Watkin Jones Plc (WJG) Earnings Call Transcript & Summary

Good morning and a very warm welcome to the half year results for Watkin Jones for the period October through to the end of March. Myself and Sarah Sergeant are very much looking forward to taking you through the results for that period and giving you some context just to bring you up to date with the broader and wider market. It's worth noting, it's also the first time that we've actually met face-to-face for 1 of our set-piece presentations, and we're both very excited about that, and it feels good to be back in person, too. Before I just give you a bit of a preview of an overview on the agenda. I'm going to start with an overview for the half year, and I'll also do that overlay to bring you up to date. I'm then going to talk about the Building Safety Act provision, which we've taken as part of the half year position. I'm then going to hand over to Sarah, who will pick up the financial review, talking about our capital structure, looking at our development pipeline. She'll then hand back to me, and I'll pick up a bit of a sprint through the sectors, which we cover, the sector review. I'll also bring you up to date with a few of our steps forward in respect of our ESG Future Foundation part of our business, prior to summarizing what you've heard, and then opening up to Q&A. And we anticipate the entire session lasting about an hour. So if that makes sense, I will kick off with the half year overview. So what's the best way to sum up the first half? I think overall really good progress in the first 6 months of this financial year. Investor demand for our products across purpose-built student accommodation, PBSA; build to rent, BTR; and affordable housing has never been higher. Our operational capability to manage the 3 pillars of build cost inflation, growth in asset values, and maintaining target margins is progressing well. On-site progress from the delivery teams constructing our 15 live buildings is good. And we are managing build cost inflation, supply chain constraints, and resourcing of those sites well, too. Our pipeline is deepening and is at record levels, and we expect the next phase of the cycle to present some particularly attractive land buying opportunities, just as we did in 2020, which will further build on our strong future performance. And then finally, in terms of overall Fresh, our property manager, is continuing to grow beds under management strongly as it establishes itself as the go-to manager of residential for rent assets in the U.K. Our first half performance is in line with our expectations and sets up a strong H2, and we are on track for full year performance. Bringing you up to date, the student portfolio sale announced this morning is a material part of this and should reinforce confidence with circa GBP 20 million of profits to be taken in H2 but to be recognized for the full year, the financial year. In terms of our H1 results, our first half results, revenue is higher than last year with margin being lower, as expected. This is driven by higher volume of lower-margin land sales and the decision to aggregate several PBSA assets into that portfolio that I've just mentioned we've closed, which understandably will take slightly longer to run through the due diligence when you have a slightly more complex portfolio to sell than individual assets. So accordingly, and on the basis of our underlying businesses performing well with good liquidity, we are declaring a divi of GBP 0.029 per share, which is up 11.5% year on year. And then the final point from this slide, which I will come back to again, is on Fire Safety and the Building Safety Act. So further to our stated position at the prelims in Jan and also in our trading statement just a few weeks ago, we have booked an exceptional provision of GBP 28 million in our half-year numbers in respect of the Building Safety Act. This is expected to be fully utilized over the next 7 years and covers the extension of developers' liability to 30 years, the inclusion of building heights of 11 meters to 18 meters, and the broadening from cladding to include life-critical fire safety defects. So if we turn to the next slide, just looking at the outlook being on track. A good way to characterize this is to look at the underlying health of the markets and then look at our secured development pipeline. We'll come to the health of the markets in a second, but if you look at our secured pipeline, which is the lead indicator of our future likely revenue and profitability, we can see that now stands at a record level of GBP 2 billion. That's up from GBP 1.4 billion this time last year, and it's comprised of 4,000 or circa 4,300 BTR apartments and circa 8,000 PBSA beds. Deeper than that, we have around 820 PBSA beds under offer and at an advanced stage of the sales process, and we have quite a large number of BTR units and PBSA beds which sit behind that at earlier stages of marketing for sale but which at this stage are proceeding very encouragingly. We also have made some good successes in the land market, new acquisitions, and planning permissions over the last few weeks. There's been a number of attractive new land development sites being placed under offer at our target margins, and we have recently legally secured a couple of BTR schemes as well as obtaining 2 material planning permissions, 1 in Belfast for a significant BTR scheme and 1 in London again for a material student accommodation scheme as well. So all of this is positive for future years revenue and profitability. So if I now turn to the Fire Safety and the Building Safety Act, and to just give you a little bit more flavor. And I'm sure you're pretty familiar with this overall position, but I think it is important just to walk through the steps which have evolved over the last few months because the position has changed for the market over that period. So the government announced in January 22, so i.e. January this year, its intention to approach developers to fund the remediation of life-critical fire safety issues on buildings over 11 meters and up to 30 years old. The largest house builders were subsequently asked to sign a voluntary pledge regarding the remediation of these buildings. So what is Watkin Jones' position in respect of that? Well, I think the first point is that we have not been asked to sign the pledge. However, we agree that individual leaseholders should not have to pay for costs associated with necessary life-critical fire safety remediation work. We've been consistent on that in our various updates we've set out in that respect. And following an initial review of buildings over 11 meters developed by the company over the last 30 years, we have taken an exceptional charge of GBP 28 million. And as I've mentioned already, the timeframe we expect at this stage to incur those costs is over 7 years. We will keep the situation under review. As the situation and legislation is clarified, we do expect quite a bit of secondary legislation to help the interpretation, the understanding of the act at this stage. It's also worth noting that this is in addition to our existing cladding provision which covers all schemes featuring ACM or HPL, the aluminum composite material or high-pressure laminate cladding, which were at the time we took the provision in 2020 still within the limitation period. And in respect of that provision, at this stage, we do see that being fully sufficient for the scope that we set out at the time. So this is entirely new and different. It's the extension of the fire safety aspects. So I think on that note, I'm going to hand over to Sarah to bring you through the financials.

