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Financial Results
Annualised revenue, the measure of store related revenue being billed (net of all discounts) at the end of the year, increased to £53.5 million, up from £49.6 million last year (excluding Leeds and Sheen), an increase of 8%. Revenue for the year was £56.9 million, up 11% from £51.2 million for 2007. Included in revenue in the prior year is a lease surrender premium received of £1.2 million, which was a one-off non-recurring item. The year on year revenue growth excluding this premium is 14%.
Other sales (included within the above), comprising the selling of packaging materials, insurance and storage related charges represented 17% of storage income for the year (2007: 16%) and generated revenue of £7.9 million for the year, up 22% from £6.5 million in 2007 (excluding Leeds and Sheen).
The EBITDA margin improved from 64% to 65% for the 32 stores open for more than two years, due to the growth in revenues with the increase in same store operating costs controlled at 2%.
The Group made a profit before tax in the year of £101.8 million, down from £152.8 million in the prior year. The main difference is due to the revaluation of the open store portfolio being £93.7 million against £138.3 million last 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 £13.3 million, down 6% from £14.2 million in 2007. This was principally caused by a higher interest cost in the year.
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| Profit before Tax Analysis |
2008
£m |
2007
£m |
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| Profit before tax |
101.8 |
152.8 |
| Gain on revaluation of investment properties |
(93.7) |
(138.3) |
| Movement in fair value on interest rate derivatives |
3.4 |
(0.7) |
| Loss on non-current assets |
0.5 |
1.1 |
| Tenant surrender premium |
- |
(1.2) |
| Non-recurring indirect tax costs |
0.3 |
- |
| REIT conversion costs |
0.2 |
0.5 |
| Establishment of Big Yellow LP |
0.6 |
- |
| Share of non-recurring costs in associate |
0.2 |
- |
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| Adjusted profit before tax |
13.3 |
14.2 |
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The basic earnings per share for the year was 89.20p (2007: 192.97p) and the fully diluted earnings per share was 88.53p (2007: 190.31p). The fall is due to the lower revaluation gains as described above and also because the prior year figure was inflated by the release of deferred taxation following the Group’s conversion to a REIT. Adjusted earnings per share based on adjusted profit after tax was 11.20p (2007: 10.01p) (see note 12).
Administration Expenses including the cost of construction management were higher at £6.7 million compared to £5.6 million in 2007. There were additional costs in 2008 relating to the establishment of Big Yellow Limited Partnership of £0.5 million (including irrecoverable VAT), coupled with additional head office staff and inflationary increases. We also incurred additional central marketing costs in the year of £0.4 million.
Interest Expense on Bank Borrowings for the year increased to £15.8 million up from £11.1 million in 2007 reflecting the increase in net borrowing over the period, coupled with the rise in interest rates. The average cost of borrowing during the year was 6.3% against 5.7% in the prior year. £1.2 million of the increase in the interest payments is due to the rise in interest rates and £3.5 million due to the increased average borrowings.
Finance costs have increased in the income statement from £12.8 million to £20.8 million because of the increase in interest as above, but also due to the £3.4 million negative fair value adjustment on the interest rate swaps at the year end.
The interest cost to the Group is increased by the £103 million development pipeline that the Group currently has, the interest against this cost has not been capitalised. If interest had been capitalised, the Group’s adjusted profit, would have been approximately £5 million higher for the year. From 1 April 2008, in accordance with changes to International Accounting Standards, we will capitalise interest against our development pipeline.
During the second half of the year, we have been paying our floating rate debt over 1 month LIBOR, rather than 3 month LIBOR which has been at elevated levels due to the illiquidity in the inter bank lending market.
The average cost of borrowing including margin at 31 March 2008 is set out below: |
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Amount
of debt
2008
£m |
Weighted
average
interest
cost
31 March
2008 |
Weighted
average
interest
cost
31 March
2007 |
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| Fixed rate debt (including callable swaps) |
140 |
6.1% |
6.0% |
| Variable rate debt (including £50 million collar) |
144 |
6.4% |
6.4% |
| Total debt |
284 |
6.2% |
6.3% |
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REIT Conversion
The Group converted to a Real Estate Investment Trust (“REIT”) on 15 January 2007. Since then we have benefited from a zero tax rate on our qualifying self storage earnings. We only pay tax on the profits attributable to our residual business, comprising primarily of the sale of packing materials and insurance, and fees earned from Big Yellow Limited Partnership and the franchise operation.
