Big Yellow Group PLC
Annual Report and Accounts 2018

Financial Review

Delivering Results

Financial results
Revenue

Total revenue for the year was £116.7 million, an increase of £7.6 million (7%) from £109.1 million in the prior year. Like-for-like revenue for the year was £114.7 million, an increase of 7% from the prior year (2017: £107.3 million), principally driven by an increase in the average occupancy of the Group’s stores. Like-for-like revenue excludes Nine Elms and Twickenham 2, which were acquired in April 2016 and Guildford Central, which opened in March 2018.

Other sales (included within the above), comprising the selling of packing materials, insurance and storage related charges, represented 16.9% of storage income for the year (2017: 16.6%) and generated revenue of £16.5 million for the year, up 9% from £15.2 million in 2017.

The other revenue earned by the Group is management fee income from the Armadillo Partnerships, and tenant income on sites where we have not started development.

Operating costs

Cost of sales is principally comprised 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.

The breakdown of the portfolio’s operating costs compared to the prior year is shown in the table below:

Category Year ended 31 March 2018 £000 Year ended 31 March 2017 £000 % change % of store operating costs in 2018
Cost of sales (insurance and packing materials) 2,663 2,391 11% 8%
Staff costs 8,740 8,572 2% 26%
General & Admin 1,187 1,196 (1%) 4%
Utilities 1,447 1,470 (2%) 4%
Property rates 10,438 10,044 4% 32%
Marketing 4,656 4,152 12% 14%
Repairs / Maintenance 2,595 2,539 2% 8%
Insurance 921 893 3% 3%
Computer costs 494 443 12% 1%
Irrecoverable VAT 18 17 6% 0%
Total per portfolio summary 33,159 31,717 5%  

Operating costs per the portfolio summary have increased by £1.4 million (5%), £0.5 million of which relates to our continued investment in marketing to maintain the Group’s online market share and enquiry levels. Following the 2017 rating review, we calculated in May 2017 that the impact on the Group’s rates bill for the year ending 31 March 2018 would be an increase of 9% (£0.9 million). The actual increase for the year at 4% is lower as a result of rates rebates received at two of our stores in respect of the previous rating period to March 2017.

The cost of insurance and packing materials varies with sales and has increased by 11%, 9% of which is the increase in sales volume, with the balance due to an increase in IPT, and some cost inflation. Our investment in LED lighting has contributed to a reduction in our utility expenditure. The other increases in store operating costs are inflationary.

The table below reconciles store operating costs per the portfolio summary to cost of sales in the income statement:

  Year ended
31 March 2018
£000		 Year ended
31 March 2017
£000
Direct store operating costs per portfolio summary (excluding rent) 33,159 31,717
Rent included in cost of sales (total rent payable is included in portfolio summary) 1,109 1,196
Depreciation charged to cost of sales 439 489
Prior year VAT recovery – (278)
Head office and other operational management costs charged to cost of sales 967 951
Cost of sales per income statement 35,674 34,075

Store EBITDA

Store EBITDA for the year was £79.5 million, an increase of £6.0 million (8%) from £73.5 million for the year ended 31 March 2017 (see Portfolio Summary). The overall EBITDA margin for all Big Yellow stores during the year was 69.3%, an improvement from 68.5% last year.

Administrative expenses

Administrative expenses in the income statement have increased by £0.4 million compared to the prior year. The prior year administrative expenses contained non-recurring costs of £0.2 million (the write-off of the Group’s acquisition costs for the purchase of Lock and Leave in part offset by prior year VAT recovery), hence the like-for-like increase is £0.6 million. £0.4 million of this increase relates to an increase in the share based payments charge and an increase in national insurance contributions on the vesting of share options (following the increase in the Company’s share price). The remaining difference is due principally to an increased investment in IT and other inflationary increases. Of our total £10.1 million administrative expense for the year, £2.5 million relates to the non-cash share based payments charge.

Interest expense on bank borrowings

The gross bank interest expense for the year was £9.8 million, a reduction of £1.1 million from the prior year. This reflects the Group’s lower average cost of debt for the year, following an amendment to the bank loan to change the term debt to variable debt at a lower margin, coupled with the cancellation of an interest rate derivative over half of the M&G loan, which was extended during the year, and its subsequent re-hedging at a lower cost. The lower average cost was in part offset by slightly higher average debt levels. The average cost of borrowing during the year was 2.9% compared to 3.3% in the prior year.

Capitalised interest increased by £0.2 million from the prior year. The interest capitalised in the year is on our Guildford Central store and the Wandsworth extension. In the prior year interest was only capitalised on these developments in the final quarter.

Total finance costs in the income statement increased to £12.0 million from £11.8 million in the prior year, despite the reduction in interest payable, with refinancing costs incurred in the year of £1.5 million (see Borrowings section on page 33).