Thank you, Richard. I'm now going to take you through the financial highlights for the half year. We've reported revenue of GBP 193 million, which is an 8.2% increase on the prior period, and this reflects 4 forward land sales in Colchester, Edinburgh for PBSA and Lewisham and Birmingham for BTR, as well as continued works across the portfolio. Our gross profit was GBP 29.9 million, which is at a gross margin of 15.5% compared to the 23.2% in the prior year. This is really due to the impact of the land sales in the period and excluding this would be 17.5%, and also due to the stage of developments in the site -- of the sites in build. Underlying operating profit for the period is at GBP 14.6 million, again impacted by the proportion of revenue from land sales and the timing of the portfolio that Richard has just referred to, which exchanged this morning. So just moving on to the balance sheet. The key points to make here are regarding the net cash position at GBP 27 million. This reflects the normal H1 position in the cash cycle of the business. Although this has been accentuated this half year due to the timing of the receipt on the payment for the land sale of Sherlock Street, which we completed just prior to the period end but received the proceeds 10 days later. London work in progress has decreased from the comparative period but increased from the end of September, and that's due to the investment in land and the timing of the receipt I've explained. And then finally, the cladding provision totals GBP 34 million, so this reflects the position of the original provision we made, which now stands at just over GBP 5 million and the additional new GBP 28 billion provision we've put in these numbers. From a cash perspective, we've had a high operating cash outflow than the previous period due really to the investment that we've made in land which will set up the forward sales which was completed today and subsequently into the full year. With net cash of GBP 28 million and the headroom we have on our RCF facility and the overdraft, we've got total available liquidity of GBP 140 million. So a very strong position to be in. And then finally, proposed interim dividend of 2.9%, up 11.5% on last year, and this is very much in line with our normal 1/3 split -- 2/3 split of dividend payout. So now moving on to the segmental breakdown. These pie charts here show the split of revenue from the different sectors of our business. You can see the growing contribution from BTR with a 59% increase from the prior period. We made good progress with revenue from developments and build and also for the forward sales for Lewisham and Sherlock Street. The PBSA revenue at GBP 78 million is down on the prior year and that's really reflective just of the number and stage of developments in sites of the build given the number of sites that we completed in FY '21 but does also include 2 forward sales. For our affordable homes business, we recognized revenue of GBP 5.4 million which really reflects the continuing transition of the business -- of the legacy business into affordable homes and some build delays at the site in Preston, albeit a number of units did complete subsequent to the period end. The Fresh business continues to recover from the pandemic with revenue at GBP 4 million due to the increase in units under management. And finally, in HY '22 we recognized approximately 11 million of commercial income in relation to fit out of a development in Stratford. So just moving on to gross margin. For BTR, gross margin was at 12.9%, again impacted by the land sales. But important to note that we continue to target the overall margin for this sector at 15%. For PBSA, this was just under 17% but again continue to target 20%. And it's important to see that the Fresh gross margin is really starting to return to pre-pandemic levels as the occupancy increase and the variable fee income kicks in. This next slide really sets out the building blocks to delivery of our full year position in line with expectations. You start on the left-hand side with the half year position, and then you can see the ongoing contribution from sales which we've already forward sold out and are in the build stage. This is followed by the significant contribution from the PBSA portfolio which we announced today, and this is approximately GBP 20 million. There are 2 other schemes, 1 and 1 BTR which we need to forward sell where we are at a very advanced stage of the process. And then you can see a relatively small contribution from schemes which are at earlier stage. So in summary, given these blocks and given we've announced today, we're confident of the full year position given the bridge we've outlined. I'm now going to look at the cash flow dynamics of the business and then consider the most efficient structure for the balance sheet and then an ensuring capital allocation policy. As you're aware, the group is a net user of cash for the first 9 months of the year. We use the previous year-end cash position to finance the development works as we build out during the year and then equally use the RCF to draw down and finance site acquisitions on a site-by-site basis. The cash then recovers as the developments are completed and the bullet payments are received. This really gives us an intra-year cash requirement of GBP 100 million, and you can see the profile in the table before showing that average net cash position of around GBP 40 million to GBP 50 million and then the year-end and half-year positions. With this, we then really look to agree the parameters for the balance sheet. With that GBP 100 million intra-year cash position, that's to maintain a net cash position at the year-end of max 1x EBITDA and then 1x net debt on the bottom side. And, of course, we'll continue to use the RCF on a site-by-site basis. The table or the chart on the right-hand side shows on how on a pro forma basis the EBITDA number gives a GBP 20 million surplus cash each year after operating items and dividends, which over 5 years amounts to circa GBP 80 million really after any spend that we would take out on the building safety remedial works. So really a kind of identification of the surplus capital which we believe will be available in the business over the next 5 years to deliver growth and also to consider any potential shareholder returns. We've then set a disciplined capital allocation policy, which allows us to invest in growth and also to consider shareholder returns. Firstly on the left-hand side is really to retain a strong balance sheet with low gearing. This is to be reflective of the cyclical nature of the business that we're in but equally gives comfort to institutional purchasers when they're looking to enter into forward sales with us. We will look to maintain our dividend policy at 2x cover, which is a healthy payout ratio. We'll then look at land investment opportunities across our business and potentially taking any advantage of the softness that we might see in the market given the current environment. We will target M&A opportunities where there is compelling strategic logic. And then finally, we'd then consider any further return to shareholders, if appropriate, but obviously, with a flexible and discretionary approach. Moving on to our development pipeline, and I think the slide that you're all familiar with now. This now stands at a record GBP 2 billion which is split between GBP 1 billion for BTR, GBP 900 million for PBSA, and GBP 100 million for affordable-led homes. And as Richard mentioned, we've seen some really significant movements in this. We've secured 4 new schemes in the period, 2 for BTR in Hove and Brighton and 2 student schemes in Bristol and Colchester, and have gained very significant planning consents for our largest BTR scheme to date in Belfast and the student accommodation in Stratford. I think a couple of specific points to note on this chart is that there are a significant list of land opportunities that we are considering and have under review for both BTR and student, which don't yet come into this pipeline as not yet secured. This list stands at around 2,000 units for student and around 1,500 for BTR. There have, as you can see, been some movements, some shifts to the right-hand side, and that's really due just to the nature of the business. But if I give you an example of one, Nottingham, which is the student accommodation site which we've just sold, you can see that that's just moved from FY '25 into FY '26, and that's really just a result of the small delay that we've experienced on the portfolio, which sets that build program back a couple of months. Couple of months from an academic perspective, obviously, then takes us into the new financial year. This next slide shows, as previously, the illustrative revenue growth year by year from the secured pipeline. I think the key points to note here, as you can see, revenue growth to over GBP 300 million is supported by 100% of sites secured and that 31% of revenue for FY '23 is now forward sold. And looking forward to FY '24, 70% of the revenue is supported by sites secured. The same chart for PBSA, again, key callouts really that GBP 300 million -- in excess of GBP 300 million to FY '23 and 100% supported by the secured pipeline. 25% of revenue for next year is forward sold and that obviously has been updated for the sale that we announced this morning. And finally, just to give a bit more color on some of the different stages of our development journey. We are continuing to see a small discount for urban brownfield land where the competition from retail, leisure, and commercial is still relatively soft. And as we set out earlier, we will continue to assess the land market opportunities which may become more frequent in the market. From a build cost perspective, we are procuring our current wave of products at 7% to 8%. We're obviously seeing inflation in the period between putting our developments in the market and closing the forward sale, which previously would have been minimal. But through the open book discussions we're having with the purchasers and the late stage of review of build costs. We're able to cover these through enhanced top line values and maintain our margins. And then, of course, once we forward sell, we set our -- that's when our business model comes into play, and we set and fix those procurement costs for the buildout of the development. The investment market continues to be very strong for our products, and we're receiving a number of offers for sites which will be put out in the market which are all well ahead of the underwrite. From a planning perspective, we're making good progress, and this has obviously been evidenced by the recent successes in Belfast and Stratford, and this is really where the expertise of our planning team comes into play. We're also favorably regarded by local authorities if we have a real track record of gaining planning and then building out. So in summary, our strong balance sheet and track record ensure opportunities to build and opportunities to sell are coming [ too fast ]. So I'll now hand over to Richard to take us through the market slides.

