Big Yellow Group PLC (“Big Yellow”, “the Group” or “the Company”) the UK’s brand leader in self storage, is pleased to announce its results for the six months and the quarter ended 30 September 2013.
We have delivered a good performance with occupancy growth across the wholly owned portfolio in line with the same period last year. This occupancy growth, combined with an improvement in yield, has offset the adverse impact, particularly within the established portfolio, from the introduction of VAT in the second half of last year. We achieved like for like revenue growth of 5.1% in October (the first month following the anniversary of the VAT introduction), demonstrating that the VAT impact is firmly in the past and we are now returning to more normal growth.
Occupancy growth over the six month period across all our stores was 232,000 sq ft (2012: 243,000 sq ft). Wholly owned store occupancy growth in the six month period was 188,000 sq ft (2012: 177,000 sq ft). The 32 established store portfolio increased in occupancy from 72.8% at the end of March 2013 to 77.1% in September 2013. The 22 lease-up stores grew in occupancy from 54.3% in March 2013 to 61.9% in September 2013. Overall like-for-like closing occupancy for the Group is 70.5% compared to 64.8% at 31 March 2013.
The 12 stores in Big Yellow Limited Partnership increased in occupancy to 60.5% (March 2013: 54.6%), a growth of 44,000 sq ft from March 2013.
Financial results
Store revenue for the period was £35.1 million, down 1% from £35.5 million in the comparable period last year, and up 7% compared to the previous half year period (six months to 31 March 2013: £32.8 million). This is in line with the guidance given at our full year results, and is the result of the reduction in the average rental yield following the introduction of VAT offset in part by growth in occupancy.
Total store revenue for the second quarter decreased by 1% to £18.4 million from £18.6 million for the same quarter last year and was up 10% from the quarter to June 2013 (£16.7 million).
Store EBITDA was £22.9 million, down 1% from £23.2 million for the same period last year. The overall store margin was 65.2%, down slightly from 65.4% for the same period last year.
The Group made an adjusted profit before tax in the period of £14.2 million, up 2% from £13.9 million for the same period last year (see note 6), and up 22% from the six months to 31 March 2013 (£11.6 million). Diluted EPRA earnings per share were 10.1 pence (2012: 10.7 pence), a decrease of 6%, and an increase of 17% from the six months to 31 March 2013 (8.6 pence). Adjusted net assets per share are 436.3 pence, an increase of 4% from 419.2 pence at 31 March 2013.
Leverage study of optimal capital structure
The Company has carried out a study of debt leverage and its impact on the long term share performance of businesses, with the help of an external consultant. The study covered 40 publically quoted companies in the REIT space together with other consumer facing businesses for the period from 2000 to 2013.
The main objective was to see if the results supported our long held view that lower geared businesses outperform in the long term.
Evidently different business models with varying operating margins might have, at the margin, different optimum levels of debt. However a consistent theme emerged that excessive levels of debt have been universally value destructive. In a narrow window between 2003 and 2006 higher levels of debt would have delivered higher returns, but even during that period optimum levels of debt were lower than might be expected, and would have required pinpoint accuracy in timing.
Transmission of this value destruction did result in significant underperformance and marked increases in share price volatility.
Optimum levels of gearing (expressed as net debt to gross asset value) ranged from 10% in moments of extreme fear (2008 to 2009) to 43% in periods of exuberance (2003 to 2006). Using 2009 to 2013 as a base, being more representative of the long term norm, albeit on a conservative basis, the optimum level of debt was found to be 23%.
We have previously said that we believe that the Group would benefit from lower leverage and the Board has a long term target of Group income cover of over 5 times. The relationship of this metric to capital leverage is not perfectly correlated but making long term assumptions on values and interest is reasonably correlated. We believe that the optimum level of debt for Big Yellow is 20% to 30% with a target of mid 20s from the current level of 29%. Given the subjective nature of valuation we prefer to express this target as net operating income over debt costs.
Shareholder returns since flotation and dividends
In the thirteen years since flotation in May 2000, Big Yellow has delivered a Total Shareholder Return (“TSR”), including dividends reinvested, of 13.9% per annum, in aggregate 479.5% at the closing price of 470p on 14 November 2013. This compares to 6.4% per annum for the FTSE Real Estate Index and 4.7% per annum for the FTSE All Share index over the same period.
At the time of the placing in January of this year, the Board committed to pay a dividend of 80% of full year adjusted earnings per share from this financial year. The interim dividend declared is 8 pence per share. This has all been declared as Property Income Dividend (“PID”). The interim dividend declared represents an increase of 60% from 5 pence per share for the same period last year.
Outlook
In our final statement earlier this year we expressed some cautious grounds for optimism which currently looks justified, given the improving economic picture and current trading. We have significant belief in London reinforcing its position as one of the world’s leading cities, if not the pre-eminent one. The weighting of our portfolio to the Greater London area will benefit from the capital’s growth.
We believe that the Company will continue to deliver attractive sustainable returns, on a relatively low risk and limited volatility basis on a long term view. The total returns set out above well illustrate the power of compounding.
Our confidence in this outlook is reinforced by the power of our brand, our market leading operating platform and critically in our exposure to London and the South East.
Nicholas Vetch
Executive Chairman
18 November 2013
