Trading and VAT
VAT has been introduced on self storage rents with effect from 1 October 2012, following the announcement in the March 2012 budget. During the consultation period we worked with other members of the industry to lobby against this change. We took legal advice over the summer and, based on that advice, decided not to proceed with a legal challenge.
Our existing customers were notified of the introduction of VAT on self storage rents in August, and the impact this would have on the cost of their storage. VAT has been passed on in full to our business customers, and in part to our existing domestic customers, with most receiving increases in their four-weekly invoices of 10% to 12.5%. Following yield management initiatives in the first half of the year, net rent per sq ft at 30 September 2012 had increased by 1.8% from 31 March 2012. Following the VAT price changes on 1 October, the Group’s current achieved net rent before VAT has fallen 3.8% from 1 April 2012, and therefore average rents will be lower in the second half of the financial year.
We are now able to recover VAT on our ongoing operating expenses, and are also entitled to a refund of previously irrecoverable VAT on capital expenditure under the Capital Goods Scheme, amounting to £11.8 million in the Group and £4.9 million in the Partnership.
Our third quarter is historically the weakest trading quarter and in recent years we have typically lost two to three percentage points of occupancy before a return to growth in the new year. This year to date we have lost 2.6% occupancy since the end of September. We expect the loss in occupancy for the quarter to be higher than in the previous two years.
In part, this follows the very successful summer we enjoyed, particularly with a significant increase in student customers, who inevitably move out at the beginning of the university year. Whilst the change to VAT will have had some impact on our existing domestic customer base, we believe this has not been material. The ratio of domestic customers square footage moving out in October and November to domestic customers square footage which moved in between April and September has remained constant with the two previous years at about 22%.
The growth in new customer demand relative to last year has slowed from the beginning of September. This again may be partially due to the imposition of VAT, but we believe that this is more likely to be market related, reflecting a slightly more subdued consumer environment following a buoyant summer.
Property
During the period we opened our iconic store in Chiswick, West London, with high visibility from the M4 flyover. We have a pipeline of four further wholly owned development sites; all except our site in Central Manchester have planning consent. The three development sites with planning consent are on the A10 at Enfield, London, in Central Guildford and on the A40 at Gypsy Corner, London. These three sites have an estimated cost to complete of £14.3 million and at this stage we have not committed to their construction, but we will keep this under review.
The Group completed the disposals of its surplus sites at Richmond and Chiswick during the period, with net proceeds received from the disposals of £12.2 million. At 30 September 2012, the Group owned approximately £7.6 million of land surplus to our requirements across three sites. We have granted an option to a social housing operator at our Bow South site. We aim to sell the remaining surplus land once we have maximised its realisable value through planning improvements.
Refinancing
We are pleased to have successfully concluded the refinancing of the Group’s debt facilities with a new 15 year £100 million facility with Aviva, and the four year £190 million financing to September 2016 with our existing senior debt providers, Lloyds TSB, HSBC and Santander. As part of this refinancing we cancelled £120 million of interest rate derivatives at a cost of £10.6 million (£9.2 million of this cost was in the first half of the year, with the balance incurred in October). Our weighted average cost of debt for the second half of the year increases from 3.8% to approximately 4.25%. In October 2012 we also extended the expiry of the £60 million Big Yellow Limited Partnership bank facility to September 2016.
Financial strategy
Our principal financial aims remain growing cash flow, earnings and dividend. 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 30 September 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, 35% 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 our stores, brand, security, and most importantly customer service, together with the diversity of our many customers, will serve better than any contract. The signing of a 15 year long term facility with Aviva in April 2012 is a testament to the resilience of our cash flows.
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.
Thereafter, subject to no material factors changing, the Board would intend to move to a higher 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.
Dividends
REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. A PID of 5 pence per share is proposed as the total interim dividend, an increase of 11% from a PID of 4.5 pence per share for the same period last year.
Outlook
As previously indicated, the impact of higher interest costs and the imposition of VAT on storage will create a drag on the pace of earnings growth in the short term. Additionally, we believe the economy will remain subdued for some years to come. However, as ably demonstrated in these strong results, the strength of our brand, growing market awareness, and our concentration of stores in London and the South East will assist in meeting these challenges.
Nicholas Vetch
Executive Chairman