Financial Review
Revenue for the year was £72.2 million, an increase of £2.5 million (4%) from £69.7 million in the prior year.
Delivering... Results
Financial results
Revenue for the year was £72.2 million, an increase of £2.5 million (4%) from £69.7 million in the prior year. Store revenue increased by 3.5% in the year to £70.7 million (2013: £68.3 million). The other revenue is fee income earned from Big Yellow Limited Partnership and Armadillo and tenant income on sites where we have not started development.
Other sales (included within the above), comprising the selling of packing materials, insurance and storage related charges, represented 17.5% of storage income for the year (2013: 17.2%) and generated revenue of £10.5 million for the year, up 5% from £10.0 million in 2013.
Store revenue for the fourth quarter increased by 11% to £17.7 million from £16.0 million for the same quarter last year. Store revenue in the seasonally weaker second half of the year was £35.6 million, up 8% from £32.9 million for the second half of the year ended 31 March 2013, and up 1% from £35.1 million for the six months ended 30 September 2013.
There was a decrease in revenue of 1% for the 32 established stores and an increase of 12% for the 22 lease-up stores. The EBITDA margin for the 32 established stores was 66% (2013: 67%); the EBITDA margin for the 22 lease-up stores was 63% (2013: 60%). The table below shows the performance of the 32 established stores and the 22 lease-up stores during the year.
| Capacity | Occupancy | Revenue | EBITDA | ||||
|---|---|---|---|---|---|---|---|
| Wholly owned store performance | 000 sq ft | 31 March 2014 000 sq ft |
31 March 2013 000 sq ft |
31 March 2014 £000 |
31 March 2013 £000 |
31 March 2014 £000 |
31 March 2013 £000 |
| 32 established stores | 1,930 | 1,452 | 1,413 | 43,619 | 44,135 | 28,571 | 29,497 |
| 22 lease-up stores | 1,491 | 936 | 810 | 27,087 | 24,199 | 17,101 | 14,635 |
| Total | 3,421 | 2,388 | 2,223 | 70,706 | 68,334 | 45,672 | 44,132 |
The Group made a profit before tax in the year of £59.8 million, compared to a profit of £31.9 million in the prior year.
After adjusting for the gain on the revaluation of investment properties and other matters shown in the table below, the Group made an adjusted profit before tax in the year of £29.2 million, up 15% from £25.5 million in 2013.
| Profit before tax analysis | 2014 £m |
2013 £m |
|---|---|---|
| Profit before tax | 59.8 | 31.9 |
| Gain on revaluation of investment properties | (28.3) | (9.5) |
| Movement in fair value on interest rate derivatives | (2.7) | 0.2 |
| Gains on surplus land | – | (1.0) |
| Refinancing costs | – | 4.3 |
| VAT implementation costs | – | 0.2 |
| Share of non-recurring losses/(gains) in associate | 0.4 | (0.6) |
| Adjusted profit before tax | 29.2 | 25.5 |
Diluted EPRA earnings per share based on adjusted profit after tax was up 6% to 20.5p (2013: 19.3p) (see note 12). Basic earnings per share for the year was 42.5p (2013: 24.4p) and fully diluted earnings per share was 42.2p (2013: 24.1p).
The movement in the adjusted profit before tax from the prior year is illustrated in the table below:
| £m | |
|---|---|
| Adjusted profit before tax – year ended 31 March 2013 | 25.5 |
| Increase in gross profit | 2.0 |
| Reduction in net interest payable | 1.1 |
| Increase in administrative expenses | (0.1) |
| Increase in share of recurring profit of associate | 0.5 |
| Increase in capitalised interest | 0.2 |
| Adjusted profit before tax – year ended 31 March 2014 | 29.2 |
Operating costs
We have continued with our programme of cost control in the Group.
Cost of sales comprises principally of the direct store operating costs, including store staff salaries, utilities, business rates, insurance, a full allocation of the central marketing budget, and repairs and maintenance.
Direct store operating costs for the portfolio have increased by 3% reflecting general inflationary pressures and an increase in business rates, particularly with an unfavourable assessment at one store backdated to 2010. This is partially offset by the increased recoverability of VAT on our operating costs compared to the first six months of the prior year.
Administrative expenses in the income statement have reduced by £0.1 million compared to the prior year. In the prior year there was a charge of £0.2 million in respect of costs incurred challenging and implementing the imposition of VAT on self storage, which was added back in calculating the Group’s adjusted profit for that year. £1.4 million of the £7.6 million administrative expense is non-cash IFRS 2 share-based payment charges.