Profit before tax

The Group made a profit before tax in the year of £134.1 million, compared to a profit of £99.8 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 £61.4 million, up 12% from £54.6 million in 2017.

Profit before tax analysis 2018
£m		 2017
£m
Profit before tax 134.1 99.8
Gain on revaluation of investment properties (71.6) (43.7)
Movement in fair value on interest rate derivatives (1.3) (0.7)
Acquisition costs written off – 0.3
Prior year VAT recovery – (0.3)
Gain on part disposal of investment property (0.6) –
Refinancing costs 1.5 –
Share of non-recurring gains and losses in associates (0.7) (0.8)
Adjusted profit before tax 61.4 54.6

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 2017 54.6
Increase in gross profit 6.2
Decrease in net interest payable 1.0
Increase in administrative expenses (0.6)
Increase in capitalised interest 0.2
Adjusted profit before tax – year ended 31 March 2018 61.4

The share of adjusted profit in the associates was in line with the prior year. The Group’s share of adjusted profit before tax of the associates was up £0.2 million, however there was an increase in the current tax charge as tax losses have now been fully utilised.

Basic earnings per share for the year was 85.0p (2017: 63.6p) and fully diluted earnings per share was 84.4p (2017: 63.1p). Diluted EPRA earnings per share based on adjusted profit after tax was up 12% to 38.5p (2017: 34.5p) (see note 12). EPRA earnings per share equates to the Company’s adjusted earnings per share in the current year.

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 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. Revaluation gains on developments and our existing open stores will be exempt from corporation tax on chargeable 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 on compliance with these criteria is issued to the Executive. To date, the Group has complied with all REIT regulations, including forward looking tests.

Taxation

There is a tax charge in the current year of £0.6 million. This compares to a charge in the prior year of £0.3 million. The current year tax charge reflects an increase in profits in our residual business, in part offset by deductions allowed for tax purposes from the exercise of share options.

Dividends

The Board is recommending the payment of a final dividend of 15.5 pence per share in addition to the interim dividend of 15.3 pence, giving a total dividend for the year of 30.8 pence, an increase of 12% from the prior year.

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 27.5 pence per share is payable (31 March 2017: 24.0 pence). The balance of the total annual dividend represents an ordinary dividend declared at the discretion of the Board, in line with our policy to distribute 80% of our adjusted earnings per share in each reporting period. The PID for the year to 31 March 2018 accounts for 89% of the total dividend, up from 87% in the prior year.

The table below summarises the declared dividend for the year:

Dividend (pence per share) 31 March
2018		 31 March
2017
Interim dividend – PID 15.3p 13.5p
  – discretionary nil p nil p
  – total 15.3p 13.5p
Final dividend – PID 12.2p 10.5p
  – discretionary 3.3p 3.6p
  – total 15.5p 14.1p
Total dividend – PID 27.5p 24.0p
  – discretionary 3.3p 3.6p
  – total 30.8p 27.6p

Subject to approval by shareholders at the Annual General Meeting to be held on 19 July 2018, the final dividend will be paid on 27 July 2018. The ex-div date is 21 June 2018 and the record date is 22 June 2018.

Cash flow growth

The Group is strongly cash generative and draws down from its longer term committed facilities as required to meet its obligations. The Group’s cash flow from operating activities for the year was £63.0 million, an increase of 13% from £56.0 million in the prior year.

  Year ended
31 March 2018
£000		 Year ended
31 March 2017
£000
Cash generated from operations 73,457 67,209
Net finance costs (9,711) (10,964)
Tax (769) (271)
Cash flow from
operating activities
62,977
55,974
Capital expenditure (41,959) (20,577)
Asset sales 650 300
Receipt from Capital Goods Scheme 2,786 2,917
Investment in associate (900) –
Dividends received from associates 446 396
Cash flow after investing
activities
24,000
39,010
Ordinary dividends (46,183) (41,158)
Issue of share capital 969 286
Finance lease payments (1,109) (1,196)
Payment to cancel interest rate
derivatives		 (3,374) –
Increase/(decrease) in borrowings 25,644 (7,243)
Net cash outflow (53) (10,301)
Opening cash and cash equivalents 6,906 17,207
Closing cash and cash equivalents 6,853 6,906
Closing debt (330,599) (304,955)
Closing net debt (323,746) (298,049)

In the year capital expenditure outflows were £42.0 million, up from £20.6 million in the prior year. The capital expenditure during the year principally relates to the acquisition of sites in Wapping, Bracknell and Slough, coupled with construction costs on Guildford Central and the extension to our existing Wandsworth store.

The cash flow after investing activities was a net inflow of £24.0 million in the year, down from an inflow of £39.0 million in 2017, with the growth in operating cash flow being more than offset by the increased investment in capital expenditure.

