Financing strategy
We were delighted to complete the ground-breaking 15 year £100 million loan with Aviva in April 2012 at a fixed cost of 4.9%, which provides a stable core of long term financing for the Group from a new debt provider to the business. This is Aviva’s first loan to a self storage company, reflecting their confidence in the Big Yellow business model. Importantly, it opens up a new source of medium and long term finance for the Group and is the first step in diversifying away from a reliance on the senior bank debt market.
We will now enter into discussions with our banking group, who continue to be supportive, and other potential insurance debt providers, with a view to refinancing the remaining £225 million bank debt facility in this calendar year. Once complete, this will inform the total blended interest rate on the drawn debt, which in turn will define the amount of debt the Board is confident carrying on the Balance Sheet. The Board’s ambition is that the interest paid on the debt should be at least 4 times covered by pre-interest cash flow within a 2 to 3 year period. To achieve this will require a reduction in the level of debt held on the balance sheet to between £245 million and £260 million, from the current net debt of £283 million.
Following the opening of our new Chiswick store, capital expenditure has largely stopped and therefore we can achieve that debt reduction by the retention of undistributed cash flow and the proceeds of the sale of surplus land. It is anticipated that the desired level of debt will be achieved by 2014-15.
Thereafter, subject to no material factors changing, the Board would intend to move to a higher dividend payout ratio. This ratio would be calculated by reference to maintaining 125% earnings cover to dividend payout.
The remainder of the cash flow will be retained in the business for future investment, including the possibility of a modest store expansion programme and/or further debt amortisation.
Quality of earnings
Given Big Yellow’s status as a REIT, inevitably some third party commentary centres around the characteristics relevant to property companies. The Group however is profoundly different in that it is not a recycler of assets, but rather owns its property principally to give it operational advantage and to allow it to enjoy high operating margins.
The Board and management’s principal financial aims therefore centre around cash flow, earnings and dividend growth. As well as the quantum of those metrics the nature of the income is also important. We believe that self storage income is essentially evergreen income with highly defensive characteristics driven from buildings with very low obsolescence risk. Although its form of contract with its customers is in theory as short as a week, it does not need to rely on contract for its income security. At 31 March 2012 the average length of stay for existing customers was 19 months. For all customers, including those who have moved out of the business, the average length of stay has remained at 8.5 months. In our established store portfolio, 37% of our customers by occupied space have been storing with us for over three years, and a further 15% of customers in these stores have been in the business for between one and three years.
The location of its stores, brand, security and most importantly customer service together with the diversity of its 36,000 customers will serve better than any contract. It is for these reasons that self storage income is so highly prized in the US where the industry has enjoyed a near 50 year growth track record.
It is instructive that the Group has secured 15 year term financing recently, a testament to the resilience of our cash flows.
Our people
The continued efforts and loyalty of the Big Yellow team, both at head office and in the stores, have delivered this performance and they remain pivotal to the achievement of our key medium term objectives of driving occupancy, revenue, and cash flow growth.
Board
Jonathan Short has announced that he is stepping down as a Non-Executive Director at the Group’s next AGM. He joined the Company in 2000 and over the ensuing 12 years has been a source of excellent advice and sound judgement. I and the Board will miss his good humour and good counsel. I have no doubt however that we will remain in regular contact. He will be replaced by Richard Cotton, formerly at JP Morgan Cazenove, which he left in April 2009. Richard is currently a Managing Director of Forum Partners, a Non-Executive Director of Hansteen Holdings plc, and has an unparalleled track record in advising publically quoted real estate orientated companies and I look forward to his presence on the Board.
Outlook
Financial headlines continue to be dominated by ongoing difficulties in the Eurozone. The core issue however is the deleveraging by sovereigns, banks and individuals which will continue for some years to come. This will have a depressing effect on UK macroeconomic performance and may of course have an impact on the trading of Big Yellow. There is however nothing new in this as this is the environment we have operated in for approaching five years now.
From time to time and at moments of heightened economic fear, we can expect to see fluctuations in demand, but we have considerable confidence in the long term resilience of our income. The proposition for investors is therefore a defensive income flow, with long term earnings growth potential, from a branded, London-centric, high margin, asset backed, internet dominant business with a conservative capital structure. UK economic activity as measured by GDP, although recovering from its low point in 2009, remains some 4% below its peak, whilst Big Yellow’s cash flow has nearly doubled from that reported for the year ended 31 March 2008.
Nicholas Vetch
Chairman
21 May 2012