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Business and Financial Review

Cash flow

Cash flows from operating activities (after net finance costs and pre working capital movements) have increased by 12% to £32.5 million for the period (2016: £28.9 million), in line with the growth in store EBITDA. These operating cash flows are after the ongoing maintenance costs of the stores, which are on average £35,000 per store per annum. The Group’s net debt has increased over the period to £305.3 million (March 2017: £298.0 million).

	Six months ended 30 September 2017 £m	Six months ended 30 September 2016 £m
Cash generated from operations pre working capital	37.4	34.6
Finance costs (net)	(4.9)	(5.7)
Free cash flow pre working capital	32.5	28.9
Working capital movements	(2.4)	(4.4)
Tax	(0.2)	–
Disposal of assets	0.7	0.3
Capital expenditure	(15.7)	(17.1)
Receipt from Capital Goods Scheme	2.3	1.6
Dividend received from associates	0.2	0.2
Cash flow after investing activities	17.4	9.5
Dividends	(22.1)	(20.0)
Payment to cancel interest rate derivatives	(3.4)	–
Issue of share capital	0.9	0.3
Increase/(decrease) in borrowings	5.8	(1.1)
Net cash outflow	(1.4)	(11.3)

The Group’s interest cover for the period (expressed as the ratio of cash generated from operations pre-working capital movements against interest paid) was 7.6 times (2016: 6.1 times).

The capital expenditure in the period principally relates to the acquisition of Wapping, and construction costs on our new store at Guildford Central and the extension of our existing Wandsworth store. The prior period capital expenditure was principally to acquire the stores in Nine Elms and Twickenham from Lock and Leave.

Taxation

The Group is a Real Estate Investment Trust (“REIT”). We benefit from a zero tax rate on our qualifying self storage earnings. We only pay corporation tax on the profits attributable to our residual business, comprising primarily of the sale of packing materials and insurance, and management fees earned by the Group.

There is a £0.3 million tax charge in the residual business for the period ended 30 September 2017 (six months to 30 September 2016: £0.3 million).

Dividends

REIT regulatory requirements determine the level of Property Income Dividend (“PID”) payable by the Group. A PID of 15.3 pence per share is proposed as the total interim dividend, an increase of 13% from 13.5 pence per share PID for the same period last year.

The interim dividend will be paid on 5 January 2018. The ex-div date is 7 December 2017 and the record date is 8 December 2017.

Financing and treasury

During the period, the Group further reduced its average cost of debt, whilst increasing the available facilities and extending the average term of its debt.

The Group extended its £70 million loan with M&G by a year, pushing its expiry out to June 2023. All other terms and conditions of the loan remained the same, hence it was not a material modification of the loan under IAS 39. At the same time, the Group cancelled the existing interest rate derivative that was in place over half of the M&G loan (2.64% expiring in June 2022) at a cost of £3.4 million and replaced it with a new derivative until June 2023 at a pre margin rate of 0.76%.

The Group also amended the terms of its existing £190 million bank facility, which was treated as an extinguishment of the loan under IAS 39.

The £85 million term loan, which attracted a margin of 150bps, was converted to revolving loan at a lower margin of 125 bps. The term of the loan was extended to October 2022 with an option in place to extend the loan by a further two years. The Group also has an option to increase the amount of revolving loan by a further £80 million during the course of the loan’s term.

The refinancing costs of £1.5 million shown in the income statement relate to the unamortised loan arrangement costs of the previous bank facility, and the write-off of the costs of the new bank facility in accordance with IAS 39. This has been eliminated from the Group’s adjusted profit for the period.

The table below summarises the Group’s debt facilities at 30 September 2017. The average cost of debt is adjusted for the 25 bps increase in the base rate announced in November 2017. The average cost has reduced to 2.9% from 3.2% at 31 March 2017:

Debt	Expiry	Facility	Drawn	Average interest cost
Aviva Loan	April 2027	£88.8 million	£88.8 million	4.9%
M&G loan	June 2023	£70 million	£70 million	2.8%
Bank loan (Lloyds & HSBC)	October 2022	£190 million	£152 million	1.9%
Total	Average term 6.1 years	£348.8 million	£310.8 million	2.9%

The Group was comfortably in compliance with its banking covenants at 30 September 2017.

