Watkin Jones plc Deliver another impressive set of final results

Watkin Jones plc (LON:WJG), a leading UK developer and constructor of multi-occupancy property assets, with a focus on the student accommodation and build to rent sectors, announced today its annual results for the year ended 30 September 2017. The Board is pleased to report a successful financial year with trading in line with its expectations.

Financial Highlights

Notes

1. For FY17, there is no difference between EBITDA and adjusted EBITDA. EBITDA comprises operating profit from continuing operations plus the Group’s profit from joint ventures, adding back charges for depreciation and amortisation. For FY16, adjusted EBITDA is stated before exceptional IPO costs.

2. For FY17, there is no difference between operating profit and adjusted operating profit. For FY16, adjusted operating profit is stated before exceptional IPO costs.

3. For FY17, there is no difference between basic and adjusted basic EPS. For FY16, adjusted basic EPS is calculated using the profit for the period from continuing operations excluding exceptional IPO costs and is based on the number of shares in issue at 30 September 2016.

· Revenue and gross profit growth were strong and in line with our expectations, driven by student accommodation developments

· Further increase in the gross margin, reflecting the strong locations of our student accommodation developments and a full-year contribution from Fresh Student Living, which was acquired in FY16

· Final dividend of 4.4 pence per share to give a total dividend of 6.6 pence, up 10.0% in line with our progressive dividend policy (FY16 total dividend was 4.0 pence for the period after our IPO, equivalent to 6.0 pence on a full-year basis)

· Continued robust cash performance, with a net cash inflow from operating activities of £19.2 million (FY16: £15.1 million after exceptional IPO costs), with a further £22.8 million of cash received in October 2017, relating to forward sales agreed before the year end

· Net cash of £41.0 million at 30 September 2017 (30 September 2016: £32.2 million)

Business Highlights

Student accommodation development

· All ten student accommodation developments for FY17 delivered ahead of the 2017/18 academic year (3,314 beds)

· 17 student accommodation developments (6,578 beds) were sold during the year, including one operational asset (590 beds), and had a total development value of £506.0 million

· Total development pipeline of 9,120 student beds across 23 sites, with 15 forward sold (6,090 beds)

Delivery pipeline:

· FY18 deliveries – all ten student developments (3,415 beds) scheduled for delivery ahead of the 2018/19 academic year are forward sold

· FY19 deliveries – five student developments (2,675 beds) scheduled for delivery ahead of the 2019/20 academic year have already been forward sold

· A further eight development sites (3,030 beds) have been secured and are targeted for delivery during FY19 to FY21

Build to rent development

· The build to rent development pipeline continues to gain momentum. The Group has five development sites, which it owns or has exchanged contracts to acquire, and is in separate negotiations on several other opportunities. From these it is targeting to develop approximately 1,500 units during the period FY18 to FY22, subject to securing the remaining necessary planning consents

· Successfully completed the Group’s first build to rent development in Leeds (322 units)

Accommodation management

· Created the Fresh Property Group, operating under the Fresh Student Living and Five Nine Living brands, bringing our accommodation management businesses under a single leadership

· 16,082 student beds under management for the 2017/18 academic year (52 schemes) up from 12,337 beds under management for the 2016/17 academic year (44 schemes)

· Contracted to manage 535 build to rent units, across five schemes, including the scheme completed in Leeds during the year

Commenting on the results, Mark Watkin Jones, Chief Executive Officer of Watkin Jones plc, said:  “We are delighted to report another impressive set of final results demonstrating our ability to continue the strong momentum established during our first year on the AIM market. The Group has generated strong revenue and earnings growth, driven by our core student accommodation development business. We are also pleased to report further increases in gross margin, supported by the strong location of our student accommodation developments and first full year contribution from Fresh Property Group, the Group’s accommodation management business. This has contributed to a double-digit increase in earnings and an increase to the net cash on the balance sheet.

The delivery of all anticipated student accommodation developments in the year, combined with continued growth in the value of our development pipeline, is delivering a secure and growing base of revenue, earnings and cash flow, which in turn enables the Group to develop new business opportunities to enhance that growth.

