REG - Watkin Jones plc - Full Year Results
RNS Number : 0970MWatkin Jones plc19 January 2021
For immediate release
19 January 2021
Watkin Jones plc
('Watkin Jones' or the 'Group')
Full year results for the year ended 30 September 2020
'Return to dividend driven by robust performance with foundations in place for future growth'
Watkin Jones plc (AIM:WJG), the UK's leading developer and manager of residential for rent with a focus on the build to rent ('BtR') and purpose built student accommodation ('PBSA') sectors, announces its annual results for the year ended 30 September 2020 ('FY20').
FY20
FY19
(Restated1)
Change
(%)
Revenue
£354.1m
£374.8m
-5.5%
Gross profit
£75.9m
£80.0m
-5.1%
Adjusted operating profit2
£51.7m
£55.6m
-7.1%
Adjusted profit before tax2
£45.8m
£50.4m
-9.3%
Adjusted basic earnings per share2
14.7p
16.1p
-8.7%
Dividend per share
7.35p
8.35p
-12.0%
Adjusted net cash3
£94.8m
£76.8m
+23.4%
Statutory operating profit
£31.2m
£53.0m
-41.1%
Statutory profit before tax
£25.3m
£47.9m
-47.1%
Basic earnings per share
8.2p
15.2p
-45.8%
Financial Highlights
· Solid financial performance, showing the resilience of the business during a challenging period for the UK economy.
· Revenue down 5.5% for the year, primarily as a result of forward sales of developments being deferred due to COVID-19 uncertainty.
· Robust gross margin for the year of 21.4% (FY19: 21.4%).
· Impact of COVID-19 disruption on operational delivery minimised and additional construction cost substantially mitigated, with FY20 planned deliveries all completed.
· All Government financial assistance received to support furloughed staff, totalling £0.8 million, repaid at the start of FY21.
· Full-year final dividend of 7.35 pence per share proposed, in line with policy of 2.0x cover by adjusted earnings, reflecting strength of financial performance and cash position.
· Strong liquidity position:
- £134.5 million gross cash at 30 September 2020 (30 September 2019: £115.6 million).
- £94.8 million net cash (after deducting loans, but excluding IFRS 16 operating lease liabilities), up from £76.8 million at 30 September 2019.
- £100.0 million revolving credit facility with HSBC renewed to May 2025, of which £65.0 million was undrawn at 30 September 2020.
· Exceptional costs of £20.5 million, including £14.8 million in relation to remediating cladding on a number of past developments and £5.7 million of additional costs in relation to COVID-19.
Richard Simpson, Chief Executive Officer of Watkin Jones, said: "We delivered a robust financial performance for FY20, building on our strong first half despite the subsequent and ongoing disruption caused by COVID-19. Our operations have performed well and we have taken the opportunity to secure sites to significantly increase our development pipeline, positioning us to deliver our growth strategy as the UK's leading developer and manager of residential for rent.
"COVID-19 undoubtedly caused delays to investment activity in the period, however I am pleased to report that the resumption in forward sales that we have seen, coupled with the increase in the number of student beds for delivery in FY21 and the scheduled completion of four BtR developments, should see Watkin Jones return to growth in the coming year, assuming there is no further significant disruption to our activities. We are pleased with our progress in growing our BtR and PBSA development pipelines and remain very confident in the long term prospects for these markets.
"We have had a good start to FY21 with new forward sales and our developments progressing well. The current escalation of the pandemic and latest lockdown brings with it further operational challenges, not least of which to Fresh who continue to provide support to students in residence and those unable to return to their accommodation in January. However, we have limited direct exposure to the level of student occupancy and with our COVID-secure operations working effectively we are able to continue delivering our developments on site. In light of our strong performance and cash position, we have resumed our previous dividend policy and the Board is therefore proposing a full-year dividend of 7.35 pence per share.
"Overall, I am confident about our business and its prospects, which are supported by strong sector dynamics and investor demand. Throughout the pandemic, we have been able to adapt to the changing circumstances and this, together with our strong pipeline of future developments and increasing focus on our ESG agenda, will allow the Group to continue to deliver for its stakeholders.
"I would like to take this opportunity to thank all the people across the Watkin Jones Group for their outstanding contribution in the most challenging of times. I want to thank them all for their hard work and their willingness to innovate, overcome problems and adapt to new ways of working which has set the foundations for our future growth."
Business Highlights
Further good progress with delivering our strategy.
Build to rent development - good progress with developments for delivery in FY21 and strong growth in pipeline
· Exciting progress with BtR strategy, delivering 159‑unit scheme in Bournemouth and making good progress on site with developments at Reading, Wembley, Sutton and Stratford, which are all on track for completion in FY21.
· Secured four significant new sites in Birmingham, Bath, Glasgow and Lewisham, London and, subsequent to the year end, a site in Belfast.
· 928 apartments across five sites forward sold for delivery over the period to FY22. Further three sites (722 apartments) currently in negotiation for sale for delivery over the period FY22 to FY23.
· Planning obtained for 538 BtR apartments on schemes in Brighton and Hove and Lewisham, London.
· Total secured development pipeline of 4,466 apartments across 13 sites, for delivery between FY21 and FY25.
BtR apartments
Total pipeline
FY21
FY22
FY23
FY24
FY25
Forward sold
928
857
71
-
-
-
Forward sales in negotiation
722
-
184
538
-
-
Sites secured with planning
-
-
-
-
-
-
Sites secured subject to planning
2,816
-
-
-
1,117
1,699
Total secured
4,466
857
255
538
1,117
1,699
Site acquisitions in legals
247
-
-
-
247
-
Total BtR pipeline
4,713
857
255
538
1,364
1,699
Student accommodation development - completed FY20 schemes and those for FY21 on track, pipeline increased
· Resilient operational performance, with 2,609 beds delivered. Six developments were completed ahead of the academic year despite lockdown restrictions and one scheme subsequent to the year end.
· 2,730 beds across six sites forward sold for delivery in FY21, with a further development (462 beds) in negotiation for forward sale.
· 1,168 beds across four sites forward sold for delivery in FY22, including sites in Bristol, York and Leicester forward sold subsequent to the year end.
· Added prime sites to the pipeline in Bristol, Bath, Edinburgh, Guildford and Manchester.
· Obtained planning for 1,217 PBSA beds across five sites, including an additional 100 beds at Kelaty House, Wembley.
· Signed an on-campus partnership agreement with Cranfield University for delivery in FY21 (415 beds) and FY22 (198 beds).
· Total secured development pipeline of 7,910 student beds across 20 sites, for delivery between FY21 and FY24.
PBSA beds
Total pipeline
FY21
FY22
FY23
FY24
FY25
Forward sold
3,898
2,730
1,168
-
-
-
Forward sales in negotiation
714
462
-
252
-
-
Sites secured with planning
1,117
-
777
340
-
-
Sites secured subject to planning
2,181
-
-
1,846
335
-
Total secured
7,910
3,192
1,945
2,438
335
-
Site acquisitions in legals
1,998
-
-
662
570
766
Total PBSA pipeline
9,908
3,192
1,945
3,100
905
766
Accommodation management (Fresh) - strong operational performance in the face of the pandemic
· Fresh continued to perform well during the pandemic, as we focused on supporting student and tenant welfare.
· At 30 September 2020, Fresh managed 20,179 student beds and BtR apartments across 66 schemes (30 September 2019: 17,721 beds and apartments, across 64 schemes).
· Nine new PBSA schemes (3,593 beds) mobilised in the year, ready for occupation and management from the start of the 2020/21 academic year.
· Won mandates during the year for the future management of 1,414 PBSA beds.
· Currently appointed to manage 21,790 student beds and BtR apartments by FY23, including expected renewals.
· Began to implement new management system for both BtR and student accommodation, for roll out in FY21.
· Achieved COVID-secure accreditation for the properties Fresh manages and provided significant support to student and residential tenants throughout the pandemic.
Residential - solid performance and exploring opportunities to develop a presence in affordable housing
· Good performance against backdrop of COVID-19 pandemic, with 95 sales completions (FY19: 150 completions), including 25 apartments in our developments at Stratford and Bath.
· Completed the 35-apartment development at Trafford Street, Chester, which was forward sold in FY19.
· Strong pick up in sales in the summer months following the lifting of the initial COVID-19 lockdown measures and introduction of temporary stamp duty relief, with 25 sales reserved or exchanged going into FY21.
· Commenced development of a site for 97 homes in Preston, including 34 affordable homes.
· Pilot testing opportunity to combine our residential delivery capability with our proven residential for rent development model in the affordable housing sector.
· Secured, subsequent to the year end, our first affordable homes site for 245 homes in Crewe, with an offer progressing for the forward sale of 159 affordable and BtR homes.
Notes
1. IFRS 16 'Leases' was applicable to the Group for the first time for FY20. The Group has adopted the fully retrospective approach in applying the standard, recognising its material impact on the Group's results and statement of financial position. The comparative results for FY19 have therefore been restated according to the transition arrangements set out in the standard. Further details on the nature of the changes to the Group's accounting required by this standard, as well as its main impacts and the adjustments made to restate the comparative figures, are detailed in the financial review below and in note 4 to the financial statements.
2. Adjusted operating profit, adjusted profit before tax and adjusted basic earnings per share are calculated before the impact of exceptional charges of £20.5 million (FY19: exceptional charge of £2.6 million).
3. Adjusted net cash is stated after deducting loans, but before deducting IFRS 16 operating lease liabilities of £134.4 million at 30 September 2020 (30 September 2019: £137.5 million).
Analyst meeting
A meeting for analysts will be held virtually at 09.30am today, 19 January 2021. A copy of the Final Results presentation is available at the Group's website: http://www.watkinjonesplc.com
An audio webcast of the conference call with analysts will be available after 12pm today:
https://webcasting.buchanan.uk.com/broadcast/5fda032ac26cbe3059348df4
Chairman's statement
This has been a difficult year for everyone, but Watkin Jones has proved its ability to adapt and respond to the most challenging of times.
The resilience of our business was soundly tested this year by the COVID-19 pandemic and I am pleased to say that we have emerged in good shape. This is testament to our strong executive leadership, our ability to adapt our operations quickly and effectively, and the support of our people, supply chain, shareholders and institutional clients.
Performance
Our operations have performed well through the pandemic and we delivered solid financial results, proving the robustness of our business.
Since the onset of the pandemic, protecting the health and wellbeing of our people, tenants and supply chain partners has been our absolute priority. While Government advice did not require us to close our development sites, we did so from 23 March 2020 until we were sure we could operate them safely. Introducing new working practices on our sites enabled us to deliver six of our seven student schemes ahead of the start of the academic year. For the seventh development, in Walthamstow, we agreed a staged handover with the client, with final completion early in FY21. However, we did incur some extra costs as a result of the disruption to our operations and measures taken to accelerate works, as well as some late delivery damages in relation to Walthamstow.
Build to rent again made a material contribution to our performance, as we completed one development and made further progress with the other schemes on site. The residential business had a good recovery in sales following the easing of the initial "lockdown" and Fresh continued to perform well, while successfully adapting to operating in a COVID-secure environment.
While the Group is soundly financed and has good liquidity, in a highly uncertain environment at the beginning of the pandemic, we considered it prudent to implement comprehensive cash conservation measures. At the year end, we had a net cash balance of £94.8 million and headroom within our debt facilities of a further £75.0 million, giving us confidence in our financial position.
Dividends
On 1 April 2020, we announced the temporary suspension of dividend payments. The Board did not therefore declare an interim dividend in FY20. However, in light of the Group's performance and our strong cash position, we have resumed our previous dividend policy of paying a dividend 2.0x covered by adjusted earnings. The Board is therefore proposing a full-year dividend of 7.35 pence per share, which will be paid on 26 February 2021 to shareholders on the register on 29 January 2021.
Board, management and people
I have been hugely impressed by the way our people, throughout the business, have responded to the challenges of COVID-19. Their flexibility, expertise and commitment enabled us to react effectively and in a way that reflects our culture, and I thank them all on the Board's behalf.
The Board has always focused carefully on the Group's culture and how the decisions we make could affect it. As one example, at our quarterly reviews of health and safety performance we always ensure that the health and safety team feels it has the support it needs to make the right decisions and to prioritise protecting people above all else. This in turn helps to reinforce a culture where our people feel valued and respected, and are incentivised to perform.
