Annual Report and Accounts 2007
Locations Our Progress Chairman's Statement Your Space Partner Business Review Financial Review Accounts
 
   
 
  We’re changing the way we communicate with our customers in order to develop long term relationships.  
 
     
  We provide domestic and business users with exceptional customer service from a network of high profile, conveniently located stores.  
     
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  Financial Results  
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  Dividend  
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  Valuation and Net Asset Value  
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  Real Estate Investment Trusts  
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  Stores and the Market  
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  Property  
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  International Franchise  
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  Our People  
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  Outlook  
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  Chairman's Statement  
         
  Big Yellow Group PLC (“Big Yellow”, “the Group” or “the Company”), is pleased to announce results for the year and for the fourth quarter ended 31 March 2007.

Overall, we are satisfied with the Group’s trading performance over the year. A good summer was followed by a modest December quarter. Activity levels saw a significant pick up early in the New Year resulting in a strong fourth quarter to the end of March. This is a seasonal business and we expect to see the usual build up in occupancy and hence revenue over the forthcoming summer months.

We were pleased to receive approval by HMRC for conversion to a Real Estate Investment Trust (“REIT”), backdated to 15 January 2007. This is an important part of the Group’s strategy and was the culmination of several months of hard work.

Financial Results
Revenue for the fourth quarter has shown a significant 8% rise to £13.9 million from £12.9 million for the third quarter ended 31 December 2006. Revenue for the year was £51.2 million (2006: £41.9 million), an increase of 22%.

Profit before tax for the year was £152.8 million up from £118.5 million last year. After adjusting for the gain on the revaluation of investment properties and other matters (see note 10) the Group made an adjusted profit before tax in the period of £14.2 million, up 13% from £12.6 million in 2006.

The basic earnings per share for the year was 192.97 pence (2006: 82.10 pence) and the fully diluted earnings per share was 190.31 pence (2006: 80.47 pence). A significant proportion of this improvement is due to the release of deferred taxation following the Group’s conversion to a REIT (see note 9). Adjusted earnings per share based on adjusted profit after tax was 10.01 pence (2006: 8.86 pence) (see note 12).

Cash generated from operations rose to £30.2 million in the year (2006: £24.4 million), an increase of 24%.

Net bank debt of £187.9 million at 31 March 2007 (2006: £142.1 million) represents approximately 27% (2006: 30%) of the Group’s investment property and development property assets totalling £686.5 million (2006: £468.5 million) and 38% (2006: 44%) of the adjusted net assets of £491.2 million (2006: £322.3 million).

We are therefore conservatively geared, with significant balance sheet capacity on which to secure future borrowings. We have credit approval for an increase of £50 million in our bank facilities to £275 million. This will result in facilities available for drawdown of £85 million on completion.

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Dividend
The Board has proposed a final dividend of 5.5 pence per share, which brings the total declared dividend in respect of the results of the financial year to 9.0 pence per share (2006: 5.0 pence per share). For further information on the dividend, see the Financial Review.

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Valuation and Net Asset Value

The value of the investment property portfolio at the 31 March 2007 was £590.1 million, up £179.6 million from £410.5 million at 31 March 2006. The increase in valuation in the same store portfolio is £92.9 million, representing a 22.6% total uplift, of which we estimate 11.5% is a function of capital growth, and 11.1% operational performance. The balance of £86.7 million is a valuation of new stores open in the period comprising capital expenditure of £39.1 million and a revaluation uplift of £47.6 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 6.80% (March 2006: 7.49%).

Whilst we believe there is unlikely to be any further significant yield contraction for UK Real Estate assets, it is arguable that there is still significant potential for yield compression for these types of self storage assets, due to a number of drivers:
 
     
 
> the yields compare favourably with more conventional Real Estate assets, as the March UK All Property IPD yield stands at 5.39% (March 2006: 5.84%);
   
> the yields on the Group’s portfolio are post administration costs against IPD yields which are pre administration;
   
> the Group’s self storage assets have enjoyed 4.6% average annual net storage rent increases over the last five years and over the same period, same store NOI margins (post allocation of administration costs) have increased from 48% to 58%;
   
> this is an institutional asset class in North America and Australia, and is growing globally and will benefit from increasing institutional interest in the UK particularly for purpose built, well located modern facilities.
 