We will look to replicate our strength and expertise in student accommodation in the build to rent sector. Our build to rent division made significant progress in the year and we were delighted to deliver our first development. As the sector continues to attract a growing number of UK and international funds it’s pleasing to see our development pipeline grow, which will contribute further to the visibility of earnings that is fundamental to our business model.

The Group will continue to demonstrate its ability to generate significant returns for its shareholders and the Board looks forward with continued confidence.

As also announced today, after careful consideration I have decided that it is necessary for me to step back from my position as Chief Executive Officer. The Group has reported strong results today and with excellent earnings visibility, Watkin Jones is in a strong position to achieve continued success in both student accommodation and build to rent. Solid foundations are in place for my successor to work with, including an excellent management team that has supported me over the years in successfully growing the business and who will continue to drive Watkin Jones forward for the long-term benefit of our shareholders.”

CHAIRMAN’S STATEMENT

Performance and dividend

The Group produced a strong trading performance in FY17, which was in line with our expectations. Good revenue growth and rising gross margins contributed to a double-digit increase in earnings. The business is also highly cash generative and we further increased the net cash on the balance sheet.

This performance underpins our ability to reward shareholders through our progressive dividend policy. At the time of the IPO, we promised to pay a healthy dividend, recognising that this was important to investors in an environment where many companies were having to reduce or scrap their dividend payouts.

Last year’s total dividend was 4.0 pence per share which, taking into account the timing of the IPO, was equivalent to a dividend for the full year of 6.0 pence. After paying an interim dividend of 2.2 pence per share this year, the Board has recommended a final dividend of 4.4 pence per share, to give a total dividend of 6.6 pence. This represents growth in the total dividend of 10.0% against the FY16 full-year equivalent. The final dividend will be paid on 28 February 2018 to shareholders on the register at close of business on 26 January 2018. The shares will go ex‑dividend on 25 January 2018.

The Board has also decided to adopt a policy of aiming to pay dividends at a level which will be two times covered by annual earnings and will implement this policy fully by FY19.

Board, management and people

There were no changes to Board membership during the year. The Directors continue to work well together, and towards the end of 2017 we began our first formal appraisal of the Board’s performance to identify areas for further development.

The Group’s success this year reflects the strong leadership of the Executive Directors, Mark Watkin Jones and Phil Byrom, and their colleagues.

Mark, Phil and the team have continued to successfully manage the pipeline, control costs, ensure delivery and implement our strategy for growth. I want to thank them and everyone in Watkin Jones for their significant contribution.

The Group has an experienced and stable senior team and we spent time this year assessing their capabilities, investing in development and considering succession planning. We are also proposing to introduce a long-term incentive plan during FY18, to help us retain our senior people and reward performance.

It is with regret that Mark Watkin Jones has notified the Board of his intention to stand down as the Group’s Chief Executive Officer once a suitable successor has been appointed, following an orderly handover period. For personal reasons, Mark is not able to undertake a full time executive role over the longer term and he and the Board believe that it is in the Group’s best interests to recruit a successor.

The Board will initiate a formal search process to identify a new Chief Executive Officer. The Board is keen to retain the benefit of Mark’s valuable knowledge and experience and the intention is that, following the transition, the Board will look at how this might be achieved, including the option of him becoming a Non-Executive Director of Watkin Jones.

After 15 years at the helm, the Board understands Mark’s desire to relinquish the Chief Executive Officer position and the associated demands of this role. Mark has played a pivotal part in shaping the Watkin Jones strategy and success. Under Mark’s leadership, Watkin Jones has gone through a transformational period, a key part of which has been the establishment and development of a strong senior management team who have increasingly taken on the day to day responsibility for the running of the business and who are capable of supporting the Group’s long-term growth aspirations. The Board will be seeking a successor to Mark who can build on this platform and maintain the Group’s track record of profitable, cash generative growth.

The Board would like to thank Mark for his enormous contribution and is also delighted that he has indicated a willingness to continue to support his successor and the business going forward.

Looking forward

The Board is confident about the outlook for the Group. The development pipeline gives us excellent visibility of our revenues and earnings, protecting our performance and giving us the time to adjust our plans if necessary. While Brexit is a source of uncertainty for many businesses, it is unlikely to be a significant issue for the Group. EU students are only 7% of the market and the demand for UK higher education is such that universities will continue to fill their places, no matter what happens to EU student numbers.

