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 basis
- Principal risks and uncertainties
- Corporate social responsibility
Approval
This report was approved by the Board of Directors on 18 May 2015 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 awareness of over seven times that of our nearest competitor (source: YouGov survey, May 2015). 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 hence business 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 16 years we have created a portfolio of 70 purpose built prime Big Yellow self storage centres, largely freehold and focussed on London, the South East and large metropolitan cities. 61% of our current store revenue derives from within the M25; for London and the South East, the proportion of current store revenue is 80%. The REVPAF performance of our stores in London was 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 41,000 sq ft (source: The Self Storage Association 2015 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 key objectives remain:
- >
- leveraging our market leading brand position to generate new prospects, principally from our online mobile and desktop platforms;
- >
- focusing on training, selling skills, and customer satisfaction to maximise prospect conversion and referrals;
- >
- growing occupancy and net rent so as to drive revenue optimally at each store;
- >
- maintaining a focus on cost control, so revenue growth is transmitted through to earnings growth;
- >
- maintaining a conservative capital structure in the business with Group pre-interest cash flow cover of a minimum of five times annual interest expense; and
- >
- producing sustainable returns for shareholders through a low leverage, low volatility, high distribution REIT.
In the fifteen years since flotation in May 2000, Big Yellow has delivered a Total Shareholder Return (“TSR”), including dividends reinvested, of 15.2% per annum, in aggregate 740% at the closing price of 647.5p on 31 March 2015. This compares to 7.8% per annum for the FTSE Real Estate Index and 4.8% 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 |
|
|
| Our competitive advantage |
|
|
| Evergreen income streams |
|
|
| Strong growth opportunities |
|
|
| Conversion into quality earnings |
|
The self storage market
In the recently published 2015 Self Storage Association UK Survey, only 45% of those surveyed had a reasonable or good awareness of self storage, in line with findings from our own research. Furthermore, only 6% of the 2,151 adults surveyed were currently using self storage or 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 very few new openings last year and indeed capacity is expected to fall in the next twelve months with the closures of stores for redevelopment into alternative uses. Between 2010 and 2014 average industry openings have been approximately nine per year, which compares to an average of 34 per year in the preceding four years.
78% of respondents to the survey expected an improvement in profits this year, compared to 79% last year, and 84% expect rents for new customers to rise in 2015 compared to 87% last year.
The Self Storage Association (“SSA”) estimate that the UK industry is made up of approximately 1,022 self storage facilities (of which 159 are purely container operations), providing 35.7 million sq ft of self storage space, equating to 0.56 sq ft per person in the UK. This compares to 7.3 sq ft per person in the US, 1.6 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: Self Storage Association 2015 UK Annual Survey). 346 self storage facilities in the UK are held by large operators (defined as those managing 10 facilities or more) which represents 40% of the total number of self storage centres, but we would estimate approximately 50 to 60% 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.
Big Yellow is well placed to benefit from the growing self storage market, given the strength of our brand, and online platform which delivers approximately 86% of our prospect enquiries. Our portfolio is strategically focussed on London, the South East and large metropolitan cities, where barriers to entry and economic activity are at their highest.
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 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 and grew by 6.1% in the year to 31 March 2014.
It has decreased this year by 3.5%, principally reflecting the acquisition of the Big Yellow Limited Partnership stores at a lower average net rent per sq ft, being a regional portfolio. On a like for like basis, net rent has grown by 2.4% this year. 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 15% over the past five years, and compound dividend growth of 24% over the same period. Compound adjusted eps growth since 2004/5 is 17%. We have illustrated the Group’s performance in these measures over the past five years on page 15.
Capital structure
In November 2013, 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 LTV 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 LTV 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 LTV is 20% to 30% with a target of mid 20s from the current level of 27%. Given the subjective nature of valuations we prefer to express this target as net operating income over debt costs.
80%
of revenue from London and the South East
15.2%
per annum TSR since floatation
17%
compound EPS growth since 2004/2005