Watkin Jones Plc (WJG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Watkin Jones Plc Half Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and we'll publish our responses where it's appropriate to do so on the Investor Meet company platform. And before we begin, I would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Watkin Jones Plc. Alex, good morning, sir.

Good morning, and welcome to the 2024 Half Year Results for Watkin Jones. I'm Alex Pease, the Chief Executive of Watkin Jones and I'll be joined in presenting our results this morning by Sarah Sergeant, our CFO. So moving on to the agenda. The agenda for this morning will begin with a short overview from myself reflecting on the key operational and market updates for Watkin Jones at the half year period. Sarah will then take you through the financial performance and the outlook for the remainder of 2024 and she'll also touch on our property management business, Fresh; and also our continued focus on ESG and our future foundations program. I will then provide a more detailed review of the operational investment and transactional markets in which we operate, the gradually improving sentiment and the challenges and opportunities that they represent. So turning to the summary page. The theme of my overview is one of continued operational progress and I think this captures the core focus of the business over this H1 period. We've been continuing to control the controllables and looking to make incremental gains across all of our operational activities. And for those of you that joined us in January, you'll see that there's a continued theme really focusing on what we as a business can do to improve. The significance and varied headwinds of 2023 have dissipated to a reasonable degree, but the market has continued to hold challenges as the economic recovery, reduction in inflation and interest rate cuts have not progressed at the pace the property sector would like to have seen. Sarah will provide a detailed review of our financial performance. However, from my perspective, it has been pleasing to see the significant efforts, focus and control put in place across the business, help yield some positive progress across our key financial metrics. We've improved both revenues and profit in the period, reducing debt and maintaining a strong cash position. We continue to have good visibility of forward sold revenue with over GBP 400 million still come through between FY '24 and FY '27. And we are also looking to sustain and grow our development pipeline. The business has continued to deliver operationally, making positive steps forward across our key functions. If you remember, back in January, we spoke of improving investor sentiment with a Watkin Jones development asset in legals, which had yet to be crystallized into actual transactional evidence. It was therefore very positive in March to close the forward fund sale of our PBSA scheme in Bristol to Hines, a new investor partner to the group. We have subsequently put a further development asset under offer and are well progressed in our legal negotiations. We have also sought to remain proactive in the land market, acquiring 2 new conditional on planning land acquisitions. We believe there will be more opportunity in land as the year progresses. We have also made progress with our existing development pipeline, actively managing assets to improve viability and submitting planning on 4 schemes with potential beds totaling 3,000 plus. On the build side, inflation and supply chain shortfalls have moderated and has been reassuring to have practically completed 4 assets or phases of schemes. And to see our current developments in build performing materially to program and budget. We made encouraging early progress on our new business stream, Refresh, launched in January and which focuses on the refurbishment and repurposing of existing assets. The wider market sectors we operate continue to offer support and opportunity looking into the medium term. Supply and demand imbalances continue to grow and this in turn is helping fuel operational performance of assets. To date, it is a cautious market recovery with slower-than-expected interest rate cuts, slowing transaction activity. However, investor sentiment continues to improve and there remains considerable capital allocations to deploy in the U.K. Watkin Jones remains a market-leading developer, deliverer and operate a residential for rent in the U.K. We've got an absolute focus on positioning the business for growth to make sure we are fit and well-equipped to capitalize as we begin a new market cycle and economic conditions rebalance. I'll now hand over to Sarah for a review of our financial results.