The cost of conversion was £12.0 million which was paid in July 2007. The charge is subject to final agreement with HMRC.
REIT status gives the Group exemption from UK corporation tax on profits and gains from its qualifying portfolio of UK stores. Future revaluation gains on these developments and our existing open stores will be exempt from corporation tax on capital 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 to the Board on compliance with these criteria is carried out. To date, the Group has complied with all REIT regulations, including forward looking tests.
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Taxation
The current year tax credit for the Group of £0.8 million arises principally from a deferred tax asset arising in respect of the negative fair value adjustment from our derivatives which relates to the residual business (2007: credit of £60.4 million, arising principally from the release of deferred tax net of the conversion charge).
The Group’s actual cash tax liability for the year is £0.1 million which relates to the conversion charge payable on the site acquired at New Cross by way of the purchase of a company. There is a tax loss of £0.3m arising in the residual business, mainly due to tax deductions in connection with share options exercised by employees. A deferred tax asset has been recognised on this loss.
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Dividends
The Group’s dividend policy is to pay a dividend based on 90% of our tax exempt recurring cash earnings, without further deduction for additional shadow capital allowances. At present our tax exempt business represents 88% of our business.
In the current year we are recommending a final dividend payment of 5.5p per share. Taken together with the interim dividend of 4p, this makes a full year declared dividend of 9.5p per share (2007: 9.0p), which represents a 6% increase. Of the proposed final dividend of 5.5p, 0.15p is the property income dividend (“PID”) element.
As a REIT the Group’s dividend will consist of two components; the PID from the REIT qualifying activities and a dividend distribution from our non-qualifying activities (non-PID). The aggregate of these two components will still be known as our total dividend. We are obliged to withhold tax from certain shareholders at a 20% rate from the PID element of the dividend. Our total dividend is therefore a gross dividend.
Subject to approval by shareholders at the Annual General Meeting to be held on 9 July 2008, the final dividend will be paid on 16 July 2008 to shareholders on the Register on 13 June 2008. |
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Big Yellow Limited Partnership
In November 2007 we established Big Yellow Limited Partnership with Pramerica Real Estate Investors Limited (“Pramerica”).
Structure
The Group is committing £25 million to the venture, and Pramerica £50 million, resulting in a one third, two thirds equity split. The Board of the Partnership comprises two representatives of both Pramerica and Big Yellow.
The Group sold five of its development sites and its existing store in Leeds to the Partnership for a cash payment of £20.3 million, which resulted in a surplus of £0.5 million arising in the Group. The Group has also entered into conditional contracts to sell two more of its development sites at Manchester and Birmingham to the Partnership. The total cost of these seven development sites in the Partnership is £55 million, providing an additional 435,000 sq ft of storage when opened.
In the case of Birmingham it is intended that Big Yellow will develop the store which will be transferred to the Partnership prior to completion at cost plus a small surplus.
In the case of Manchester, Big Yellow has previously entered into a conditional agreement with Crosby Homes (North West) Limited (‘Crosby’), for the development of a significant sized mixed use scheme to include the shell of an 80,000 sq ft self storage centre to be developed at the expense of Crosby. In the event that the conditions of that agreement are satisfied, then Big Yellow will fit out the store at its own cost and prior to its completion transfer the store to the Partnership at the then open market value.
To date the Group has reinvested £5.7 million into the Partnership.The balance of our £25 million committed equity will be contributed over the development life of the Partnership.
The Group earns certain property acquisition, planning, construction and operational fees from the Partnership. For the 4 month period to 31 March 2008, these fees amounted to £138,000.
Funding
A five year term development loan of £75 million has been secured from the Royal Bank of Scotland plc to further fund the Partnership. £15 million of this loan has now been syndicated to HSBC plc. The Partnership has decided to swap out all drawdown amounts through to 30 June 2013 as each drawdown takes place, so the loan will be 100% hedged. Interest is capitalised within the Partnership. The weighted average interest cost at 31 March 2008 was 6.65% including margin.
Results
In the consolidated accounts of Big Yellow Group PLC, the Partnership is treated as an associate. We have adopted equity accounting for the Partnership, so that our share of the Partnership’s results are disclosed in operating profit and our net investment is shown in the balance sheet within “Investment in associate”. We have provided in note 13e the balance sheet and income statement of the Partnership. During the four month period from its commencement of trading to 31 March 2008, the Partnership made a loss of £748,000, of which Big Yellow’s share was £249,000. After adjusting for non-recurring items, the Partnership made a recurring loss of £21,000, of which the Group’s share is £7,000.