Our financing policy is to fund our current needs through a mix of debt, equity and cash flow to allow us to build out our development pipeline and achieve our strategic growth objectives, which we believe improve returns for shareholders. We aim to ensure that there are sufficient medium-term facilities in place to finance our committed development programme, secured against the freehold portfolio, with debt serviced by our strong operational cash flows. We maintain a keen watch on medium and long-term rates and the Group’s policy in respect of interest rates is to maintain a balance between flexibility and hedging of interest rate risk.

The net debt to gross property assets ratio is 24% (2016: 26%) and the net debt to adjusted net assets ratio (see net asset value section below) is 30% (2016: 32%).

Property
Investment property

The Group’s investment properties are carried at the half year at Directors’ valuation. They are valued externally by Cushman and Wakefield LLP (“C&W”) at the year end. The Directors’ valuations reflect the latest cash flows derived from each of the stores at the end of September.

In performing the valuations, the Directors consulted with C&W on the capitalisation rates used in the valuations in light of a number of self storage transactions that had taken place in the market in the past six months. The Directors consider that capitalisation rates for London and South East freehold self storage centres have reduced by 15 bps since the start of the financial year. C&W support this view. This cap rate reduction has therefore been applied to the September valuation for the applicable stores.

The Directors consider that the other core assumptions underpinning the valuations including the stabilised occupancy assumptions used, rental growth, and discount rates used by C&W in the March 2017 valuations, are still appropriate at the September valuation date (see the Group’s annual report for the year ended 31 March 2017 for the full detail of the valuation methodology).

At 30 September 2017 the total value of the Group’s properties is shown in the table below:

Analysis of property portfolio	Value at 30 September 2017 £m	Revaluation movement in the period £m
Investment property	1,204.7	48.0
Investment property under construction	49.1	(0.5)
Investment property total	1,253.8	47.5

The revaluation surplus for the open stores in the period was £48.0 million, as the growth in cash flows feed through to the valuation, coupled with the cap rate reduction discussed above. There is a small deficit on the investment property under construction, due to an increase in anticipated costs on one scheme following feedback from the planning authorities on our initial proposals.

The initial yield on the portfolio before administration expenses and assuming no rental growth, is 6.7% rising to a stabilised yield of 7.0% (31 March 2017: 6.7% rising to 7.2%).

Development pipeline

The Group has acquired three development sites since March, in Wapping (London), Slough and Bracknell. This takes the total pipeline to approximately 575,000 sq ft, representing 13% of current MLA, with an estimated future cost to complete of £90 million. The status of the Group’s development pipeline is summarised in the table below:

Site	Location	Status	Anticipated capacity
Guildford	Prime location in centre of Guildford on Woodbridge Meadows	Construction commenced, store due to open in March 2018, cost to complete of £2.9 million.	56,000 sq ft
Wandsworth, London	Extension to existing 47,000 sq ft store	Construction commenced, extension due to open Additional in April 2018, cost to complete of £3.6 million.	Additional 25,000 sq ft
Manchester	Prime location on Water Street, central Manchester	Planning consent granted in September 2017. Store construction to start March 2018, with a view to opening in Spring 2019, cost to complete of £7.0 million.	60,000 sq ft
Camberwell, London	Prominent location on Southampton Way	Initial planning application refused and subsequent appeal dismissed. A revised planning application will be submitted in February 2018.	70,000 to 75,000 sq ft
Kings Cross, London	Prominent location on York Way	Planning application currently being prepared to be submitted in early 2018.	110,000 to 115,000 sq ft
Bracknell	Prime location on Ellesfield Avenue	Contracts recently exchanged with completion due in December. Application to be submitted in early 2018 to incorporate self storage and other occupiers.	60,000 to 65,000 sq ft
Slough	Prominent location on Bath Road	Site recently acquired. Planning application to be submitted in early 2018.	45,000 to 50,000 sq ft
Battersea, London	Prominent location on junction of Lombard Road and York Road (South Circular)	Potential redevelopment to increase size of existing 34,000 sq ft Big Yellow store. Redevelopment of adjoining retail into a mixed use residential led scheme. Ongoing detailed planning discussions with the Borough Council with the aim of submitting an application in May 2018.	Up to an additional 40,000 sq ft
Wapping, London	Prominent location on The Highway	Site acquired in May 2017. We will convert part into self storage and collect income from the other tenancies with a view to achieving a more comprehensive self storage centre in the longer term.	50,000 to 75,000 sq ft
Newcastle	Prime location on Scotswood Road	Negotiations ongoing with existing long leasehold tenant to obtain vacant possession.	50,000 to 60,000 sq ft