Thank you, Alex. I will now take you through the financial highlights for the half year '24, review our market guidance for the full year and then comment on the positive changes we've had in building our pipeline. I will start with our financial performance. Importantly, these results show a return to profitability for Watkin Jones and progress across all key financial metrics. We reported strong revenue of GBP 175 million, which has come predominantly from the build-out of our forward sold developments and also the forward sale of student scheme in Bristol, which closed in March. Notably, this was a 14% increase on the prior period. Our gross profit was GBP 18 million compared to GBP 16 million in the prior period, with gross margin at 10.5% and in line with our margin guidance. The segmental analysis is set out to the appendix but shows relatively stable revenues of GBP 100 million at a gross margin of 9.3%, but a 25% increase in student revenues to GBP 61 million. The student gross margin of 11.6% is ahead of last year. This gross profit flowed through to operating profit of GBP 4 million compared to GBP 1.8 million in the prior period with some overhead efficiency supporting the bottom line. We have a net interest charge of GBP 1.6 million compared to GBP 1.5 million in the prior period, reflecting the benefit of the continued good financial management, higher interest income and reduced non-utilization fee from our RCF reduction and reduced interest payable following the debt pay down last year. The Board has decided not to declare an interim dividend with the maintenance of financial flexibility being the prior year's debt. Now moving on to the cash. We've continued to have great focus on our cash management and this has resulted in a small cash inflow from operating activities compared to outflows in the prior periods. This has been driven by the disposal of our student scheme in March and the unwinded working capital following practical completion of schemes. This has also resulted in a reduction in our debt position from GBP 29 million at year-end to GBP 23 million now. And our view is that this borrowing position remains conservative with room for growth. So its gross cash of GBP 67 million and the headroom we have in our facility and not overdraft. We have cash and available facilities of GBP 104 million. Moving on to the balance sheet. You can see that land and work in progress has decreased as a result of the disposal of our Bristol student schemes. Other current assets, which comprises contract assets and trade receivables has reduced by GBP 15 million, reflecting the receipt of bullet payments as we outlined at the full year results in January. Of the contract asset balance of GBP 53 million at 31st of March, over half of it is due to be received in the second half. We have spent GBP 10 million of our building safety provision in the period and received a small amount of recoveries in cash, resulting in a gross provision of GBP 56 million at the end of March, offset by great plant contributions, which is shown here as reimbursement assets of GBP 10 million. We've continued to make good progress at working through our legacy building provision, completing 3 properties in the period and spending GBP 10 million, which is very much in line with our expectations. Positively, all the live schemes are progressing in line with their budgeted costs and the forecast cash spend is in line with our expectations. This is an area where there remains significant uncertainty and we do continue to monitor closely the status of assets in scope and the scope of cost of work continues to evolve. Importantly, our provision remains unchanged at the end of March and we're continuing to look at recoveries and down the supply chain. I will now move on to our operating profit outlook for the full year. This slide demonstrates the build forecast from our half year position and shows we have progressive operating profit for the full year before any further forward sales. This is made up of follows: our forward sold revenue, which is contractually secured of GBP 150 million and approximately 10% gross margin. That's represented by the base block on the chart. The gross margin contribution from our Fresh business represented by the blue box, offset by our overheads, which here is on shown in red. As we've previously outlined, profit will be H2 weighted and the operational profit to be secured shown here by the shaded red block can be made up from a combination of the sites that we have in the market. These comprise one student scheme, which is well advanced in legal; and 2 schemes, which have planning consent and are currently being marketed. We also have further secured sites, which we are progressing through planning and we'll also have the potential to contribute to the full year position. But of course, we do need to be mindful of the wider environment and note that there's lower than expected reduction in interest rates or another macroeconomic shot could impact these transactions and therefore, the pace on recovery. Looking forward, this slide gives guidance to our full year secured cash position. The key point here is that we'll have another unwind working capital in the form of final bullet payments on the schemes we've completed. This amounts over GBP 25 million. This combined with working capital outflow on the live team will give us a strong secured cash position for the full year before any further forward sales. Now moving on to the pipeline, where we've continued to make progression. This is an update of the slide that we showed at the full year, which sets out an illustrative recovery profile of the business with the potential for us to build back to a GBP 30 million PBIT business over this 3-year period. Underpinning this is our secured pipeline of GBP 1.4 billion. This is very much anchored on our level of forward sold revenue of GBP 400 million shown here in the base block, which will come through in this financial year FY '25 and FY '26. This metric, of course, has been augmented by the forward