Interest expense on bank borrowings
The gross bank interest expense for the year was £10.8 million, a decrease of £0.7 million from the prior year. This reflects the reduction in debt in January 2013 following the placing in that month. The average cost of borrowing during the year was 4.5%, compared to 4.0% in the prior year.
Total interest payable has decreased in the statement of comprehensive income from £12.3 million to £11.3 million in part due to the decrease in the gross bank interest expense. Additionally, capitalised interest increased by £0.2 million from the prior year, with the Group constructing its store at Gypsy Corner throughout the year, compared with limited construction activity taking place during the prior year.
The prior year refinancing costs of £4.3 million relate to the unamortised loan arrangement costs of the previous facility, and the write-off of the costs of the new bank facility in accordance with IAS 39. This was adjusted from the Group’s recurring profit for that year.
VAT
VAT was introduced on self storage rents with effect from 1 October 2012, following the announcement in the March 2012 budget.
We are now able to recover the majority of VAT on our ongoing operating expenses, and are also entitled to a refund of previously irrecoverable VAT on capital expenditure under the Capital Goods Scheme.
We have a receivable of £9.0 million in respect of payments due back to the Group under the Capital Goods Scheme as a consequence of the introduction of VAT on self storage from 1 October 2012. The debtor has been reduced in the year by £1.2 million following the identification of some trapped Capital Goods Scheme recovery. We have also made revisions to the timing of the payments due back to the Group. The final amount is subject to agreement with HMRC. The debtor has been discounted in accordance with International Accounting Standards to the net present value using the Group’s average cost of debt, with £0.4 million of the discount being unwound through interest receivable in the period. The gross value of the debtor before discounting is £10.2 million. The first payment under the Capital Goods Scheme of £0.8 million was received in October 2013.
REIT status
The Group converted to a Real Estate Investment Trust (“REIT”) in January 2007. Since then the Group has benefited from a zero tax rate on the Group’s qualifying self storage earnings. The Group only pays tax on the profits attributable to our residual business, comprising primarily of the sale of packing materials and insurance, and fees earned from Big Yellow Limited Partnership and from the management of the Armadillo portfolio.
REIT status gives the Group exemption from UK corporation tax on profits and gains from its qualifying portfolio of UK stores. Future revaluation gains on developments and our existing open stores will be exempt from corporation tax on capital gains, provided certain criteria are met.
The Group has a rigorous internal system in place for monitoring compliance with criteria set out in the REIT regulations. On a monthly basis, a report to the Executive on compliance with these criteria is carried out. To date, the Group has complied with all REIT regulations, including forward looking tests.
Taxation
There is a tax charge for the year of £0.3 million. There was no charge in the prior year due to tax relief arising from the restructuring of interest rate derivatives in 2009 and in the year.
Dividends
REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. On the basis of the full year distributable reserves for PID purposes, a PID of 13 pence per share is payable (31 March 2013: 8 pence per share PID).
The Board is recommending the payment of a final dividend of 8.4 pence per share. The table below summarises the declared dividend for the year:
| Dividend (pence per share) | 31 March 2014 £m |
31 March 2013 £m |
|
|---|---|---|---|
| Interim dividend | – PID | 8.0p | 5.0p |
| – discretionary | nil p | nil p | |
| – total | 8.0p | 5.0p | |
| Final dividend | – PID | 5.0p | 3.0p |
| – discretionary | 3.4p | 3.0p | |
| – total | 8.4p | 6.0p | |
| Total dividend | – PID | 13.0p | 8.0p |
| – discretionary | 3.4p | 3.0p | |
| – total | 16.4p | 11.0p | |
Subject to approval by shareholders at the Annual General Meeting to be held on 16 July 2014, the final dividend will be paid on 24 July 2014. The ex-div date is 11 June 2014 and the record date is 13 June 2014.
Cash flow growth
The Group is strongly cash generative and draws down from its longer term committed facilities as required to meet obligations.
