Interest expense on bank borrowings
The gross bank interest expense for the year was £11.5 million, an increase of £0.4 million from the prior year. This reflects a higher average cost of debt in the year following the Aviva refinancing in April and the bank refinancing in October, offset in part by the reduction in debt in February following the placing. The average cost of borrowing during the year was 4.0%, compared to 3.7% in the prior year.
Total interest payable has increased in the statement of comprehensive income from £11.2 million to £12.3 million in part due to the increase in the gross bank interest expense. Additionally, capitalised interest decreased by £0.8 million from the prior year, with limited construction activity taking place during the year, compared to construction on three sites in the prior year.
The refinancing costs of £4.3 million relate to the unamortised loan arrangement costs of the previous facility, and the write-off of the costs of the new bank facility in accordance with IAS 39. This has been adjusted from the Group’s recurring profit for the year.
REIT status
The Group converted to a Real Estate Investment Trust (“REIT”) in January 2007. Since then the Group has benefited from a zero tax rate on the Group’s qualifying self storage earnings. The Group only pays 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 Executive on compliance with these criteria is carried out. To date, the Group has complied with all REIT regulations, including forward looking tests.
VAT
VAT was 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%. Whilst the change to VAT will have had some impact on our existing domestic customer base, we believe this has not been material.
We are now able to recover the majority of 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 a gross amount of £11.8 million in the Group and £4.9 million in the Partnership (of which the Group’s share is £1.6 million).
Taxation
There is no cash tax payable for the year, due to tax relief arising from the restructuring of interest rate derivatives in 2009 and in the year. There is no tax charge for the year ended 31 March 2013 (2012: £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 8 pence per share is payable (31 March 2012: 9 pence per share PID).
The Board is recommending the payment of a final dividend of 6 pence per share. The table below summarises the declared dividend for the year:
| Dividend (pence per share) | 31 March 2013 |
31 March 2012 |
|
|---|---|---|---|
| Interim dividend | – PID | 5p | 4.5p |
| – discretionary | nil p | nil p | |
| – total | 5p | 4.5p | |
| Final dividend | – PID | 3p | 4.5p |
| – discretionary | 3p | 1p | |
| – total | 6p | 5.5p | |
| Total dividend | – PID | 8p | 9p |
| – discretionary | 3p | 1p | |
| – total | 11p | 10p | |
Subject to approval by shareholders at the Annual General Meeting to be held on 19 July 2013, the final dividend will be paid on 24 July 2013. The ex-div date is 12 June 2013 and the record date is 14 June 2013.
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 2013 £000 |
Year ended 31 March 2012 £000 |
|
|---|---|---|
| Cash generated from operations | 42,025 | 38,877 |
| Finance costs (net) | (11,839) | (11,489) |
| Free cash flow | 30,186 | 27,388 |
| Capital expenditure | (8,647) | (23,630) |
| Asset sales | 15,864 | 5,404 |
| Investment in associate | (1,567) | (1,167) |
| Cash flow after investing activities | 35,836 | 7,995 |
| Ordinary dividends | (13,543) | (12,223) |
| Share buy back | – | (3,727) |
| Issue of share capital | 36,764 | 61 |
| Non-recurring finance costs | (15,573) | – |
| (Decrease)/increase in borrowings | (45,694) | 9,000 |
| Net cash (outflow)/inflow | (2,210) | 1,106 |
| Opening cash and cash equivalents | 10,060 | 8,954 |
| Closing cash and cash equivalents | 7,850 | 10,060 |
| Debt | (238,306) | (284,000) |
| Net debt | (230,456) | (273,940) |
Free cash flow pre-capital expenditure increased by 10% to £30.2 million for the year (2012: £27.4 million). In the year capital expenditure outflows were £8.6 million, down from £23.6 million in the prior year, with construction activity largely limited to completing the store at Chiswick and the hotel development at Richmond. The cash flow after investing activities was a net inflow of £35.8 million in the year, compared to an inflow of £8.0 million in 2012. The non-recurring finance costs relate to £10.5 million of payments made to cancel interest rate derivatives and £5.1 million relating to arrangement fees paid for the Aviva and senior debt loans. The placing proceeds and surplus land sales enabled us to reduce debt by £45.7 million in the year.
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