Balance sheet
Property

The Group’s 74 stores and seven stores under development owned at 31 March 2018, which are classified as investment properties, have been valued individually by Cushman & Wakefield (“C&W”) and this has resulted in an investment property asset value of £1,303.3 million, comprising £1,201.8 million (92%) for the 67 freehold (including three long leaseholds) open stores, £43.3 million (3%) for the seven short leasehold open stores and £58.2 million (5%) for the seven freehold investment properties under construction.

Analysis of property portfolio Value at
31 March 2018		 Revaluation
movement in year
Investment property £1,245.1m £72.9m
Investment property
under construction
£58.2m
(£1.3m)
Total £1,303.3m £71.6m

Investment property

The valuations in the current year have grown from the prior year, with a revaluation surplus of £72.9 million arising on the open Big Yellow stores (see note 15 for the detailed valuation methodology). Of this increase 69% is due to an improvement in the cap rate used in the valuations. The average exit capitalisation rate used in the valuations was 6.3% in the current year, compared to 6.6% in the prior year, with the discount rate adopted also reducing from 9.7% to 9.4%. The remaining 31% of the increase in value is due to the growth in cash flow from the assets and changes to the operating assumptions adopted in the valuations.

The valuation is based on an average occupancy over the 10 year cash flow period of 83.1% across the whole portfolio.

  Mature
Leasehold 		Mature
Freehold		 Established
Freehold		 Developing
Freehold		 Total
Number of stores 7 60 4 3 74
MLA capacity (sq ft) 420,000 3,737,000 271,000 178,000 4,606,000
Valuation at 31 March 2018 £43.3m £1,080.8m £82.9m £38.1m £1,245.1m
Value per sq ft £103 £289 £306 £214 £270
Occupancy at 31 March 2018 83.8% 82.0% 82.3% 50.6% 81.0%
Stabilised occupancy assumed 84.9% 83.3% 85.4% 85.0% 83.6%
Net initial yield pre-admin expenses 12.9% 6.4% 5.9% 3.5% 6.5%
Stabilised yield assuming no rental growth 13.2% 6.7% 6.4% 8.5% 6.9%

The initial yield pre-administration expenses assuming no rental growth is 6.5% (2017: 6.5%) rising to a stabilised yield of 6.9% (2017: 7.2%). The stores are assumed to grow to stabilised occupancy in 16 months on average. note 15 contains more detail on the assumptions underpinning the valuations.

As referred to in note 15 C&W observe that there is less transaction activity in the prime self storage market compared to other property markets, although there has been some activity for secondary assets. The capitalisation rates are therefore subject to higher levels of uncertainty than for other property sectors.

C&W’s valuation report further confirms that the properties have been valued individually but that if the portfolio were to be sold as a single lot or in selected groups of properties, the total value could differ significantly. C&W state that in current market conditions they are of the view that there could be a material portfolio premium.

Investment property under construction

The investment property under construction valuation has increased by £22.0 million in the year. Capital expenditure accounts for £33.0 million of this increase, notably on Bracknell, Slough, Wapping and Hove. This has been partly offset by Guildford Central transferring to open stores and a revaluation deficit of £1.3 million, where our projected construction costs have increased due to a change in the planned schemes on a couple of sites which are subject to planning.

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 15 for further details) to be used in the calculation of our adjusted diluted net asset value. This Red Book valuation on the basis of the special assumption of 2.75% purchaser’s costs, results in a higher property valuation at 31 March 2018 of £1,380.3 million (£77.0 million higher than the value recorded in the financial statements). With the share of uplift on the revaluation of the Armadillo stores (£0.7 million), this translates to 48.8 pence per share.

This revised valuation translates into an adjusted net asset value per share of 665.0 pence (2017: 607.6 pence) after the dilutive effect of outstanding share options.

Receivables

At 31 March 2018 we have a receivable of £4.3 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 receivable relates to VAT to be recovered on historic store development expenditure.

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 £0.2 million of the discount being unwound through interest receivable in the period. The gross value of the debtor before discounting is £4.6 million.

The Group received has received £11.3 million to date under the Scheme, of which £2.8 million was received in the year.

Net asset value

The adjusted net asset value is 665.0 pence per share (see note 13), up 9% from 607.6 pence per share at 31 March 2017. The table below reconciles the movement from 31 March 2017:

Movement in adjusted net asset value £m EPRA
adjusted
NAV pence
per share
1 April 2017 963.4 607.6
Adjusted profit after tax 60.8 38.4
Equity dividends paid (46.2) (29.1)
Cancellation of interest rate derivative (3.4) (2.1)
Revaluation movements
(including share of associate)		 72.4 45.6
Movement in purchaser’s cost adjustment 9.2 5.8
Other movements (e.g. share schemes) 2.9 (1.2)
31 March 2018 1,059.1 665.0

Borrowings

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.

