Watkin Jones Plc - Pre-Close and COVID-19 Update
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Watkin Jones plc
('Watkin Jones' or the 'Group')
Pre-Close and COVID-19 Update
'Resilient business responding to the unprecedented challenge of COVID-19'
Watkin Jones plc (AIM:WJG), the UK's leading developer and manager of residential for rent, with a focus on the student accommodation and Build to Rent sectors, announces a pre-close update for the half year ended 31 March 2020 (the 'period' or 'H1-2020') and comments on the impact of COVID-19.
Pre-Close update for the six months ended 31 March 2020
The Group's trading remained strong through the first half of the year. All business segments performed well, delivering on their operational objectives, with the disruption caused by COVID-19 only starting to have an effect on our operations towards the end of March 2020. As a result, the Board expects to report revenues and earnings for H1-2020 in line with its expectations.
Continued progress was made during the period in growing the pipeline of sites for future development and in achieving forward sales of assets to the Group's high-quality institutional client base, including:
- Forward sale of a 348 bed PBSA scheme at Wilder Street, Bristol, for delivery in FY21;
- Agreement, with planning consent, to increase the forward sold PBSA development at Kelaty House, Wembley by 100 beds;
- Secured two further PBSA sites in Bristol (291 beds) and Bath (300 beds);
- Secured two further significant BtR sites in Birmingham (565 apartments) and Bath (323 apartments).
Including these additions, the Group's forward sold and secured PBSA development pipeline comprises over 7,000 beds, across 19 sites, with 12 sites (4,985 beds) forward sold. On the same basis, the Group's BtR pipeline stands at over 2,600 apartments, across 10 sites, with five developments (1,012 apartments) forward sold. The Group has a number of additional opportunities, in both sectors, which provide scope to further expand the development pipeline.
The performance in the first half reflects the continued strength of demand during the period for well-located assets in the Group's target cities and the recognition of Watkin Jones as a preferred development partner.
The impact of COVID-19
As announced on 27 March, we have begun to experience significant disruption to our operations as a result of the COVID-19 outbreak. Our non-site based staff are currently working from home, in line with our established Business Continuity Plan, and we have halted all non-essential work on our construction sites. This will inevitably impact financial performance, whilst these measures are in place. We have a strong forward sold delivery pipeline for delivery over the next two years. However, it is difficult to predict the scale of adverse impacts caused by further disruption to our operations, or to forward sale markets, at this time. The Board therefore believes that it is appropriate to withdraw financial guidance at the current time, with the intention to reinstate it as soon as the backdrop becomes more stable.
Notwithstanding the challenging current backdrop, the Board believes that the long-term outlook for both the student accommodation and BtR sectors remains strong. These markets are underpinned by robust fundamental growth drivers, which will continue to appeal to institutional investors. The Group is confident of further enhancing its position as a market leader over time.
Watkin Jones has entered this unprecedented period of market uncertainty well positioned, with a 'capital light' business model. The Group has forward sold all of its 2020 developments and eight out of ten of its developments scheduled for delivery in 2021 to institutional partners, which provides cashflow and earnings visibility. At 31 March 2020, the Group had a gross cash balance of circa £71 million and a net cash balance after deducting site specific loans of circa £36 million. In addition, the Group has in place a £60 million RCF to primarily support land procurement and development opportunities, of which only £29 million was drawn down as at 31 March 2020.
Whilst the Group has a resilient financial position, the Board believes it is prudent to adopt a cautious approach to new investment, as well as to introduce measures to manage costs and conserve cash, until the extent and duration of the disruption caused by COVID-19 is better understood. The Board therefore does not intend to declare an interim dividend alongside its results for the six months to 31 March 2020. It will reinstate dividend payments as soon as appropriate. Furthermore, the executive directors will not receive an annual pay increase, which would otherwise have been due on 1 April 2020, and until normal construction activity is resumed, the non-executive directors will waive 20% of their fees.
In our FY19 full year results announcement on 14 January 2020 we advised that the integrity of cladding systems and fire protection measures was a matter of ongoing review. In response to revised government guidance on the suitability of certain cladding solutions, published on 20 January 2020, we have been working with the owners of the buildings we have developed in order to determine if any remedial actions are required. All of Watkin Jones' developments have been constructed in compliance with prevailing building regulations at the time but, given the change to guidance, the Group believes it is right to engage with building owners proactively to ensure any changes are made as expediently as possible.
Whilst discussions with certain property owners remain ongoing, the Board currently expects that this will result in a sharing of the initial costs of any remedial works with them. The gross cost to the Group is currently expected to be in the range of £12 - £15 million over the next two to three years. A one off non-underlying provision for this cost will be made at the year end. The Group believes it may be able to recover some of this cost from the sub-contractors and consultants engaged on implementing the particular cladding systems at the time. This is likely to take an extended period of time to achieve and the extent of any recovery is currently uncertain.