A summary of the cash flow for the year is set out in the table below:
| Year ended 31 March 2014 £000 |
Year ended 31 March 2013 £000 |
|
|---|---|---|
| Cash generated from operations | 43,290 | 42,025 |
| Finance costs (net) | (10,538) | (11,839) |
| Free cash flow | 32,752 | 30,186 |
| Capital expenditure (including finance lease payments) | (9,570) | (8,647) |
| Asset sales | – | 15,864 |
| Receipt from Capital Goods Scheme | 756 | – |
| Investment in associate | – | (1,567) |
| Cash flow after investing activities | 23,938 | 35,836 |
| Ordinary dividends | (19,591) | (13,543) |
| Issue of share capital | 42 | 36,764 |
| Non-recurring finance costs | – | (15,573) |
| Decrease in borrowings | (8,938) | (45,694) |
| Net cash outflow | (4,549) | (2,210) |
| Opening cash and cash equivalents | 7,850 | 10,060 |
| Closing cash and cash equivalents | 3,301 | 7,850 |
| Debt | (229,368) | (238,306) |
| Net debt | (226,067) | (230,456) |
Free cash flow pre-capital expenditure increased by 9% to £32.8 million for the year (2013: £30.2 million). In the year capital expenditure outflows were £9.6 million, up from £8.6 million in the prior year. During the year we constructed our Gypsy Corner store, invested in Phase 2 fit outs, and continued our programme of LED roll-out across the portfolio. The cash flow after investing activities was a net inflow of £23.9 million in the year, compared to an inflow of £35.8 million in 2013; the reduction being due to receipts in the prior year of £15.9 million from the sale of surplus land. The non-recurring finance costs in the prior year relate to £10.5 million of payments made to cancel interest rate derivatives and £5.1 million relating to arrangement fees paid for the Aviva and senior debt loans.
Balance sheet
Property
The Group’s 54 wholly owned stores and four stores under development at 31 March 2014, which are classified as investment properties, have been valued by Cushman & Wakefield (“C&W”) and this has resulted in an investment property asset value of £798.7 million, comprising £726.4 million (91%) for the 47 freehold (including one long leasehold) open stores, £50.0 million (6%) for the seven short leasehold open stores and £22.3 million (3%) for the four investment properties under construction.
| Analysis of property portfolio | No of locations |
Value at 31 March 2014 £m |
Revaluation movement in year £m |
|---|---|---|---|
| Investment property | 54 | 776.4 | 29.2 |
| Investment property under construction | 4 | 22.3 | (0.8) |
| Investment property total | 58 | 798.7 | 28.4 |
| Surplus land | 3 | 6.1 | – |
| Total | 61 | 804.8 | 28.4 |
Investment property
Each store is reviewed and valued individually by Cushman & Wakefield LLP, who are the valuers to a significant proportion of the UK and European self storage market.
The valuations in the current year have grown from the prior year, with a revaluation surplus of £30.4 million on the open stores, before adjusting for the Capital Goods Scheme.
The valuation is based on an average occupancy over the 10 year cash flow period of 79.2% across the whole portfolio. Between April 2004 and March 2008, the 32 established stores had an average occupancy of 83%.
| Established store portfolio |
Lease-up store portfolio |
All wholly owned stores |
|
|---|---|---|---|
| Valuation at 31 March 2014 | £416.4m | £360.0m | £776.4m |
| Occupancy at 31 March 2014 | 75.2% | 62.8% | 69.8% |
| Stabilised occupancy assumed in valuations | 81.5% | 80.5% | 81.1% |
| Net initial yield pre-admin expenses | 7.0% | 5.5% | 6.3% |
| Stabilised yield assuming no rental growth | 7.8% | 7.8% | 7.8% |
The initial yield pre-administration expenses assuming no rental growth is 6.3% (2013: 5.9%) rising to a stabilised yield of 7.8% (2013: 8.2%). The 32 established stores that were mature in 2007 are assumed to return to stabilised occupancy in 29 months on average. The 22 lease-up stores are assumed to reach stabilised occupancy in 36 months on average from 1 April 2014. Note 14 contains more detail on the assumptions underpinning the valuations.
Investment property under construction
The four wholly owned development sites have increased in value by £5.0 million, £5.8 million relating to capital expenditure incurred, with the balance of £0.8 million a revaluation deficit. C&W’s forecast valuations for when the assets have reached stabilised occupancy, including assumptions in relation to revenue and operating cost growth, are currently pointing to a revaluation surplus on total development cost of £30.3 million on the three wholly owned development sites with planning consent.
In their report to us, our valuers, Cushman & Wakefield have drawn attention to valuation uncertainty resulting from a lack of transactions in the self storage investment market. Please see note 14 for further details.