The capital expenditure committed for the remainder of the financial year is approximately £17.5 million, which relates to the completion of the purchases of Bracknell and Slough and construction costs incurred on Manchester, Guildford Central and the extension of our Wandsworth store.

The Group manages the construction and fit-out of its stores in-house, as we believe it provides both better control and quality, and we have an excellent record of building stores on time and within budget.

Capital Goods Scheme receivable

At 30 September 2017 we had a receivable of £4.6 million in respect of payments due back to the Group under the Capital Goods Scheme as a consequence of the introduction of VAT on self storage from 1 October 2012. To date, we have received payments under the Capital Goods Scheme of £9.1 million, receiving £2.3 million during the period and £0.4 million subsequent to the period end.

Net asset value

The adjusted net asset value is 640.8 pence per share (see note 13), up 5% from 607.6 pence per share at 31 March 2017. The table below reconciles the movement from 31 March 2017:

Movement in adjusted net asset value	Equity shareholders’ funds £m	EPRA adjusted NAV pence per share
1 April 2017	963.4	607.6
Adjusted profit after tax	30.3	19.0
Equity dividends paid	(22.1)	(13.9)
Cancellation of interest rate derivative	(3.4)	(2.1)
Revaluation movements (including share of associate)	48.2	30.2
Movement in purchaser’s cost adjustment	3.7	2.3
Other movements (e.g. share schemes)	1.4	(2.3)
30 September 2017	1,021.5	640.8

Armadillo Self Storage

In 2014 we set up a joint venture with a consortium of Australian investors with the aim of acquiring existing self storage facilities as a consolidator in the secondary market. The Group has a 20% investment in Armadillo Storage Holding Company Limited and a 20% investment in Armadillo Storage Holding Company 2 Limited. In the consolidated accounts of Big Yellow Group PLC, our investments in the vehicles are treated as associates using the equity accounting method.

In April 2017 a further three stores were acquired into the Armadillo platform in Exeter, Plymouth and Torquay, for £4.75 million. This takes the Armadillo platform to 19 stores and 829,000 sq ft of MLA. As with the other existing store acquisitions, the intention is to upgrade and reconfigure the stores through additional investment to drive cash flow growth.

The occupancy of the portfolios is 649,000 sq ft, against a total capacity of 829,000 sq ft representing occupancy at 30 September 2017 of 78.3% (31 March 2017: 74.7%). The revenue of the portfolio increased by 21% to £6.3 million for the six months to 30 September 2017 (2016: £5.2 million), on a like-for-like basis, the increase was 9%.

The Armadillo Partnerships made a combined operating profit of £3.0 million in the period, of which Big Yellow’s share is £0.6 million. After net interest costs, the revaluation of investment properties, deferred tax on the revaluation surplus and interest rate derivatives, the profit for the period was £4.7 million, of which the Group’s share was £0.9 million.

Big Yellow has a responsibility for operating the assets and receives a management fee from the Partnerships, which for the period to 30 September 2017 amounted to £0.5 million.

The Group’s share of the interim dividend declared for the period is £0.24 million, representing a 6.3% yield on our original equity investment for the six months.

James Gibson
Chief Executive Officer

20 November 2017

John Trotman
Chief Financial Officer