Big Yellow Group PLC
Half Year Report 2014

Business and Financial Review

Our core proposition remains a high quality product, competitively priced, with excellent customer service, providing value for money to our customers.

Continued growth in Occupancy

Trading performance

The improving UK GDP environment and consumer confidence both in London and regional cities, coupled with growing awareness, has led to improving demand for self storage from both domestic and business customers. This will incrementally feed through to our business, resulting in growing occupancy, earnings and cash flow. This is against a backdrop of limited new supply with very few new store openings committed in our core area of operation.

Our third quarter is historically the weakest trading quarter and in recent years we have typically lost two to three percentage points of occupancy before a return to growth in the new year. Since the end of September we have lost 26,000 sq ft (0.7% of maximum lettable area “MLA”), compared to 32,000 sq ft (0.9% of MLA) lost at this stage last year. The move outs have been in line with our expectations following the strong summer trading.

Store occupancy

The level of enquiries across all our stores increased by 11% compared to the same six months last year. Conversion rates of these enquiries remained strong, meaning total move-ins, including the stores in Big Yellow Limited Partnership, were up 9% on the same period last year. We are experiencing a higher level of churn in the business, with move-outs increasing by a similar amount when compared to the same period last year.

Portfolio at 30 September 2014 Occupancy at
30 September
2014		 Occupancy
change from
March 2014
000 sq ft		 30 September
2014
000 sq ft		 31 March
2014
000 sq ft		 30 September
2013
000 sq ft
Established stores 79.8% 89 1,541 1,452 1,488
Lease-up stores 68.0% 149 1,085 936 923
Total – wholly owned stores 74.5% 238 2,626 2,388 2,411
Partnership lease-up stores 69.2% 74 518 444 453
Total – all Big Yellow stores 73.5% 312 3,144 2,832 2,864

Occupied space increased by 312,000 sq ft across all stores in the period (2013: occupancy growth of 232,000 sq ft). This growth includes 24,000 sq ft of occupancy acquired with the acquisition of Fort Box Self Storage in Oxford (Oxford 2), so the net occupancy growth in the period was 288,000 sq ft (214,000 sq ft in the wholly owned stores).

We saw encouraging growth from domestic, student and business customers during the six month period, with the overall split by occupied space being 67% domestic and 33% business at 30 September 2014. This is broadly unchanged from the same time last year.

The 32 established stores are those that had reached stabilisation as a portfolio in 2007 prior to the economic downturn; 18 of these stores are in London, with the other 14 in large metropolitan cities in the South. This portfolio of stores (with an average net lettable area of 60,300 sq ft) was 79.8% occupied at the end of the period. This occupancy represents an average of 48,156 sq ft occupied per store.

The closing occupancy of the 18 established stores inside London was 81.2%, an average of 52,430 sq ft occupied per store (2013: 77.9%); for the 14 established stores outside London, closing occupancy was 77.7%, an average of 42,625 sq ft occupied per store (2013: 75.3%).

The lease-up stores have grown in occupancy by 138,000 sq ft from the same time last year (excluding the sq ft acquired with Oxford 2), and by 125,000 sq in the six months from 31 March 2014.

Pricing and rental yield

Our core proposition remains a high quality product, competitively priced, with excellent customer service, providing value for money to our customers. Our stores offer a headline opening promotion of 50% off for up to the first 8 weeks, and we continue to manage pricing dynamically, taking account of customer demand and local competition.

The closing net rent at 30 September 2014 was up 0.4% from 31 March 2014, and up 3.5% from 30 September 2013. Our key aim over the next two to three years is to drive occupancy in the stores. As the stores lease-up, our pricing model reduces the level of promotional discounts offered in individual stores. This squeezing out of promotions leads to an increase in net achieved rents. The table below illustrates this, showing the growth in net rent per sq ft for the portfolio over the six month period.

Average occupancy
in the six months		 Net rent per sq ft growth
over the six months to
30 September 2014
0 to 60% (0.5%)
60 to 70% (0.8%)
70 to 80% 0.7%
Above 80% 3.5%

Security of income

Our principal financial aims remain growing cash flow, earnings and dividend. We believe that self storage income is essentially evergreen income with highly defensive characteristics driven from buildings with very low obsolescence risk. Although its form of contract with its customers is in theory as short as a week, it does not need to rely on contract for its income security. At 30 September 2014 the average length of stay for existing customers was 21 months. For all customers, including those who have moved out of the business, the average length of stay has remained at 8 months. In our portfolio, 27% of our customers by occupied space have been storing with us for over two years, and a further 17% of customers in these stores have been in the business for between one and two years.

The location of our stores, brand, security, and most importantly customer service, together with the diversity of our 47,000 customers, will serve better than any contract.

