Risks and Uncertainties
Principal risks and uncertainties
The section below details the principal risks and uncertainties that are considered to have the most material impact on the Group’s strategy and objectives. These key risks are monitored on an ongoing basis by the Executive Directors, and considered fully by the Board in its annual risk review.
Risk and impact
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MitigationThe UK economy is projected to grow at approximately 2.5% in 2015, and is expected to go ahead of the level of output last achieved in 2007 before the global financial crisis. Self storage has proved relatively resilient through the crisis, with our revenue and earnings increasing over the last five years. As the economy has recovered in the past couple of years, the market risk has fallen in line with increasing occupancy. Self storage is a relatively immature market in the UK compared to other self storage markets such as the United States and Australia, and we believe has further opportunity for growth. Awareness of self storage and how it can be used by domestic and business customers is relatively low throughout the UK, although higher in London. The rate of growth of branded self storage on main roads in good locations has historically been limited by the difficulty of acquiring sites at affordable prices and obtaining planning consent. The lack of availability of credit within the economy has further reduced this rate of growth since the start of the downturn, and over the last three or so years new store openings within the sector have slowed to an average of nine stores per year over the past five years, down from a peak of 34 per year in 2005-2009. Our performance during the downturn has been relatively resilient, although not immune. We believe that the resilience of our performance is due to a combination of factors including:
We have a large current storage customer base of over 47,000 spread across the portfolio of stores and many thousands more who have used Big Yellow over the years. In any month, customers move in and out at the margin resulting in changes in occupancy. This is a seasonal business and typically we see growth over the spring and the summer months, with the seasonally weaker periods being the winter months. The Group’s occupancy has increased by 5.3% in the year from 67.9% to 73.2%. |
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Property riskThere is a risk that we will be unable to acquire new development sites which meet management’s criteria. This would impact on our ability to grow the overall store platform. |
Our management has significant experience in the property industry generated over many years and in particular in acquiring property on main roads in high profile locations and obtaining planning consents. We do take planning risk where necessary, that said the availability of land, and competition for it makes acquiring new sites challenging. The planning process remains difficult with some planning consents taking in excess of twelve months to achieve, although given we have planning consent on all bar one site, the risk to the Group has reduced significantly from prior years. We manage the construction of our properties very tightly. The building of each site is handled through a design and build contract, with the fit out project managed in-house using an established professional team of external advisors and sub-contractors who have worked with us for many years to our Big Yellow specification. |
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Valuation riskThe valuations of the Group’s investment properties may fall due to external pressures or the impact of performance. Lack of transactional evidence in the self storage sector leads to more subjective valuations. |
The valuations are carried out by independent, qualified external valuers who value a significant proportion of the UK self storage industry. The portfolio is diverse with over 47,000 customers using the product for a wide variety of reasons. There is significant headroom on our loan to value banking covenants. |
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Treasury riskThe Group may face increased costs from adverse interest rate movements. |
Our financing policy is to fund our current needs through a mix of debt, equity and cash flow to allow us to selectively build out the remaining development pipeline and achieve our strategic growth objectives, which we believe improve returns for shareholders. We have made it clear that we believe optimal leverage for a business such as ours should be LTV in the range 20% to 30% and this informs our management of treasury risk. We aim to ensure that there are sufficient medium-term facilities in place to finance our committed development programme, secured against the freehold portfolio, with debt serviced by our strong operational cash flows. We have a fixed rate loan in place from Aviva Commercial Finance Limited, with 12 years remaining. For our bank debt, we borrow at floating rates of interest and use swaps to hedge our interest rate exposure. Our policy is to have at least 50% of our total borrowings fixed, with the balance floating paying margin over LIBOR. At 31 March 2015 56% of the Group’s total borrowings were fixed or subject to interest rate derivatives (including forward start derivatives). The Group’s income cover ratio on an annualised basis at 31 March 2015 was 5.9 times. The Group reviews its current and forecast projections of cash flow, borrowing and interest cover as part of its monthly management accounts. In addition, an analysis of the impact of significant transactions is carried out regularly, as well as a sensitivity analysis assuming movements in interest rates and occupancy in the stores on gearing and interest cover. The Group regularly monitors its counterparty risk. The Group monitors compliance with its banking covenants closely. During the year it complied with all its covenants, and is forecast to do so for the foreseeable future. |
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Credit riskThe Group is exposed to a credit risk from its customers. |
Our customers are required to pay a deposit when they start to rent a self storage room and are also required to pay in advance for their four-weekly storage charges. The Group is therefore not exposed to a significant credit risk. 82% of our current customers pay by direct debit; however of new customers moving into the business in the last year 85% have paid by direct debit. Businesses often prefer to pay by cheque or BACS. Since 2007 we have not seen an increase in the levels of bad debts and arrears. In the year to 31 March 2015 our bad debt expense represented 0.15% of revenue in the year (2014: 0.10%). |
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Taxation riskThe Group is exposed to changes in the tax regime affecting the cost of corporation tax, VAT and Stamp Duty Land Tax (“SDLT”), for example the imposition of VAT on self storage from 1 October 2012. |
We regularly monitor proposed and actual changes in legislation with the help of our professional advisors, through direct liaison with HMRC, and through trade bodies to understand and, if possible, mitigate or benefit from their impact. The Government announced a review of property rates earlier this year. This is a significant cost to the business, and we are monitoring any potential impact from a revision in the basis of assessment or taxation. |
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Real Estate Investment Trust
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The Group has internal monitoring procedures in place to ensure that the appropriate rules and legislation are complied with. To date all REIT regulations have been complied with, including projected tests. |
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Human resources riskOur people are key to our success and as such we are exposed to a risk of high staff turnover, and a risk of the loss of key personnel. With the economy improving and unemployment falling, the risk of higher staff turnover and difficulty in finding the right employees increases. |
We have developed a professional, lively and enjoyable working environment and believe our success stems from attracting and retaining the right people. We encourage all our staff to build on their skills through appropriate training and regular performance reviews. We believe in an accessible and open culture and everyone at all levels is encouraged to review and challenge accepted norms, so as to contribute to the performance of the Group. |
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Security riskThe Group is exposed to the risk of the damage or loss of store due to vandalism, fire, or natural incidents such as flooding. This may also cause reputational damage. |
The safety and security of our customers, their belongings, and stores remains a key priority. To achieve this we invest in state of the art access control systems, individual room alarms, digital CCTV systems, intruder and fire alarm systems and the remote monitoring of all our stores outside of our trading hours. We are the only major operator in the UK self storage industry that has every room in every store individually alarmed. We have implemented customer security procedures in line with advice from the Police and continue to work with the regulatory authorities on issues of security, reviewing our operational procedures regularly. The importance of security and the need for vigilance is communicated to all store staff and reinforced through training and routine operational procedures. We have continued to run courses for all our staff to enhance the awareness and effectiveness of our procedures in relation to security. |
Internal audit
The Group does not have a formal internal audit function because the Board has concluded that the internal controls systems are sufficient for the Group at this time. However, the Group employs a Store Compliance Manager responsible for reviewing store operational and financial controls. He reports to the Chief Financial Officer, and also meets with the Audit Committee Chairman at least once a year. This role is supported by an Assistant Store Compliance Manager, enabling additional work and support to be carried out across the Group’s store portfolio. The Store Compliance team visit each operational store twice a year to carry out a detailed store audit. These audits are unannounced and the Store Compliance team carry out detailed tests on financial management within the stores, administrative standards, and operational standards. Part of the store staff’s bonus is based on the scores they achieve in these audits. The results of each audit are reviewed by the Chief Financial Officer, the Financial Controller and the Head of Store Operations.