Purchaser’s cost adjustment
As in prior years, we have instructed an alternative valuation on our assets using a purchaser’s cost assumption of 2.75% (see note 14 for further details) to be used in the calculation of our adjusted diluted net asset value. This Red Book valuation on the basis of 2.75% purchaser’s costs, results in a higher property valuation at 31 March 2014 of £834.2 million (£35.5 million higher than the value recorded in the financial statements). The valuations in Big Yellow Limited Partnership are £4.8 million higher than the value recorded in the financial statements, of which the Group’s share is £1.6 million. The sum of these is £37.1 million and translates to 26.0 pence per share.
The revised valuation translates into an adjusted net asset value per share of 446.5 pence (2013: 419.2 pence) after the dilutive effect of outstanding share options.
Surplus land
At 31 March 2014 the Group owned £6.1 million of land surplus to our requirements across three sites. We aim to sell this surplus land once we have maximised its realisable value through planning improvements. In the year a tenant vacated an office attached to one of our stores. We are looking at the options for redeveloping this office for sale, which has been transferred to surplus land from investment property. The sites are held at the lower of cost and net realisable value and have not been externally valued.
Movement in adjusted NAV
The year on year movement in adjusted net asset value (see note 12) is illustrated in the table below:
| Movement in adjusted net asset value | Equity shareholders’ funds £m |
EPRA adjusted NAV per share pence |
|---|---|---|
| 1 April 2013 | 594.5 | 419.2 |
| Adjusted profit | 29.2 | 20.6 |
| Equity dividends paid | (19.6) | (13.8) |
| Revaluation movements (including share of associate) | 27.7 | 19.5 |
| Movement in purchaser’s cost adjustment | 1.4 | 1.0 |
| Other movements (eg share schemes) | 1.2 | – |
| 31 March 2014 | 634.4 | 446.5 |
Borrowings
We focus on improving our cash flows and for the year we had healthy Group interest cover of 4.1 times (2013: 3.5 times) based on cash generated from operations against interest paid, allied to a relatively conservative debt structure secured principally against the freehold estate.
In April 2012, we completed a £100 million 15 year fixed rate loan with Aviva Commercial Finance Limited. The loan is secured over a portfolio of 15 freehold self storage centres which were valued at £242.1 million at 29 February 2012 for the purposes of the drawdown. The annual fixed interest rate on the loan is 4.90%.
The loan amortises to £60 million over the course of the 15 years. The debt service is payable monthly based on fixed annual amounts. The loan outstanding on the fifth anniversary will be £89.8 million; £76.7 million will be outstanding on the tenth anniversary, with £60 million remaining at expiry in April 2027.
The Group has a £155 million four year bank facility with Lloyds, HSBC and Santander, expiring in September 2016. £120 million of the facility is term loan with the balance of £35 million revolving. The facilities attract a ratcheted margin over LIBOR based on interest cover. The Group is currently paying a blended 2.4% margin, the lowest margin on the ratchet, which is effective for asset income cover of greater than three times.
The Group has a £70 million interest rate derivative to September 2016 at a fixed rate of 2.8% plus margin. The balance of the bank debt drawn accrues interest at variable rates based on one month LIBOR plus margin.
The Group's average cost of debt at 31 March 2014 is shown in the table below.
| Amount of debt £m |
Weighted average interest cost |
|
|---|---|---|
| Aviva loan | 96.4 | 4.9% |
| Fixed bank debt | 70.0 | 5.3% |
| Variable bank debt | 63.0 | 2.9% |
| Total | 229.4 | 4.5% |
The Group was in compliance with its banking covenants at 31 March 2014; see note 19 for details.
The Group has £25.3 million of cash and undrawn bank facilities and relatively conservative levels of gearing. The Group currently has a net debt to gross property assets ratio of 28%, and a net debt to adjusted net assets ratio of 36%.
At 31 March 2014, the fair value on the Group’s interest rate derivatives was a liability of £2.8 million. The Group does not hedge account its interest rate derivatives. As recommended by EPRA (European Public Real Estate Association), the fair value movements are eliminated from adjusted profit before tax, diluted EPRA earnings per share, and adjusted net assets per share.
Treasury continues to be closely monitored and its policy approved by the Board. We maintain a keen watch on medium and long term rates and the Group’s policy in respect of interest rates is to maintain a balance between flexibility and hedging of interest rate risk.
Cash deposits are only placed with approved financial institutions in accordance with the Group’s treasury policy.
Share capital
The share capital of the Company totalled £14.3 million at 31 March 2014 (2013: £14.3 million), consisting of 143,061,147 ordinary shares of 10p each (2013: 142,639,647 shares).