Revenue

  Six months to
30 September
2014
£000		 Six months to
30 September
2013
£000
Established stores 23,307 21,843
Lease-up stores 15,816 13,237
Total revenue 39,123 35,080

Revenue for the established stores increased by 7% compared to the same period last year. EBITDA margins for the 32 established stores increased from 66.0% for the period to 30 September 2013 to 67.6% for the current period.

Revenue in the lease-up portfolio was up 19% compared to the same period last year. The EBITDA margin on the lease-up stores has increased from 63.7% for the period to 30 September 2013 to 66.1% for the current period. The overall store EBITDA margin increased from 65.2% to 67.0%.

Like-for-like revenue per available foot (“REVPAF”) was £22.61 for the six months, an increase of 11% from £20.39 for the six months to 30 September 2013.

We continue to improve sales of insurance, packing materials and other ancillary items, with revenue from these areas growing by 7% to £5.9 million in the period (2013: £5.5 million).

Operating costs

Store operating costs have increased by £0.7 million from the prior period, due to the additional costs of Gypsy Corner and Oxford 2, coupled with an increased investment in marketing and general inflationary increases. The movement in cost of sales in the income statement is in line with the increase in store operating costs.

Administrative expenses have increased by £0.2 million, largely as a result of an increase in the non-cash share based payments charge, which represents £0.9 million of the overall £4.2 million expense.

Interest

The loan interest expense during the period was £0.2 million lower than the same period last year, due to the lower average cost of debt following the completion of the refinancing in August 2014. Capitalised interest in the period was £0.2 million, in line with the same period last year, as a result of capital expenditure on Enfield.

Results

The 29% increase in adjusted profit before tax to £18.4 million is reconciled in the table below:

Movement in adjusted profit before tax £m
Adjusted profit before tax for the six months to 30 September 2013 14.2
Increase in gross profit 3.5
Increase in administrative expenses (0.2)
Increase in share of associates’ recurring profit 0.7
Reduction in net interest payable 0.2
Adjusted profit before tax for the six months to 30 September 2014 18.4

The Group’s statutory profit before tax for the period is £35.3 million, an increase of 2% from £34.5 million for the same period last year.The increase in adjusted profit before tax has been partially offset by a lower revaluation gain in the period.

The table below reconciles the statutory profit before tax to the adjusted profit before tax:

Profit before tax analysis

  Six months
ended 30
September
2014
£m		 Six months
to 30
September
2013
£m
Profit before tax 35.3 34.5
Adjusted for:
Gain on revaluation of investment properties		 (15.3) (17.8)
Change in fair value of interest rate derivatives 0.2 (1.8)
Gains on surplus land (1.3) –
Share of non-recurring gains in associates (0.5) (0.7)
Adjusted profit before tax 18.4 14.2

Diluted EPRA earnings per share was 13.0 pence (2013: 10.1 pence), an increase of 29% from the same period last year.

Cash flow growth

Cash flows from operating activities (after net finance costs) have increased by 27% to £17.8 million for the period (2013: £14.0 million), in line with the growth in store EBITDA. These operating cash flows are after the ongoing maintenance costs of the stores, which are on average £35,000 per store per annum. The Group’s net debt increased in the period by £3.2 million to £229.2 million (2013: £226.0 million).

  Six months
ended 30
September
2014
£000		 Six months
ended 30
September
2013
£000
Cash generated from operations 22,871 19,330
Finance costs (net) (see below) (5,059) (5,345)
Free cash flow 17,812 13,985
Capital expenditure (6,941) (3,818)
Net investment in associates (1,920) –
Surplus land sales 2,815 –
Cash flow after investing activities 11,766 10,167
Non-recurring finance costs (see below) (3,880) –
Dividends (11,774) (8,384)
Issue of share capital 709 33
Increase/(decrease) in borrowings 7,996 (7,957)
Net cash inflow/(outflow) 4,817 (6,141)

The capital expenditure in the period principally relates to the construction costs of our Enfield store and the acquisition of the freehold store in Oxford.

The non-recurring finance costs incurred in the period relate to the cancellation of interest rate swaps (£1.4 million) and arrangement fees and costs incurred in completing the refinancing of the bank and M&G loans (£2.5 million).

Taxation

The Group is a Real Estate Investment Trust (“REIT”). We benefit from a zero tax rate on our qualifying self storage earnings. We only pay corporation tax on the profits attributable to our residual business, comprising primarily of the sale of packing materials and insurance, and management fees earned by the Group.

There is a nil tax charge in the non-exempt residual business for the period ended 30 September 2014 (six months to 30 September 2013: £nil), due to the utilisation of brought forward tax losses and group relief.

Dividends

REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. A PID of 10.4 pence per share is proposed as the total interim dividend, an increase of 30% from 8 pence per share PID for the same period last year.