While we see growth opportunities across all parts of the Group, over the medium term we see the greatest upside potential in build to rent. The Board is encouraged by our progress to date in that market and the Group now has the foundations to develop a second major business over the coming years.

Grenville Turner

Independent Non‑Executive Chairman

12 January 2018

CHIEF EXECUTIVE OFFICER’S REVIEW

Performance

Revenue from continuing operations rose by 13.1% to £301.9 million (FY16: £267.0 million), contributing to an 18.0% increase in gross profit to £63.5 million (FY16: £53.8 million). Operating profit was 12.7% higher at £42.7 million (FY16: £37.9 million before exceptional IPO costs), representing an operating margin of 14.1% (FY16: 14.2%).

Our business is strongly cash generative and we achieved an operating cash inflow of £19.2 million (FY16: £15.1 million after exceptional IPO costs), with a further £22.8 million of cash received after the year end, relating to forward sales we agreed during FY17.

Developing student accommodation generates our core revenue and earnings and the business had another excellent year. We completed all ten schemes on time (3,314 beds), maintaining our 100% record of delivering ahead of the start of the academic year. We also continued to refill the pipeline of development sites, ensuring we maintain the visibility of earnings that is fundamental to our business model.

Our accommodation management business, Fresh Property Group, is continuing to perform well. It currently has 16,082 student beds under management for the 2017/18 academic year, a 30% increase on the number under management for 2016/17. The business is also expanding in the build to rent market and now has 535 units under management, including the 322-unit scheme we completed in Leeds during the year.

We are successfully building a pipeline of development opportunities in build to rent. The Group has five development sites, which it owns or has exchanged contracts to acquire, and is in separate negotiations on several other opportunities.

The private residential business also had a good year, completing 94 sales and increasing its gross margin to 16.7%, from 11.5% in FY16.

Operating review

Student accommodation

The market opportunity

The number of full-time students in the UK is a key determinant of demand for PBSA, since these students are more likely to live away from home than part-time students. The full-time student population has steadily grown, increasing by an average of 2% per year since 2004, to reach 1.74 million. Despite the increase in tuition fees in 2012, demand for university places remains substantially greater than supply. In 2016/17, there were 699,850 applications to UK universities, of which 533,890 were accepted. UCAS applicants in 2016/17 were 7% higher than in 2011/12.

UK demographics are positive, with an upturn in the number of 17 to 21-year-olds coming through from 2021. Trends in international students are also positive. Over 397,000 students are now from outside the UK, representing 23% of the student population and an increase of 70% over the period 2005/06 to 2015/16. Non-EU international student numbers increased by 24% from 2008/09 to 2015/16, making up circa 17.8% of the full‑time student population. While EU international student acceptances have fallen in 2017 by 2.1%, this is offset by an increase in non-EU international students of 1.8%. EU international students make up a relatively small proportion of the market at circa 7.3% and we do not believe that the changes in EU student numbers will have a noticeable impact on demand for PBSA.

At the start of the 2017/18 academic year Cushman and Wakefield reported that 602,000 PBSA bed spaces were available. Significant scope remains for increased penetration of private PBSA, particularly as universities turn to the private sector for provision and more students than ever are studying away from home (1.04 million). Since 2013, growth has predominantly come from the private sector, where bed numbers up to 2016 have increased by 43% compared to an increase of 5% in university accommodation across the same period.

PBSA investment

Institutional investors increasingly see UK PBSA, which has maintained good headline rental growth, as a core real‑estate holding. Headline rental growth in 2016/17 was 2.9%. The increasing maturity of the market is seeing investors demand greater scale, driving investment activity. The UK student accommodation market has also attracted capital from all over the globe. The largest share of transactions from non-UK domiciled investors in 2016 was from Asia, whilst 2017 has seen significant investment activity from North America. It is estimated that £3.6 billion of stock has been traded in 2017. £1.05 billion of stock is believed to be under offer and a further £1.5 billion of stock is believed to be in the market.

Competition

We operate across the entire PBSA development lifecycle, and whilst there are other specialist PBSA developers in the UK, most do not construct their own developments, few provide asset management services, and their scale and geographical focus vary considerably. Some are owner/operators, who invest in assets and manage developments themselves.