The Group has strong executive leadership and we have seen the benefits of that this year. One of the Board's responsibilities is to ensure that we have the breadth and depth of leadership we will need in the future, so we can meet our growth objectives. The Board therefore spent time during the year reviewing talent across the Group and considering succession planning. This exercise demonstrated the great strides we have taken with building our leadership pipeline in the last twelve months.
There were no changes to the composition of the Board or its committees during the year. The Directors continue to work well together and we significantly stepped up our formal and informal interactions this year, as we oversaw and supported the Group's response to the pandemic.
Governance
We have continued to evolve and reinforce our corporate governance framework so it remains fit for purpose as the Group grows. One example is the formal and rigorous review of our strategy during the year, supported by an external facilitator. Our discussions considered how we can make a difference in our markets, how we should be structured to best take advantage of the opportunities we see, and the associated risks we face. Since the end of the year, this work has enabled us to approve a new strategy to evolve the residential business into an affordable housing-led developer, under a capital-light partnership model. We intend to carefully trial the new model, through a pilot in the North West. The Board also put considerable focus on risk management during the year, ensuring we have a real understanding of the risks facing the business and the barriers we have in place to limit their potential impact, as well as the costs and consequences of getting it wrong.
As part of our ongoing enhancements to governance, we recruited our first in-house Company Secretary, who will join us in 2021. I want to thank Prism for their excellent support to our company secretarial function.
Environmental, social and governance ("ESG") initiatives are firmly on the Board's agenda, reflecting both the importance of these matters to our stakeholders and their potential to influence the Group's long-term success. The Executive team has worked hard to develop and refine our approach this year. Our decision to be proactive about undertaking remedial cladding works, despite not being legally required to do so, is one example of our determination to do what is right.
Looking forward
We remain in highly uncertain times, both in terms of the progress of the pandemic and its economic impact. Even so, we are confident in the underlying strength of the UK's higher education sector, in the growing demand for more build to rent properties, and in our ability to adapt to changing circumstances, which will enable us to continue to deliver for our stakeholders.
Grenville Turner
Non‑Executive Chairman
19 January 2021
Chief Executive Officer's review
This was an exceptionally challenging year, but one which fully demonstrated the quality of the business and its people.
Performance
Despite the inevitable disruption from COVID-19 in the second half of the year, we built on our strong first half and delivered a robust financial performance for FY20 as a whole. We also made further strategic progress as the UK's leading developer and manager of residential for rent.
This outcome reflects the outstanding contribution from our people across the Group. I want to thank them all for their hard work and their willingness to innovate, overcome problems and adapt to new ways of working. It also demonstrates the highly defensive nature of residential for rent as an asset class, and the support of our clients, customers, supply chain partners and communities, which we truly appreciate.
Revenue was £354.1 million (FY19: £374.8 million), a reduction of 5.5%, which was primarily due to the delay in some anticipated forward sales in the second half of the year.
Gross profit was £75.9 million (FY19: £80.0 million), while operating profit was £51.7 million (FY19: £55.6 million) before exceptional charges of £20.5 million (FY19: £2.6 million). The exceptional charges mainly relate to the anticipated cost of remediating cladding on past developments, as well as additional costs and impairment charges incurred as a result of the pandemic. The pre-exceptional operating margin was 14.6% (FY19: 14.8%).
While the business is soundly financed and has substantial headroom in its banking facilities, we prudently took the early decision that we should conserve cash during the pandemic. This helped us to achieve a strong closing cash balance of £134.5 million (FY19: £115.7 million).
Our rapid response to COVID‑19 enabled us to meet the revised delivery schedule for student accommodation we set out at the half‑year. This strong operational performance contributed to revenue in the year of £226.0 million for our student accommodation division, compared with £246.1 million in FY19. In total, we delivered 2,609 beds across seven schemes.
For FY21, we have seven schemes with 3,192 beds scheduled for delivery. Of this, six schemes with 2,730 beds have been forward sold, with the remaining scheme in negotiation for sale.
Build to rent development again made a significant contribution to our performance, with revenue of £94.0 million (FY19: £77.4 million). We made good progress with the developments in Reading, Wembley, Sutton and Stratford, which are all moving forward as planned for completion in FY21. We also completed our development in Bournemouth in the year, albeit later than planned due to some issues with on site management and the installation of the cladding system, compounded by the onset of the pandemic.
We have continued to add attractive sites to the pipeline for both BtR and PBSA developments, supporting our growth ambitions in the residential for rent market. We secured nine sites during the second half of the year and a further four sites after our year end, three of which were under forward sales agreements.
Fresh delivered another solid performance, with revenue of £7.6 million (FY19: £7.5 million). Nine new PBSA schemes (3,595 beds) were mobilised in the year, ready for occupation and management from the start of the 2020/21 academic year. At the end of the year, the division had a total of 20,179 student beds and BtR apartments under management across 66 schemes, up from 17,721 units across 64 schemes at the start of the year. Fresh won mandates during the year for the future management of 1,414 PBSA beds and, by FY23, Fresh is currently appointed to manage 21,790 student beds and apartments, including expected renewals.
The residential development business achieved revenues of £26.3 million (FY19: £34.3 million), with a strong pick up in sales following the lifting of the initial COVID-19 "lockdown" measures and introduction of the temporary stamp duty relief.
Strategy
We continue to successfully implement the growth strategy we set out last year. BtR development will be the biggest contributor to growth in the coming years, and we expect it to make a comparable contribution to revenues as PBSA by FY23, based on our current pipeline. We have also identified an opportunity for a closely aligned residential development business, which combines affordable housing with our BtR and residential for sale offers.
Streamlining and investing in our operations is a key pillar of our strategy, helping us to deliver better outcomes for clients and customers while improving our own efficiency. We continued to implement the restructuring I outlined in my report last year, in particular combining three regional student accommodation delivery divisions into one. The development side of the business is now organised around cross‑functional hubs, responsible for delivering both PBSA and BtR developments, which supports our ability to leverage our PBSA expertise into the BtR market.
We have created a strategic framework for managing ESG initiatives. I see being a responsible company as a business imperative. One of the key attractions for us of the affordable housing market is the opportunity to help meet a pressing social need that will make a real difference to people's lives.
ESG performance
Health and safety is vitally important to us, in terms of protecting the people and subcontractors who work for us and in ensuring that residents have a safe place to live. This ethos underpinned our careful response to COVID-19 and our decision to remediate cladding on properties we had previously developed, despite having no legal liability to do so.
I am pleased to say that we have continued to improve day-to-day health and safety performance within the business this year. Our incident rate, which is the number of incidents recorded per 100,000 employees, was 128 (FY19: 152), which compares with 2,420 for the wider industry (source: HSE).
Other examples of our commitment to ESG include our decision to ensure that everyone who was furloughed during the early stages of the pandemic would continue to receive 80% of their pay, rather than just the amount covered by Government assistance. In addition, we took the decision that the executive team and the Directors would take a 20% pay cut during the period we received furlough money from the Government. We subsequently repaid the financial assistance we had received once we were certain the business was in sound shape. We appreciate that this affected our profits but we believe that a highly ethical approach to business is best for our clients, investors and society, and is therefore best for shareholders.
I am a firm believer in the importance of culture to long-term business success. The reorganisation of the development and delivery divisions has helped to flatten our structure, empowering our people and making communication and engagement easier and more effective. This structure also gives more transparency about career opportunities, so our people can better see where they can take their careers in Watkin Jones. The introduction of agile working also supports our culture, by allowing our people to make their own decisions about how and where they work most effectively, while aiding collaboration. This will help us to attract and retain people who will thrive in such an environment, while also allowing us to reap the benefits of a more diverse workforce.
We also continue to work hard to minimise our environmental impact and to ensure we engage effectively with all of our stakeholders.
Brexit
As I reported last year, we did a significant amount of work in preparing for a range of possible Brexit outcomes. We are pleased to see the agreement of a trade deal with the EU. This will further help ensure our supply chain continuity and we do not believe Brexit will affect the timely delivery of our development schemes.
Outlook
Institutional forward sale markets started to recover in the final quarter of FY20 and this has enabled us to complete three forward sales of PBSA developments since the year end. These schemes are in Bristol, York and Leicester and total 909 beds for delivery in FY22.
The COVID-related delays to our development cycle will take time to unwind. However, the resumption of forward sales, the increase in the number of student beds for delivery in FY21 and the scheduled completion of four BtR developments should see us return to growth in the coming year, assuming we do not see further significant disruption to our activities from COVID-19. While the new lockdown in January 2021 requires us to continue supporting our employees and customers, we have safe operating procedures in place to continue our on site developments, and we are closely monitoring the situation.
Our work this year to add attractive new development sites to the pipeline also underpins the visibility of our revenue and earnings in future years. We will continue to secure new sites in the coming months, while being careful to protect our liquidity.
In summary, I am fundamentally optimistic about our business, the dynamics of the sectors we operate in and the strength of investor demand for our product.
Richard Simpson
Chief Executive Officer
19 January 2021
Operating review
Build to rent
BtR is an important and growing contributor to the Group's financial performance. Revenues in the year were £94.0 million, up 21.4% from £77.4 million in FY19. This revenue performance reflected the completion in the year of the 159-apartment scheme in Bournemouth, and good progress on site with the forward sold developments in Reading, Wembley, Sutton and Stratford which are due for delivery in FY21. Despite temporary disruption on site resulting from COVID-19, construction is proceeding to plan for all four schemes. The completion of the development in Bournemouth was hampered by on-site management issues and problems with the cladding system, which were further compounded by the initial COVID-19 disruption.
Gross profit for the year was £14.9 million (FY19: £13.8 million), at a margin of 15.8% (FY19: 17.8%). The margin achieved in the year is consistent with our guidance of an average 15% margin for BtR developments in the medium term. The margin in FY19 benefited from a strong contribution from the Reading scheme, which was the main contributor to BtR revenues in that year.
There were no new forward sales in the year, due to a slowdown in institutional client investment activity caused by the COVID-19 related uncertainty. The forward sale market began to recover towards the end of the year and we are currently negotiating on the sale of three developments (722 apartments).
The Group secured four significant new development sites during the year, three of which are subject to planning. These sites are in Birmingham (550 apartments), Bath (343 apartments), Glasgow (779 apartments) and Lewisham, London (322 apartments). Subsequent to the year end a further site was secured subject to planning in Belfast (778 apartments).
We also obtained planning permission for 538 BtR apartments at sites in Brighton and Hove (216 apartments) and Lewisham, London (322 apartments) for delivery in FY23.
The current BtR development pipeline is as shown in the table below:
BtR apartments
Total pipeline
FY21
FY22
FY23
FY24
FY25
Forward sold
928
857
71
-
-
-
Forward sales in negotiation
722
-
184
538
-
-
Sites secured with planning
-
-
-
-
-
-
Sites secured subject to planning
2,816
-
-
-
1,117
1,699
Total secured
4,466
857
255
538
1,117
1,699
Site acquisitions in legals
247
-
-
-
247
-
Total BtR pipeline
4,713
857
255
538
1,364
1,699
The appraised future revenue value to the Group of the above secured development pipeline is c.£900.0 million, of which c.£90.0 million is currently forward sold.
Student accommodation
Revenues from student accommodation development were £226.0 million (FY19: £246.1 million), a decline of 8.2%. The reduction in revenue was primarily due to a delay in the anticipated forward sale of a scheme which is currently in build in Leicester, for delivery in FY21, and in the forward sale of several other new developments, as the COVID-19 pandemic caused a hiatus in institutional clients' investment activity.
The division recorded a robust gross profit of £54.3 million (FY19: £54.9 million), despite the disruption caused by the pandemic. The gross margin of 24.0% was ahead of the 22.3% for FY19, reflecting the delay to new forward sales of land, which typically attract a lower margin than we achieve on the subsequent works carried out under the development agreement.
We closed all our development sites on 23 March 2020, as we assessed our response to the pandemic and introduced COVID-secure working practices, with close to full working capacity achieved again by the end of May. By carefully reprogramming our developments, including appropriate scenario planning, and introducing extended working hours and rotating shift patterns where required, we were able to complete six schemes with 2,256 beds that were due for delivery ahead of the new academic year.
For the seventh scheme due in FY20, a 353-bed development in Walthamstow, we agreed a phased delivery with the client, with two of the three blocks handed over for the 2020/21 academic year and the third block completed approximately three months later. While we incurred some damages as a result of the late completion, our close working relationship with the client and the efforts we made to recover the delay caused by the COVID-19 disruption and to complete as quickly as possible, enabled us to negotiate an improved position.