The interim dividend will be paid on 8 January 2015. The ex-div date is 11 December 2014 and the record date is 12 December 2014.

Financing and treasury

During the period we completed the refinancing of our £145 million bank facility with Lloyds and HSBC, extending the maturity to August 2019. 50% of the bank facility is term and 50% is revolving. The term loan attracts a margin of 175 bps and the revolving loan a margin of 150 bps, reflecting a reduction of 75bps for both tranches from the previous facility. The Group bank facility requires us to have 50% of all borrowings fixed.

In addition, the Group has further diversified its pool of lenders by signing a new £70 million facility with M&G Investments Limited, the term of which will be seven years from the date of drawdown which can occur at any time in the period up to 29 June 2015. The loan will be secured over a portfolio of 15 freehold self storage centres. 50% of the seven year loan is fixed by way of a forward start interest rate derivative, the balance of the loan is variable based on three month LIBOR plus margin. The average cost of the M&G loan at the current rate of LIBOR will be 3.75%.

The Group agreed a short term bridging facility of £70 million with Lloyds Bank plc, which is repayable immediately on the drawdown of the M&G loan.

The Group has a £100 million 15 year loan with Aviva Commercial Finance Limited. The loan has a fixed interest rate of 4.9% and amortises to £60 million over the course of the 15 years. The loan outstanding at 30 September 2014 was £95.4 million.

During the period the Group cancelled £40 million of its existing interest rate derivatives at a cash cost of £1.4 million, leaving £30 million fixed at 2.8% plus applicable margin.

As a result of this refinancing, and prior to the drawing of the M&G facility, our average cost of debt has decreased from 4.6% to 3.7%. Following the M&G facility being drawn and the Lloyds bridging loan being repaid we would expect the average cost to be approximately 4.2% based on the current levels of LIBOR.

The Group was comfortably in compliance with its banking covenants at 30 September 2014.

The net debt to gross property assets ratio is 28% (2013: 29%) and the net debt to adjusted net assets ratio is 35% (2013: 36%).

Property

We have a pipeline of four wholly owned development sites, of which two have planning consent (Enfield and Guildford Central). Enfield, on the A10 in London, is under construction and will open in April 2015. We are commencing detailed design works on the Guildford Central store, and anticipate that construction will commence in June 2015, with a planned opening in April 2016. These two sites have an aggregate estimated cost to complete of £8.1 million at 30 September 2014. Our site in Cambridge is an existing warehouse building which we intend to refurbish and open in late 2015. We also own a development site in Central Manchester which does not have planning.

The Group’s investment properties have been valued by Cushman and Wakefield LLP (“C&W”). At 30 September 2014 the total value of the Group’s wholly owned properties is shown in the table below:

Analysis of property portfolio No of
locations		 Value at 30
September
2014
£m		 Revaluation
movement
in the period
£m
Investment property 56 809.1 15.0
Investment property under construction 3 11.4 0.3
Investment property total 59 820.5 15.3
Surplus land 2 4.8 –
Total 61 825.3 15.3

Investment property

The valuation uplift for the open stores in the period was £15.0 million, as the growth in cash flows feed through to the valuation, coupled with a reduction in cap rate for a number of the London stores. The table below summarises the key outputs of the valuations for the wholly owned open store portfolio.

  Established
Leasehold
stores		 store portfolio
Freehold
stores		 Lease-up
store
portfolio		 Total
Number of stores 7 25 24 56
MLA capacity(sq ft) 431,000 1,499,000 1,596,000 3,526,000
Valuation at 30 September 2014 £50.3m £373.6m £385.2m £809.1m
Value per sq ft £117 £249 £241 £229
Occupancy at 30 September 2014 81.0% 79.5% 68.0% 74.5%
Stabilised occupancy assumed in valuations 81.9% 81.1% 80.4% 80.9%
Net initial yield pre-admin expenses 11.8% 6.8% 6.0% 6.7%
Stabilised yield assuming no rental growth 11.9% 7.1% 7.6% 7.7%

The initial yield on the established portfolio of 32 stores before administration expenses and assuming no rental growth, is 7.4% rising to a stabilised yield of 7.7% (March 2014: 7.0% rising to 7.8%). Including the 24 lease-up stores, the initial yield pre-administration expenses is 6.7% rising to 7.7% (March 2014: 6.3% rising to 7.8%).

Investment property under construction

The three wholly owned development sites have increased in value by £1.8 million in line with capital expenditure incurred at Enfield. C&W’s forecast valuations for when the assets have reached stabilised occupancy, including assumptions in relation to revenue and operating cost growth within these assets, are currently pointing to a revaluation surplus on total development cost of £16.3 million on the two wholly owned development sites with planning consent.