Some non-specialist developers have exposure to PBSA, offering procurement, planning and construction services. Typically, these firms are either housebuilders or commercial property developers with student accommodation divisions.

We believe our focus, market knowledge, geographical coverage and ability to work across the entire development cycle give us a competitive advantage. We also believe that we are the only developer that forward sells all its schemes to investors, making us an attractive conduit for institutions looking to increase exposure to PBSA. These factors make us well placed to compete effectively.

Performance

Revenues from student accommodation development were £256.1 million, up 8.0% on the £237.2 million achieved in FY16. This reflected the quality of the sites, which had correspondingly higher values, and in turn fed through to a higher gross margin, which rose to 22.1% (FY16: 20.5%).

We look to maintain a pipeline of student accommodation of around 10,000 beds, for delivery over the following three years. Our pipeline remains robust. All ten of the developments for completion in FY18, ahead of the 2018/19 academic year, have been forward sold. For FY19, we are targeting delivery of seven developments, of which five had been forward sold at the year end. All the sites for FY19 have been secured and all have planning consent. We have secured five sites for FY20 and a number of other sites are in negotiation. Of the secured sites, three have planning consent, with the remainder progressing through the planning process.

In total, at the year end, we had a development pipeline of 23 sites, representing 9,120 beds, with an appraised development value of £762 million. Of these beds:

· 3,415 are for delivery in FY18;

· 3,153 are for delivery in FY19; and

· 2,552 are for delivery in FY20 and beyond.

In total, we sold 17 developments with 6,578 beds during the year, including one operational asset of 590 beds, with a total development value of £506 million.

The planning environment remains challenging but our expertise and in-house resource has enabled us to continue to make good progress. During FY17, we achieved planning consent for six developments (1,610 beds), with consent for a further three developments (959 beds) received since the year end.

Build to rent

The market opportunity

Build to rent has significant momentum as an asset class, with a number of factors creating demand for properties and supporting rental levels. This makes build to rent an exciting opportunity for institutional investors.

There is well-known structural supply and demand imbalance in the UK property market and for many years, the supply of new homes has fallen well short of the number required. In 2016/17, the number of new homes built reached 217,350. This was the highest for nine years but still well below the 300,000 that the government is targeting by 2022. The shortage of new builds contributes to high house prices in parts of the country with the strongest local economies, pricing many people out of the market. As a result, many people are renting for the long term instead.

In addition, the population has become more transitory, moving from a “job for life” attitude to the expectation that young people will now have several jobs during their lifetime. Young adults between the ages of 20 to 30, accustomed to the benefits of all-inclusive PBSA, make up a significant share of the build to rent market and often enjoy the flexibility of renting.

Since 1991, the private rented sector has more than doubled in size and now accommodates 19% of all UK households (circa five million households). This figure is forecast to increase to 25% by 2021, as the sector continues to grow. Private renters are also getting older, with 46% of those in their late twenties and early thirties being tenants, up from 24% in 2006.

The rental market is fragmented and dominated by small buy-to-let landlords, with little over 3% being owned by institutions. This is expected to change, as build to rent offers institutions an attractive income stream that correlates strongly with inflation and is considered highly sustainable through the economic cycle. Current investment in the build to rent sector is estimated to total £25 billion and is forecast to reach £70 billion by 2022. According to recent research by the Investment Property Forum, 80% of residential investors surveyed intend to increase their exposure over the next twelve months, with £8 billion earmarked for investment in 2018.

Performance

During the year, we completed our first build to rent development, the 322-apartment scheme in Leeds. In October 2017, it won Best Large Development at the Yorkshire Residential Property Awards.

Another key initiative for us was the preparation of our build to rent development specification. This enables institutional clients to specify our product offering and allows us to appropriately cost potential schemes.

We made good progress with securing a pipeline of further development opportunities. We acquired a site in Sutton, London, on which we have now obtained planning for 165 units, and secured planning for a site in Leicester to build a total of 322 units. Subsequent to the year end, we also secured planning on a site in Bournemouth, to build a total of 147 units and on a site in Sheffield for 62 units. In addition, we have exchanged contracts to acquire a site in Uxbridge, which subject to planning consent, will deliver approximately 270 units, and we are in separate negotiations on several other opportunities. We are targeting the development of around 1,500 units on these sites during the period FY18 to FY22, subject to obtaining the remaining necessary planning consents.