The cost of the damages is included in the exceptional COVID‑19 cost to the business. In addition, the business incurred exceptional costs relating to the waiver of 2020/21 final term rents due from students who were tenants of the Group's leased student accommodation properties and were unable to return to their accommodation as a result of the first lockdown and due to a further impairment to the carrying value of one of the leased properties, which was already impaired, as a result of lower occupancy due to the pandemic. More information on exceptional items is included in the financial review below.
We forward sold one PBSA development in the year, the 348-bed scheme at Wilder Street, Bristol, for delivery in FY21. This follows an option agreement announced in October 2018, which was conditional on full planning consent being achieved. The consideration payable to us for Wilder Street is c.£33.8 million, net of all client funding and acquisition costs, and is payable over FY20 and FY21 as the development works progress.
We also obtained planning for and completed an agreement with DWS to add a further 100 beds to the scheme at Kelaty House in Wembley, for delivery in FY21.
In April, we signed an on-campus partnership agreement with Cranfield University to develop 415 beds for delivery in FY21 and a further 198 beds for FY22. The development value to us is £48.0 million, payable over the period FY20 to FY22. The agreement also contains an option for a second phase of 252 beds. This is a significant addition to our PBSA development pipeline and paves the way for similar university partnerships.
The Group secured a further six PBSA development sites in the year, four of which are subject to planning. These comprised two sites in Edinburgh (644 beds) and sites in Bath (335 beds), Bristol (387 beds), Guildford (375 beds) and Manchester (419 beds).
After our year end we entered into forward sales agreements for three new development sites, for which the clients concerned acquired the land directly. These were in Bristol (291 beds), York (368 beds) and Leicester (250 beds), all for delivery in FY22 and with a total forward sold development value of £65.2 million.
The Group obtained planning for 1,217 beds, comprising the additional 100 beds for the Wembley site, 984 beds for sites in Edinburgh and 133 beds in Exeter.
The current PBSA development pipeline is as shown in the table below:
PBSA beds
Total pipeline
FY21
FY22
FY23
FY24
FY25
Forward sold
3,898
2,730
1,168
-
-
-
Forward sales in negotiation
714
462
-
252
-
-
Sites secured with planning
1,117
-
777
340
-
-
Sites secured subject to planning
2,181
-
-
1,846
335
-
Total secured
7,910
3,192
1,945
2,438
335
-
Site acquisitions in legals
1,998
-
-
662
570
766
Total PBSA pipeline
9,908
3,192
1,945
3,100
905
766
The appraised future revenue value to the Group of the above secured development pipeline is c.£600.0 million, of which c.£215.0 million is currently forward sold.
Accommodation management (Fresh)
Fresh generated revenues of £7.6 million, broadly in line with the £7.5 million recorded in FY19. Gross profit was £4.5 million (FY19: £4.6 million), reflecting a margin of 59.8% (FY19: 61.5%). The stable revenue position reflects the fact that Fresh's revenues largely derive from fixed management fees, but with a modest level of variable income based on the level of occupancy revenues achieved. The disruption to student lettings in the final term of the 2020/21 academic year resulted in a small reduction in expected fee income and consequential decrease in the gross margin relative to FY19. The gross margin was, however, in line with our normal target of 60.0%.
At the start of the financial year, Fresh had 17,721 student beds and BtR apartments under management, across 64 schemes. This compared with 15,421 units across 56 schemes a year earlier.
Fresh continued to perform well, mobilising nine new PBSA schemes in the year (3,593 beds) and winning mandates for the future management of 1,414 PBSA beds. At the end of the financial year, Fresh had 20,179 PBSA beds and BtR apartments under management across 66 schemes, and is currently appointed to manage 21,790 beds and apartments by FY23, including expected renewals. Fresh is now the fourth largest operator of student beds in the UK (source: CBRE), up from sixth in 2019, and it remains the largest third-party operator.
Ensuring customers were living in a COVID‑secure environment was a key focus for the business from March, with occupancy levels in student accommodation remaining relatively high during lockdown. Around 60% of students were still in residence at the start of lockdown, with more than one third of beds still occupied in June. This required Fresh to develop new ways of working, so customers could continue to receive essential services and support during the pandemic. In September 2020, the Group was awarded COVID-secure accreditation by the British Safety Council, reflecting the rigorous approach adopted by Fresh and the Group's other divisions. The latest lockdown measures will impact students who had planned to return to their accommodation for the start of the 2020/21 spring term. We will continue to respond to the situation as it evolves and to provide them with the necessary support.
At the start of FY20, Fresh launched its Be wellbeing and lifestyle programme, which puts residents at the heart by creating communities that thrive and care for each other, where our residents feel welcomed and connected, and can enjoy a range of tailored activities, events and support.
Adapting the Be programme during the pandemic to provide on line communities, support activities and advice has enabled residents to remain connected and feel supported during this difficult period.
The business continues to invest in its infrastructure systems, to support service delivery to both residents and to clients.
The implementation of our new single management platform Yardi is progressing well and will launch in 2021. This will result in a seamless customer journey for residents from the point of initial booking through the whole length of their tenancy. Live data via our new app will enable residents to manage all aspects of their tenancy, as well as connect with our on site teams and their neighbours in a way that is convenient for them.
Yardi will give Fresh a best-in-class control framework and the ability to provide dynamic reporting to clients.
Fresh is also moving to a single consumer brand. The consolidation of the Fresh Student Living and Five Nine Living brands under the new single Fresh brand will be complete in early FY21 and will communicate a clear customer proposition that is relevant to the broader residential for rent market, while also enabling the targeting of specific audiences with relevant messaging and creative concepts.
Residential
The residential business delivered revenues of £26.3 million in FY20, down from £34.3 million in FY19. Overall, the division achieved 95 sales in the year, compared to 150 in FY19. Revenues in the prior year were helped by strong sales from the apartment development at Duncan House, Stratford. Sales in FY20 were inevitably impacted by the initial COVID-19 lockdown in the critical spring period and by the temporary suspension in site build. We did, however, see a good pick up in sales in the summer months, following the easing of the initial lockdown and introduction of the temporary stamp duty relief, and the division entered FY21 with 25 sales exchanged or reserved.
Important contributions to revenue in the year came from:
· a solid performance from the division's operations in the North West, and in particular the development at Macclesfield;
· further sales of apartments at the Duncan House, Stratford, and Riverview Court, Bath developments; and
· the completion of the 35-apartment development at Trafford Street, Chester, which was forward sold in the previous financial year.
Gross profit for the year was £4.0 million (FY19: £7.2 million), representing a margin of 15.4% (FY19: 20.9%). The lower margin reflects the mix of revenues this year, and in particular the contribution in the prior year from the high‑margin sales of apartments at Duncan House, Stratford.
We acquired and commenced a development site for 97 homes in Preston during the year and commenced development of a site for 29 homes in Bontnewydd, North Wales.
Alongside the demand for private housing to buy, there is also a significant need for more affordable housing. Affordable housing is increasingly delivered as part of mixed‑tenure schemes, which incorporate an element of BtR and private housing for sale. This enables the delivery of a meaningful number of affordable units, while the inclusion of the other tenures makes the scheme more economically viable. We see an opportunity to pivot our residential housing division to become part of a new business stream, led by affordable housing. If our North West trial of this model is successful, it has the potential to deliver important social benefits through the provision of much-needed affordable homes.
Subsequent to the year end, we secured our first site under the affordable homes pilot strategy. This site, for 245 units in Crewe, has planning and is targeted to deliver 90 affordable, 69 BtR and 84 private for sale homes, and should start to contribute to revenues from the end of FY21. Offers for the forward sale of the affordable and BtR homes have been received and are progressing into legals.
With the addition of the above site the future pipeline stands at c.745 homes and apartments.
Financial Review
The Group remains well capitalised, with significant liquidity and substantial headroom within its banking facilities, supporting future growth.
Highlights
FY20
FY19
£m
£m
Change
Revenue
354.1
374.8
-5.5%
Gross profit
75.9
80.0
-5.1%
Administrative expenses
(24.2)
(24.4)
-0.7%
Operating profit before exceptional items
51.7
55.6
-7.1%
Exceptional costs
(20.5)
(2.6)
Operating profit
31.2
53.0
-41.1%
Share of profit in joint ventures
0.2
0.3
Net finance costs
(6.1)
(5.4)
Profit before tax from continuing operations
25.3
47.9
-47.1%
Income tax expense
(4.2)
(9.1)
Profit for the year
21.1
38.8
-45.7%
Basic earnings per share from continuing operations
8.2p
15.2p
-45.8%
Adjusted basic earnings per share
14.7p
16.1p
-8.7%
Dividend per share
7.35p
8.35p
-12.0%
Comparative figures for FY19 have been restated as necessary for the adoption of IFRS 16 - Leases, as described later in this section.
Revenue
Revenue was £354.1 million, down 5.5% from £374.8 million in FY19. The reduction was primarily the result of delays to forward sales of developments as a result of COVID-19, which slowed institutional clients' activity during the second half of the year, as well as lower residential sales.
Revenues from student accommodation development were £226.0 million (FY19: £246.1 million). The reduction in the year was mainly due to a delay in the forward sale of our scheme in Leicester, which is currently in build for delivery in FY21, as well as delays in the forward sale of other new developments.
BtR development revenues increased 21.4% in the year to £94.0 million (FY19: £77.4 million), reflecting the completion of the development in Bournemouth and continued progress with the schemes in build at Reading, Wembley, Sutton and Stratford. BtR revenues were, however, also impacted by the delay in the forward sale of new developments.
Accommodation management revenues earned by Fresh were £7.6 million, against £7.5 million in FY19. Despite the disruption to student occupancy in the second half of FY20 as a result of the pandemic, the consistent revenue performance reflects the fixed management fee income earned by Fresh, with only a modest level of fees being variable based on the level of occupancy revenues achieved. The latter did, however, suppress Fresh's revenues when considering that the number of student beds and apartments under management at the start of FY20 (17,721) was 14.9% higher than at the start of FY19 (15,421).
The residential business delivered revenues of £26.3 million, compared to £34.3 million for FY19. The division experienced a good recovery in sales following the relaxation of the initial COVID-19 lockdown measures and introduction of the temporary stamp duty relief, but its revenue performance was inevitably impacted by the disruption to its important spring selling period and by the temporary closure to its sites, which delayed the build completion of some homes into FY21.
There were no significant revenues in the year generated by developing commercial property alongside PBSA and BtR developments. This activity produced revenue of £9.5 million in the previous year.
Gross profit
Gross profit was £75.9 million (FY19: £80.0 million), reflecting a gross margin consistent with last year of 21.4% (FY19: 21.4%). Whilst we had a shift in the revenue mix towards BtR, which is at a lower margin than PBSA, the maintained gross margin was primarily attributable to a stronger margin achieved in the year on our student accommodation development activities.
The gross profit from our PBSA development activities was £54.3 million (FY19: £54.9 million) at a margin of 24.0% (FY19: 22.3%). The improvement in the margin reflects the absence of new forward land sales in the second half of the year, which would otherwise have added to revenues but would have reduced the gross margin. We typically earn a low or nil margin on the land sale element of new forward sales, which under IFRS 15 'Revenue from Contracts with Customers' is accounted for separately from the revenues due under the agreement to carry out the development works. This means that we typically earn a lower margin in the year in which the land sale occurs, followed by higher margins in the following years as the development works are undertaken.
BtR development generated a gross profit of £14.9 million (FY19: £13.8 million), resulting in a gross margin of 15.8% (FY19: 17.8%). The margin achieved in the year was broadly in line with our expectation of generating a 15% margin from our BtR development activities in the medium term, with the slight improvement reflecting the absence of anticipated new forward land sales in the second half of the year, which as noted for PBSA above, are typically at low or nil margin. The gross margin in FY19 benefited from a strong contribution from the development at Reading, which accounted for a higher proportion of BtR revenues in that year.
Fresh continued to generate a highly attractive level of profitability, with gross profit of £4.5 million (FY19: £4.6 million) equating to a gross margin of 59.8% (FY19: 61.5%). The slight drop in margin reflects the impact of the modest reduction in variable fee income as a result of the disruption to student occupancy in the second half of the year.
Gross profit for the residential business was £4.0 million, versus £7.2 million in FY19. The reduction in the gross margin from 20.9% in FY19 to 15.4% in FY20 was primarily due to a change in mix, with the prior year benefiting from higher margin sales from developments completed in that year.
