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Business and Financial Review

Cash flow

Cash flows from operating activities (after net finance costs) have increased by 16% to £34.6 million for the period (2017: £29.9 million). The period on period growth in cash flow is higher than for adjusted profit before tax as a result of favourable working capital movements. These operating cash flows are after the ongoing maintenance costs of the stores, which are on average £36,000 per store per annum. The Group’s net debt has reduced over the period to £270.3 million (March 2018: £323.7 million), following the equity raise in September 2018.

	Six months ended 30 September 2018 £m	Six months ended 30 September 2017 £m
Cash generated from operations	40.0	35.0
Finance costs (net)	(5.3)	(4.9)
Free cash flow	34.7	30.1
Tax	(0.1)	(0.2)
Disposal of assets	–	0.7
Capital expenditure	(24.1)	(15.7)
Receipt from Capital Goods Scheme	1.4	2.3
Dividend received from associates	0.2	0.2
Cash flow after investing activities	12.1	17.4
Dividends	(24.4)	(22.1)
Payment to cancel interest rate derivatives	–	(3.4)
Issue of share capital	65.7	0.9
(Decrease)/increase in borrowings	(54.2)	5.8
Net cash outflow	(0.8)	(1.4)

The Group’s interest cover for the period (expressed as the ratio of cash generated from operations against interest paid) was 7.5 times (2017: 7.1 times).

The capital expenditure in the period principally relates to the acquisitions of Uxbridge and Hove, construction costs on our new stores at Wapping and Manchester, and the completion of the extension to our Wandsworth store.

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 2018 (six months to 30 September 2017: £0.3 million).

Dividends

REIT regulatory requirements determine the level of Property Income Distribution (“PID”) payable by the Group. A PID of 16.7 pence per share is proposed as the total interim dividend, an increase of 9% from 15.3 pence per share PID for the same period last year.

The interim dividend will be paid on 7 January 2019. The ex-div date is 6 December 2018 and the record date is 7 December 2018.

Financing and treasury

Our financing policy is to fund our current needs through a mix of debt, equity and cash flow to allow us to build out, and add to, 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.

During the period the Group extended the term of its bank loan by a further year, and retains an option to extend the loan by a further year. The Group also has an option to increase the amount of revolving loan by a further £60 million during the course of the loan’s term.

The table below summarises the Group’s debt facilities at 30 September 2018. The average cost has increased to 3.3% from 2.9% at 31 March 2018 following the repayment of variable rate bank debt following the placing in September, coupled with the increase in base rate in August 2018.

Debt	Expiry	Facility	Drawn	Average interest cost
Aviva Loan	April 2027	£86.4 million	£86.4 million	4.9%
M&G loan	June 2023	£70 million	£70 million	2.9%
Bank loan (Lloyds & HSBC)	October 2023	£210 million	£120 million	2.3%
Total	Average term 5.7 years	£366.4 million	£276.4 million	3.3%

The Group was comfortably in compliance with its banking covenants at 30 September 2018.

The refinancing costs of £1.5 million shown in the prior period 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 was eliminated from the Group’s adjusted profit for that period. In the prior period, the Group cancelled an 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 net debt to gross property assets ratio is 20% (2017: 24%) and the net debt to adjusted net assets ratio (see net asset value section below) is 23% (2017: 30%).

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. The Directors consider that the capitalisation rates are unchanged since the start of the financial year. C&W support this view. In the prior period there was a cap rate reduction of 15bps applied to the Group’s London and South East stores. This explains the lower revaluation surplus in the current period compared to the same period last year.

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 2018 valuations are still appropriate at the September valuation date (see the Group’s annual report for the year ended 31 March 2018 for the full detail of the valuation methodology).

At 30 September 2018 the total value of the Group’s properties is shown in the table below:

Analysis of property portfolio	Value at 30 September 2018 £m	Revaluation movement in the period £m
Investment property	1,290.2	27.3
Investment property under construction	63.3	0.3
Investment property total	1,353.5	27.6

The revaluation surplus for the open stores in the period was £27.3 million, as the growth in cash flows feeds through to the valuation. There is a small surplus on the investment property under construction, due to an increase in the anticipated size on one of our schemes.

The initial yield on the portfolio before administration expenses and assuming no rental growth, is 6.6% rising to a stabilised yield of 6.9% (31 March 2018: 6.5% rising to 6.9%).