     
  The increase in value of the Group’s investment properties, together with an adjustment to the valuation assumptions results in a 140.8p increase in the adjusted fully diluted net asset value per share over the year. The valuation of these assets is a business asset valuation, assuming an acquisition of not just the property, but also the operating cash flow. This by definition requires the sale of the operational contracts (customer, employment and maintenance etc) attached to the property which is difficult to achieve except in a corporate structure. Accordingly the adjusted net asset per share this year reflects the assumption that the assets are valued in accordance with the RICS Red Book assuming a sale in a corporate structure. The assets are still held in the Group balance sheet on the basis of the prior year RICS Red Book valuation assuming a direct property sale. A full disclosure of the rationale and impact is contained in the Financial Review on page 17 and in note 14.

90% by value of the Group’s 43 open stores and sites held for development are freehold (including one long leasehold). The freehold proportion will increase as we open stores in the development pipeline, all of which are freehold. We strongly believe that these assets will materially outperform our short leasehold assets due to the wasting nature of the latter. This is illustrated by the fact that the freeholds within the same store portfolio showed a valuation uplift in the year of 24%, compared to an uplift of 12% in respect of the nine short leasehold stores.

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Real Estate Investment Trusts
The Group has succeeded in converting to a REIT, effective from 15 January 2007. In essence, a REIT will exempt qualifying companies from paying corporation tax on their qualifying earnings in return for distributing 90% of qualifying profits to shareholders. Certain rules apply to a REIT limiting the amount of development, debt gearing and non-qualifying trading activities.

The cost of conversion represents 2% of gross property assets, which based on the value of the Group’s properties at 15 January this year totalling £599.9 million, would represent a liability of £12.0 million. The final charge will be subject to agreement with the tax authorities. This sum will be paid in July 2007.

Conversion to a REIT represents a significant step forward for the Group, largely eliminating the Group’s corporation tax liability going forward and completely eliminating an estimated £95 million of contingent capital gains tax liability as at 15 January 2007.

Furthermore, Big Yellow has a significant development pipeline of self storage assets, within the REIT ringfence and the development gains arising will generally be tax-free.

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Stores and the Market
Self storage, we believe, will become increasingly mainstream as a sector, which will inevitably mean increased financial and human capital availability, resulting in increased competition over a period of time. Supply of self storage, however, will remain largely constrained by the availability of land, planning consents and competition from other uses, particularly in London and the larger provincial cities and towns.

At the period end, occupied space represented 1,835,000 sq ft, up 10% from 1,672,000 sq ft at the same time last year. This represents 71% occupancy rate across all 43 stores open at the period end.

We have included, as usual, a table summarising the performance of all our stores over the year, this can be found on page 20.

The portfolio of 30 stores that were open for more than two years at the beginning of the period was 85% occupied at the end of the year, with an average occupancy during the year of 85%. In addition these 30 stores achieved EBITDA margins of 64% (2006: 62%) and, after an allocation of central overhead, net operating income margins of 58% (2006: 56%). The 21 freehold stores within this 30 achieved EBITDA margins of 71% in the year.

Same store revenue for these 30 stores increased 8% year on year, 6% as a result of increases in average prices and yield management; 1% average occupancy growth and the balance improved packing material and insurance sales. In addition from May 2007, we have successfully put through our target annual storage price rise of approximately 4.2% across the whole 43 store portfolio.

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Property
We acquired nine freehold sites in the year, five in London and four outside London at Sheffield, Nottingham, Poole and High Wycombe.

Since the year end, we have acquired a further three sites in Reading, Birmingham, and Camberley.

As part of our expansion strategy, we continue to seek sites in the Midlands and the North and have recently acquired sites in Birmingham (since the year end) and Nottingham to add to our existing sites in Manchester, Liverpool and Sheffield.

After a frustrating first six months we secured six planning consents in the second half of the year. Importantly all six were in London, where the process is at its most complex. These, together, with our site in Fulham result in seven stores being constructed at present or with planning. The government has imposed a target timescale of 13 weeks for Local Authorities to resolve applications. This has proved untenable in our experience, and accordingly a substantial amount of pre-application consultation is necessary before submission. This process in general is taking longer than the application process itself.