In their report, C&W have drawn attention to valuation uncertainty resulting from a lack of transactions in the self storage investment market. Please see note 15 for further details.

Surplus land

In September, the Group sold its surplus site at Guildford Central for £2.8 million, representing a profit over book value of £1.3 million.

At 30 September 2014 the Group owned £4.8 million of land surplus to our requirements across two sites. We aim to sell this surplus land once we have maximised its realisable value through planning improvements. The sites are held at the lower of cost and net realisable value and have not been externally valued.

Capital Goods Scheme receivable

At 30 September 2014 we had a receivable of £9.2 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. To date, we have received payments under the Capital Goods Scheme of £0.8 million in October 2013, and £1.4 million in October 2014.

Net asset value

The adjusted net asset value is 461.9 pence per share (see note 14), up 3% from 446.5 pence per share at 31 March 2014. The table below reconciles the movement from 31 March 2014.

Movement in adjusted net asset value Equity
shareholders’
funds
£m		 EPRA
adjusted
NAV pence
per share
1 April 2014 634.4 446.5
Adjusted profit before tax 18.4 12.8
Equity dividends paid (11.8) (8.2)
Revaluation movements(including share of associates) 15.8 11.1
Cancellation of interest rate derivatives (1.4) (1.0)
Movement in purchaser’s cost adjustment 0.9 0.6
Other movements (eg share incentives) 2.8 0.1
30 September 2014 659.1 461.9

Big Yellow Limited Partnership

Big Yellow Limited Partnership, a joint investment with Pramerica Real Estate Investors Limited, owns self storage centres outside London. In the consolidated accounts of Big Yellow Group PLC, the Partnership is treated as an associate using the equity accounting method. The Partnership has twelve stores.

The occupancy of the stores is 518,000 sq ft, against a total capacity of 749,000 sq ft, with growth of 74,000 sq ft since 31 March. The stores’ occupancy at 30 September 2014 was 69.2% (March 2014: 59.3%). The net rent achieved at 30 September 2014 by the Partnership stores is £18.15 per sq ft, an increase of 5% from the same time last year, and an increase of 0.8% from 31 March 2014. The revenue of the portfolio increased by 17% to £5.6 million for the six months to 30 September 2014 compared to the same period last year.

The Partnership made an operating profit of £3.0 million in the period, of which Big Yellow’s share is a third. After net interest costs and the revaluation of investment properties and interest rate derivatives, the profit for the period for the Partnership was £2.5 million, of which the Group’s share was £0.8 million.

The Group earns certain construction and operational fees from the Partnership. For the period to 30 September 2014, these fees amounted to £0.3 million (2013: £0.3 million).

The Partnership has a £57 million bank facility with RBS and HSBC expiring in September 2016. Interest rate swaps are in place covering £29 million of the debt at a pre-margin cost of 1.05%. The balance of the drawn debt pays interest based on three month LIBOR plus margin. There is a margin ratchet based on the Partnership’s income cover which ranges between 250 bps and 400 bps; the margin is currently 325 bps. The facility’s weighted average interest cost is 4.1%.

Big Yellow has an option to purchase the assets contained within the Partnership or the equity interest in the Partnership which it does not own exercisable in March 2015.

Armadillo Self Storage

In April 2014 we acquired the Armadillo portfolio with an Australian consortium for a total price of £19.75 million. The Group initially invested £3.6 million representing an initial stake of 38% in the business. Our partners had a right to increase their share from 62% to 80% at par, which they exercised in July 2014. In the consolidated accounts of Big Yellow Group PLC, our investment in the vehicle is treated as an associate using the equity accounting method. Armadillo has an £11 million loan from Lloyds Bank expiring in April 2019.

The occupancy of the stores is 257,000 sq ft, against a total capacity of 401,000 sq ft, with growth of 17,000 sq ft since 31 March. The stores’ occupancy at 30 September 2014 was 64.1% (March 2014: 59.9%). The net rent achieved at 30 September 2014 by the Armadillo stores is £14.38 per sq ft, an increase of 5% from the same time last year and up 2% from 31 March 2014. The revenue of the portfolio increased by 12% to £2.2 million for the six months to 30 September 2014 compared to the same period last year.

Armadillo made an operating profit of £0.9 million in the period, of which Big Yellow’s share is £0.3 million (representing 38% until July and 20% thereafter). After net interest costs and the revaluation of investment properties and interest rate derivatives, the profit for the period for Armadillo was £2.4 million, of which the Group’s share was £0.5 million.

Big Yellow has a five year management contract in place. For the period from acquisition to 30 September 2014, fees amounted to £0.3 million.

In October we received an interim dividend of £89,000, representing a 4.6% yield for the period.



James Gibson
Chief Executive Officer

18 November 2014

John Trotman
Chief Financial Officer

18 November 2014

Back to top