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The Board of Big Yellow Group PLC, the UK’s leading self storage brand, is pleased to announce results for the six months and for the second quarter ended 30 September 2008.
Financial Results
Revenue for the period was £30.1 million, up 5% from the £28.6 million achieved in the comparable period last year. Revenue for the second quarter of £15.6 million was 3% up on the £15.1 million reported for the quarter to 30 September 2007 and an increase of 8% on the quarter to 30 June 2008.
After adjusting for the loss on the revaluation of investment properties and other matters shown in the table below, the Group made an adjusted profit before tax in the period of £6.9 million, down 12% from £7.8 million for the same period last year. The reduction was entirely due to an increase in the interest charge of £1.8 million in the period. This increase in the interest charge was due to a combination of increased debt that has been drawn down to fund the acquisition and development of new sites, and higher interest rates. Group EBITDA pre-non recurring items and valuation movements was £15.5 million, up 7% from the same period last year.
£130 million of the Group’s debt was fixed over the medium term at the period end. Recent reductions in monthly LIBOR will result in materially lower interest charges going forward, and indeed since the period end, we have fixed £70 million of our floating rate debt at 3.93% plus margin to September 2013, a significant reduction on recent costs.
As a result of a write down of £60.6 million in the value of our property assets, the group made a pre-tax loss of £54.3 million. |
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| (Loss)/profit before tax analysis |
Six months
to 30 Sept
2008
£m |
|
Six months
to 30 Sept
2007
Restated*
£m |
Year ended
31 March
2008
Restated*
£m |
 |
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| (Loss)/profit before tax |
(54.3) |
|
46.8 |
102.6 |
Adjusted for:
Loss/(gain) on revaluation of investment properties |
53.4 |
|
(39.8) |
(92.8) |
| Change in fair value of interest rate derivatives |
(1.4) |
|
0.4 |
3.4 |
| Losses/(gains) on non-current assets |
7.2 |
|
(0.1) |
0.5 |
| REIT conversion costs |
- |
|
0.2 |
0.2 |
| Non-recurring indirect tax costs |
- |
|
0.3 |
0.3 |
| Non-recurring costs in associate |
0.6 |
|
- |
0.2 |
| Set up costs for Big Yellow Limited Partnership |
- |
|
- |
0.6 |
| Loan refinancing costs |
1.4 |
|
- |
- |
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| Adjusted profit before tax |
6.9 |
|
7.8 |
15.0 |
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| * |
The results of the Group have been restated to account for the change in accounting policy in respect of interest capitalisation under IAS 23 Borrowing Costs. Please see note 1 for further details. |
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Dividends
REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. On the basis of the full year forecasted distributable reserves for PID purposes, no PID is payable due to the level of shadow capital allowances available to the Group (30 September 2007 – PID of nil pence per share).
Our recently opened stores in London have performed well over the past year and we therefore believe that it is the right strategy to continue to grow the portfolio. Given the current economic environment the Board considers that at least for this year it is more prudent to build out stores at the appropriate moment from the Group’s free cash flow and surplus land sales, so as to conserve the Group’s available debt facilities. In effect we are looking to turn dilutive land into accretive Big Yellow stores so as to improve earnings and hence dividends in the future. With this in mind the Board has decided to suspend the discretionary interim ordinary dividend (30 September 2007 – interim ordinary dividend of 4.0 pence per share). |
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Stores and the Market
We have included, as usual, a table summarising the trading performance of all our stores over the year.
During the period we opened a store in Kennington, with a further store opening in Sheffield Hillsborough (within Big Yellow Limited Partnership) in October 2008. We are intending to open a further four stores in the remainder of the financial year, in Sheen and Bromley within the wholly owned Group, and Liverpool and Birmingham within Big Yellow Limited Partnership.
