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Watkin Jones eyeing post-recovery bounce-back

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Watkin Jones [LON:WJG], the AIM-listed, property developer published its Full Year Results for 2023  to end-September today (23rd January).

It has been a difficult few years for the real estate sector with even the biggest developers, like Barratt Developments [LON:BDEV] having a tumultuous 2023. Watkin Jones’ CEO, Alex Pease, who has only been in the job since November said: “Significant cost inflation and volatility in real estate funding markets meant that FY23 represented a period of unprecedented challenge for the business. However, I am pleased that against this backdrop the group demonstrated resilience and agility, taking a number of important actions operationally.”

Pease has been with Watkin Jones since 2010 and operating in the roles of investment director and chief investment officer since 2013, taking over as interim CEO in July 2023.

The company reported increased revenue of GBP413.2m, up 1.5% year-on-year. However, that was about the peak of the good news. In terms of statutory gross profit, Watkin Jones was still in the black reporting GBP34.9m gross profit, down 48.4% y-o-y. Statutory operating profit fell down a chasm, with the developer booking a loss of GBP38m, against a statutory operating profit of GBP24.3m in the year the end-September 2022 – 256% down y-o-y.

This translated into a statutory loss before tax of GBP42.5m, down 331% from the GBP18.4m statutory profit before tax it reported in 2022. This wiped out EPS with a negative statutory basic loss per share of 12.7p against a 5.2p statutory basic EPS  in 2022. The company is not recommending paying out any additional dividends this year after proposing an interim dividend of 1.4p/share, which was paid in June 2023.

Exceptional charge for building safety work

To be fair Watkin Jones had mitigating circumstances over and above the carnage in the real estate sector in 2023, caused by an escalating cycle of interest rates forced on the economy by the Bank of England throughout the year, which took a wrecking ball to the mortgage lending market and still hasn’t dented inflation that much. The developer drew the ‘Street Repairs’ card from Monopoly’s Community Chest, which in the late-game, as we all know is a game-changer, and was hit with a GBP35m exceptional charge for building safety work, on top of GBP3.1m corporate restructuring costs.

Although the GBP35m building safety cost are spread over five years, and the GBP3.1m restructuring charge will in the fullness of time save Watkin Jones GBP4m a year, the up-front nature of the costs meant that the London-based developer’s bottom line was torpedoed, turning a somewhat disappointing GBP2.9m loss before tax into a whopping statutory markdown of GBP42.5m.

The poor trading conditions saw Watkin Jones eat into its reserves, with its cash pile reduced almost by half in a year from GBP82.6m to GBP43.9m. The company extended its revolving credit facility with HSBC for a further six months to November 2024, with the revolver having GBP50m capacity – reduced from GBP100m as at September 2022 – with GBP28.8m drawn down at the end of the financial year. The developer also has a GBP10m overdraft facility making total capital available for land acquisition and development GBP103.6m, down from GBP196m in 2022.

Build-to-rent operations

The company operates in the build-to-rent (BTR) sector, an emerging sub-sector in private rented residential stock, designed specifically for renting rather than for sale, typically owned by institutional investors and managed by specialist operators. The majority of BTR properties nationally have been completed in London and Watkin Jones specifically targets urban locations with a large student population and claims the BTR could soon include up to 30% of the market.

The company also specialises in Student Accommodation and newbuild Affordable Housing and will manage and maintain the properties it builds on behalf of its investors. Some of its recently completed developments include the 316 BTR unit Bath Junction development; the 365 unit mixed BTR/Affordable Ravensbourne Place development in Lewisham, London where it has clients L&G and CBRE; and a mixed Student Accommodation/hotel development near the national stadium in Wembley, London where it built 700 student units and 300 hotel apartments, which was sold onto German Investment Manager, DWS Group.

Despite the poor results, Pease remained quite chipper in a statement this morning, saying: “Whilst funding conditions remain difficult, the outlook is gradually improving and the strong asset performance in PBSA and BTR sectors gives me confidence in the longer-term market recovery and return to growth. In the near term, we remain focussed on driving improvements to the productivity and efficiency of the business, as well as looking at opportunities to extract more value from our sector expertise and end-to-end capabilities.”

Watkin Jones portfolio restructuring

The company executed a series of disposals in the year as part of a corporate restructuring, selling a portfolio of non-core private rental sector (PRS) assets ahead of remedial works netting the company GBP17.2m, but repaid GBP4m of loans from Svenska Handelsbanken on the portfolio. This was recorded as a book loss on disposal of GBP4.6m in administrative expenses. Administrative expenses increased to GBP72.8m compared with GBP43.4m the year previously, with the effect of this disposal and exceptional items recorded in the year.

The share price has taken a bit of a battering. Opening the day (23rd January) at 52.74p Watkin Jones’ shares had fallen to 50.2p by lunchtime. Over one-year shares have dropped 52.9% and over three years have lost 73%. Shares have ranged between 30p and 117.6p over a 52-week period. The company has a market capitalization of GBP135m.

Watkin Jones Share Price

Source: London Stock Exchange

Undoubtedly it has been a tough year for all in the property market, whether renting, first-time buying, or for asset management companies or developers. Watkin Jones is pressing on and said it has secured a development pipeline estimated at GBP1.5bn in future revenue, including GBP500m forward sold, GBP300m secured with planning, and GBP700m in planning, with GBP100m secured since the year-end.

Its management believes that the demand pressures for urban accommodation places it well in the recovery market and is anticipating strong tenant demand and rental growth in the BTR sector, and thinks that it will bounce-back more quickly than other parts of the real estate sector.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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