
Movement
|
|
Revenue |
£158.3 million |
£133.7 million |
+18.4% |
|
Gross profit |
£34.5 million |
£29.1 million |
+18.6% |
|
Operating profit |
£23.8 million |
£19.4 million |
+22.7% |
|
Adjusted EBITDA1 |
£24.5 million |
£21.9 million |
+11.9% |
|
Profit before tax |
£23.6 million |
£21.1 million |
+11.9% |
|
Basic EPS |
7.53 pence |
6.69 pence |
+12.5% |
|
Dividend per share |
2.47 pence |
2.2 pence |
+12.3% |
|
Net cash |
£38.4 million |
£11.7 million |
+328.2% |
· 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.