Our Strategy and Business Model
The Strategic Report
discusses the following areas:
- Our Strategy and Business Model
- Operational and Marketing Review
- Store Performance
- Financial Review
- Going Concern
- Principal Risks and Uncertainties
- Corporate Social Responsibility
Approval
This report was approved by the Board of Directors on 19 May 2014 and signed on its behalf by:
James Gibson
Chief Executive Officer
John Trotman
Chief Financial Officer
Our Strategy
Our strategy from the outset has been to develop Big Yellow into the market leading self storage brand, which we have achieved with unprompted brand awareness of five times that of our nearest competitor in London, and ten times for the rest of the UK. We concentrate on developing our stores in main road locations with high visibility, where our distinctive branding generates high awareness of Big Yellow.
Self storage demand from businesses and individuals at any given store is linked in part to local economic activity, consumer and business confidence, all of which are inter-related. Fluctuations in housing activity whether in the rented or owner occupied sector are also a factor and in our view influence the top slice of demand over and above a core occupancy. This has been demonstrated by the resilience of our like-for-like stores since September 2007 despite a collapse in housing activity and GDP over the period 2007 to 2009.
Local GDP and housing activity are greatest in the larger urban conurbations and in particular London and the South East. Furthermore, people and businesses are space constrained in these more expensive areas. Barriers to entry in terms of competition for land and difficulty around obtaining planning are also highest in more urbanised locations.
Over the last 15 years we have created a portfolio of 67 purpose built prime Big Yellow self storage centres, largely freehold and focussed on London, the South East and large metropolitan cities. 55 of these stores are wholly owned, with 12 owned in Big Yellow Limited Partnership, of which the Group owns a third. 74% of our current store revenue derives from within the M25; with the South East, the proportion of current store revenue rises to 89%. The REVPAF performance of our stores in London has been more resilient over the downturn than in the regions.
Our Big Yellow stores are on average 63,000 sq ft, compared to an industry average of 42,000 sq ft (source: The Self Storage Association 2014 UK Annual Survey). The upside from filling our larger than average sized stores is, in our view, only possible in large metropolitan markets, where self storage demand from domestic and business customers is the highest. As the operating costs of our assets are relatively fixed, larger stores in bigger urban conurbations, particularly London, drive higher revenues and higher operating margins.
We continue to believe that the medium term opportunity to create shareholder value will be principally achieved by leasing up existing stores to drive revenue, the majority of which flows through to the bottom line given that our operating and central overhead costs are already largely fixed and embedded.
Our current focus is to:
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- leverage our market leading brand position to generate new prospects, principally from our online mobile and desktop platforms;
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- focus on training, selling skills, and customer satisfaction to maximise prospect conversion and referrals;
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- grow occupancy and net rent so as to drive revenue optimally at each store;
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- maintain a focus on cost control, so revenue growth is transmitted through to earnings growth;
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- maintain a conservative capital structure in the business with Group pre-interest cash flow cover of a minimum of four times annual interest expense; and
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- produce sustainable returns for shareholders through a low leverage, low volatility, high distribution REIT.
In the fourteen years since flotation in May 2000, Big Yellow has delivered a Total Shareholder Return (“TSR”), including dividends reinvested, of 14.8% per annum, in aggregate 585.1% at the closing price of 546.5p on 31 March 2014. This compares to 6.8% per annum for the FTSE Real Estate Index and 4.7% per annum for the FTSE All Share index over the same period. This demonstrates the power of compounding over the longer term.
Our Business Model
| Attractive market dynamics |
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| Our competitive advantage |
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| Evergreen income streams |
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| Strong growth opportunities |
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| Conversion into quality earnings |
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The self storage market
In the recently published 2014 Self Storage Association UK Survey, only 38% of those surveyed had a reasonable or good awareness of self storage, in line with findings from our own research. Furthermore, 2% of the 2,138 adults surveyed were currently using self storage and 5% were thinking of using self storage in the next year. This indicates a continued opportunity for growth and with increasing use, together with the ongoing marketing efforts of everyone in the industry, we anticipate awareness to grow.
Growth in new facilities across the industry has been limited to regional areas of the UK, particularly in the north, whereas in London, there were no new openings last year and indeed capacity is expected to fall in the next twelve months with the closures of stores for redevelopment. Between 2010 and 2013 average industry openings have been approximately nine per year, which compares to an average of 34 per year in the preceding four years.
79% of respondents to the survey expected an improvement in profits this year, compared to 35% last year, and 87% expect rents for new customers to rise in 2014 compared to 79% last year.
The Self Storage Association (“SSA”) estimate that the UK industry is made up of approximately 975 self storage facilities (of which 141 are purely container operations), providing 34.4 million sq ft of self storage space, equating to 0.5 sq ft per person in the UK. This compares to 7.3 sq ft per person in the US, 1.4 sq ft per person in Australia and 0.1 sq ft for mainland Europe, where the roll-out of self storage is a more recent phenomenon (source: The Self Storage Association 2014 UK Annual Survey). 339 self storage facilities in the UK are held by large operators (defined as those managing 10 facilities or more) which represents 35% of the total number, but we would estimate approximately 50% of total capacity.
Awareness of self storage will continue to grow as more businesses and individuals use the product at a time when the supply side is restricted, with very few store openings expected in the calendar year.
KPIs
The key performance indicators of our stores are occupancy and rental yield, which together drive the revenue of the business. These are three key measures which are focussed on by the Board, and are reported on a weekly basis. Over the course of the past five years, both occupancy and revenue have grown significantly. Rental yield was relatively stable between 2010 and 2012, reduced following the introduction of VAT in 2013, but has increased this year by 6.1% to closer to the 2012 level. Our key focus is on continuing to grow occupancy, with rental yield growth following once the stores have reached higher occupancy levels.
Adjusted profit before tax, adjusted earnings per share and distributions to shareholders are our other KPIs. We have delivered compound eps growth of 12% over the past five years, and compound dividend growth of 42% over the same period. Compound eps growth over the past ten years is 16%.
We have illustrated the Group’s performance in these measures over the past five years in Highlights.
Capital structure
During the year the Company 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 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.
Different business models with varying operating margins might, at the margin, have 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, which is 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 28%. Given the subjective nature of valuation we prefer to express this target as net operating income over debt costs.
89%
of revenue
from London and
the South East
14.8%
per annum
TSR since floatation
16%
compound EPS
growth over the
last ten years