sale of our student scheme in March. We also have GBP 250 million of revenue schemes that we have in the market. And then we have GBP 800 million of revenue from sites, which as we've secured and working through planning. [indiscernible] has increased by GBP 100 million since our last update due to the one new student scheme we've secured. And we're also looking at much more new land opportunities, looking to secure worth GBP 300 million and these are currently in legals, and Alex will give some more color on those later. There is still some drag on margin from the schemes we sold in FY '22 and FY '23, which will continue to impact FY '26. But the margin on new assets, which we're seeing coming through at 14%, 15% will build back to a more normalized position, giving us a blended 12% in FY '26. Just to point out this slide just represents our student BTR and affordable homes pipeline. For modeling purposes, we need to include the additional gross margin from Fresh. Now moving on to Fresh. Operationally, Fresh was performed well in the first month of the year with occupancy levels above 97% and rental growth on average at 7%. Looking to the next academic year have also been tracking ahead of last year. The business has been working hard to rebuild its units under management following the loss of a large client portfolio at the start of the year, which was taken in house and the business has had good success in achieving this objective. It's onboarded 2 new schemes and has a number of student schemes mobilizing for the start of the next academic year with current units under management, just over 20,000. There has, however, been significant movement in the competitor landscape. With third-party operators bring brought out by owner operators, for example, Homes For Student Acquisition by Far East Orchard. This is evolving -- this is feeding into an evolving fee and contract structure, which we will continue to keep under review. But we do see Fresh is well-placed in the market as a true independent third-party operator. Looking forward, potential active pipeline over 7,000 units and the business is also strategically reviewing its BTR offering. And finally, I'll touch on ESG. We've continued to make good progress across the 3 pillars of our ESG strategy: people, places and planners and it remains central to our construction and operational activities. We've diverted an average of 99% waste away from landfill, ahead of our 2025 target. And as we set out in the full year, we are working to reduce our carbon footprint, we've had some good successes in the period. We have supply partnerships in place, the reuse of primary materials. We're trialing a scheme where we return all excess plus the board to the manufacturer, especially recycling. We've also trialed new spec aluminum windows, which are made from 75% recycled material. But of course, all of this wouldn't be possible without our supply space and we hosted our second supplier conference in March. And we've continued to have people at the heart of our strategy with numerous engagement events across the different areas of the business, including a charity walk up Snowdon a couple of weeks ago. I will now hand back to Alex to cover the market in more detail.

Thanks, Sarah. So now turning to some of the key themes prevalence in our residential sectors. Here, the core fundamentals continue to offer strong support for the residential sector and the Watkin Jones business. Supply of new build to rent and PBSA stock being delivered remains highly constrained as starts and sites have decreased. This supply lag will continue over the next few years as planning applications and consents are also significantly down. The demand pool on the other side for PBSA has continued to grow over the last 10 years through both international and U.K. domestic students. In build to rent, there is significant forecast demand fueled by growing populations, shrinking household sizes and changing lifestyle habits. These imbalances and shortfalls have driven strong operational performance across the residential for rent sectors. Rental growth remained strong, however, this has moderated from a double-digit growth recorded in '22, '23. We view this moderation as a positive for the sector, ensuring sustainable growth. The operational performance is helping the investment market recovery gets underway, which I will come into more detail shortly. As reported at our full year results, the acute build cost inflation and supply chain challenges experienced have to a large extent normalized. We are not yet seeing deflation at a holistic build cost level, though, but there has been deflation some materials and goods. We continue to monitor the various global geopolitical tensions, which could put pressure on materials and supply. And we are actively looking to put further resilience into our supply chain. We believe the barriers to entry for our markets remain high and these have been exacerbated by the continuing evolution in planning and legislation around Building Safety Act, ESG and design criteria. We believe that Watkin Jones are well placed to utilize our scale and specialist focus and skill sets to take advantage here. In terms of investor sentiment, as mentioned earlier, we are continuing to see a gradual improvement in investor sentiment and activity. The sector fundamentals and maturity of the U.K. market is ensuring that U.K. residential for rent is a key target still for capital allocations. We are increasingly seeing new entrants announcing investments or plans to invest with the likes of Aviva, Legal & General and PGIM having already transacted and others such as Landmark, Thor Equities and Cadillac Fairview announcing new U.K. platforms recently. At this stage, the investment market recovery remains cautious in the short term as some investors delay decision-making or the pace of progressing transactions whilst waiting for more certainty or evidence on interest rate cuts coming through. We expect there to be an uptick in activity as clarity on trajectory rate reductions