At the period end occupied space was 1,807,000 sq ft, down 4% from 1,888,000 sq ft at the same time last year. The portfolio of 32 same stores (with an average net lettable area of 60,750 sq ft) was 76% occupied at the end of the period, with an average occupancy during the period of 78%, down from 84% for the same period last year. In the seven weeks following the period end, during which we typically see a seasonal net reduction in occupancy, we have lost 20,500 sq ft (1% of occupancy). This compares to a loss in the same period in 2007 of 64,000 sq ft (3% of occupancy) and a loss of 18,000 sq ft in 2006 (1% of occupancy).
Same store revenue for these 32 stores decreased 1% compared to the same period last year, the occupancy loss being largely offset by yield improvement. In May 2008 we put through an annual storage rent increase of 6% on average across the whole store portfolio. Net revenue per square foot on the same store portfolio was £26.53 for the period, an increase of 7.5% from the prior period of £24.68. The balance of the improvement after rate increases was operational yield improvement.
In addition, the 32 stores achieved EBITDA margins of 65% and after an allocation of central overhead, net operating income margins of 59%. Both of these measures increased by 2 percentage points from the same period last year. Despite the small revenue reduction in the same store portfolio we have increased profitability in these stores through cost savings; EBITDA was up 3% to £15.2m.
The domestic customer base is fairly broad and whilst customers within the owner occupied segment have suffered, we have seen a significant increase in customers within the rental sector, who now comprise approximately 30% of the move-ins to our stores. Our business customers, who represent 18% of our customers and 30% of occupied space, typically occupying larger rooms, and have remained relatively resilient, benefiting from the flexibility and convenience of self storage in these uncertain times.
Total packing materials, insurance and other sales were £4.1 million in the period (2007: £4.1 million).
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 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. Furthermore, Big Yellow has a significant development pipeline of self storage assets within the REIT ringfence and any development profits arising on these assets will generally be tax free.
There is no cash tax payable for the period. The tax charge for the period ended 30 September 2008 is £546,000 (2007: £327,000). This charge arises due to the write off of deferred tax assets relating to deductions for share options, losses and interest rates swaps within the residual business. |
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Valuation and Net Asset Value
At 30 September 2008 the total value of the Group’s wholly owned properties was £813.3 million (2007: £789.3 million), comprising £717.7 million for the 48 storage centres which were open at the period end (and one store which has been closed for redevelopment), £83.6 million for sites held for development and £12.0 million of surplus land held for sale.
The Group’s investment properties have been valued by Cushman and Wakefield (C&W). The properties held for development and sale are held at historical cost (less provision for impairment) and have not been externally valued. The Directors have assessed the carrying value of these sites and have made a provision in the period of £7.2 million against them. Of this £4.4 million has been provided for against land which we are intending to sell, and £2.8 million against sites which are held for development. The latter are specifically sites where we are unsure about the outcome of planning. If we are successful in obtaining planning then it is possible that the impairment charge may be reversed. This leaves a residual value of £27.7m of sites for sale at the period end, of which £8.1m has been sold or is contracted and £8.6m is under offer.
The valuation translates into an adjusted net asset value of 465.9 pence per share (see note 14), down 1% from 472.4 pence per share last year and 10.5% from 520.8 pence per share at 31 March 2008.
The value of the investment property portfolio at 30 September 2008 was £717.7 million (2007: £649.4 million), down £33.2 million from £750.9 million at 31 March 2008.
The decrease in valuation of the same store portfolio is £59.5 million, representing a 7.9% total decrease, of which we estimate 8.0% is a function of capital reduction offset by a small improvement of 0.1% due to operational performance. Capital expenditure on existing stores was £5.8 million, this includes our store at Sheen which is currently being redeveloped. The balance of £20.5 million is the valuation of our Kennington store which opened in May, comprising capital expenditure of £14.4 million and a revaluation uplift of £6.1 million.
The net yield on the portfolio based on the net operating income at store level in the first year after the projected stabilisation of each store is 7.58% (March 2008: 7.02 %; September 2007: 6.75%). These yields are taken after an allocation for central overhead. As a comparison with conventional property yields, the commensurate yield pre overhead allocation is 8.25%.