During the year, the Group further reduced its average cost of debt, whilst increasing the available facilities and extending the average term of its debt.

The Group extended its £70 million loan with M&G by a year, pushing its expiry out to June 2023. All other terms and conditions of the loan remained the same, hence it was not a material modification of the loan under IAS 39. At the same time, the Group cancelled the existing interest rate derivative that was in place over half of the M&G loan (2.64% expiring in June 2022) at a cost of £3.4 million and replaced it with a new derivative until June 2023 at a pre-margin rate of 0.76%.

The Group also amended the terms of its existing £190 million bank facility, which was treated as an extinguishment of the loan under IAS 39. The £85 million term loan, which attracted a margin of 150bps, was converted to revolving loan at a lower margin of 125 bps. The term of the loan was extended to October 2022 with an option in place to extend the loan by a further two years. The Group also has an option to increase the amount of revolving loan by a further £80 million during the course of the loan’s term. The Group exercised its option over £20 million of this debt in March 2018, resulting in the overall bank facility being £210 million at the balance sheet date.

The refinancing costs of £1.5 million shown in the income statement relate to the unamortised loan arrangement costs of the previous bank facility, and the write-off of the costs of the new bank facility in accordance with IAS 39.

The table below summarises the Group’s debt facilities at 31 March 2018. The average cost of debt has reduced to 2.9% from 3.2% at 31 March 2017:

Debt Expiry Facility Drawn Average cost
Aviva Loan April 2027 £87.6 million £87.6 million 4.9%
M&G loan June 2023 £70 million £70 million 2.8%
Bank loan (Lloyds & HSBC) October 2022 £210 million £173 million 1.8%
Total Average term 5.5 years £367.6 million £330.6 million 2.9%

The Group was comfortably in compliance with its banking covenants at 31 March 2018. For the year we had Group interest cover of 7.6 times (2017: 6.1 times) based on pre-interest operating cash flow against interest paid. The net debt to gross property assets ratio is 25% (2017: 25%) and the net debt to adjusted net assets ratio (see net asset value section above) is 31% (2017: 31%).

At 31 March 2018, the fair value on the Group’s interest rate derivatives was an asset of £1.7 million. The Group does not hedge account its interest rate derivatives. As recommended by EPRA, the fair value movements are eliminated from adjusted profit before tax, diluted EPRA earnings per share, and adjusted net assets per share.

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 £15.9 million at 31 March 2018 (2017: £15.8 million), consisting of 158,570,574 ordinary shares of 10p each (2017: 157,882,867 shares). 0.7 million shares were issued for the exercise of options during the year at an average exercise price of 725p (2017: 0.5 million shares at an average price of 738p).

The Group holds 1.1 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.

  2018
No.		 2017
No.
Opening shares 157,882,867 157,369,287
Shares issued for the exercise of options 687,707 513,580
Closing shares in issue 158,570,574 157,882,867
Shares held in EBT (1,122,907) (1,122,907)
Closing shares for NAV purposes 157,447,667 156,759,960

77.4 million shares were traded in the market during the year ended 31 March 2018 (2017: 74.9 million). The average mid-market price of shares traded during the year was 801.5p with a high of 900p and a low of 722p.

Investment in Armadillo

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. In March 2018, Armadillo 2 raised £4.5 million of equity, which alongside additional debt from Lloyds, funded the acquisition of 1st Storage Centres. Big Yellow’s equity invested was £0.9 million (20% of the total raised), with the balance funded by our partners.

The occupancy of the Armadillo stores at 31 March 2018 was 73.9% (31 March 2017: 74.7%). The occupancy growth in the year was 161,000 sq ft, including 141,000 sq ft of occupancy acquired in the six store purchases made in the year. The net rent achieved at 31 March 2018 by the Armadillo stores is £16.97 per sq ft, an increase of 2.8% from the same time last year. Revenue increased by 22% to £12.8 million for the year to 31 March 2018 (2017: £10.5 million); the like-for-like increase in revenue was 10%.

The Armadillo Partnerships made a combined operating profit of £6.2 million in the year, of which Big Yellow’s share is £1.2 million. After net interest costs, the revaluation of investment properties (valued by Jones Lang LaSalle), deferred tax on the revaluation surplus and movement in interest rate derivatives, the profit for the year was £4.6 million, of which the Group’s share was £0.9 million.

Big Yellow has a five year management contract in place in each Partnership. For the year to 31 March 2018 the Group earned management fees of £1.0 million. The Group’s share of the declared dividend for the year is £0.4 million, representing a 12% yield on our original equity invested.

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