Brilliant. So I'm going to do a relatively quick canter through the various parts of the residential for rent sector. I'll start with the umbrella part which we call residential for rent. It's also known as the living sector. And I think the -- you'll hear probably a very similar language as I go through the subsectors, which is I'll be talking about record volumes, record levels of interest, and you'll see that being a real common thread through the living sector at the moment where there is just a real focus. It's very much a hot sector, and it's been a rerating that's been coming over the last 10 to 15 years. Good structural support for the next period, for sure, out to many decades. But if we look at some of the detail that's on this slide, I think there are some interesting stats which I can help bring out, which no doubt you will scan yourselves as you read through it. But the overall market is continuing its positive rerating as both an asset class for investors but also, most importantly, from an underlying tenant-resident demand perspective and that's across the U.K. So it's not singly being picked up in the southeast. So it's truly a national thing. And this market dynamic is really supportive for us into the long term. So if we look at this from the eyes of the resident, because that clearly is what drives the institutional investor, if we look at supply and demand, there's 230,000 new rental homes needed per annum, but if you look at the entire BTR development pipeline in the U.K. at the moment, it's about 46,000 units. So there's a very, very big delta between the 2. And, of course, that demand is growing, not being matched by new supply, and then there's existing supply coming out as we're seeing increasingly buy-to-rent investors are selling out to owner occupiers. So we are seeing the level of rental accommodation actually drop, and you'll see that in a subsequent slide when we turn to the BTR, in terms of net new supply of BTR has actually been negative for the last few years. So I think that's an interesting trend. Clearly, that is very supportive of the living sector the residential for rent sector. But if you look at what this therefore does in terms of that supply-demand delta, very simply it is leading to longer tenancies, and this is being measured now in terms of tenancy lengths across the U.K. which is very good for institutional owners of residential. This excess demand is clearly fueling rental growth, and we're seeing some quite large rental growth generally across the major provincial cities across the U.K. spread quite evenly. London's catching up quite quickly, too, which I think is interesting from a period of underperformance over the last few years. And, of course, the rental growth is directly capitalizing into the asset value. So, yes, resi is an imperfect hedge on inflation, but nonetheless, it's directly capitalizing into the asset value growth. And this is what we're finding when we're taking assets into the market. Where rents are moving on month or month, we can actually -- we can do a proper mark-to-market and access that asset value straight away, which I think is really helpful for us as a business. And therefore, you can see on this slide about forecasts ungeared annualized total property returns at levels of roughly 6.6% out to about 7% over a period of next 5 years. And this, of course, is driving the -- first time I'm going to probably mention the record levels of institutional investment, it won't be the last. We've seen GBP 3.5 billion invested into the sector in Q1 alone this year, which is a very significant step up from previous quarters. So if we turn to BTR -- so that was the umbrella. If we then do more of a deeper dive, and I think, by the way, that bar graph is very interesting, as you can see how institutional investment has evolved from initially focusing on commercial but increasingly now is focusing more on the residential-for-rent sector, and you can see that you've got the decline for the moment of office investment over the last few years, and you've seen a commencement rise in investment into build-to-rent. I think that's a very interesting bar graph. But let's say, if we look at build-to-rent, very interesting investor rerating over the last 5 years. The relative attractiveness of BTR versus commercial real estate, as I've just said, certainly has been accelerated by the pandemic. And I think it's polarized on both sides. It's positive for living BTR. It's negative for commercial. And I think that will continue to be a key theme, which widens that delta. But not just the pandemic, digitalization consumers, and consumer seems to be in a very big push into renting residential rather than this more traditional approach to owning your residential. And as I say, this is a catalyst for BTR. It is not a disruptor. So if you're going to pick up on any mega trends, these are relatively well established and they are strong, and it's very much supportive of BTR in the living sector. So the high proportion of tenant satisfaction which again I think is interesting within BTR, which is set out here, underlines the demand profile. And again, second time I'm mentioning, consequently there's been record levels of investment within BTR in calendar Q1 this year at GBP 1.7 billion with associated yield compression to, on average, about 3.5%. And interestingly, forecasts are for further yield compression because of the strength of demand and unmet demand with very, very limited stock available in the market. So if we turn to PBSA, student applications are up 7% for the next academic year, which is positive. But actually that comparator is to the 2019-2020 academic year, so that was the pre-COVID academic year. So a 7% growth for next academic year compared to what was seen in 2019-2020 pre-COVID. And I think that's actually pretty significant. I think it's quite a powerful stat because it's showing that the levels and the appetite and demand for student accommodation -- I'm sorry, levels of demand for application to come and study higher education within the U.K. is now eclipsed where we got to at the height of the market just prior to the COVID disruption which I think very much sets the scene for the resilience of this sector going forward. There is a clear expectation for a full recovery in student numbers for the academic year, which will start in this autumn. And as ever, the main drivers are the U.K. demographic growth and overseas international growth in demand, which will continue to grow student numbers within the U.K. into the foreseeable future. Still looking at forecasting about 230,000, 240,000 growth in student numbers by 2030 from where we are today. And bookings for the next academic year are following this application data. So when you've got the high level -- you've got the lead data into applications to go study at universities, then you have more specific lead indicators about application rates to come and book new accommodation for next year. But our own data points with Fresh, our property manager, where applications are significantly up year on year, and we also have