We are encouraged by our progress to date and by the prospects we see in build to rent. As noted above, there is growing institutional demand for build to rent assets, and through Fresh Property Group we will increasingly be able to demonstrate the revenue enhancement and cost savings achievable with specialist management, which in turn will increase the value of completed assets. We are therefore currently taking a prudent approach to forward sales, in anticipation of rising values in the build to rent market.

Accommodation management

We created Fresh Property Group during FY17, to bring our two accommodation management businesses under a single leadership team. It operates under the Fresh Student Living brand in student accommodation and Five Nine Living in build to rent. Creating Fresh Property Group allows us to present institutional clients with a single accommodation management offering that covers both the PBSA and build to rent markets, and helps us to make maximum use of our resources and expertise, while avoiding duplication.

Fresh Property Group is a key part of the Group’s complete end-to-end solution for clients, which spans sourcing of sites to managing the completed developments. It can take on all aspects of accommodation management for clients, including mobilising, marketing and letting, managing the building and tenants, and collecting rent. The business has invested significant amounts in best-in-class systems and processes, which make it highly scalable and provide efficient processing of back-office functions, freeing our people to focus on providing excellent service.

The business grew strongly in FY17, generating revenue of £6.1 million and gross profit of £3.8 million, representing a margin of 61.9%. For FY16, this reporting segment comprised the Fresh Student Living business, which we acquired in February 2016. For the period post‑acquisition, Fresh Student Living contributed £2.8 million to FY16 revenue and £1.7 million to gross profit. On a like‑for‑like basis, Fresh Student Living’s revenues for the year to 30 September 2016 amounted to £5.1 million, at a gross margin of approximately 60%.

In addition to managing student schemes we developed, Fresh Property Group continued to win contracts to manage third-party developments during the year. In total, Fresh Property Group is currently contracted to manage 16,082 student beds across 52 schemes for the 2017/18 academic year (2016/17 academic year: 12,337 beds across 44 schemes). By FY20, Fresh Property Group is currently contracted to manage 20,628 beds across 68 schemes, which is an increase of 1,992 beds since the date of Watkin Jones plc’s last annual report.

The number of contracted beds under management by FY20 may initially be reduced by 5,124 beds as a consequence of the sale of a portfolio of assets by the Curlew Student Trust (“CST”). However, the launch of CST 2, which will have a life of 25 years, and for which Fresh will be the preferred property manager, presents a significant replacement growth opportunity. More detail is given later in this report.

We also continue to develop our letting and operational management services for the build to rent sector, where we are looking to leverage our capabilities and institutional relationships developed in PBSA. At the end year, there were five schemes managed under the Five Nine Living brand, with 535 units between them, including the development the Group completed in Leeds during the year.

Key initiatives to support the growth of Fresh Property Group in FY17 included launching a new website for Fresh Student Living. This offers a better service to students and, in turn, helps us to improve returns for our institutional clients. In addition, we launched the Five Nine Living website, which includes a full online booking system. We believe this functionality is currently unique in the build to rent market.

The quality of Fresh Property Group’s service was recognised by the industry during the year, when it won Operator of the Year at Property Week’s Student Accommodation Awards. A number of our front-line staff and teams were also winners at the inaugural Student Housing Leadership Awards.

Residential

The residential business performed in line with our expectations in the year. It completed 94 sales in FY17 (2016: 127), resulting in revenue of £18.1 million, down from £26.3 million in FY16. Revenue in the prior year included £11.0 million of sales at nil-margin from the Group’s legacy development sites in Droylsden, Manchester and the Cestria, Chester development. Sales in FY17 included £6.0 million of nil-margin sales from these two sites. Sales at Droylsden, Manchester are ongoing and will continue to release cash from inventory.

With fewer nil-margin sales from legacy sites and more profitable schemes coming into development during FY17, the gross margin was increased to 16.7% (FY16: 11.5%).

Our objective is to continue to grow the residential business, acquiring suitable sites to enable us to maintain a land bank sufficient for around three years of development. At the year end, the land bank was 589 plots (30 September 2016: 573 plots).