The Partnership is tax transparent, so the Limited Partners are taxed on any profits.
Big Yellow has an option to purchase the assets contained within the Partnership, or the interest in the Partnership which it does not own, exercisable from the 31 March 2013. On exit whether by way of exercise of the options or a sale to a third party, Big Yellow is entitled to certain promotes, which would result in Big Yellow sharing in the surplus created in the partnership. |
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Balance Sheet
The Group’s 48 stores (including one store closed for redevelopment) at 31 March 2008, which are classified as investment properties, have been re-valued by Cushman & Wakefield (C&W) and this has resulted in a gross property asset value of £854.3 million, comprising £692.3 million (81%) for the 41 freehold (including one long leasehold) open stores, £58.6 million (7%) for the seven short leasehold open stores and £103.4 million (12%) for development properties. The properties held for development have not been externally valued and have been included in the balance sheet at historical cost less provision for impairment.
As in the prior year, we have instructed an alternative valuation on our assets using a purchaser’s cost assumption of 2.75% (see note 14 for further details) to be used in the calculation of our adjusted diluted net asset value. This Red Book valuation on the basis of 2.75% purchaser’s costs, results in a higher property valuation at 31 March 2008 of £784,550,000 (£33,640,000 higher than the value recorded in the financial statements or 28.4 pence per share).
The revised valuation translates into an adjusted net asset value per share of 520.2 pence (2007: 437.8 pence) after the dilutive effect of outstanding share options (see table below).
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| Analysis of Net Asset Value |
2008 |
2007 |
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| Basic net asset value (£m) |
580.1 |
488.0 |
| Exercise of share options (£m) |
2.7 |
3.3 |
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| Diluted net asset value (£m) |
582.8 |
491.3 |
| Adjustments: |
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| Deferred tax on fair value of interest rate swaps (£m) |
- |
(0.1) |
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| Balance sheet adjusted net asset value (£m) |
582.8 |
491.2 |
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| Basic net assets per share (pence) |
505.8 |
428.3 |
| Diluted net assets per share (pence) |
491.8 |
416.0 |
| Balance sheet adjusted net assets per share (pence) |
491.8 |
415.8 |
| Diluted shares used for calculation (million) |
118.5 |
118.1 |
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| Balance sheet adjusted net asset value (as above) (£m) |
582.8 |
491.2 |
| Valuation methodology assumption (see note 14) (£m) |
33.6 |
25.9 |
| Adjusted net asset value (£m) |
616.4 |
517.1 |
| Adjusted net assets per share (pence) |
520.2 |
437.8 |
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Valuation
The value of the investment property portfolio at 31 March 2008 was £750.9 million, up £160.8 million from £590.1 million at 31 March 2007. Of the £160.8 million movement £79.2 million is capital expenditure in the year and £93.7 million is the revaluation increase in the year, and the balance is the transfer of Leeds to Big Yellow Limited Partnership for £12.1 million.
The revaluation movement in the year comprises £56.7 million in respect of the six new stores opened in the year and £37.0 million in respect of the 42 stores open and valued at 31 March 2007.
The anticipated initial yield on the portfolio in the following year, as represented by net operating income at store level, is 4.21%, rising to 7.02% in the year following stabilisation of each store. The stabilised reversionary yield has increased from 6.80% at 31 March 2007 to 7.02% at 31 March 2008, largely as a result of the opening of six new stores in the year which has depressed the initial yield and increased the reversionary yield.
In common with other real estate groups, we have calculated the total return to our equity shareholders based on the increase in fully diluted net assets per share plus dividends paid in the year. As can be seen from the table below Big Yellow achieve total returns to shareholders of 21.0% (91.9 pence per share). |
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2008 |
2007 |
Movement |
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| NAV per share |
505.8p |
428.3p |
18% |
| Adjusted diluted NAV per share (see note 12) |
520.2p |
437.8p |
19% |
| Dividend paid per share |
9.5p |
6.5p |
46% |
| Total return per share |
91.9p |
147.3p |
(38)% |
| Total return |
21.0% |
49.6% |
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Financing and Treasury
The Group is strongly cash generative operationally and draws down from its longer term committed facilities as required to meet obligations.