Unite as another listed business where their level of bookings for next academic year currently is sitting at about 77%. So again, when you look at investor volumes, how does this translate to investor volumes? What I think is interesting is if you look at that bar graph in the bottom left there, you can see that actual volumes in 2021, so last year, arguably still resting slightly with some aspects of COVID. We saw higher volumes in terms of investor appetite than we had back in 2019, which was pre-COVID. And if we bring it all the way up to date to 2022, Q1 GBP 1.1 billion with as much as GBP 5 billion in the market, so very much expecting -- I'm going to use it third time now -- record levels of student investment activity for this year. So the market is actually very positive. The return to affordable housing, very sadly, the picture here is one of continued growing demand -- unmet demand with supply lagging a long way behind. You may have thought, given the prominence this subject has had, this dynamic might have started to change, but it certainly hasn't. And if anything, it's getting more stark. This, though, does create a material opportunity. And again, what I think is interesting from these stats which are on this graph is that there's effectively a shortfall of about 93,000 affordable houses being delivered each year within the U.K., and that equates to a GBP 34 billion per annum of investment opportunity, which potentially the institutional partners could bring their capital to bear to start making a real difference in this respect. And, of course, that is squarely what our aim is within the affordable housing side for our business. What I think is also interesting is housing associations invested 20% less last year into new homes and, of course, we know they've got capital tied up essentially with legacy issues within their own built estate, which is a real opportunity for the private sector to come forward in partnership with Homes England very material approach. There's been various assessments here that private sector investment in affordable housing will grow sevenfold from where it is today by 2027. I think what's interesting at the moment there's a rumor with the government they're trading a few ideas, aren't they, but extending this right to buy scheme would certainly create a very big opportunity for developers such as ourselves who are focusing on affordable housing for the housing associations who will then get a bit of a windfall in terms of capital to recycle that back into new stock and replenish the stock, which they've perhaps just lost to enfranchisement. So I think again could be an interesting trend for us. But overall, you can see that the sector we work within the residential-for-rent sector is extremely robust. So just turning then to ESG, which we have called, as you know, Future Foundations. Good progress in the period having launched our strategy in November last year. As you know, the strategy is built around the 3 pillars of people, places, and planet, and we are now in the delivery phase of our strategy, which is really energizing for the business, as we can see incremental improvements across a broad front across the company almost on a daily basis. And cumulatively we're on track with our plans at this stage. I'll just give you a flavor for some of the things which we're up to. So if we start with planet and Scope 3, so that's our supply chain carbon footprint, we are working with our supply chain to explore how we can utilize much more offsite manufacture and modular methods to reduce the amount of shipping and haulage which otherwise is involved to bring those items individually to a construction site prior to them being pulled together the carbon footprint is many times larger. So if you can effectively create a unitized solution offsite and then just bring 1 piece of material actually to that site, it actually makes quite a meaningful difference. And so that is something we are exploring pretty closely with our supply chain at the moment. We're very hopeful that we can bring some innovations into how we actually piece together our building over the next period. In terms of Scope 1 and 2, again, some good incremental steps. We've switched our car fleet to electric and hybrid already. We swapped our construction plant for more modern, energy-efficient plant, and that's from our tower cranes through to generators, it's all been changed. And we've also been reducing the energy footprint of our office space as well. On the people's side we've partnered with a social mobility charity called Talent Tap, and their mission is to help young people realize their potential and build confidence to grab it, be it academic or professional. And what Talent Tap do is they run a series of residential courses where we look to host them in our completed developments, which make perfect venues given the blend of ensuite accommodation above and then the larger communal space on the lower floors which are ideal for hosting smaller conferences and tuitions and various things like that. This is especially true of student accommodation where there are voids traditionally over the holiday periods as well. And then finally, in respect of our places, we've made some good progress with the long-term sustainability credentials of our buildings and our current secured development pipeline and the efficiency of longer-term downstream sustainability of our buildings is measured in 2 ways through planning, one's called BREEAM and that's for student, and the other one's called HQM, which is Homes Quality Mark for BTR, and we have materially moved up the rankings which we are now demanding of all of our schemes going forward. So BREEAM is now excellent on every single scheme as a hygiene mark and then HQM, Homes Quality Mark, is up to a 4-star standard, so again materially move forward the sustainability credentials of our secured pipeline. So let me just turn to the summary. So overall, therefore, we've had a strong first half, which sets up the full year and follow-on year as well. The additional news on the student portfolio disposal this morning reinforces this position. Our sector is performing strongly and is very much structurally undersupplied. Consumer demand is growing well and the sectors are rerating positively. Operationally, the business is delivering across all areas, so that's land acquisitions, that's planning permissions, that's forward sales, that's our construction activities, and it's Fresh's ability to provide excellent customer service and grow. These 3 pillars I mentioned earlier, that relationship between cost, value, margin is working within our business, and we can operationalize it well at the moment. It gives us real confidence for the future. We do believe that we've now drawn a line under the Building Safety Act, and we are prepared and ready for our responsibilities within that over the coming period. With our robust balance sheet, liquidity position, and record secured development pipeline, we are looking into the future with confidence and excitement. So on that note, we can turn to Q&A.