Administrative expenses
Administrative expenses were £24.2 million in FY20, a slight reduction on the £24.4 million for FY19. As a result of COVID-19, we took precautionary measures to reduce spend across a number of areas, for example suspending the 1 April pay review, reducing the salaries for the Executive Committee and the fees for the Non‑Executive Directors by 20% during the period April - June 2020 and cutting back on discretionary expenditure, including on consultancy costs. The Group's profit performance this year also resulted in a reduction in the cost of the bonus accrual of c.£1.3 million. These cost reductions offset increases in our headcount in the year, with the average number of management and administrative personnel increasing by seven to 116, inflationary cost increases and higher insurance costs as a result of a more challenging insurance market.
Operating profit before exceptional items
Operating profit before exceptional items was £51.7 million (FY19: £55.6 million). The operating margin was 14.6% (FY19: 14.8%), reflecting the maintained gross margin and holding of administrative expenses.
Exceptional items
The Group incurred a number of exceptional costs during the year, totalling £20.5 million (FY19: £2.6 million). The largest component was a provision of £14.8 million in respect of remedial works relating to cladding. Of this, £4.9 million was utilised in the year, with the remainder expected to be incurred over the next two financial years.
In addition, we incurred exceptional charges totalling £5.7 million as a result of the COVID-19 pandemic:
· £2.7 million relating to the additional direct costs incurred on site as a result of additional health and safety measures and the implementation of accelerated working practices, to make up for construction delays caused by COVID-19, as well as the cost of damages arising from the late completion of the Walthamstow PBSA scheme;
· £1.1 million for waiving the final 2019/20 rent instalments for students living in the Group's leased student accommodation assets, who left their accommodation prior to 23 March 2020 and were unable to return; and
· £1.9 million in respect of an impairment to one of the student accommodation leased investment property assets, as a result of the reduction in student occupancy for the 2020/21 academic year due to the pandemic.
Exceptional costs in FY19 totalled £2.6 million. This related to the cost of compensating our CEO, Richard Simpson, for forfeiting outstanding incentives he held in respect of his former employer.
Share of profit in joint ventures
The Group's share of profit in joint ventures was £0.2 million (FY19: £0.3 million). These relate to the balance of profits arising in relation to PBSA developments completed in Belfast in prior years.
Finance costs
Our finance costs are primarily the finance cost of capitalised leases under IFRS 16. Finance costs also include fees associated with the availability of our revolving credit facility ("RCF") with HSBC, and the interest cost of the loans we have with Svenska Handelsbanken AB (see "Bank facilities" below). The net finance cost for the year was £6.1 million (FY19: £5.4 million), of which £5.1 million was in respect of capitalised leases (FY19: £5.2 million).
Profit before tax
Profit before tax for the year amounted to £25.3 million (FY19: £47.9 million). Adjusted profit before tax, which excludes the impact of exceptional items, was £45.8 million (FY19: £50.4 million).
Taxation
The corporation tax charge was £4.2 million (FY19: £9.1 million). The effective tax rate of 16.7% (FY19: 18.9%) was less than the UK corporation tax rate of 19%. The lower tax rate was primarily due to a prior year tax credit relating to the taxation of distributions from the Curlew Student Fund, which had already been taxed at source, and the higher proportionate benefit relative to the lower profit of specific tax allowances, including land remediation expenditure.
Earnings per share
Basic earnings per share from continuing operations was 8.2 pence (FY19: 15.2 pence). Adjusted basic earnings per share, which excludes the impact of the exceptional items discussed above, was 14.7 pence (FY19: 16.1 pence).
Dividends
On 1 April 2020, we announced that we were suspending the interim dividend, as a result of the economic uncertainty and disruption caused by COVID-19. However, given the Group's subsequent operational performance, the strength of our financial position and the Board's confidence in the outlook, the Board has proposed a final dividend of 7.35 pence per share. The dividend is 2.0x covered by adjusted earnings, in line with our dividend policy.
At 30 September 2020, the Company had distributable reserves of £100.8 million available to pay dividends.
EBITDA
EBITDA is an important measure of our underlying performance. It is calculated as operating profit plus profit from joint ventures, before interest, tax, depreciation and amortisation.
EBITDA decreased by 34.6% to £40.9 million (FY19: £62.5 million). Adjusted EBITDA, which excludes exceptional items, was £61.3 million (FY19: £65.0 million), representing an adjusted EBITDA margin of 17.3% (FY19: 17.4%).
Statement of financial position
At 30 September 2020, non-current assets amounted to £134.7 million (FY19: £142.7 million), with the most significant item being the carrying value of the leased student accommodation investment properties amounting to £104.6 million (FY19: £110.2 million), which arises following the adoption of IFRS 16 (see "Implementation of IFRS 16 'Leases'" below). Right-of-use assets relating to office and car leases amount to £4.8 million (FY19: £5.9 million). The reduction in the balances in the year reflect the depreciation and impairment charges. Intangible assets relating to Fresh amounted to £13.3 million, reduced by the amortisation charge of £0.6 million in the year, and are supported by the future cash flows for the business.
Inventory and work in progress was £125.7 million, down from £134.2 million at 30 September 2019. The reduction was mainly attributable to the residential sales in the year, notably from the apartment developments at Stratford and Bath and the housing development in Macclesfield, which resulted in a reduction in residential stock and work in progress of £12.3 million. PBSA and BtR inventory and work in progress was largely unchanged from last year as we realised cash from the sale of the Liverpool Road, Chester PBSA development and the forward sale of the Wilder Street, Bristol land site, but spent similar amounts on the PBSA and BtR developments in build in Leicester and on the acquisition of a new BtR site in Glasgow.
Contract assets were £41.5 million at the year end (30 September 2019: £25.6 million). These contract assets are mainly the final payment balances which will be received on the completion in FY21 of the forward sold developments currently in build, of which £30.6 million related to the developments in build in Reading, Sutton and Wembley.
Trade and other receivables at 30 September 2020 stood at £23.5 million (FY19: £13.9 million), with the increase mainly in respect of certified and retention balances that will be payable on the developments in build.
Contract liabilities and trade and other payables amounted to £106.3 million at 30 September 2020 (30 September 2019: £86.5 million), with the increase of £19.8 million due to a higher value of subcontract and supplier liabilities (£72.4 million) compared to a year ago (£50.7 million), reflecting the value of work performed in the final months of the year on the developments completed at the end of FY20 and those in build for FY21.
Our corporation tax liability was reduced to £0.8 million at 30 September 2020, from £7.0 million at 30 September 2019, reflecting our quarterly payments on account during the year.
The provision for cladding remedial works of £9.9 million has been split between current liabilities (£6.3 million) and non‑current liabilities (£3.6 million), based on our anticipated expenditure over the next two years.
Interest-bearing loans and borrowings stood at £39.7 million at 30 September 2020, net of debt arrangement fees of £0.9 million, compared to £38.8 million at 30 September 2019 (see "Bank facilities" below).
Implementation of IFRS 16 'Leases'
The Group has applied IFRS 16 'Leases' for the first time in FY20. This standard affects the Group's six historic student accommodation sale and leaseback properties, as well as leases for the rental of office space and motor vehicles. The new standard creates investment property (leased) assets for the student accommodation leases, right-of-use assets for the office and motor vehicle leases and a liability for future lease payments.
We have adopted the fully retrospective approach in applying the standard, recognising its material impact on the Group's results and statement of financial position. As noted earlier, the comparative results for FY19 and the statement of financial position at 30 September 2019 have therefore been restated according to the transition arrangements set out in the standard.
The investment property (leased) assets recognised at 30 September 2020 amount to £104.6 million (30 September 2019: £110.2 million), net of impairment charges of £5.7 million (30 September 2019: £3.5 million). The impairment charge at 30 September 2019 was previously classified as an onerous lease provision.
The right-of-use assets recognised at 30 September 2020 amount to £4.8 million (30 September 2019: £5.9 million).
Corresponding lease liabilities of £134.4 million have been recognised (30 September 2019: £137.5 million), of which £128.1 million (30 September 2019: £131.3 million) is non-current and reflects the remaining length of the PBSA leases, varying between six and 32 years. The two leases with the longest remaining terms, Dunaskin Mill, Glasgow, and New Bridewell, Bristol, which are profitable, account for £75.9 million of the total lease liabilities.
The difference between the right‑of‑use assets and lease liabilities at 30 September 2019 of £21.3 million, net of a deferred tax asset of £3.5 million, the reclassification of the onerous lease provision of £3.5 million and previously prepaid lease rental payments of £0.6 million, is reflected in a reduction in retained earnings of £14.9 million at that date.
In our interim financial statements for the six months ended 31 March 2020, the student accommodation leased assets were included as right-of-use assets. However, the interaction of IAS 40 'Investment property' with IFRS 16 requires that leased assets on which rental income is received are classified as investment property. The leased student accommodation assets have therefore been reclassified as investment property (leased) in accordance with IAS 40.
The Group's income statements for FY20 and FY19 have been impacted as follows:
FY20
FY19
Pre
IFRS 16
IFRS 16
Pre
IFRS 16
IFRS 16
IFRS 16
Impact
Reported
IFRS 16
Impact
Reported
£'m
£'m
£'m
£'m
£'m
£'m
Gross profit
72.5
3.4
75.9
76.8
3.2
80.0
Administrative expenses
(24.3)
0.1
(24.2)
(24.5)
0.1
(24.4)
Operating profit before exceptional items
48.2
3.5
51.7
52.3
3.3
55.6
Exceptional costs
(20.5)
-
(20.5)
(2.6)
-
(2.6)
Operating profit
27.7
3.5
31.2
49.7
3.3
53.0
Share of profit in joint ventures
0.2
-
0.2
0.3
-
0.3
Net finance charges
(1.0)
(5.1)
(6.1)
(0.3)
(5.1)
(5.4)
Profit before tax
26.9
(1.6)
25.3
49.7
(1.8)
47.9
Adjusted EBITDA
49.9
11.4
61.3
53.9
11.1
65.0
Further details on the nature of the changes to the Group's accounting required by this standard, as well as its main impacts and the adjustments made to restate the comparative figures, are provided in note 4 to the financial statements below.
Cash flows
FY20
FY191
Continuing operations
£m
£m
Operating profit before exceptional items
51.7
55.6
Exceptional items
(8.7)
(0.4)
Depreciation and amortisation
9.4
9.2
Impairment of leased student accommodation property (non-exceptional)
0.3
0.8
(Increase)/decrease in working capital
2.1
(26.2)
Finance costs paid
(6.5)
(5.7)
Tax paid
(10.0)
(9.8)
Net cash inflow from operating activities
38.3
23.5
Purchase of fixed assets
(0.2)
(0.3)
Cash flow from joint venture interests
0.8
-
Cash flow from other financial assets
-
0.2
Dividends paid
(14.3)
(20.1)
Payment of lease liabilities
(6.1)
(5.9)
Payment of hire purchase liabilities
(1.0)
(1.3)
Cash flow from borrowings
1.4
12.9
Increase in cash
18.9
9.0
Cash at beginning of year
115.6
106.6
Cash at end of year
134.5
115.6
Less: borrowings
(39.7)
(38.8)
Net cash before deducting lease liabilities
94.8
76.8
Less: lease liabilities
(134.4)
(137.5)
Net debt
(39.6)
(60.7)
1. Restated for the impact of IFRS 16.
In a typical year, the Group's cash balance peaks around the year end, as we receive the final payments on student accommodation developments completing ahead of the new academic year.
The Group is then a net user of cash until the following year end, as a result of outflows such as tax and dividend payments, overhead costs and land purchases. The cash balance at the year end is therefore important for funding our day-to-day cash requirements and puts the Group in a strong position when bidding for new sites to grow the future development pipeline.
The Group's net cash flow from operating activities was £38.3 million (FY19: £23.5 million), reflecting a strong cash flow from the Group's trading operations in the year. The cash flow from operating activities, before deducting the cash cost of exceptional items, finance costs and tax payments, was £63.5 million (FY19: £39.4 million). The working capital balance was relatively unchanged, decreasing by £2.1 million in the year, compared to an increase of £26.2 million in FY19.
Finance costs paid totalled £6.5 million (FY19: £5.7 million), including £5.1 million (FY19: £5.2 million), as a result of the finance charges on the capitalised lease liabilities, for which the capital repayments amounted to £6.1 million (FY19: £5.9 million).