Whilst we recognise that yields on real estate assets have increased significantly, we are sceptical that assets of this high quality in this sub-sector, where there is a scarcity of prime product, could be acquired at these levels. We estimate that there are approximately 110 self storage assets of this quality in the UK of which we own or part own 50. The remainder are owned by multi site competitors, who we doubt are sellers of their assets, in line with ourselves.
In their report to us, our valuers, Cushman and Wakefield, have drawn attention to valuation uncertainty resulting from exceptional volatility in the financial markets and a lack of transactions in the property investment market. Please see note 15 for further details. |
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Analysis of Net Asset Value |
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As at
30 Sept
2008
£m |
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As at
30 Sept
2007
Restated
£m |
As at
31 March
2008
Restated
£m |
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| Basic net asset value |
519.9 |
|
528.0 |
580.9 |
| Exercise of share options |
2.6 |
|
3.0 |
2.7 |
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| Diluted net asset value |
522.5 |
|
531.0 |
583.6 |
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| Diluted net assets per share (pence) |
439.4 |
|
448.1 |
492.4 |
| Diluted shares used for calculation (million) |
118.9 |
|
118.5 |
118.5 |
| Diluted net asset value (as above) (£m) |
522.5 |
|
531.0 |
583.6 |
| Valuation methodology assumption (see note 14) (£m) |
31.5 |
|
28.7 |
33.6 |
| Adjusted net asset value (£m) |
554.0 |
|
559.7 |
617.2 |
| Adjusted net assets per share (pence) |
465.9 |
|
472.4 |
520.8 |
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Property and Construction
We have acquired one site during the first half of the year, in Stockport within Big Yellow Limited Partnership.
There are now 21 sites in the pipeline which, when fully developed, will represent an additional 1.4 million square feet and when open will provide the Group with a total of 71 stores and 4.5 million square feet. We have planning permission on 15 of the 21 pipeline sites and are in negotiations on 5, with one under appeal. 55% of our total stores and sites are located within the M25 and 64 (over 90% by value) are freehold or long leasehold. A further four stores, in Sheen and Bromley (wholly owned), and Liverpool and Birmingham (within Big Yellow Limited Partnership) are expected to open in this financial year.
We are seeing reductions in construction tender prices as a result of falling commodity prices in an increasingly competitive construction sector.
Supply of appropriate land has always been restricted in our preferred geographical areas and that remains the case. We do however expect to see further opportunities as distress spills out into the wider economy and we anticipate seeing more opportunities in the next 12 months or so.
Big Yellow Limited Partnership
In November 2007, the Group established Big Yellow Limited Partnership with Pramerica Real Estate Investors Limited to develop self storage centres in the Midlands, the North and Scotland. Big Yellow has committed £25 million to the venture, and Pramerica £50 million, resulting in a one third, two thirds equity split. A five year term development loan of £75 million has been secured from the Royal Bank of Scotland plc, HSH Nordbank AG and HSBC Bank plc to further fund the Partnership.
During the period, the Group sold four development sites to the Partnership. These development sites are in Camberley, High Wycombe, Poole and Reading and will provide additional self storage space for the Partnership of 235,000 sq ft. In addition to these sites, the Group agreed that the next seven sites acquired by the Partnership can include sites outside the M25 as well as the area of the Midlands and the North. Thereafter, any additional sites in the Partnership will only be in the Midlands and the North.
The Partnership made an operating profit of £80,000 in the period, of which Big Yellow’s share is £26,000. After revaluation of investment properties and interest rate derivatives, the loss for the period for the Partnership was £1.9 million, of which Big Yellow’s share was £0.6 million.
Big Yellow has the option to buy the assets or Pramerica’s share of the equity in the Partnership, exercisable from 31 March 2013.
For clarity we have included a table below showing the split of stores and development sites between the Group and the Partnership.