Glynis Johnson, Jefferies. 4, if I may. First 1, just in terms of that GBP 20 million profits from those -- that you've effectively booked this morning, how much of that is from the operational assets and how much of that is the forward land sales for the 3 assets? Second of all, you very kindly talked about the plots that are sitting in the land that you're looking to acquire, but when should we be knocking on your door questioning when that land needs to effectively come into the pipeline for delivery, you often talk about that the 24 months build time in terms of PBSA, the 3-year build time in terms of build-to-rent. So when does that land sale really have to happen -- or land buying have to happen? Thirdly, M&A, what kind of M&A, what assets do you need/want? What skills do you need/want? What is M&A for your kind of business? And lastly, the Building Safety Levy, what is your understanding of what that might be for your business because clearly it's a very different business and I appreciate there's lots of things that we don't know about Building Safety Levy and also the Building Levy in the Section 106 potential changes. But what's your understanding what that might mean for your business?

Just on the circa GBP 20 million, it's probably about a 1/3, 2/3 split from operational properties to the development sites. That's obviously -- the operational properties, that's obviously all in the year. The development sites obviously then will continue to contribute to profit in the outlying years. Second question, just in terms of those plots which are sitting below the land bank that you see on the slides. I think that's really what we are advanced enough in stages where they would forward sell in '23. So it'll be a revenue and profit contributor in '23 to then obviously completion '24, '25. And that's across both student and BTR.