Strategy

The Group is following a consistent strategy, which is delivering sustainable growth and positioning us to take advantage of the exciting opportunities ahead.

The visibility provided by developing student accommodation is central to this strategy. It gives us a secure and growing base of revenue, earnings and cash flow, which allows us to develop new businesses to enhance that growth. The strength of our student accommodation pipeline makes this an excellent time to pursue our strategy in build to rent. We can use the knowledge, experience and relationships we have developed in student accommodation over nearly two decades, which are all directly applicable in the build to rent market.

Our development pipeline will also provide a stream of new contracts in accommodation management, in both student and build to rent. Winning contracts to manage buildings developed by third parties is another exciting source of growth for this business, as the market is far greater than the buildings we develop ourselves.

People and culture

Any business is only as good as the people it employs, which is why we invest so much time and money in developing our people and helping them to achieve their potential.

Our primary focus in FY17 was on ensuring the Group has the leadership it needs to achieve its growth plans. We have established an Executive Committee to provide the executive leadership to the Group below Board level and to further the management of our governance responsibilities. The members of the Executive Committee are myself, Phil Byrom (CFO), Alex Pease (Investment Director), Jim Davies (MD Newmark Developments) and Rebecca Hopewell (CEO Fresh Property Group).

The operational Board was unchanged during the year, and we have looked to invest in and empower them, as well as the management teams below them and throughout the Group. This included helping our people to understand how they contribute to the business and to show them the opportunities available within the Group, which we believe make us an employer of choice. As part of this, we have begun succession planning for management at Board level and below.

Our other activities in the year encompassed enhancing performance management and improving communication, to drive engagement and collaboration across our divisions.

Sustainability

With a history dating back more than two centuries, it is natural for us to think for the long term. We therefore aim to ensure we are economically, socially and environmentally sustainable. The way we work is governed by a set of robust policies and we look to understand and manage the needs of our stakeholders, which include our people, clients, supply chain and shareholders, as well as wider society in the form of our communities and both the local and global environment.

Curlew Student Trust portfolio sale

We have been advised by Curlew Capital that the Curlew Student Trust (“CST”) is in legal negotiations to sell a portfolio of its assets. CST was launched in 2013 as a seven-year Fund, with a strategy to forward fund and hold good quality student accommodation assets in strong university towns and cities across the UK. CST is backed by clients of CBRE Global Investment Partners. The sale is expected to exchange and complete in the next few weeks.

The sale transaction includes 14 schemes (5,124 beds) which are managed by the Fresh Property Group. It is expected that Fresh will continue to provide management services to the new owner for FY18, but that ultimately the new owner may decide to take the management in house. Fresh will be fully compensated for any unexpired contract periods on all of the assets should they be terminated early by the new owner. Should Fresh not be retained as property manager for these assets, this will not have a material effect on the Group’s financial performance.

Curlew Capital have advised us that, following the success of CST, they have received approval to launch a second Fund, Curlew Student Trust 2 (“CST 2”), backed again by clients of CBRE Global Investment Partners. CST 2 will have a similar strategy to CST to forward fund and hold good quality student accommodation assets in strong university towns and cities across the UK. CST 2 will have a 25-year life and is expected to be launched in January 2018. CST 2 has already secured two seed assets (917 beds) for delivery in 2020 and has ambitious growth plans. Fresh will be the preferred property manager for CST 2, which creates the potential for longer-term business growth for Fresh.

Outlook

I believe that Watkin Jones is in an excellent position. Student accommodation continues to provide strong visibility and we have growing momentum in build to rent. At the same time, our investment in our people gives us the leadership we need to take advantage of the opportunities ahead.

As noted in the Chairman’s statement, after careful consideration I have decided that it is necessary for me to step back from my position as Chief Executive Officer. The Group has reported strong results for FY17 and with excellent earnings visibility, Watkin Jones is in a strong position to achieve continued success in both student accommodation and build to rent. Solid foundations are in place for my successor to work with, including an excellent management team that has supported me over the years, in successfully growing the business, and who will continue to drive Watkin Jones forward for the long-term benefit of our shareholders.

Mark Watkin Jones

Chief Executive Officer

12 January 2018