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Business and Financial Review

Cash flow growth

Cash flows from operating activities (after net finance costs and pre working capital movements) have increased by 10% to £28.9 million for the period (2015: £26.3 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 has increased over the period to £305.2 million (March 2016: £295.0 million).

	Six months ended 30 September 2016 £m	Six months ended 30 September 2015 £m
Cash generated from operations pre working capital	34.6	31.2
Finance costs (net) (see below)	(5.7)	(4.9)
Free cash flow pre working capital	28.9	26.3
Working capital movements	(4.4)	(0.6)
Sale of surplus land	0.3	–
Capital expenditure	(17.1)	(8.2)
Receipt from Capital Goods Scheme	1.6	–
Dividend received from associates	0.2	0.1
Cash flow after investing activities	9.5	17.6
Dividends	(20.0)	(17.5)
Issue of share capital	0.3	0.4
Decrease in borrowings	(1.1)	(4.1)
Net cash outflow	(11.3)	(3.6)

The capital expenditure in the period principally relates to the costs to acquire the stores in Nine Elms and Twickenham from Lock and Leave. The negative working capital movements in the period are principally due to movements on VAT balances owing to HMRC.

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 £0.3 million tax charge in the residual business for the period ended 30 September 2016 (six months to 30 September 2015: £0.2 million).

Dividends

REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. A PID of 13.5 pence per share is proposed as the total interim dividend, an increase of 12% from 12.1 pence per share PID for the same period last year.

The interim dividend will be paid on 6 January 2017. The ex-div date is 8 December 2016 and the record date is 9 December 2016.

Financing and treasury

Our financing policy is to fund our current needs through a mix of debt, equity and cash flow to allow us to build out our development pipeline and achieve our strategic growth objectives, which we believe improve returns for shareholders. 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 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.

The table below summarises the Group’s debt facilities at 30 September 2016.

The Group’s loan with Aviva is at a fixed rate and amortises to £60 million over the course of its 15 year term. The M&G loan is 50% fixed and 50% floating and is for a bullet seven year term.

During the period, the Group exercised its option to extend the expiry of the Group’s bank loan by a year to October 2021. The Group’s revolving bank debt pays a margin of 125 bps and the term debt 150 bps. The Group has an option to increase the amount of the revolving loan facility by a further £60 million during the course of the loan’s term.

During the period, the Group took out an interest rate derivative of £30 million expiring in September 2021 at a pre-margin cost of 0.4%, replacing an expiring swap which was at the pre-margin cost of 2.8%. The bank loan requires 45% of all drawn debt to be hedged or fixed.

The Group was comfortably in compliance with its banking covenants at 30 September 2016.

The net debt to gross property assets ratio is 26% (2015: 26%) and the net debt to adjusted net assets ratio is 32% (2015: 33%).

Debt	Expiry	Facility	Drawn	Average cost
Aviva Loan	April 2027	£91.1 million	£91.1 million	4.9%
M&G loan	June 2022	£70 million	£70 million	3.6%
Bank loan (Lloyds & HSBC)	October 2021	£190 million	£150 million	1.7%
Total	Average term 6.4 years	£351.1 million	£311.1 million	3.1%

Development pipeline

The status of the Group’s development pipeline is summarised in the table below:

Site	Location	Status	Anticipated capacity
Guildford	Prime location in the centre of Guildford on Woodbridge Meadows.	Consent granted, store due to open in January 2018, cost to complete of £6.0 million.	56,000 sq ft
Wandsworth, London	Extension to existing 47,000 sq ft store.	Planning application submitted in June 2016, awaiting determination.	Additional 27,000 sq ft
Camberwell, London	Located in prominent location on Southampton Way.	Planning application submitted in November 2016.	55,000 to 60,000 sq ft
Kings Cross, London	Prominent location on York Way.	Discussions ongoing with adjoining landowner for a land swap to improve scale of development, with joint planning application currently being prepared.	90,000 to 100,000 sq ft
Battersea, London	Prominent location on junction of Lombard Road and York Road (South Circular).	Potential redevelopment to increase size of existing 34,000 sq ft Big Yellow store. Redevelopment of adjoining retail into a mixed use led residential scheme. Ongoing detailed planning discussions with the Borough Council.	Up to an additional 60,000 sq ft
Newcastle	Prime location on Scotswood Road.	Negotiations ongoing with existing long leasehold tenant to obtain vacant possession.	50,000 to 60,000 sq ft
Manchester	Prime location on Water Street in central Manchester.	Detailed pre-application planning discussions ongoing with Council.	60,000 to 65,000 sq ft

The capital expenditure committed for the remainder of the financial year is approximately £2 million, which relates to the construction of Guildford.