Perfect. And then if I pick up the Building Safety Levy, clearly, it's effectively a planning tax, which there's been no disclosure on. I think there's been some speculation about the overall number they're looking to raise and therefore you can look at how many planning permissions are granted each year and divide it and then you can get a per unit tariff card. I'm sure you've done that. But that's probably as much as we know at the moment. Clearly, from our perspective, we are not a prolific developer of individual houses, and therefore, the fact that individual houses are currently in this means it will dilute any potential impact on our more traditional mid- and high-rise apartment blocks. But that's as much as we understand at the moment. It is worth noting that effectively any taxes relating to land will ultimately be borne by the landowner. So we all know that the price we pay for land is a residual calculation of netting off everything, including your required profit. And therefore, any tax that comes in will ultimately be borne by the landowner. And if you think we're about to come into potentially quite a fragile economic environment, that is doubly the case in terms of land values. So I'm pretty confident we'll be shielded from that. There will be a transition, of course, where we've secured land, and we'll just have to wear that extra development cost. And then M&A, as you can see from our presentation here, we are very, very keen on BTR, PBSA, and affordable housing. So there's not any particular area which you would naturally be drawn to, but I think there's practicalities. There are not really any large PBSA developers. Effectively there are not so many large BTR developers with really interesting development pipelines, but there are in affordable housing. But we're certainly scanning the arc across all those areas.

So you'd be looking to buy assets, you'd be looking to buy land effectively.

To potentially accelerate our ambitions within affordable housing. But equally, we are always looking at PBSA and BtR, too.

Kieran Lee, Berenberg. Just a couple on me. Firstly, you mentioned that there had been delays in the PBSA development pipeline of 2 to 3 months I think you said. Given that these assets complete ahead of the new academic year, has there been any impact on pricing or are you having to compensate potential owners given you'll have vacant assets for up to 9 months? And then secondly, on that building safety provision, do you expect to recognize the GBP 28 million linearly across the 7 years or do you think there'll be peaks and troughs? And to what extent do you think you can recover from contractors or insurers, et cetera?

So I'll do the first one if that makes sense. Yes, so in terms of timing, so if the transaction changes in terms of executing it, that won't directly just mean that the student asset in particular will then PC month or 2 into start of the academic year. We will either look to accelerate it and that will all be part of our cost calculations and our appraisal when we're underwriting it to ensure that it's ready for the start of the academic year, or potentially as Sarah has mentioned earlier when she was looking at things moving out of financial year, it might just then wait another 12 months and be ready for the following academic year. But at the moment, what we're seeing is that in our programs, we do build in quite a bit of contingency for some delays, and therefore we're still confident about delivering for the targeted academic year.

And then just on the GBP 28 million provision, I think it will be spent up to 7 years. I think given the secondary legislation from the act still needs to be clarified and defined, so I think we'll probably see little spend in the first year, bulk of the spend probably 2 to 5 years, and then the balance really in the last 2 years. But from a cash flow perspective, I've obviously pro forma'd on a straight-line basis.