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Big Yellow
(wholly owned) |
Big Yellow
Limited
Partnership |
Total |
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| At 17 November 2008 |
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| No of stores trading |
48 |
2 |
50 |
| No of stores under development * |
10 |
11 |
21 |
| Total number of stores and sites |
58 |
13 |
71 |
| Development sites with planning consent |
7 |
8 |
15 |
| Open store capacity (sq ft) |
3,017,000 |
132,000 |
3,149,000 |
| Development site capacity (sq ft) |
703,000 |
670,000 |
1,373,000 |
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| Total planned capacity (sq ft) |
3,720,000 |
802,000 |
4,522,000 |
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| * |
Includes sites with conditional sale agreements to Big Yellow Limited Partnership from the Group. |
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Financing and Treasury
We were pleased to announce in September the completion of the refinancing of the Group’s core debt facility. The new £325 million revolving facility provided by HSH Nordbank AG replaced our previous £325 million facility which was due to expire in April 2010. The new facility provides the Group with its core debt over the medium term to September 2013. Despite the unprecedented dislocation in the credit markets we have demonstrated that we are able to secure debt on sensible terms from high quality lenders.
Cash generated from operations increased by 3% to £16.5 million (2007: £16.0 million) for the period.
The Group was comfortably in compliance with its bank covenants at 30 September 2008. We continue to focus on improving our cash flows and we currently have interest cover under our banking covenant in excess of 2 times, against a minimum requirement of 1.25.
The net debt at the end of September was £295.7 million, (representing a loan to gross property assets ratio of 36%) leaving us £29.3 million of available funds. We will consider using these funds to complete the pipeline in due course.
Risks and Uncertainties
The operational risks facing the Group for the remaining six months of the financial year are consistent with those outlined in the Annual Report for the year ended 31 March 2008. The outlook for the housing market and the economy is weaker than in March 2008, but the risk mitigating factors listed in the 2008 Annual Report are still appropriate.
The value of Big Yellow’s property portfolio is affected by the conditions prevailing in the property investment market and the general economic environment. Accordingly, the Group’s net asset value can rise and fall due to external factors beyond management’s control. The uncertainties in global financial markets look set to continue and investors remain cautious about property investment in the short-term. We have a high quality prime portfolio of assets which should help to mitigate the impact of this on the Group.
Self storage is a seasonal business, and over the last three years we have seen losses in occupancy of c 2-4% in the December quarter, followed in the New Year by an increase in activity, occupancy and revenue growth. The visibility we have on the business is relatively limited at three to four weeks and is based on the net reservations we have in hand, which are currently in line with our expectations.
Our customers are facing more difficult financial conditions and there is therefore an increased risk that they may default on their rent payments. Since the start of the current economic difficulties, we have not seen an increase in bad debts. We have nearly 30,000 customers and this, coupled with the diversity of their reasons for using storage mean the risk of individual tenant default to Big Yellow is low. 75% of our customers pay by direct debit and we take a deposit from all customers. Furthermore, we have a right of lien over customers’ goods, so in the ultimate event of default, we are able to auction the goods to recover the debts.
Outlook
Whilst trading conditions remain tough we have now been in a difficult trading environment for nearly six quarters and so far we are reassured at the Group’s performance. We have no doubt that further challenges lie ahead but are encouraged that in the last seven weeks, the expected seasonal net occupancy reduction is not as marked as that experienced this time last year.
We intend to continue building out stores from our existing development pipeline when appropriate. Four further stores are due to open this financial year. In the self storage market generally, as with other real estate, there has been a significant reduction in the availability of credit and particularly for some of the smaller operators, more uncertainty and risk around their business models. The result will be a more or less complete halt on competing new store commitments and indeed some previously committed sites may never be built out.
The Group started the downturn with a relatively robust financial structure which has been further improved by our joint venture, with our excellent partner, Pramerica and reinforced by our recent refinancing. Beyond the challenge of maintaining the Group’s security, we are now turning our attention to how we can continue growing the business and take advantage of the opportunities that will undoubtedly be presented to us. |
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Nicholas Vetch
Chairman
17 November 2008
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