Development pipeline

The Group has acquired three development sites since March, in Uxbridge, Hove and Queensbury. These acquisitions take the total pipeline to approximately 680,000 sq ft, representing 15% of current MLA, with an estimated future cost to complete of £100 million. The status of the Group’s development pipeline is summarised in the table below:

Site	Location	Status	Anticipated capacity
Manchester	Prime location on Water Street, central Manchester	Planning consent granted in September 2017. Store construction started in March 2018, with a view to opening in Summer 2019.	60,000 sq ft
Camberwell, London	Prominent location on Southampton Way	Planning consent granted in April 2018. Construction started in November 2018 with a view to opening in Spring 2020.	77,000 sq ft
Kings Cross, London	Prominent location on York Way	Planning application submitted and registered by LB Islington.	115,000 to 120,000 sq ft
Bracknell	Prime location on Ellesfield Avenue	Site acquired in February 2018. Planning application submitted in October to Bracknell Forest Council incorporating self storage and other trade occupiers.	60,000 to 65,000 sq ft
Slough	Prominent location on Bath Road	Site acquired in November 2017. Planning application to be submitted to Slough Borough Council in late 2018.	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. Application submitted and registered by LB Wandsworth in August 2018.	Up to an additional 40,000 sq ft
Wapping, London	Prominent location on The Highway	Site acquired in May 2017. The Group converted the existing vacant space and opened a 25,000 sq ft self storage centre at the end of July, and are also collecting income from the remaining short-let tenancies. This provides income while we look to expand the store.	Up to an additional 45,000 sq ft
Uxbridge, London	Prominent location on Oxford Road	Site acquired in April 2018. Planning application to be submitted to South Bucks DC late 2018/early 2019.	55,000 sq ft
Hove	Prominent location on Old Shoreham Road	Site acquired in April 2018. Planning application to be submitted in 2019.	55,000 sq ft to 60,000 sq ft
Queensbury, London	Prominent location off Honeypot Lane	Contracts exchanged, planning discussions to commence following completion	55,000 sq ft to 60,000 sq ft
Newcastle	Prime location on Scotswood Road	Planning application to be submitted in early 2019.	60,000 sq ft
Total			672,000 sq ft to 692,000 sq ft

The capital expenditure forecast for the remainder of the financial year (excluding any new site acquisitions) is approximately £15 million, which principally relates to the completion of the purchase of Queensbury and construction costs incurred on Manchester and Camberwell.

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 2018 we had a receivable of £2.9 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 £13.1 million, receiving £1.4 million during the period and £0.4 million subsequent to the period end.

Net asset value

The adjusted net asset value is 697.7 pence per share (see note 13), up 3% from 675.5 pence per share at 31 March 2018 (rebased for the impact of the placing). The table below reconciles the movement from 31 March 2018:

Movement in adjusted net asset value	Equity shareholders’ funds £m	EPRA adjusted NAV pence per share
31 March 2018	1,059.1	665.0
Share placing	65.3	10.5
31 March 2018 (rebased)	1,124.4	675.5
Adjusted profit after tax	33.0	19.8
Equity dividends paid	(24.4)	(14.6)
Revaluation movements (including share of associate)	28.2	16.9
Movement in purchaser’s cost adjustment	2.5	1.5
Other movements (e.g. share schemes)	1.9	(1.4)
30 September 2018	1,165.6	697.7

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%z 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.

The occupancy of the portfolios at 30 September 2018 is 740,000 sq ft, against a total capacity of 965,000 sq ft representing occupancy at 30 September 2018 of 76.7% (31 March 2018: 73.9%). The revenue of the portfolio increased by 21% to £7.6 million for the six months to 30 September 2018 (2017: £6.3 million). On a like-for-like basis, the increase was 6%.

The Armadillo Partnerships made a combined operating profit of £2.7 million in the period, of which Big Yellow’s share is £0.5 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 £4.1 million, of which the Group’s share was £0.8 million.

Included within administrative expenses in Armadillo 1 is a £1 million accrual for a performance fee payable to Big Yellow in April 2019. The final fee calculation will be based on the 31 March 2019 external property valuation for the Armadillo 1 portfolio. Under revenue recognition accounting principles, Big Yellow will recognise the fee to revenue in the second half of the year should the performance conditions be met.

Big Yellow has a responsibility for operating the assets and receives a management fee from the Partnerships, which for the period to 30 September 2018 amounted to £0.6 million. The Group’s share of the interim dividend declared for the period is £0.3 million, representing a 6.6% yield on our equity invested for the six months.

James Gibson
Chief Executive Officer

19 November 2018

John Trotman
Chief Financial Officer