Colin Sheridan at Davy. Just a couple from me, if I can. First just on the provision just following up again. At this point, do you think there's any maybe muted or feared changes to that legislation that you maybe think might have a material impact on the level of that provision going forward, or are we now just at the point where you're really measuring the extent of the existing legislation in relation to how big that might -- that provision may end up being or how much may be utilized? And then I suppose, Richard, you provocatively started talking about the next phase of the cycle without going into exactly what that might be or what it might look like, if it does at least contain a greater number of opportunities in your mind. I wonder to what extent you're confident that you can bring customers along at the same time there given how close you 'retrying back-to-back transactions given that they might be facing a very different set of economic challenges at that point in time as well. And I suppose the follow on from that question being, whether or not Watkin Jones would be willing to maybe take a little bit more risk by way of more speculation or maybe a little bit more [ WIP ] in the future, too?

Perfect.

Yes. So I'll take the provision point. I think, as we said, it's an estimate of the review that we've done at the moment, we consider it to be not a full provision but it's the right number. I don't think from a legislation perspective that would increase. But obviously, as that's clarified, opportunity to potentially bring it down. And Kieran, so I didn't answer your point about any recovery. So in that number we haven't assumed any recoveries from a subcontractor perspective. But obviously, we'll continue to work through that as we finalize the investigations.

And then just on your second question there. Hopefully, Sarah did set out our capital structure and now our approach to available cash or liquidity, and we were looking to reserve some capital for special opportunities. And potentially the next phase of this cycle will present some really interesting opportunities in terms of land buying. And whilst the businesses' preferred route is to take options, as you know, if there was a very -- if there was an exceptional profit opportunity available, but in order to access it, you needed to put that land on your balance sheet, i.e., buy it unconditionally then that is something we would consider to do.

Clyde Lewis at Peel Hunt. I think I'm going to match Glynis with 4 as well. Just when you're thinking about your forward sales versus aggregating portfolios, they obviously get you to the same position in the end, but they give us a different risk profile. And I'm just wondering where your thoughts are about how much you do of the aggregation versus the single forward sales. And clearly, the bigger units are probably easier to do on the forward sales and the smaller ones probably see more of an aggregated portfolio approach. But I'm just wondering in terms of the balance of the business, as you go forward, how much you want to do of one and of the other, because obviously implications for cash flow and implications for when the profit gets recognized and whether we end up with the lumpy first half, second half splits again, and all sorts of things in there. One on the cladding. Can you let us know how many properties do you think are exposed or covered by that provision? One on the margin bridge, you very kindly gave the difference in the margin between reported and what the impact would have been around the land sales, and I think that leaves us 17.5% against the 23.2%. I'm just looking for a bit of help in closing that gap. And the last one was on affordable opportunities, which is I suppose around the sort of schemes you're looking for, how your thoughts have evolved there? Obviously, I saw the one in Belfast, which got my eyebrows raised a little bit. But just to I suppose understanding where you think these opportunities lie geographically for the group but also the sort of schemes that you're likely to take on, whether it's going to be a real mixed tenure type activities or much more exposed towards affordable.

Should I pick up portfolios? I could do the cladding one. I could do the last one if you do the margin one in the middle. Brilliant, okay. So in terms -- and you're absolutely right. So we've got this balance, it's a really obvious balance. If we take an individual asset into the market, assuming there is just a normalized market as opposed to taking an aggregate of assets into the market, it's very likely we'll get a better premium for the portfolio because people are prepared at this point in time to pay a premium for access of a higher volume of stock. But then the downside is the point you're making, Clyde, which is that if we are to sell portfolios, it does take a bit longer, there's more risk to manage, there's clearly a lot more due diligence to be done. The whole process will just take a bit longer. And as a business, we're reporting every 6 months and it's really important that we can give shareholders good visibility of good momentum of very predictable performance, and so on and so forth. So we've just got to balance this friction between that. And I think there is an understanding with our shareholder base that we are a low-volume, high-value type business, so not so many transactions each year. But when they land, they do make a material impact positively to the performance of the company, not just in a year but multi-year. So there's an element of latitude around that and I think we're seeing that this morning. But notwithstanding that, we do need to deliver in these reporting periods. So I think we need to balance and blend. I think the other thing we need to -- so I think it'll be a balance of it. I think we will typically favor the individual assets because we can see those trading relatively quickly and there's really strong liquidity. And possibly we're foregoing absolute premium value which might be there for some of the assets. The other thing we need to bear in mind is that, of course, as the cycle unfolds and evolves, then investor demands change too. So clearly, the last few years has been all about aggregating as much as you could and being prepared to pay handsome premiums for it. That might change. And so we just need to be aware of that. But through all of it, will give us a strategy which I think is relying on individual asset sales for the majority but from time to time recognizing the exceptional value in portfolios and looking to take that on. And the second was about number of properties. So in total it's just under 20.

And then just on the margin bridge, Clyde, if you think about FY '21, it was a relatively high gross margin across both student and BTR. Couple of factors that came into that. So BTR, I think you'll remember we had the turnkey property in Leicester, which obviously we forward sold, took the risk on, and sold on completion in the summer months, obviously, took the risk and therefore came with a slightly higher margin. And then with student, it was really the number of sites that we had, that we're actually completing that year, [indiscernible] would be the standout one where we had a high margin. So really I guess where we are, if you exclude the land sales, really represents the early stage of developments of the majority of sites that we haven't built at the moment.