Dividends paid in the year amounted to £14.3 million (FY19: £20.1 million) and corporation tax payments totalled £10.0 million (FY19: £9.8 million).
At the year end, we had a gross cash balance of £134.5 million and loans of £39.7 million, resulting in a net cash position of £94.8 million. At 30 September 2019, we had gross cash of £115.6 million, loans of £38.8 million and net cash of £76.8 million.
Net cash balances are stated before deducting the operating lease liabilities of £134.4 million (30 September 2019: £137.5 million), arising as a result of applying IFRS 16. We believe the net cash balance before deducting operating lease liabilities is a more relevant measure for the Group. The lease liabilities relate primarily to several historic student accommodation sale and leaseback properties, for which the lease rental liabilities are expected to be substantially covered by the future net student rental incomes to be received, in the absence of the short-term disruption caused by COVID-19.
Bank facilities
During the year, we renewed our RCF with HSBC for five years to May 2025, while increasing the facility from £60.0 million to £100.0 million on the same terms. At the year end, we had drawn £35.0 million against the RCF, giving unused headroom within the facility of £65.0 million. We have also maintained an overdraft facility of £10.0 million.
The Group also has loan facilities with Svenska Handelsbanken AB, which are used to fund our operating build to rent stock in Sheffield and Droylsden. These facilities run to March 2022. The outstanding balance at the year end was £5.0 million (30 September 2019: £5.5 million).
Going concern
We have undertaken a thorough review of the Group's ability to continue to trade as a going concern for the period to 31 January 2022 (the "forecast period"). This review has been undertaken taking into consideration the following matters:
Liquidity
At 30 September 2020, the Group had a robust liquidity position, with cash and available headroom in its banking facilities totalling £209.5 million, as set out below.
£m
Cash balances
134.5
RCF headroom
65.0
Overdraft facility
10.0
Total cash and available facilities
209.5
Strong liquidity has been maintained through the first quarter of FY21, providing the Group with a good level of cash and available banking facilities for the year ahead.
As noted above, the RCF is committed and has a five-year term to May 2025. All financial covenants under the facility were comfortably met at 30 September 2020 and will continue to be met through the forecast period.
Business model
Our forward sale business model, is by definition, capital-light. By forward selling the majority of our BtR and PBSA developments, we receive payment for the land either at the same time as or shortly after we complete the purchase, and before we commit to any significant development expenditure. Once forward sold, we receive payment for the development works as they progress.
By being in control of our development pipeline we are able to ensure that we only commit construction expenditure to developments that are either forward sold or to undertake a modest level of enabling works. In certain circumstances we may decide to continue construction activities beyond the initial enabling phase, without a forward sale agreement in place, but we take this decision based on our available liquidity and can suspend the works should it prove necessary. This greatly limits our exposure to development expenditure which is not covered by cash income.
Sites are normally secured on a subject to satisfactory planning basis, which gives us time to manage the cash requirements and to market them for forward sale. We also take a cautious approach to managing our land acquisition programme to ensure that we have sufficient liquidity available to complete the acquisition of the sites without any new forward sales being secured.
The Fresh business receives a regular contractual monthly fixed fee income from its multiple clients and the short to medium-term risk to its revenue stream is low.
For our residential business, which is currently relatively small and only has a few sites in build, we manage our development expenditure so that, other than for infrastructure works, we only commit expenditure where it is supported by a forward sales position.
We also receive rental income from tenants on our leased PBSA assets and operational BtR assets. The level of rental income received, whilst reduced in the short term for the PBSA assets as a result of COVID-19, is relatively small in the context of the Group's revenues as a whole.
Our business model and approach to cash management therefore provides a high degree of resilience.
Counterparty risk
Our clients are predominantly blue-chip institutional funds and the risk of default is low. The funds for a forward sold development are normally specifically allocated by the client or backed by committed debt funding.
For forward sold developments our cash income remains ahead of our development expenditure through the life of the development, such that if we were exposed to a client payment default, we could suspend the works, thereby limiting any cash exposure.
Fresh has many clients and these are mostly institutional funds with low default risk.
Base case cash forecast
We have prepared a base case cash forecast for the forecast period, based on our current business plan and trading assumptions for the year, including a lower level of revenue from the leased PBSA assets as a result of COVID-19. This is strongly supported by our forward sold pipeline of six PBSA developments and four BtR developments for delivery in FY21, as well as Fresh's contracted income and the reserved/exchanged sales for our residential business. Our currently secured cash flow, derived from our forward sold developments and other contracted income, net of overheads and tax, results in a modest cash utilisation over the forecast period, with the result that our liquidity position is strongly maintained.
In addition to the secured cash flow, the base case forecast assumes a number of new forward sales and further house sales, which if achieved will result in a further strengthening of our liquidity position, after allowing for dividend payments. We currently have under offer and are progressing sales of three BtR schemes and one PBSA scheme, which will underpin the additional forward sales assumptions in the forecast.
Risk analysis
In addition to the base case forecast and though considered unlikely, we have considered the following possible significant downside risks as a consequence of the pandemic:
· counterparty risk - whilst the majority of our clients are not considered to present a default risk, we have identified two which we consider could be more vulnerable in the event of further sustained disruption;
· suspension of the forward sale markets, resulting from a significant economic downturn or market uncertainty - this is our most significant risk as it would greatly limit our ability to achieve any further forward sales and would potentially mean that we have to complete on secured site acquisitions without a subsequent forward sale in place; and
· collapse of the housing market - in this scenario we have considered the possibility of a significant reduction in future house sales.
We have run various model scenarios to assess the possible impact of the above risks, including a worst case downside scenario assuming the following:
· default by the two identified counterparty risks;
· no further forward sales are achieved, other than those currently under offer, as a result of a freeze in the sales markets;
· only 50% of further house sales are achieved beyond those currently reserved/exchanged; and
· we continue to complete the acquisition of our secured sites in line with the current target programmes, with limited mitigating actions being taken.
In the worst case downside scenario we have included for the payment of our FY20 full-year proposed dividend in line with our policy.
The cash forecast prepared under the worst case downside scenario illustrates that adequate liquidity is maintained through the forecast period.
Conclusion
Based on the thorough review and robust downside forecasting undertaken, and having not identified any material uncertainties that may cast any significant doubt, the Board is satisfied that the Group will be able to continue to trade for the period to 31 January 2022 and has therefore adopted the going concern basis in preparing the financial statements.
Philip Byrom
Chief Financial Officer
19 January 2021
For further information:
Watkin Jones plc
Richard Simpson, Chief Executive Officer
Tel: +44 (0) 20 3617 4453
Phil Byrom, Chief Financial Officer
Peel Hunt LLP (Nominated Adviser & Joint Corporate Broker)
Tel: +44 (0) 20 7418 8900
Mike Bell / Ed Allsopp
Jefferies Hoare Govett (Joint Corporate Broker)
Tel: +44 (0) 20 7029 8000
Max Jones / Will Soutar
Media enquiries:
Buchanan
Henry Harrison-Topham / Richard Oldworth
Jamie Hooper / Steph Watson
Tel: +44 (0) 20 7466 5000
watkinjones@buchanan.uk.com
www.buchanan.uk.com
Notes to Editors
Watkin Jones is the UK's leading developer and manager of residential for rent, with a focus on the build to rent and student accommodation sectors. The Group has strong relationships with institutional investors, and a reputation for successful, on-time-delivery of high quality developments. Since 1999, Watkin Jones has delivered over 43,000 student beds across 130 sites, making it a key player and leader in the UK purpose built student accommodation market. In addition, Fresh, the Group's specialist accommodation management business, manages over 20,000 student beds and build to rent apartments on behalf of its institutional clients. Watkin Jones has also been responsible for over 80 residential developments, ranging from starter homes to executive housing and apartments. The Group is increasingly expanding its operations into the build to rent sector.
The Group's competitive advantage lies in its experienced management team and business model, which enables it to offer an end-to-end solution for investors, delivered entirely in-house with minimal reliance on third parties, across the entire life cycle of an asset.
Watkin Jones was admitted to trading on AIM in March 2016 with the ticker WJG.L. For additional information please visit www.watkinjonesplc.com
Consolidated statement of comprehensive income
for the year ended 30 September 2020
Year
ended
30
September
2020
Year
ended
30
September
2019
Restated
(note 4)
Notes
£'000
£'000
Continuing operations
Revenue
5
354,121
374,785
Cost of sales
(278,205)
(294,752)
Gross profit
75,916
80,033
Administrative expenses
(24,249)
(24,433)
Operating profit before exceptional items
51,667
55,600
Exceptional costs
6
(20,437)
(2,576)
Operating profit
31,230
53,024
Share of profit in joint ventures
199
286
Finance income
251
428
Finance costs
(6,366)
(5,874)
Profit before tax
25,314
47,864
Income tax expense
7
(4,222)
(9,041)
Profit for the year attributable to ordinary equity holders of the parent
21,092
38,823
Other comprehensive income
Other comprehensive income that will not be reclassified to profit or loss in subsequent periods:
Net loss on equity instruments designated at fair value through other comprehensive income
(6)
(2)
Total comprehensive income for the year attributable to ordinary equity holders of the parent
21,086
38,821
Pence
Pence
Earnings per share for the year attributable to ordinary equity holders of the parent
Basic earnings per share
8
8.246
15.202
Diluted earnings per share
8
8.234
15.175
Adjusted proforma basic earnings per share (excluding exceptional costs)
8
14.717
16.111
Adjusted proforma diluted earnings per share (excluding exceptional costs)
8
14.696
16.082
Consolidated statement of financial position
as at 30 September 2020
30
September
2020
30
September
2019
Restated
(note 4)
30 September 2018
Restated
(note 4)
Notes
£'000
£'000
£'000
Non-current assets
Intangible assets
13,284
13,844
14,403
Investment property (leased)
10
104,623
110,224
117,483
Right-of-use assets
10
4,763
5,930
7,013
Property, plant and equipment
4,376
4,966
4,809
Investment in joint ventures
3,243
2,794
2,558
Deferred tax asset
3,313
3,836
3,155
Other financial assets
1,133
1,139
1,350
134,735
142,733
150,771
Current assets
Inventory and work in progress
125,660
134,226
132,778
Contract assets
41,522
25,578
8,758
Trade and other receivables
23,518
13,850
17,499
Cash and cash equivalents
12
134,513
115,652
106,640
325,213
289,306
265,675
Total assets
459,948
432,039
416,446
Current liabilities
Trade and other payables
(97,300)
(81,368)
(84,014)
Contract liabilities
(8,967)
(5,164)
(14,314)
Provisions
(6,277)
-
-
Interest-bearing loans and borrowings
(711)
(1,324)
(1,605)
Lease liabilities
10
(6,310)
(6,192)
(5,770)
Current tax liabilities
(819)
(7,043)
(7,204)
(120,384)
(101,091)
(112,907)
Non-current liabilities
Interest-bearing loans and borrowings
(38,956)
(37,481)
(24,877)
Lease liabilities
10
(128,143)
(131,330)
(137,522)
Deferred tax liabilities
(1,040)
(1,042)
(1,050)
Provisions
(3,587)
-
-
(171,726)
(169,853)
(163,449)
Total liabilities
(292,110)
(270,944)
(276,356)
Net assets
167,838
161,095
140,090
Equity
Share capital
2,562
2,553
2,553
Share premium
84,612
84,612
84,612
Merger reserve
(75,383)
(75,383)
(75,383)
Fair value reserve of financial assets at FVOCI
428
434
436
Share‑based payment reserve
2,348
2,311
84
Retained earnings
153,271
146,568
127,788
Total equity
167,838
161,095
140,090
Consolidated statement of changes in equity
for the year ended 30 September 2020
Share
capital
Share
premium
Merger
reserve
Fair value
reserve of
financial
assets at
FVOCI
Share-based
payment
reserve
Retained
earnings
Total
£'000
£'000
£'000
£'000
£'000
£'000
£'000
As at 30 September 2018
2,553
84,612
(75,383)
436
84
141,217
153,519
Effect of initial application of IFRS 16 (note 4)
-
-
-
-
-
(13,429)
(13,429)
As at 30 September 2018 (restated)
2,553
84,612
(75,383)
436
84
127,788
140,090
Profit for the year (restated)
-
-
-
-
-
38,823
38,823
Other comprehensive income
-
-
-
(2)
-
-
(2)
Total comprehensive income (restated)
-
-
-
(2)
-
38,823
38,821
Share-based payments
-
-
-
-
2,208
-
2,208
Deferred tax credited directly to equity
-
-
-
-
19
70
89
Dividend paid (note 9)
-
-
-
-
-
(20,113)
(20,113)
Balance at 30 September 2019 (restated)
2,553
84,612
(75,383)
434
2,311
146,568
161,095
Profit for the year
-
-
-
-
-
21,092
21,092
Other comprehensive income
-
-
-
(6)
-
-
(6)
Total comprehensive income
-
-
-
(6)
-
21,092
21,086
Share-based payments
-
-
-
-
37
-
37
Deferred tax debited directly to equity
-
-
-
-
-
(70)
(70)
Issue of shares
9
-
-
-
-
-
9
Dividend paid (note 9)
-
-
-
-
-
(14,319)
(14,319)
Balance at 30 September 2020
2,562
84,612
(75,383)
428
2,348
153,271
167,838
Consolidated statement of cash flows
for the year ended 30 September 2020
Year
ended
30
September
2020
Year
ended
30
September
2019
Restated
(note 4)
Notes
£'000
£'000
Cash flows from operating activities
Cash inflow from operations
11
54,868
38,943
Interest received
245
428
Interest paid
(6,792)
(6,090)
Tax paid
(10,035)
(9,769)
Net cash inflow from operating activities
38,286
23,512
Cash flows from investing activities
Acquisition of property, plant and equipment
(317)
(361)
Proceeds on disposal of property, plant and equipment
69
87
Cash flow from joint venture interests
812
-
Cash distribution received from other financial assets
-
209
Net cash inflow from investing activities
564
(65)
Cash flows from financing activities
Dividends paid
9
(14,319)
(20,113)
Proceeds from exercise of share options
9
-
Payment of principal portion of lease liabilities
(6,089)
(5,953)
Payment of capital element of other interest bearing loans
(1,034)
(1,307)
Drawdown of RCF
20,843
46,244
Repayment of bank loans
(18,499)
(33,306)
Bank loan arrangement fees
(900)
-
Net cash outflow from financing activities
(19,989)
(14,435)
Net increase in cash
18,861
9,012
Cash and cash equivalents at 1 October 2019 and 1 October 2018
115,652
106,640
Cash and cash equivalents at 30 September 2020 and 30 September 2019
134,513
115,652
Notes to the consolidated financial statements
for the year ended 30 September 2020
1. General information
Watkin Jones plc (the "Company") is a public limited company incorporated in the United Kingdom under the Companies Act 2006 (registration number 9791105). The Company is domiciled in the United Kingdom and its registered address is 7-9 Swallow Street, London, England, W1B 4DE.