Shares issued for the exercise of options during the year amounted to 0.4 million at an average exercise price of 450p.
The Group holds 1.4 million shares in treasury and 1.5 million shares within an Employee Benefit Trust (“EBT”). These shares are shown as a debit in reserves and are not included in calculating net asset value per share.
| 2014 No. |
2013 No. |
|
|---|---|---|
| Opening shares | 142,639,647 | 131,393,041 |
| Shares issued for the placing | – | 10,000,000 |
| Shares issued to EBT | – | 876,671 |
| Shares issued for the exercise of options | 421,500 | 369,935 |
| Closing shares in issue | 143,061,147 | 142,639,647 |
| Shares held in EBT | (1,500,000) | (1,500,000) |
| Shares held in treasury | (1,418,750) | (1,418,750) |
| Closing shares for NAV purposes | 140,142,397 | 139,720,897 |
54,249,527 shares were traded in the market during the year ended 31 March 2014 (2013: 45,430,167). The average mid-market price of shares traded during the year was 452.1p with a high of 571.5p and a low of 355.3p.
Big Yellow Limited Partnership
Big Yellow Limited Partnership, a joint venture with Pramerica Real Estate Investors Limited (“Pramerica”), owns self storage centres in the Midlands, the North, Scotland and four locations in the South. In the consolidated accounts of Big Yellow Group PLC, the Partnership is treated as an associate. We have adopted equity accounting for the Partnership, so that our share of the Partnership’s results are disclosed in operating profit and our net investment is shown in the balance sheet within “Investment in Associate”. We have provided in note 13d the balance sheet and income statement of the Partnership, along with the Group’s share of the income statement captions, and detail on Big Yellow’s option to acquire the assets of the Partnership.
Structure
The Group and Pramerica have committed equity in a one third, two thirds split respectively. The Board of the Partnership comprises two representatives of both Pramerica and Big Yellow. Pramerica have the casting vote over the approval of the Partnership’s annual business plan.
The Partners have resolved not to develop any further stores. No further equity contributions are forecast.
The Group earns certain construction and operational fees from the Partnership. For the year to 31 March 2014, these fees amounted to £0.6 million (2013: £0.6 million).
Funding
The Partnership has a £60 million bank facility with RBS and HSBC expiring in September 2016. £2 million of this facility has been repaid and cancelled during the year, leaving drawn debt at £58 million at 31 March 2014. The average cost of the facility at 31 March 2014 is 4.3%. Interest rate derivatives are in place covering 50% of the drawn debt at a pre-margin cost of 1.05%. There is a margin ratchet based on the Partnership’s income cover which ranges between 250 bps and 400 bps; the margin is currently 350 bps.
Results
For the year ended 31 March 2014, the operating profit of the Partnership was £4.6 million (2013: £3.4 million), with all 12 stores being profitable at the operating level.
The Partnership made a profit before tax of £0.5 million (2013: £1.9 million). Big Yellow’s share of this profit was £0.2 million (2013: £0.6 million).
After adjusting for non-recurring items of a revaluation loss of £2.0 million (principally due to a reduction in the stable occupancy assumptions used in the valuations), and fair value gain on interest rate derivatives of £0.8 million, the Partnership made an adjusted profit of £1.8 million (2013: adjusted profit of £0.3 million), of which the Group’s share is £0.6 million (2013: £0.1 million). The Partnership is tax transparent, so the limited partners are taxed on any profits.
We recognised a receivable of £4.3 million in the prior year in respect of payments due back to the Partnership under the Capital Goods Scheme. These amounts are subject to agreement with HMRC. The receivable has been discounted; the gross value of the receivable before discounting is £4.9 million. The first payment under the Capital Goods Scheme of £0.4 million was received in October 2013.
Going Concern
A review of the Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are shown in the balance sheet, cash flow statement and accompanying notes in the financial statements. Further information concerning the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk can be found in this Report and in the notes to the financial statements.
After reviewing Group and Company cash balances, borrowing facilities, forecast valuation movements and projected cash flows, the Directors believe that the Group and Company have adequate resources to continue operations for the foreseeable future. In reaching this conclusion the Directors have had regard to the Group’s operating plan and budget for the year ending 31 March 2015 and projections contained in the longer-term business plan which covers the period to March 2019. The Directors have considered carefully the Group’s trading performance and cash flows as a result of the uncertain global economic environment and the other principal risks to the Group’s performance and are satisfied with the Group’s positioning. For this reason, they continue to adopt the going concern basis in preparing the financial statements.