I suppose [indiscernible] question. So there hasn't been an underlying shrinkage in gross margin from either of those?

No.

No. And then the final one about affordable housing. We are looking at sites typically which the volume housebuilders wouldn't, so that's just it's generally in terms of the amount of units. They typically have sweet spots between about 100 to 150 units which sits just on the bottom edge of how they look at things. I think that's a good way to make a market for yourself. And then in terms of geography, we're very much focused in the northwest at the moment, but you have to go a long way northwest to get to Belfast. So we are also open to opportunities which come from the core activities of our BTR and PBSA business. So where we are undertaking developments nationally and there's an opportunity for really good quality affordable housing development as part of it, we will certainly do it, and that there is the example of the Belfast [ game ]. But at the moment, northwest of England is where we're focusing on affordable. But we do intend to scale that up nationally over the next few years. And in terms of the tenure, we really like the fact that the affordable -- residential schemes will be affordable housing-led. We think that is a really good product to the market. I think the balance of tenure, because we recognize that we probably wouldn't ever see or wouldn't -- never say never, we wouldn't see at the moment a sustainable mix of residential housing types being 100% affordable housing. We think there will always be a balance, and we think that balance we favor BTR single family because we have the opportunity to forward sell the entire development to the same institutional purchaser in 1 transaction. And I didn't talk about it at all in terms of the sector, but we're seeing really strong volumes grow on BTR single family as we're seeing volumes growing for BTR multifamily, the tower blocks as well. So we do see liquid market for that, too. Yes. I'm conscious, we've got about 5 minutes left. So there's time for a few more questions.

Alastair Stewart, Progressive. A couple of questions. First on the investor demand, it seemed to dry up immediately following the pandemic, then built up a bit and -- a lot. Can you provide some dynamics on what they're saying to you? Are they concerned about costs? Are they prepared to take and lower -- take on risk, sorry? And also in the land market, Sarah, you mentioned a softer land market. Typically who's coming to -- who you're talking to in terms of the land market and again a bit of color on what the competition is like?

Perfect. So should I so the first one and you do the second. So in terms of investors what are they saying to us, well, clearly they are looking to get real assets, real yields. They're looking for hedges on inflation, recognizing that residential is an imperfect hedge. But it has actually performed very strongly in that respect over the last year or 2. They're looking at the net initial yields or that total property return I set up there of somewhere between 6.5% to 7% ungeared and thinking that actually when you put some gearing on top of that gives a very healthy geared total return. And are seeing that if there is further inflation in terms of rents and so on and so forth and they are probably quite well protected for it, so you can definitely see institutional investors are seeking out residential for rent assets at the moment. They are very open to doing a mark-to-market as I mentioned as part of the presentation. So where you can clearly see rental growth month for month and time typically 4 to 5 months to close one of our transactions. Clearly, therefore, the asset values moved on, whilst we're getting it documented. Actually to have a late-stage review, as we call it, with those institutional investors and just review on a valuation basis where that value has moved on to, they understand that the asset price can go up. And that's part of the reason why they're buying it in the first place that they're seeing positive movement. So, yes, Stewart, I would say that's exactly how they're thinking about their investment decisions into the sector.

And then just on the land piece continuing to come through our normal routes from a land promoter, agent perspective, in terms of that competition and this has been probably prevalent through the pandemic and coming out of it, I think that need for commercial office space for retail, leisure is probably a little bit more on the up than it has been recently. But those would have been the competitors pre-pandemic, relatively quiet post-pandemic.

There's time for one more.

Sorry, if I can just steal one more. Can you just circle the square between -- you used to say you needed net cash of GBP 100 million and that was going to increase up to GBP 150 million and that was in order to capture growth opportunities. Now you're telling us there's GBP 20 million per annum that's available for growth opportunities and a max cash up to 1x EBIT. What's the difference? How should we perceive the difference in terms of the definition versus what you actually need and what net cash we should be looking at as the minimum before we start talking about surplus?

Yes. I think it's really -- if you look about that GBP 100 million cash, it's making sure that we are making best use of the facilities available to us, which we haven't previously done, overdraft our RCF, and then equally be able to take the year-end position and build that out. So I think the GBP 20 million is aggregate pro forma, but it'd probably a conservative position in terms of looking forwards.

That GBP 150 million that was previous is no longer your requirement?

Yes. I think that the GBP 100 million, as you say, if we're looking at in our forecast that allows us to be -- GBP 100 million plus our facilities allows us to be able to make those land purchases and finance the development as we build out the pipeline effectively and build out the revenue.

Perfect. I think we're bang on half 10. So I think it just falls to me to thank you very much for attending this morning. Thanks to Berenberg for lending us your offices and look forward to catching up again soon. Thank you.