The principal activities of the Company and its subsidiaries (collectively the "Group") are those of property development and the management of properties for multiple residential occupation.
The consolidated financial statements for the Group for the year ended 30 September 2020 comprise the Company and its subsidiaries. The basis of preparation of the consolidated financial statements is set out in note 2 below.
2. Basis of preparation
The preparation of the financial statements in conformity with the Group's accounting policies requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reported period. Whilst these estimates and assumptions are based on the Directors' best knowledge of the amount, events or actions, actual results may differ from those estimates.
The financial information set out above does not constitute the Group's statutory accounts for the years ended 30 September 2020 or 2019, but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under Section 498(2) or (3) of the Companies Act 2006.
Whilst the financial information included in this announcement has been computed in accordance with IFRS as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to send its 2020 Annual Report to shareholders on 26 January 2021.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods for which the financial information included in this announcement has been presented. The financial information included in this announcement is prepared on the historical cost basis except as disclosed in these accounting policies. The financial information is presented in pounds sterling and all values are rounded to the nearest thousand (£'000), except when otherwise indicated.
3. Accounting policies
The results for the year have been prepared on a basis consistent with the accounting policies set out in the Watkin Jones plc Annual Report for the year ended 30 September 2020.
4. New standards and interpretations
New standards and interpretations adopted for the first time during the financial year ended 30 September 2020
IFRS 16 'Leases'
In the current year, the Group has applied IFRS 16 'Leases' for the first time. The date of the initial application of IFRS 16 for the Group is 1 October 2019. IFRS 16 replaces IAS 17 'Leases' and IFRIC 4 'Determining whether an Arrangement contains a lease'.
IFRS 16 introduces new or amended requirements in respect of lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of an investment property (leased) asset or a right-of-use asset and a lease liability at commencement of all leases, except for short-term leases and leases of low-value assets when such recognition exemptions are adopted. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.
Details of the Group's approach to the transition to IFRS 16 are set out below, followed by a description of the impact of adopting IFRS 16.
Approach to the transition to IFRS 16
The Group has chosen to apply IFRS 16 retrospectively at the date of initial application, as if it had already been effective at the commencement date of the existing lease contracts. The two capitalisation exemptions proposed by the standard - lease contracts with a duration of less than twelve months and lease contracts for which the underlying asset has a low value - have been used. The Group has elected to only apply IFRS 16 to contracts previously identified as a lease under IAS 17. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements from IAS 17. Under IFRS 16, a lessor continues to classify leases as either finance leases or operating leases and account for those two types of leases differently.
Impact of lessee accounting
IFRS 16 has changed how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. The accounting for these leases upon the initial adoption of the standard is as follows:
· recognise investment property (leased) or right-of-use assets in the consolidated statement of financial position, initially measured at the present value of the future minimum lease payments from the inception of each lease discounted at the lease's incremental borrowing rate. Depreciation has been recognised in relation to these assets with the initial asset valuation calculated on the basis that depreciation has been applied from the inception of the underlying lease;
· recognise lease liabilities in the consolidated statement of financial position, initially measured at the present value of the future minimum lease payment from the inception of each lease discounted at the lease's incremental borrowing rate. The discount has been unwound each year with the initial liability valuation calculated on the basis that the unwind of the discount has been applied from the inception of the lease; and
· the difference between the right‑of‑use assets, lease liabilities and prepaid or accrued lease payments has resulted in an adjustment to equity at 1 October 2018 relative to that previously reported.
Subsequent treatment is as follows:
· to recognise depreciation of investment property (leased) and right-of‑use assets in the consolidated statement of comprehensive income;
· the lease liability is unwound each year, with the discount unwind recognised as an interest expense; and
· to separate the total amount of cash paid into a portion repaying the principal of the lease liability (presented within financing activities) and interest (presented within operating activities) in the consolidated statement of cash flows.
The application of IFRS 16 has generated a different profile for the recognition of lease expenditure in the Group statement of comprehensive income when compared to IAS 17. The calculation of lease liabilities under IFRS 16 requires the discounting of future minimum lease payments with the unwind of the discount then recognised in the statement of comprehensive income. When estimating future minimum lease payments, the minimum rent increases applicable under each lease are factored into the calculation and for the six student accommodation sale and leaseback properties these minimum annual rent increases range from 1.5% to 2.5%. This results in the timing of the recognition of lease costs under IFRS 16 having a greater weighting in the early life of the leases than under IAS 17 and lower costs in the later years. In addition, EBITDA for the Group has increased significantly as the costs associated with these leases will now be recognised as depreciation and interest. The following tables set out the adjustments recognised as at the date of initial application of IFRS 16.
Statement of comprehensive income for the year ended 30 September 2019
As reported
IFRS 16
adjustment
As restated
£'000
£'000
£'000
Continuing operations
Revenue
374,785
-
374,785
Cost of sales
(298,020)
3,268
(294,752)
Gross profit
76,765
3,268
80,033
Administrative expenses
(24,472)
39
(24,433)
Operating profit before exceptional items
52,293
3,307
55,600
Exceptional costs
(2,576)
-
(2,576)
Operating profit
49,717
3,307
53,024
Share of profit in joint ventures
286
-
286
Finance income
428
-
428
Finance costs
(695)
(5,179)
(5,874)
Profit before tax
49,736
(1,872)
47,864
Income tax expense
(9,436)
395
(9,041)
Profit for the year attributable to ordinary equity holders of the parent
40,300
(1,477)
38,823
Earnings per share for the year attributable to ordinary equity holders of the parent
Basic earnings per share
15.780
(0.578)
15.202
Diluted earnings per share
15.740
(0.565)
15.175
Adjusted proforma basic earnings per share (excluding exceptional costs)
16.689
(0.578)
16.111
Adjusted proforma diluted earnings per share (excluding exceptional costs)
16.646
(0.564)
16.082
The application of IFRS 16 resulted in an increase in operating profit of £3.3 million due to lease payments no longer being recognised in the statement of comprehensive income and replaced by depreciation and interest costs. This has led to a net reduction in cost of sales and administrative expenses. An increased interest expense, in comparison to IAS 17, was recognised in respect of interest on lease liabilities of £5.2 million with overall profit for the year attributable to ordinary equity holders of the parent reduced by £1.5 million.
Statement of comprehensive income for the year ended 30 September 2020
On a see-
through
basis
IFRS 16
adjustment
As reported
£'000
£'000
£'000
Continuing operations
Revenue
354,121
-
354,121
Cost of sales
(281,669)
3,464
(278,205)
Gross profit
72,452
3,464
75,916
Administrative expenses
(24,306)
57
(24,249)
Operating profit before exceptional items
48,146
3,521
51,667
Exceptional costs
(20,437)
-
(20,437)
Operating profit
27,709
3,521
31,230
Share of profit in joint ventures
199
-
199
Finance income
251
-
251
Finance costs
(1,263)
(5,103)
(6,366)
Profit before tax
26,896
(1,582)
25,314
Income tax expense
(4,523)
301
(4,222)
Profit for the year attributable to ordinary equity holders of the parent
22,373
(1,281)
21,092
Earnings per share for the year attributable to ordinary equity holders of the parent
Basic earnings per share
8.746
(0.500)
8.246
Diluted earnings per share
8.734
(0.500)
8.234
Adjusted proforma basic earnings per share (excluding exceptional costs)
15.218
(0.501)
14.717
Adjusted proforma diluted earnings per share (excluding exceptional costs)
15.196
(0.500)
14.696
The application of IFRS 16 resulted in an increase in operating profit of £3.5 million due to lease payments no longer being recognised in the statement of comprehensive income and replaced by depreciation and interest costs. This has led to a net reduction in cost of sales and administrative expenses. An increased interest expense, in comparison to IAS 17, was recognised in respect of interest on lease liabilities of £5.1 million with overall profit for the year attributable to ordinary equity holders of the parent reduced by £1.3 million.
Statement of financial position at 30 September 2018
As reported
IFRS 16
adjustment
As restated
£'000
£'000
£'000
Non-current assets
Intangible assets
14,403
-
14,403
Investment property (leased)
-
117,483
117,483
Right-of-use assets
-
7,013
7,013
Property, plant and equipment
4,809
-
4,809
Investment in joint ventures
2,558
-
2,558
Deferred tax asset
42
3,113
3,155
Other financial assets
1,350
-
1,350
23,162
127,609
150,771
Current assets
Inventory and work in progress
132,778
-
132,778
Contract assets
8,758
-
8,758
Trade and other receivables
18,209
(710)
17,499
Cash and cash equivalents
106,640
-
106,640
266,385
(710)
265,675
Total assets
289,547
126,899
416,446
Current liabilities
Trade and other payables
(84,308)
294
(84,014)
Contract liabilities
(14,314)
-
(14,314)
Provisions
(1,068)
1,068
-
Interest-bearing loans and borrowings
(1,605)
-
(1,605)
Lease liabilities
-
(5,770)
(5,770)
Current tax liabilities
(7,204)
-
(7,204)
(108,499)
(4,408)
(112,907)
Non-current liabilities
Interest-bearing loans and borrowings
(24,877)
-
(24,877)
Lease liabilities
-
(137,522)
(137,522)
Deferred tax liabilities
(1,050)
-
(1,050)
Provisions
(1,602)
1,602
-
(27,529)
(135,920)
(163,449)
Total liabilities
(136,028)
(140,328)
(276,356)
Net assets
153,519
(13,429)
140,090
Equity
Share capital
2,553
-
2,553
Share premium
84,612
-
84,612
Merger reserve
(75,383)
-
(75,383)
Fair value reserve of financial assets at FVOCI
436
-
436
Share‑based payment reserve
84
-
84
Retained earnings
141,217
(13,429)
127,788
Total equity
153,519
(13,429)
140,090
On 1 October 2018, £117.5 million was recognised in the statement of financial position as investment property (leased) assets in respect of student leaseback arrangements and £7.0 million as right-of-use assets in respect of office properties and motor vehicles. In addition, a lease liability of £143.3 million was recognised in respect of these assets. Trade and other receivables reduced by £0.7 million due to the reclassification of prepayments from receivables to lease liabilities. Provisions reduced by £2.7 million due to the reclassification of these provisions to investment property (leased) assets as impairment provisions. Deferred tax assets totalling £3.1 million were recognised in relation to the future tax benefit from these adjustments.