The Group manages the construction and fit-out of its stores in-house, as we believe it provides both better control and quality, and we have an excellent record of building stores on time and within budget.

Investment property

The Group’s investment properties are carried at the half year at Directors’ valuation. They are valued externally by Cushman and Wakefield LLP (“C&W”) at the year end. The Directors’ valuations reflect the latest cash flows derived from each of the stores at the end of September. In performing the valuations, the Directors consider that the core assumptions underpinning the valuations including the stabilised occupancy assumptions used, rental growth, and discount rates used by C&W in the March 2016 valuations, are still appropriate at the September valuation date (see the Group’s annual report for the year ended 31 March 2016 for the full detail of the valuation methodology). In consultation with C&W, the Directors have retained the capitalisation rates at the March levels. A significant open market self storage transaction completed in October 2016, which supported this view on capitalisation rates.

At 30 September 2016 the total value of the Group’s properties is shown in the table below:

Analysis of property portfolio	Value at 30 September 2016 £m	Revaluation movement in the period £m
Investment property	1,139.8	32.2
Investment property under construction	34.1	(0.6)
Investment property total	1,173.9	31.6

The revaluation surplus for the open stores in the period was £32.2 million, as the growth in cash flows feed through to the valuation.

The initial yield on the portfolio before administration expenses and assuming no rental growth, is 6.7% rising to a stabilised yield of 7.2% (31 March 2016: 6.5% rising to 7.2%).

Surplus land

During the period the Group sold its remaining piece of surplus land for its book value of £0.3 million.

Capital Goods Scheme receivable

At 30 September 2016 we had a receivable of £8.0 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. To date, we have received payments under the Capital Goods Scheme of £7.2 million, receiving £1.6 million during the period and £1.3 million subsequent to the period end.

Net asset value

The adjusted net asset value is 594.1 pence per share (see note 14), up 4% from 569.1 pence per share at 31 March 2016. The table below reconciles the movement from 31 March 2016.

Movement in adjusted net asset value	Equity shareholders’ funds £m	EPRA adjusted NAV pence per share
1 April 2016	899.0	569.1
Adjusted profit before tax	27.0	17.0
Equity dividends paid	(20.0)	(12.6)
Revaluation movements (including share of associate)	31.9	20.1
Movement in purchaser’s cost adjustment	2.1	1.3
Other movements (eg share schemes)	1.2	(0.8)
30 September 2016	941.2	594.1

Armadillo Self Storage

The Group has a 20% investment in Armadillo Storage Holding Company Limited and a 20% investment in Armadillo Storage Holding Company 2 Limited. In the consolidated accounts of Big Yellow Group PLC, our investments in the vehicles are treated as associates using the equity accounting method.

During the period, Armadillo acquired two stores from Lock and Leave, in Canterbury and West Molesey, with a combined capacity of 63,000 sq ft.

The occupancy of the portfolios is 536,000 sq ft, against a total capacity of 736,000 sq ft representing occupancy at 30 September 2016 of 72.8% (31 March 2016: 70.9%). The revenue of the portfolio increased by 16% to £5.2 million for the six months to 30 September 2016 (2015: £4.5 million), on a like-for-like basis, the increase was 4%.

The Armadillo Partnerships made a combined operating profit of £2.6 million in the period, of which Big Yellow’s share is £0.5 million. After net interest costs, the revaluation of investment properties, deferred tax on the revaluation surplus and interest rate derivatives, the profit for the period was £2.8 million, of which the Group’s share was £0.6 million.

Big Yellow has a five year management contract in place in each Partnership. For the period to 30 September 2016, the Group earned management fees of £0.4 million.

The Group’s share of the interim dividend declared for the period is £0.2 million, representing a 5.5% yield on our original equity investment for the six months.

James Gibson
Chief Executive Officer

21 November 2016

John Trotman
Chief Financial Officer