emerges. So how does this feed through into sort of transactional volumes? Well, transaction volumes in Q1 for 2024 show levels at circa GBP 1.3 billion of investment, which is slightly below the long-term average for the sectors. The volumes do show a bias towards PBSA transactions of circa 60%. This is most likely reflecting the enhanced viability characteristics of PBSA and the fact it's a more established asset class with a greater quantum of stock available to trade. Importantly, in recent months, there have been several key and potentially benchmark transactions to include Legal & General entering the direct lead PBSA market and both KKR and Goldman Sachs acquiring trading Build to Rent blocks in Wembley. The yield and pricing for these transactions are viewed as strong and a positive that core and core plus capital are starting to deploy again in volume. From a Watkin Jones perspective, as discussed, we have closed a forward fund sale to Hines of a PBSA scheme in Bristol, representing a new client for Watkin Jones and also a continued appetite for forward firmed opportunities. We are now under offer on a further development scheme and are well progressed in legals with this transaction. Anecdotally, since the new year, we've seen a good increase in the interest from investors reviewing new opportunities, accessing data rooms and underwriting bids. Alongside our typical forward fund sales, we are continuing to explore potential alternative funding structures, which can provide secure base margin returns but also potential upside profit from market recovery performance. Again, moving to the other side and the land market and how we might take advantage. The U.K. land market does remain idiosyncratic. And what do I mean by that? Well, transaction levels have increased substantially year-on-year albeit that this was off an extremely low base in Q1 2023. Land pricing remains depressed. However, there is often a significant variance in land pricing, largely driven by its location, its unique development attributes and the status of its owner. Are they a fore-seller, have they held the site a long time, all of that comes into play. From a Watkin Jones perspective, we remain proactive in the market, continuing to enhance our national coverage through internal and external conduits. Whilst viability challenges do remain, we are identifying more opportunities, both on and off market and a greater willingness from vendors to negotiate on price and structure. We believe that there's further opportunity ahead and we will continue to emerge as we progress through the year. In the half year, we have secured 2 new PBSA sites on a subject to planning basis and we have a further 3 assets under exclusivity as we work through legal and technical due diligence. This is -- moving now to the planning side of things. As a general election approaches, the U.K. planning system and how to fix it will undoubtedly feature large or most of the parties various manifestos. It's clear to see that residential planning applications and consents have declined significantly in the last few years as a result in part to the challenged economic environment, but also due to the continued evolving and complicating legislative and planning backdrop, particularly areas orientating around ESG, design and the Building Safety Act. These enhanced requirements and required knowledge and skill base potentially increase the barriers to entry for some developers. For Watkin Jones, we believe this is an opportunity to lever our scale, specialist focus and integrated development model to drive a key competitive advantage addressing these requirements. Our typical target markets continue to align well with National Brownfields and urban regeneration policies. We have a specialist team which maintains a very strong planning track record. And in the period, we have submitted applications for over 3,000 student bed spaces. If you remember back in January, we also touched on a new model that we were trialing called Refresh. And just to give you a bit of an update on our progress so far. So look, we've made encouraging early progress with this Refresh business stream, which is looking to target redevelopment, refurbishment and repositioning of assets for clients. We've appointed a Senior Director to lead the delivery side of this business and establish internal structures and governance. Importantly to note, this will have minimal impact on overheads in the early years. We've also undertaken a soft launch to both the market and our supply chain, which has been universally well received. The team have already secured 2 smaller projects under contract helping to improve concept for us and test our various processes. And we've also further free opportunities in exclusivity. We continue legal and due diligence on a larger university-led redevelopment scheme, which we alluded to in our full year update and this is progressing well. We will continue to update our shareholders as this business stream develops. But again, good early progress. So in summary, throughout the period, we've made positive steps forward across our key financial performance metrics. We continue to focus on the controllables within the business, looking to drive incremental progress and value across our core business functions. The strong residential supply and demand fundamentals endure and support the robust operational results and outlook for our sectors. Investor appetite and capital allocations have been sustained despite the economic headwinds. And whilst the market recovery has been gradual, there is certainly improving investor and transactional sentiment. In summary, Watkin Jones remains a market-leading business and we continue to position ourselves for growth as the economy recovers and a new property cycle begins. Thanks very much for your time this morning and we'll now move through to a Q&A session. And I know that a number of questions have already been submitted, which we will sort of respond to in turn. But if you do have questions, please put them into the Q&A slide.

