Big Yellow Group PLC
Annual Report and Accounts 2016

Risks and Uncertainties



Principal risks and uncertainties

The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.

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

Self storage market risk

There is a risk to the business that the self storage market does not grow in line with our projections, and that economic growth in the UK is below expectations, which could result in falling demand and a loss of income.

 

Mitigation

The UK economy is projected to grow at approximately 2% in 2016, and is now 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 six years. As the economy has recovered in the past few 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 new store openings within the sector have slowed to an average of 11 stores per year over the past six years, down from a peak of 34 per year in 2005-2009.

Our performance during the downturn was relatively resilient, although not immune. We believe that the resilience of our performance is due to a combination of factors including:

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a prime portfolio of freehold self storage properties;
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a focus on London and the South East and other large metropolitan cities, which have proved more resilient during the downturn and where the drivers in the self storage market are at their strongest and the barriers to competition are at their highest;
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the strength of operational and sales management;
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continuing innovation to deliver the highest levels of customer service;
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the UK’s leading self storage brand, with high public awareness and online strength; and
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strong cash flow generation and high operating margins, from a secure capital structure.

We have a large current storage customer base of approximately 50,000 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 like-for-like occupancy has increased by 3.5 percentage points in the year from 73.2% to 76.7%.

Property risk

There 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.

Given the recent acquisitions of sites in London, the risk to the Group from failure to obtain planning has increased from the prior year.

 

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. Our in-house development team and our professional advisers have significant experience in obtaining planning consents for self storage centres.

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 advisers and sub-contractors who have worked with us for many years to our Big Yellow specification. We carried out an external benchmarking of our construction costs and tendering programme in the year, which had satisfactory results.

Valuation risk

The 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 approximately 50,000 customers currently using our stores for a wide variety of reasons.

There is significant headroom on our loan to value banking covenants.

Treasury risk

The 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 11 years remaining. In the year, the Group drew down on a seven year £70 million loan from M&G Investments, which is 50% fixed and 50% floating. 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 45% of our total borrowings fixed, with the balance floating paying margin over LIBOR. At 31 March 2016 50% of the Group’s total borrowings were fixed or subject to interest rate derivatives. The Group’s interest cover ratio for the year to 31 March 2016 was 6.2 times, which has increased from 5.4 times in the prior year.

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. This sensitivity testing underpins the viability statement below.

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.

Credit risk

The 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. 81% of our current customers pay by direct debit; however of new customers moving into the business in the last year 83% 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 2016 our bad debt expense represented 0.08% of revenue in the year, a reduction from 0.15% in the prior year.

Taxation risk

The 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 advisers, 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 last 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.

Real Estate Investment Trust (“REIT”) risk

The Group is exposed to potential tax penalties or loss of its REIT status by failing to comply with the REIT legislation.

 

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.

Human resources risk

Our 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.

We were pleased to be ranked 80th in the Sunday Times Best 100 Companies to Work For survey in 2016.

Security risk

The 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.

Cyber risk

There have been a number of high profile cyber-attacks / data security breaches over the last 12 months and the Group considers the risks to the website and internal systems to have increased over the year.

This risk hasn’t increased any faster for the Group than anyone else; we consider that the threats in the entire digital landscape continue to increase. The results of any breach may result in reputational damage, or customer compensation, causing a loss of market share and income.

 

The Group receives specialist advice and consultancy in respect of cyber security and we have dedicated in-house monitoring and regular reviews of our security systems. We also limit the retention of customer data to the minimum requirement.

During the year we have continued to invest in digital security, implementing new intrusion detection systems as well as the replacement of existing systems such as firewalls. Policies and procedures are under regular review and benchmarked against industry best practice by our consultants. These policies also include defend, detect and response policies.

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 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.

GOING CONCERN

A review of the Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are shown in the balance sheet, cash flow statement and accompanying notes in the financial statements. Further information concerning the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk can be found in this Report and in the notes to the financial statements.

After reviewing Group and Company cash balances, borrowing facilities, forecast valuation movements and projected cash flows, the Directors believe that the Group and Company have adequate resources to continue operations for the foreseeable future. In reaching this conclusion the Directors have had regard to the Group’s operating plan and budget for the year ending 31 March 2017 and projections contained in the longer-term business plan which covers the period to March 2020. The Directors have considered carefully the Group’s trading performance and cash flows as a result of the uncertain global economic environment and the other principal risks to the Group’s performance and are satisfied with the Group’s positioning. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

VIABILITY STATEMENT

The Directors have assessed the Group’s viability over a four year period to March 2020. This is based on the Group’s long term strategic plan with the period selected to give greater certainty over the forecasting assumptions used.

In making their assessment, the Directors took account of the Group’s current financial position, including committed capital expenditure. The Directors also assessed the potential financial impact of the various risks and uncertainties set out in the report above on the Group’s cash flows, REIT compliance and financial covenants and the likely effectiveness of the mitigating options detailed. The Directors have assumed that funding for the business in the form of equity and bank and insurance debt will be available in all plausible market conditions.

Based on this assessment the Directors have a reasonable expectation that the Company and the Group will be able to continue in operating and meet all their liabilities as they fall due to March 2020.

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