A summary of the cash flow for the year is set out in the table below: |
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Year ended 31 March |
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2008
£'000 |
2007
£'000 |
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| Cash flow from operations |
30,752 |
30,198 |
| Finance costs (net) |
(16,364) |
(13,472) |
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| Free cash flow |
14,388 |
16,726 |
| Capital expenditure |
(110,886) |
(96,007) |
| Asset sales |
30,827 |
2,165 |
| Investment in associate |
(5,703) |
- |
| Ordinary dividends |
(10,860) |
(7,051) |
| REIT conversion charge paid |
(11,997) |
- |
| Issue of share capital |
876 |
38,377 |
| Purchase of own shares |
(1,084) |
- |
| Increase in borrowings |
94,000 |
33,707 |
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| Net cash outflow |
(439) |
(12,083) |
| Opening cash and cash equivalents |
2,110 |
14,193 |
| Closing cash and cash equivalents |
1,671 |
2,110 |
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The free cash flow reduced during the year, reflecting the increased bank borrowing costs incurred by the Group. |
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Borrowings
We focus on improving our cash flows and we currently have healthy interest cover of two times with a relatively conservative debt structure secured principally against the freehold estate. The Group was in compliance with its bank covenants at 31 March 2008, and we forecast to be in compliance with our banking covenants in the foreseeable future.
At the end of the year, the Group had net bank borrowings of £282.3 million, an increase of £94.4 million over last year following £116.5 million of capital expenditure, £16.4 million of net interest paid (including finance lease costs), the REIT conversion charge payment of £12.0 million, dividend payments of £10.9 million, net cash outflows from changes in share capital of £0.2 million, offset by operating cash flow of £30.8 million, and land disposal proceeds of £30.8 million.
The Group has a syndicated bank facility with the Royal Bank of Scotland, Bank of Ireland, Barclays and Lloyds TSB of £325 million. This facility is secured on a portfolio of 33 freehold and leasehold assets. Net debt at the end of March was £282.3 million, leaving £42.7 million of available facilities to fund expansion with significant balance sheet space given the low level of gearing. The Group currently has over £350 million of unsecured assets, and has a net debt to gross property assets ratio of 33%. The Group has a net debt to total equity ratio of 48.7%.
Treasury continues to be closely monitored and its policy approved by the Board. 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.
At 31 March 2008, the Group had total bank borrowings of £284 million of which 67% was hedged in the medium term. £190 million is hedged at maturities expiring between 2010 and 2012. £80 million of this relates to swaps fixed at 5.24% with a maturity of September 2012 which are callable quarterly by the counter-party bank. The Group’s syndicated debt facility expires in April 2010. We intend to discuss with our banks the extension of this facility during the current financial year.
The Group does not hedge account its interest rate derivatives. Therefore movements in the fair value are taken to the income statement, but as recommended by EPRA (European Public Real Estate Association), these are eliminated from adjusted profit before tax and adjusted earnings per share.
Cash deposits are only placed with approved financial institutions in accordance with the Group’s policy.
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Share Capital
The share capital of the Company totalled £11.6 million at 31 March 2008 (2007: £11.5 million), consisting of 115,514,119 ordinary shares of 10p each (2007: 114,559,534 shares).
Shares issued for the exercise of options during the period amounted to 954,585 at an average exercise price of 93p.
During the year the Group purchased 100,000 of its own shares for Treasury at an average price of 529.1 pence per share. 100,000 shares were also purchased in the year at an average price of 549.6 pence per share and were transferred into an Employee Benefit Trust (“EBT”). 615,000 shares were purchased in 2005 at an average price of 132p, and were subsequently transferred into the EBT. These shares are shown as a debit in reserves and are not included in calculating earnings and net asset value per share. |
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2008
No. |
2007
No. |
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| Opening shares |
114,559,534 |
102,752,607 |
| Shares issued by way of placing |
- |
9,100,000 |
| Shares issued for the exercise of options |
945,585 |
2,706,927 |
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| Closing shares in issue |
115,514,119 |
114,559,534 |
| Shares held in EBT and Treasury |
(815,000) |
(615,000) |
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| Closing shares for NAV purposes |
114,699,119 |
113,944,534 |
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201,144,905 shares were traded in the market during the year ended 31 March 2008 (2007: 144,998,398). The average mid market price of shares traded during the year was 496p with a high of 684p and a low of 355p.
At 31 March 2008 there were 2,091,705 shares subject to share option awards to employees of the Group at an average strike price of 106p. In addition there are 1,559,914 nil paid options, granted under the Group’s LTIP scheme and 157,919 share options granted under the Group’s SAYE scheme at an average strike price of 294p.
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