[Operator Instructions] But just while the company take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your Investor dashboard. Sarah, Alex, as you can see there in the Q&A tab on the right-hand side, we have received a number of questions throughout your presentation this morning. And thank you to all of those on the call for taking the time to submit their questions. But Alex and Sarah, at this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end.

Sure. No problem. Okay. So coming to the first question, again, I won't read out people's names who submitted them. But except from this one because John Davis has asked quite a specific question about a specific scheme. But the gist of the question is, management team are doing a great job building back the company's financial position, but with regards the provision and in particular, Wales and signing up to sort of the pledges with the Welsh government, where is your progress on this? And what's the time frames? So John, we will respond in more detail to your question because it is quite a detailed one. But fundamentally, we're making good progress with the Welsh government. We've met with them. We've got a way forward, which we think works for both parties. It's always been our intention to make sure that leaseholders are protected in their various schemes and we continue to maintain that sort of standpoint. So yes, look, we're making good progress. Also, we've been waiting for technical reports to come back on the particular assets, which have now come back and we are able to sort of move forward with the plans for that scheme. So I'll come back to you. But yes, fundamentally, progress is being made and we're working well with the Welsh government. The next question, how significant was the impact of the forward sale of Gas Lane, PBSA scheme on the overall revenue and profit for the period. Are there any similar forward sales expected in the second half of the year that could impact financial performance? So Sarah, do you want to cover the first part of that and I can cover the second part.

Yes, of course. So for Gas Lane, the revenue contribution in the half year was circa GBP 20 million and profit gross margin was very much in line with 10% in line with where we've obviously guided.

Okay. And look, in terms of sales for the rest of the year, yes, look, clearly, in order for us to hit our consensus figures, which we're still targeting. There's a number of things that we need to do as a business and the sales are some of those. So I think as we said in the presentation, we have a further scheme development scheme, well progressed in legals, which we are looking to close. We also have 2 assets which have consent and are planning consent and are sat on our balance sheet, which we are actively in the market discussing with investors. And then we have 2 further schemes which don't yet have planning, but we have reasonable visibility that planning should come through. There's never a certainty in these things, but it's been well received. And if it comes through in the time frames, then we still have the opportunity to sell those schemes. So reality for us in the second half of the year, we do want to make sure we sell the scheme and legals. And then to hit consensus, we can do that by a combination of selling probably minimum 2 of the 4 assets that I just alluded to. It will clearly be dependent on what price we sell the assets for and also the time frames when we sell them. But effectively, there's a number of different routes through to us to be able to try and hit consensus position. So hopefully, that covers that one. How confident are you that further building safety provisions will not need to be made, so do you want to cover that?

Yes, sure. I think there's a number of -- there's a number of provision question. So I'll probably cover them all to get there. I must start with there's one talking about the net impact of our building safety activities. Why don't we talk about what we've -- explain what we have in the balance sheet and the moment and then we can go on to, I guess, the kind of wider question. So the net provision that we have in the balance sheet at the end of March is GBP 46 million and that's provided a growth provision of GBP 56 million, less GBP 10 million contributions that we've agreed from builders building owners. So effectively, we're saying our provision or cash outflow will be GBP 46 million. We're guiding that, that would take over the next 5 years, but with circa GBP 15 million to GBP 20 million next year and then the balance spread over the older tails for many years. And as we said, we will continue to look at further recoveries that potentially could come from down the supply chain. I think in terms of the uncertainty, I mean, I guess the point is that I don't think there's any CFO or a CEO in the sector who could say hand on heart that the provision is complete, just given the changes in the industry and the changes in the legislation. I think we flipped to them what we have done. So we've obviously had a third party who's gone through the costs we have for each profit -- property and obviously assured us on those. And as I said in my part, the buildings that we are working on at the moment are very much in line with the budget. So we made that assessment correctly. We are continuing, as I said, to go to down the supply chain. And then we also have very much a level of appropriate contingency, both on a property-by-property basis, but also a level of general contingency to safeguard against any further movements. So it's one that we are very much tended to work through. From a cash perspective, we obviously -- because we're doing the remedial work for themselves, we have control over that cash outflow. And obviously, we're getting kind of good experience from doing it, which we're trying to build into another part of our business refreshes Alex and Alex alluded to. Alex, is there anything you'd add to that?