The net difference of £13.4 million has been recognised as a reduction in retained earnings.
Statement of financial position at 30 September 2019
As reported
IFRS 16
adjustment
As restated
£'000
£'000
£'000
Non-current assets
Intangible assets
13,844
-
13,844
Investment property (leased)
-
110,224
110,224
Right-of-use assets
-
5,930
5,930
Property, plant and equipment
4,966
-
4,966
Investment in joint ventures
2,794
-
2,794
Deferred tax asset
290
3,546
3,836
Other financial assets
1,139
-
1,139
23,033
119,700
142,733
Current assets
Inventory and work in progress
134,226
-
134,226
Contract assets
25,578
-
25,578
Trade and other receivables
14,443
(593)
13,850
Cash and cash equivalents
115,652
-
115,652
289,899
(593)
289,306
Total assets
312,932
119,107
432,039
Current liabilities
Trade and other payables
(81,407)
39
(81,368)
Contract liabilities
(5,164)
-
(5,164)
Provisions
(863)
863
-
Interest-bearing loans and borrowings
(1,324)
-
(1,324)
Lease liabilities
-
(6,192)
(6,192)
Current tax liabilities
(7,056)
13
(7,043)
(95,814)
(5,277)
(101,091)
Non-current liabilities
Interest-bearing loans and borrowings
(37,481)
-
(37,481)
Lease liabilities
-
(131,330)
(131,330)
Deferred tax liabilities
(1,042)
-
(1,042)
Provisions
(2,594)
2,594
-
(41,117)
(128,736)
(169,853)
Total liabilities
(136,931)
(134,013)
(270,944)
Net assets
176,001
(14,906)
161,095
Equity
Share capital
2,553
-
2,553
Share premium
84,612
-
84,612
Merger reserve
(75,383)
-
(75,383)
Fair value reserve of financial assets at FVOCI
434
-
434
Share‑based payment reserve
2,311
-
2,311
Retained earnings
161,474
(14,906)
146,568
Total equity
176,001
(14,906)
161,095
On 1 October 2019, £110.2 million was recognised in the statement of financial position as investment property (leased) assets in respect of student leaseback arrangements and £5.9 million as right-of-use assets in respect of office properties and motor vehicles. In addition, a lease liability of £137.5 million was recognised in respect of these assets. Trade and other receivables reduced by £0.6 million due to the reclassification of prepayments from receivables to lease liabilities. Provisions reduced by £3.5 million due to the reclassification of these provisions to investment property (leased) assets as impairment provisions. Deferred tax assets totalling £3.5 million were recognised in relation to the future tax benefit from these adjustments.
The net difference of £14.9 million has been recognised as a reduction in retained earnings.
Statement of financial position at 30 September 2020
On a see-
through
basis
IFRS 16
adjustment
As reported
£'000
£'000
£'000
Non-current assets
Intangible assets
13,284
-
13,284
Investment property (leased)
-
104,623
104,623
Right-of-use assets
-
4,763
4,763
Property, plant and equipment
4,376
-
4,376
Investment in joint ventures
3,243
-
3,243
Deferred tax asset
251
3,062
3,313
Other financial assets
1,133
-
1,133
22,287
112,448
134,735
Current assets
Inventory and work in progress
125,660
-
125,660
Contract assets
41,522
-
41,522
Trade and other receivables
24,250
(732)
23,518
Cash and cash equivalents
134,513
-
134,513
325,945
(732)
325,213
Total assets
348,232
111,716
459,948
Current liabilities
Trade and other payables
(97,761)
461
(97,300)
Contract liabilities
(8,967)
-
(8,967)
Provisions
(9,208)
2,931
(6,277)
Interest-bearing loans and borrowings
(711)
-
(711)
Lease liabilities
-
(6,310)
(6,310)
Current tax liabilities
(819)
-
(819)
(117,466)
(2,918)
(120,384)
Non-current liabilities
Interest-bearing loans and borrowings
(38,956)
-
(38,956)
Lease liabilities
-
(128,143)
(128,143)
Deferred tax liabilities
(1,040)
-
(1,040)
Provisions
(6,691)
3,104
(3,587)
(46,687)
(125,039)
(171,726)
Total liabilities
(164,153)
(127,957)
(292,110)
Net assets
184,079
(16,241)
167,838
Equity
Share capital
2,562
-
2,562
Share premium
84,612
-
84,612
Merger reserve
(75,383)
-
(75,383)
Fair value reserve of financial assets at FVOCI
428
-
428
Share‑based payment reserve
2,348
-
2,348
Retained earnings
169,512
(16,241)
153,271
Total equity
184,079
(16,241)
167,838
On 30 September 2020, £104.6million was recognised in the statement of financial position as investment property (leased) assets in respect of student leaseback arrangements and £4.8 million as right-of-use assets in respect of office properties and motor vehicles. In addition, a lease liability of £134.4 million was recognised in respect of these assets. Trade and other receivables reduced by £0.7 million due to the reclassification of prepayments from receivables to lease liabilities. Provisions reduced by £6.0 million due to the reclassification of these provisions to investment property (leased) assets as impairment provisions. Deferred tax assets totalling £3.1 million were recognised in relation to the future tax benefit from these adjustments.
The net difference of £16.2 million has been recognised as a reduction in retained earnings.
Statement of cash flows for the year ended 30 September 2019
As reported
IFRS 16
adjustment
As restated
£'000
£'000
£'000
Cash flows from operating activities
Cash inflow from operations
27,811
11,132
38,943
Interest received
428
-
428
Interest paid
(911)
(5,179)
(6,090)
Tax paid
(9,769)
-
(9,769)
Net cash inflow from operating activities
17,559
5,953
23,512
Cash flows from investing activities
Acquisition of property, plant and equipment
(361)
-
(361)
Proceeds on disposal of property, plant and equipment
87
-
87
Cash distribution received from other financial assets
209
-
209
Net cash inflow from investing activities
(65)
-
(65)
Cash flows from financing activities
Dividends paid
(20,113)
-
(20,113)
Payment of lease liabilities
-
(5,953)
(5,953)
Payment of capital element of other interest bearing loans
(1,307)
-
(1,307)
Drawdown of RCF
46,244
-
46,244
Repayment of bank loans
(33,306)
-
(33,306)
Net cash outflow from financing activities
(8,482)
(5,953)
(14,435)
Net increase in cash
9,012
---
9,012
Cash and cash equivalents at 1 October 2019 and 1 October 2018
106,640
-
106,640
Cash and cash equivalents at 30 September 2020 and 30 September 2019
115,652
-
115,652
The application of IFRS 16 resulted in an increase in the cash inflow from operations of £11.1 million due to the reclassification of operating lease payments as interest paid and payment of lease liabilities. Interest paid has increased by £5.2 million and the payment of lease liabilities by £5.9 million.
Statement of cash flows for the year ended 30 September 2020
On a see-through
basis
IFRS 16
adjustment
As reported
£'000
£'000
£'000
Cash flows from operating activities
Cash inflow from operations
43,676
11,192
54,868
Interest received
245
-
245
Interest paid
(1,689)
(5,103)
(6,792)
Tax paid
(10,035)
-
(10,035)
Net cash inflow from operating activities
32,197
6,089
38,286
Cash flows from investing activities
Acquisition of property, plant and equipment
(317)
-
(317)
Proceeds on disposal of property, plant and equipment
69
-
69
Cash flow from joint venture interests
812
-
812
Cash distribution received from other financial assets
-
-
-
Net cash inflow from investing activities
564
-
564
Cash flows from financing activities
Dividends paid
(14,319)
-
(14,319)
Proceeds from exercise of share options
9
-
9
Payment of principal portion of lease liabilities
-
(6,089)
(6,089)
Payment of capital element of other interest bearing loans
(1,034)
-
(1,034)
Drawdown of RCF
20,843
-
20,843
Repayment of bank loans
(18,499)
-
(18,499)
Bank loan arrangement fees
(900)
-
(900)
Net cash outflow from financing activities
(13,900)
(6,089)
(19,989)
Net increase in cash
18,861
-
18,861
Cash and cash equivalents at 1 October 2019
115,652
-
115,652
Cash and cash equivalents at 30 September 2020
134,513
-
134,513
The application of IFRS 16 resulted in an increase in the cash inflow from operations of £11.2 million due to the reclassification of operating lease payments as interest paid and payment of lease liabilities. Interest paid has increased by £5.1 million and the payment of lease liabilities by £6.1 million.
New standards and interpretations that have not yet been adopted
The following standards and interpretations that are anticipated to be relevant to the Group have an effective date after the date of these financial statements. The Group has not early adopted them and plans to adopt them from the effective dates once endorsed for application in the EU. These standards are not expected to have a significant impact on the Group's consolidated financial statements.
Effective for accounting
Standard or interpretation
periods beginning on or after
Amendments to IFRS 3 'Business Combinations'
1 January 2020
Amendments to IAS 1 and IAS 8: Definition of Material
1 January 2020
Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform
1 January 2020
IFRS 17 'Insurance contracts'
1 January 2023
5. Segmental reporting
The Group has identified four segments for which it reports under IFRS 8 'Operating Segments'. The following represents the segments that the Group operates in:
a. Student accommodation - the development of purpose built student accommodation;
b. Build to rent - the development of build to rent accommodation;
c. Residential - the development of traditional residential property; and
d. Accommodation management - the management of student accommodation and build to rent property.
Corporate - revenue from the development of commercial property forming part of mixed‑use schemes and other revenue and costs not solely attributable to any one operating segment.
All revenues arise in the UK.
Performance is measured by the Board based on gross profit as reported in the management accounts.
Apart from inventory and work in progress, no other assets or liabilities are analysed into the operating segments.
Year ended 30 September 2020
Student
accommodation
Build
to rent
Residential
Accommodation
management
Corporate
Total
£'000
£'000
£'000
£'000
£'000
£'000
Segmental revenue
226,026
93,991
26,268
7,586
250
354,121
Segmental gross profit
54,285
14,884
4,042
4,540
(1,835)
75,916
Administration expenses
-
-
-
(3,432)
(20,817)
(24,249)
Exceptional costs
-
-
-
-
(20,437)
(20,437)
Share of operating profit in joint ventures
199
-
-
-
-
199
Finance income
-
-
-
-
251
251
Finance costs
-
-
-
-
(6,366)
(6,366)
Profit/(loss) before tax
54,484
14,884
4,042
1,108
(49,204)
25,314
Taxation
-
-
-
-
(4,222)
(4,222)
Continuing profit/(loss) for the year
54,484
14,884
4,042
1,108
(53,426)
21,092
Profit for the year attributable to ordinary equity shareholders of the parent
21,092
Inventory and work in progress
30,706
53,964
30,656
-
10,334
125,660
Year ended 30 September 2019
Student
accommodation
Build
to rent
Residential
Accommodation
management
Corporate
Total
£'000
£'000
£'000
£'000
£'000
£'000
Segmental revenue
246,116
77,429
34,278
7,460
9,502
374,785
Segmental gross profit
54,850
13,783
7,158
4,586
(344)
80,033
Administration expenses
-
-
-
(3,167)
(21,266)
(24,433)
Exceptional costs
-
-
-
-
(2,576)
(2,576)
Share of operating profit in joint ventures
286
-
-
-
-
286
Finance income
-
-
-
-
428
428
Finance costs
-
-
-
-
(5,874)
(5,874)
Profit/(loss) before tax
55,136
13,783
7,158
1,419
(29,632)
47,864
Taxation
-
-
-
-
(9,041)
(9,041)
Continuing profit/(loss) for the year
55,136
13,783
7,158
1,419
(38,673)
38,823
Profit for the year attributable to ordinary equity shareholders of the parent
38,823
Inventory and work in progress
40,268
38,608
45,153
-
10,197
134,226
The prior year comparative information has been restated so that it is presented in a way which is consistent with the internal reporting provided to the chief operating decision-maker. Revenue of £3,786,000 and gross profit of £555,000 has been transferred from the Residential to the Build to Rent segment.
