Operating costs
Cost of sales comprise principally of the direct store operating costs, including store staff salaries, utilities, business rates, insurance, an allocation of the central marketing budget, and repairs and maintenance. We have continued with our programme of cost control in the Group. Administrative expenses were held flat in the year. £1.5 million of the £7.1 million administrative expense is non-cash IFRS 2 share based payment charges.
Direct store operating costs for the established portfolio, including leasehold rent, have increased by 2% reflecting general inflationary pressures, notably from business rates. The operating costs in the lease-up stores have increased mainly due to the additional operating costs of Eltham and New Cross, both of which opened in the current financial year.
Interest expense on bank borrowings
The gross bank interest expense for the year was in line with the prior year at £11.1 million reflecting a broadly consistent level of average drawn debt in the year. The average cost of borrowing during the year was 3.7%, in line with the prior year.
Total interest payable has decreased in the statement of comprehensive income from £11.3 million to £11.2 million following a £0.2 million increase in the level of capitalised interest in the year, with construction taking place on three sites during the year. The capitalised interest in the forthcoming financial year will be minimal, with no planned construction projects beyond Chiswick, which opened in April 2012. This will increase the interest payable in the statement of comprehensive income, which will flow through to the Group’s adjusted earnings.
VAT impact
In addition to the commentary contained in the Chairman’s Statement about the impact of the proposed introduction of VAT on self storage and the actions we would take to mitigate it, we have provided further details on the capital goods scheme repayment due to us below.
Over the last ten years we have not been recovering VAT on our capital expenditure given that self storage is exempt. Any future implementation of this change would require the reimbursement of a significant sum to the Group under the Capital Goods Scheme which would be subject to agreement with HMRC. We estimate that this amounts to £12.3 million in the Group and a total of £5.3 million in Big Yellow Limited Partnership. The reimbursement would be spread over ten years, however the majority of the amount would be received within five years. This has not been recognised as an asset at the balance sheet date as the legislation to introduce VAT had not been substantially enacted at 31 March 2012, but has been included in our calculation of adjusted net assets per share (see note 12).
REIT status
The Group converted to a Real Estate Investment Trust (“REIT”) in January 2007. Since then the Group has benefited from a zero corporation tax rate on the Group’s qualifying self storage earnings. The Group only pays corporation 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 from the management of the Armadillo portfolio.
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.
Taxation
There is no cash tax payable for the year, due to tax relief arising from the restructuring of interest rate derivatives in 2009. There is no tax charge for the year ended 31 March 2012 (2011: £nil).
Dividends
REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. On the basis of the full year distributable reserves for PID purposes, a PID of 9 pence per share is payable (31 March 2011: 4 pence per share PID).
The Board is recommending the payment of a final dividend of 5.5 pence per share. The table below summarises the declared dividend for the year:
| Dividend (pence per share) | 31 March 2012 |
31 March 2011 |
|
|---|---|---|---|
| Interim dividend | – PID | 4.5p | 2p |
| – discretionary | nil p | 2p | |
| – total | 4.5p | 4p | |
| Final dividend | – PID | 4.5p | 2p |
| – discretionary | 1p | 3p | |
| – total | 5.5p | 5p | |
| Total dividend | – PID | 9p | 4p |
| – discretionary | 1p | 5p | |
| – total | 10p | 9p | |
Subject to approval by shareholders at the Annual General Meeting to be held on 10 July 2012, the final dividend will be paid on 20 July 2012 to shareholders on the Register on 8 June 2012.
Cash flow growth
The Group is strongly cash generative 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:
| Year ended 31 March 2012 £000 |
Year ended 31 March 2011 £000 |
|
|---|---|---|
| Cash generated from operations | 38,877 | 34,925 |
| Finance costs (net) | (11,489) | (11,391) |
| Free cash flow | 27,388 | 23,534 |
| Capital expenditure | (23,630) | (13,395) |
| Asset sales | 5,404 | 4,497 |
| Investment in associate | (1,167) | (1,000) |
| Cash flow after investing activities | 7,995 | 13,636 |
| Ordinary dividends | (12,223) | (10,328) |
| Share buy back | (3,727) | – |
| Issue of share capital | 61 | 27 |
| Increase/(decrease) in borrowings | 9,000 | (25,000) |
| Net cash inflow/(outflow) | 1,106 | (21,665) |
| Opening cash and cash equivalents | 8,954 | 30,619 |
| Closing cash and cash equivalents | 10,060 | 8,954 |
| Debt | (284,000) | (275,000) |
| Net debt | (273,940) | (266,046) |
Free cash flow pre-capital expenditure increased by 17% to £27.4 million for the year (2011: £23.5 million). In the year capital expenditure outflows were £23.6 million, up from £13.4 million in the prior year, with the construction of Chiswick, New Cross (combined expenditure of £15.5 million) and the Richmond hotel (£4.4 million) the significant amounts. The cash flow after investing activities was a net inflow of £8.0 million in the year, compared to an inflow of £13.6 million in 2011.
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