We now have five further sites with applications submitted, with five more close to being submitted following extensive consultations. One site is subject to an appeal to the Secretary of State for further determination and the balance have more recently been acquired and are in the feasibility phase.

We now have 23 stores in the pipeline (including one extension site at our Richmond store), which when fully developed, will represent an additional 1.5 million sq ft and when open will provide the Group with a total of 66 stores and 4.1 million sq ft. The result is an estimated development programme of £221 million. The build up in the pipeline should ensure a faster opening schedule in future years. 61% of our total stores and sites are located within the M25 and 57 are freehold or long leasehold. In the year we have opened six stores – three in London, and one each in Tunbridge Wells, Bristol Ashton Gate and Gloucester.

At 31 March 2007, there was surplus land held in the balance sheet of £29.7 million, and since the year end, we have sold land at our development site in Merton for £7.7 million. Further surplus land will be disposed of in due course.

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International Franchise
I am pleased to announce that in October 2006 we signed our first International Franchise Agreement for the United Arab Emirates with Big Yellow FZ LLC, a privately backed business set up to exploit the opportunities for development of a network of Big Yellow stores in the Gulf Cooperation Council states. The site for the first store in Dubai has been acquired and has now started construction to develop a 280,000 sq ft Big Yellow Self Storage centre, which is expected to open in spring 2008. Furthermore, since the year end we have signed a Franchise Agreement with the same partner for the Kingdom of Bahrain.

As is typical of franchise structures, we are not investing capital in this business but are providing operating know-how and the licensing of the Big Yellow brand for an upfront fee and a share of future revenues.

We are now reviewing other opportunities to expand the business internationally using this franchise model and have taken steps to protect the trademark in selected territories.

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Our People
As we have consistently reported on over the last seven years, the Big Yellow team has remained largely stable, both at Head Office and within the stores. Never complacent on this issue however, we are constantly investing in our people, which we believe is reflected in the very high customer satisfaction responses that we receive. 97% of our customers would recommend using Big Yellow to a friend.

For some four years, James Gibson has combined the roles of Chief Executive Officer and Finance Director of the Group, but as the Group becomes larger and more complex, we have resolved to split these functions. Accordingly, John Trotman has been appointed as Chief Financial Officer and will be joining the Company on 25 June this year. It is the Board’s intention to promote John to the Board in due course. John is a Chartered Accountant and former Senior Manager at Deloitte & Touche LLP, where he specialised in the real estate sector and self storage. Since leaving Deloitte in 2005, John has been working for a subsidiary of the Kajima Corporation involved in the large Silvertown Quays regeneration project.

Additionally, as reported above, we are intending to expand our international franchise operations and have appointed Tom Wilcockson as International Franchise Director and we expect him to join the Group in July of this year. Tom previously held the same position at Early Learning Centre, where he was largely responsible for the implementation of that Group’s international franchise expansion.

I would like to take the opportunity of thanking all the people who work at Big Yellow for their continued efforts, loyalty and hard work which, at the risk of repetition, really does make the difference between success and failure in our business.

The last word goes to Philip Burks, a co-founder of the Group and its Property Director for the last seven years who has surrendered his executive role to become a non-executive. Through his contacts, experience and expertise, Philip has played a critical role over the years in the expansion and success of Big Yellow and on behalf of the Board, I would like to thank him for his contribution. Furthermore I remain grateful that he will remain close to Big Yellow and I am pleased to say he will be available as and when we need his advice or access to his connections.

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Outlook
We are currently enjoying good trading conditions and we expect this to continue into the summer. We have secured six planning consents in the second half of the year, two since we last reported in January. Planning remains a significant obstacle, but with a pipeline of 23 sites, of which 14 are in London, we hope that this will deliver a steady stream of freehold store openings over the coming years. In the meantime we intend to continue adding sites to the pipeline.

We believe that the three value drivers of our business, development, occupancy growth and rental growth, fuelled by the location of our stores, branding, marketing and management will continue to deliver strong returns to shareholders.
 
     
  Nick Vetch Signature

Nicholas Vetch
Chairman

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