6. Exceptional costs
Year
ended
30
September
2020
Year
ended
30
September
2019
£'000
£'000
Covid-19 costs
COVID-19 additional costs of on-site working and in completing developments
(2,659)
-
Waiver of academic year 2019/20 final term rents due on leased student accommodation assets due to lockdown measures
(1,086)
-
Impairment of the right-of-use carrying value of leased student accommodation assets due to reduced 2020/21 student occupancy
(1,892)
-
Total COVID-19 costs
(5,637)
-
Fire safety recladding works
(14,800)
-
Cost of compensating the Group's new CEO, Richard Simpson, for his forfeit Unite Group plc ("Unite") 2018 bonus
-
(411)
Cost of Watkin Jones plc share awards issued on compensating Richard Simpson for his forfeit Unite 2015-2017 share awards
-
(2,165)
Total exceptional costs
(20,437)
(2,576)
During the year a total impairment charge of £2,241,000 was recognised in relation to the carrying value of leased student accommodation assets (note 10). £1,892,000 of this impairment charge has been treated as an exceptional item due to the impact of reduced student occupancy during the 2020/21 academic year as a result of the COVID-19 pandemic. This element of the total charge has been calculated by comparing the final impairment calculations to a calculation of the impairment charge using the income forecasts for 2020/21 prepared prior to the pandemic.
All of the exceptional costs in the year have been treated as allowable deductions for corporation tax purposes (2019: £1,341,000 of the £2,576,000 exceptional costs were treated as allowable deductions).
7. Income taxes
Year
ended
30 September
2020
Year
ended
30
September
2019
Restated
(note 4)
£'000
£'000
Current income tax
UK corporation tax on profits for the year
4,076
9,426
Adjustments in respect of prior periods
(305)
183
Total current tax
3,771
9,609
Deferred tax
Origination and reversal of temporary differences
455
(644)
Adjustments in respect of prior year
(10)
76
Effect of tax rate change on opening balance
6
-
Total deferred tax
451
(568)
Total tax expense
4,222
9,041
Reconciliation of total tax expense
Year
ended
30
September
2020
Year
ended
30
September
2019
Restated
(note 4)
£'000
£'000
Profit before tax
25,314
47,864
Profit multiplied by standard rate of corporation tax in the UK of 19% (2019: 19%)
4,810
9,094
Expenses not deductible
288
282
Income not taxable
(53)
(79)
Other differences
(508)
(513)
Prior period adjustment
(315)
257
At the effective rate of tax of 16.7% (2019: 18.9%)
4,222
9,041
Income tax expense reported in the statement of profit or loss
4,222
9,041
8. Earnings per share
Basic and diluted earnings per share ("EPS") amounts are calculated by dividing the net profit or loss for the year attributable to ordinary equity holders of the parent by the weighted average number of shares in issue during the year.
The following table reflects the income and share data used in the basic and diluted EPS computations:
Year
ended
30
September
2020
Year
ended
30
September
2019
Restated
(note 5)
£'000
£'000
Profit for the year attributable to ordinary equity holders of the parent
21,092
38,823
Add back exceptional costs for the year (note 6)
20,437
2,576
Less corporation tax benefit from exceptional costs for the year
(3,883)
(255)
Adjusted profit for the year attributable to ordinary equity holders of the parent (excluding exceptional costs after tax)
37,646
41,144
Number of
Number of
shares
shares
Weighted average number of ordinary shares for basic earnings per share
255,795,659
255,382,181
Adjustment for the effects of dilutive potential ordinary shares
367,800
658,650
Weighted average number for diluted earnings per share
256,163,459
256,040,831
Pence
Pence
Basic earnings per share
Basic profit for the year attributable to ordinary equity holders of the parent
8.246
15.202
Adjusted proforma basic earnings per share (excluding exceptional costs after tax)
Adjusted profit for the year attributable to ordinary equity holders of the parent
14.717
16.111
Diluted earnings per share
Basic profit for the year attributable to diluted equity holders of the parent
8.234
15.175
Adjusted proforma diluted earnings per share (excluding exceptional costs after tax)
Adjusted profit for the year attributable to diluted equity holders of the parent
14.696
16.082
9. Dividends
Year
ended
30
September
2020
Year
ended
30
September
2019
£'000
£'000
Interim dividend paid in June 2020 of nil pence (June 2019: 2.75 pence)
-
7,018
Final dividend paid in February 2020 of 5.6 pence (February 2019: 5.13 pence)
14,319
13,095
14,319
20,113
The interim dividend that would have been paid in June 2020 was suspended as a precautionary measure whilst the impact of COVID-19 on the business was assessed.
The final dividend proposed for the year ended 30 September 2020 is 7.35 pence per ordinary share. This dividend was declared after 30 September 2020 and as such the liability of £18,828,000 has not been recognised at that date. At 30 September 2020, the Company had distributable reserves available of £100,816,000 (30 September 2019: £115,135,000).
10. Leases
Set out below are the carrying amounts of right-of-use assets recognised and the movements during the year:
Investment
property
(leased)
Plant and machinery
Motor
vehicles
Total
£'000
£'000
£'000
£'000
Cost
At 30 September 2018
158,231
9,411
1,577
169,219
Additions
-
-
372
372
Disposals
-
-
(352)
(352)
At 30 September 2019
158,231
9,411
1,597
169,239
Additions/adjustment
3,162
-
313
3,475
Disposals
-
-
(478)
(478)
At 30 September 2020
161,393
9,411
1,432
172,236
Depreciation
At 30 September 2018
38,077
3,412
563
42,052
Charge for the year
6,473
791
496
7,760
Disposals
-
-
(184)
(184)
At 30 September 2019
44,550
4,203
875
49,628
Charge for the year
6,522
791
552
7,865
Disposals
-
-
(341)
(341)
At 30 September 2020
51,072
4,994
1,086
57,152
Impairment
At 30 September 2018
2,671
-
-
2,671
Charge for the year
786
-
-
786
At 30 September 2019
3,457
-
-
3,457
Charge for the year
2,241
-
-
2,241
At 30 September 2020
5,698
-
-
5,698
Net book value
At 30 September 2020
104,623
4,417
346
109,386
At 30 September 2019
110,224
5,208
722
116,154
At 30 September 2018
117,483
5,999
1,014
124,496
Investment property (leased) assets relate to the Group's six student leaseback arrangements. Each of the six leaseback arrangements are considered to be a separate CGU. The Directors consider an impairment indication to exist if there is a shortfall between the annual net rental income generated by each property and the annual headlease payment due under each lease. The Directors have reviewed the carrying value of four of these leases where there is an indication of impairment and compared them to their respective recoverable amounts. An impairment charge totalling £2,241,000 (2019: £786,000) has been recognised in respect of one of the Group's sale and leaseback arrangements - Europa, Liverpool, because the recoverable amount was less than the depreciated carrying value of the asset. £1,892,000 (2019: £Nil) of this impairment charge has been recognised as an exceptional item in the consolidated statement of comprehensive income and £349,000 (2019: £786,000) has been recognised within student accommodation cost of sales.
The recoverable amount for each CGU has been calculated as its value in use. The valuation technique used is a discounted cash flow. Due to the bespoke nature of these arrangements these valuations are also considered to represent the fair value of each of the investment property (leased) assets. The key inputs into the valuation are gross rental income, operating costs, lease term and an estimated discount rate reflecting the market assessment of risk that would be applied to each asset. The estimated discount rates for each property are included in the next table. A key assumption in the valuation calculation as at 30 September 2020 is that occupancy levels will return to those at the start of the 2019/20 academic year by the 2021/22 academic year.
Impairment charge/(reversal)
£'000
Fair value in use
£'000
Year
ended
30
September
2020
Year
ended
30
September
2019
Discount
rate (yields)
Lease
termination
date
Year
ended
30
September
2020
Year
ended
30
September
2019
Collegelands, Glasgow
-
(229)
5.5%
6 September 2026
14,244
17,220
Europa, Liverpool
2,241
993
6.5%
18 March 2030
12,462
18,172
Optima, Loughborough
-
153
6.0%
18 March 2030
2,182
2,375
Glassyard Building, London
-
(131)
5.0%
10 September 2034
11,177
11,551
Dunaskin Mill, Glasgow
-
-
5.5%
5 September 2051
53,059
53,084
New Bridewell, Bristol
-
-
5.5%
12 March 2052
56,964
56,913
Total
2,241
786
150,088
159,315
Set out below are the carrying amounts of lease liabilities and movements during the period:
Year
ended
30
September
2020
Year
ended
30
September
2019
£'000
£'000
At the start of the period
137,522
143,292
Additions
3,475
372
Disposals
(455)
(189)
Accretion of interest
5,103
5,179
Payments
(11,192)
(11,132)
At the end of the period
134,453
137,522
Current
6,310
6,192
Non-current
128,143
131,330
Lease liability maturity analysis
Year
ended
30
September
2020
Year
ended
30
September
2019
£'000
£'000
Year one
11,041
11,302
Year two
10,880
10,638
Year three
10,781
10,758
Year four
10,707
10,948
Year five
10,909
11,117
Onwards
150,554
159,372
204,872
214,135
Total commitments - Group as lessor
Year
ended
30
September
2020
Year
ended
30
September
2019
£'000
£'000
Non-cancellable operating lease rentals are receivable as follows:
Within one year
12,436
14,846
Later than one year and less than five years
573
3,586
After five years
780
917
13,789
19,349
The Group acts as lessor in respect of certain commercial property and for the student accommodation properties operated under the sale and leaseback arrangements detailed above.
11. Reconciliation of profit before tax to net cash flows from operating activities
Year ended
30 September
2020
Year
Ended
30
September
Restated
(note 5)
£'000
£'000
Profit before tax
25,314
47,864
Depreciation of leased investment properties and right-of-use assets
7,865
7,760
Depreciation of plant and equipment
998
835
Impairment of leased investment properties
2,241
786
Amortisation of intangible assets
559
559
(Profit) on sale of plant and equipment
(24)
(42)
Finance income
(245)
(428)
Finance costs
6,366
5,874
Share of profit in joint ventures
(199)
(286)
Decrease/(increase) in inventory and work in progress
8,566
(1,948)
Interest capitalised in development land, inventory and work in progress
465
216
(Increase)/decrease in contract assets
(15,944)
(16,820)
(Increase)/decrease in trade and other receivables
(10,785)
4,089
Increase/(decrease) in contract liabilities
3,803
(9,150)
Increase/(decrease) in trade and other payables
15,987
(2,593)
Provision for fire safety cladding works
9,864
-
Increase in share‑based payment reserve
37
2,227
Net cash inflow from operating activities
54,868
38,943
Major non-cash transactions
There were no major non-cash transactions during the period.
12. Analysis of net cash/(debt)
30 September 2020
At
beginning
of year
Cash flow
Other
movements
At
end of year
£'000
£'000
£'000
£'000
Cash at bank and in hand
115,652
18,861
-
134,513
Bank loans
(37,413)
(1,444)
(179)
(39,036)
Other interest bearing loans
(1,392)
1,034
(273)
(631)
Net cash before deducting lease liabilities
76,847
18,451
(452)
94,846
Lease liabilities (note 10)
(137,522)
6,089
(3,020)
(134,453)
Net debt
(60,675)
24,540
(3,472)
(39,607)
30 September 2019 - restated (note 4)
At
beginning
of year
Cash flow
Other
movements
At
end of year
£'000
£'000
£'000
£'000
Cash at bank and in hand
106,640
9,012
-
115,652
Bank loans
(24,459)
(12,938)
(16)
(37,413)
Other interest bearing loans
(2,023)
1,307
(676)
(1,392)
Net cash before deducting lease liabilities
80,158
(2,619)
(692)
76,847
Lease liabilities (note 10)
(143,292)
5,953
(183)
(137,522)
Net debt
(63,134)
3,334
(875)
(60,675)
Cash at bank and in hand as at 30 September 2020 includes £814,225 of cash deposited by the Group in an escrow account in connection with a development in progress, access to which is contingent upon the completion of certain development works (30 September 2019: £1,853,000). Non‑cash movements relate to the acquisition of property, plant and equipment under finance leases, the amortisation of bank loan arrangement fees and changes to the calculation of the value of lease liabilities as a result of movements in the rent inflation rates assumed.
13. Annual report
Copies of this announcement are available from the Company at 7-9 Swallow Street, London W1B 4DE. The Group's annual report for the year ended 30 September 2020 will be posted to shareholders shortly and will be available on our website at www.watkinjonesplc.com.
- ENDS -
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