Watkin Jones plc Half Year Results 2022

Watkin Jones plc

(the 'Group')

HY Results for the six months ended 31 March 2022

('H1-2022' or the 'period' 

Record development pipeline, full year in line with expectations

(1)  For H1-2022 Underlying Operating Profit, Underlying Profit before tax and Underlying Earnings per share are calculated before the impact of the exceptional charge of £28.0 million for the potential costs of the remedial work required under the new Building Safety Act

(2)  Adjusted net cash is stated after deducting interest bearing loans and borrowings, but before deducting IFRS 16 operating lease liabilities of £126.0 million at 31 March 2022 (31 March 2021: £134.5 million)

Key Highlights

• Full year underlying profit performance expected to be in line with expectations
• £2.0 billion record pipeline (estimated future revenue), up 43% on last year, of which £0.6 billion has already been forward sold; giving us clear visibility of revenue and earnings growth in future years
• 8.2% increase in revenue to £193.0 million, boosted by strengthening institutional investor demand
• £14.6 million underlying operating profit is down as expected on last year due to:
• A higher proportion of lower margin land sales in the period; and
• The timing impact of the planned portfolio sale of three PBSA schemes
• In response to the new Building Safety Act and following a review of all buildings over 11 metres tall developed by the Group over the last 30 years, we have recognised an exceptional charge of £28.0 million for the potential costs of the remediation work required, which we expect will be incurred over a period of up to 7 years
• £26.8 million adjusted net cash showing good liquidity after high levels of growth investment in H1-2022 which will deliver forward sales in H2-2022 and beyond
• Interim dividend of 2.9p, up 11.5%, reflecting the strengthening development pipeline and expected strong H2-2022 profits
• Operational resilience of the business continues to be demonstrated:
• 15 current developments on track
•  Proactive management of inflationary increases for both asset values and build costs, thus ensuring margins are maintained
• 22,155 beds under Fresh management, up 10% and bookings well advanced for the next academic year
• Affordable-led Homes business is gaining traction with the pipeline building from site acquisitions.
• Announced today the sale to EQT of a PBSA portfolio which comprises three prime student developments along with two operational properties. This has an FY-2022 profit contribution of c. £20 million. All properties are to be managed by Fresh.

Richard Simpson, Chief Executive Officer of Watkin Jones, said : “ We are continuing to build on the positive momentum from the second half of last year and have demonstrated operational resilience through the strength of our business model.  The sale today of a major portfolio of PBSA schemes to EQT, a new institutional investor to the sector, with ongoing management provided by our Fresh business, underlines the attraction of our end-to-end offer for institutional capital targeting UK residential for rent. Our pro-active management of build costs and sales values has ensured that our overall development margins are maintained, and we are confident going into the second half.”

“We note the recent passing of the Building Safety Act. Whilst it is unclear as to the exact remedial works that will be required, we have taken an exceptional charge of £28 million. We expect these remedial costs to be incurred over a period of up to 7 years.

Strong institutional demand for residential for rent assets

• 2 BTR schemes (837 apartments) and 2 PBSA schemes (601 beds) forward sold since the start of FY22
• Includes 1 further BTR scheme (551 apartments) in Birmingham forward sold since the 18 January 2022 preliminary announcement, with total revenue value of c.£136 million
• PBSA portfolio of three developments (1,059 beds), along with two operational properties, has recently closed, and a scheme in Bristol (800 beds) is under offer and expected to close shortly

Development pipeline further enhanced

• Record pipeline now standing at £2.0 billion (including Affordable-led Homes pipeline of £0.1 billion)
• 2 BTR schemes (312 apartments) and 2 PBSA schemes (1,105 beds) acquired since the start of FY22
•  Includes BTR schemes in Leeds (230 apartments) and in Hove (82 apartments)
• Significant planning consents gained since the start of FY22 for a BTR development in Belfast (778 apartments) and a PBSA development in Stratford (397 beds)

Our BTR and PBSA development pipelines are as follows:

PBSA pipeline

BTR pipeline

Building safety

In January 2022, the Government announced its intention to approach developers to fund the remediation of life-critical fire safety issues on buildings over 11 metres and up to 30 years old. The largest developers within the industry were subsequently asked to sign a voluntary pledge regarding the remediation of such issues on these buildings.

While the Group has not been asked to sign the pledge, we agree that individual leaseholders should not have to pay for costs associated with necessary life-critical fire safety remediation work that arise in the short and medium term. We are mindful of our obligations as a responsible developer and will continue to monitor the developing legal situation in order to understand fully how Government expects the new regulatory regime to apply to the development sector as a whole.  In the meantime, we will continue to comply with our legal and contractual obligations.

We note the requirement for secondary legislation to clarify the impact of the Government's plans. However, we expect that, in due course, we will incur costs in relation to remediation works on developments over 11 metres tall and up to 30 years old.

Whilst it is unclear exactly what remedial works will be needed, we have undertaken an initial review of buildings above 11 metres developed by the Group over the last 30 years, and concluded that an exceptional charge of £28.0 million should be made for these potential costs. This amount covers the following areas set out in the Building Safety Act: i) the extension of scope for developers' responsibility to 30 years; ii) the increased scope by including buildings between 11m and 18m; and iii) the expanded scope to incorporate non-cladding fire safety defects.  This amount will be kept under review as the situation is clarified. We expect the costs will be incurred over a period of up to 7 years. The cost estimate assumes no future recoveries from sub-contractors and consultants in the supply chain.

This is in addition to the £15.0 million cladding provision set aside in 2020 which was to cover the remediation of all schemes with ACM or HPL cladding which were still within the original limitation period.

Name change

As the business has evolved and widened its activities, the Board intends to change the corporate and trading name to better reflect today's broader business. Further details will be released in due course.