Review of the year
Financial review
Richard Hodsden
Chief Financial Officer
"The Group's revenue increased by £5.8 million (an increase of 6.6%) from £89.2 million in FY2010 to £95.1 million in FY2011."
Highlights
- Revenue up 6.6% to £95.1 million (FY2010: £89.2 million)
- Underlying EBITDA1 up 2.7% to £50.5 million (FY2010: £49.2 million)
- EPRA2 Adjusted profit after tax3 up 4.8% to £16.1 million
- EPRA Adjusted Earnings per share3 ("EPS") up 4.8% to 8.58 pence (FY2010: 8.19 pence)
- Final dividend increased 9.2% to 3.55 pence per share (FY2010: 3.25 pence per share)
- Profit after tax of £13.0 million (FY2010: £26.3 million) reflecting the impact of non-cash movements in the (loss)/gain on investment properties, exceptional items and the associated tax
- Basic EPS of 6.95 pence per share (FY2010: 14.05 pence per share)
1 EBITDA before exceptional items, contingent rent, (loss)/gain on investment properties and fair value movement
of derivatives
(underlying EBITDA).
2 EPRA - European Public Real Estate Association.
3 See note 7.
International financial reporting standards ("IFRS")
This report is prepared in accordance with IFRS and details the key performance measures during the year.
Results of operations
The table below sets out the Group's results of operations for the year ended 31 October 2011 and the year ended 31 October 2010, as well as the year on year change.
Revenue
Revenue for the Group is primarily derived from the rental of self-storage space, the sale of ancillary products such as insurance and merchandise such as packing and storage products in both the UK and France.
The table below sets out the Group's revenues by geographic segment for FY2011 and FY2010.
The Group's revenue increased by £5.8 million (an increase of 6.6%) from £89.2 million in FY2010 to £95.1 million in FY2011. As covered in the Chief Executive's review, the key drivers for revenue growth have been the increase in occupancy (268,000 sq ft year on year), the growth in average rate per sq ft (+2.2% year on year) and ancillary revenues (+8.2% year on year). There has been minimal currency impact during the year with an average exchange rate of €1.152:£1 for FY2011 against an average rate of €1.155:£1 for FY2010.
Results of operations
Year ended 31 October |
|||
| 2011 £'000 |
2010 £'000 |
% change | |
Revenue |
95,060 | 89,214 | +6.6% |
Cost of sales |
(31,222) | (28,951) | |
Gross profit |
63,838 | 60,263 | +5.9% |
Administrative expenses |
(15,476) | (11,819) | |
Operating profit before loss on investment properties |
48,362 | 48,444 | –0.2% |
(Loss)/gain on investment properties (including exceptional impairment charge) |
(18,417) | 18,472 | |
Operating profit |
29,945 | 66,916 | –55.2% |
Net finance costs |
(21,398) | (37,695) | |
Profit before income tax |
8,547 | 29,221 | –70.8% |
Income tax credit/(expense) |
4,481 | (2,881) | |
Profit for the year |
13,028 | 26,340 | –50.5% |
Revenues by geographic segment
Year ended 31 October |
|||||
| 2011 £'000 |
% of total | 2010 £'000 |
% of total | % change | |
United Kingdom |
71,014 | 74.7% | 67,116 | 75.2% | +5.8% |
France |
24,046 | 25.3% | 22,098 | 24.8% | +8.8% |
Total revenue |
95,060 | 100.0% | 89,214 | 100.0% | +6.6% |
Cost of sales
Cost of sales consists primarily of our store costs, staff salaries, business rates, utilities, insurance and maintenance. The Group's cost of sales increased by £2.3 million or 7.8% from £28.9 million in FY2010 to £31.2 million in FY2011.
There are three key elements to the cost increase:
- strategic investment in expanding the UK call centre of approximately £0.3 million in the year;
- underlying cost of sales (excluding the strategic investments in the call centre) has increased by £1.0 million;
- therefore underlying costs of sales, including the strategic investments and general costs increases are up 4.5% to £30.2 million; and
- over and above this, the operating costs of new stores, including the full year costs of those stores opened last year, accounted for the remaining £1.0 million of the overall increase.
Administrative expense
During the year our underlying administrative expense increased by approximately £1.3 million to £14.1 million in FY2011 from £12.8 million in FY2010 as set out in the table below.
Of the £1.3 million increase in underlying administrative expenses:
- approximately £0.3 million of the increase is directly attributable to strategic investments made in the marketing, yield management and national accounts functions during the year;
- around £0.6 million of the increase relates to increased payroll costs and is split equally between the UK and France. In the UK, the increase is driven by increased headcount and national insurance, in France it is mainly attributable; to higher bonus payments and the introduction of a statutory profit participation scheme; and
- the balance of £0.4 million includes just over £0.3 million of costs relating to projects in FY2011 which are one off in nature with the remainder being general inflationary increases.
Cost of sales
| £'000 | £'000 | |
Cost of sales FY2010 |
(28,951) | |
Underlying costs increased by 4.5% (including strategic investments) |
(1,299) | |
New store operating costs |
(972) | |
| (2,271) | ||
Cost of sales FY2011 |
(31,222) |
Administrative expense
| FY2011 £'000 |
FY2010 £'000 |
|
Reported administrative expenses |
(15,476) | (11,819) |
Adjusted for: |
||
– exceptional items* |
1,332 | 280 |
– changes in fair value of derivatives |
8 | (461) |
– VAT rebate and one off provision releases |
— | (775) |
Underlying administration expenses |
(14,136) | (12,775) |
* Exceptional items include costs relating to the retirement of Chief Executive and the impairment of value and the
subsequent relocation
of the Paris head office as a result of the fire at the La Défense store.
Underlying EBITDA
Year ended 31 October |
||
| 2011 £'000 |
2010 £'000 |
|
Operating profit |
29,945 | 66,916 |
Adjusted for: |
||
– loss/(profit) on investment properties |
16,187 | (18,472) |
– impairment of investment property |
2,230 | — |
– depreciation and contingent rent |
810 | 915 |
– change in fair value of derivatives |
8 | (461) |
Exceptional items: |
||
– impairment of non-current assets |
382 | — |
– loss on sale of non-current assets |
— | 280 |
– costs relating to retirement of CEO |
702 | — |
– costs relating to relocating French head office |
248 | — |
Underlying EBITDA |
50,512 | 49,178 |
EBITDA before exceptional items, contingent rent, change in fair value of derivatives and (loss)/gain on investment properties
Underlying EBITDA is calculated above for FY2011 and FY2010.
The Group's underlying EBITDA increased by £1.3 million or 2.7% from £49.2 million in FY2010 to £50.5 million in FY2011. This increase principally reflects the increase in revenues discussed above partly offset by the higher cost base in FY2011.
(Loss)/gain on investment properties
The (loss)/gain on investment properties consists of the fair value revaluation gains and losses with respect to the investment properties under IAS 40, impairments in the value of investment properties and finance lease depreciation for the interests in leaseholds. The Group's loss on investment properties was £18.4 million in FY2011 comprising a loss of £10.6 million for revaluations, a one off exceptional impairment charge of £2.2 million and finance lease depreciation of £5.6 million, compared to a gain of £18.5 million in FY2010 comprising a gain of £24.1 million for revaluations and £5.6 million of finance lease depreciation. The movement reflects the combination of yield movements within the valuations together with the impact of changes in the cash flow metrics of each store. The key variables in the valuations are rate per sq ft, stabilised occupancy, number of months to reach stabilised occupancy and the yields applied. The valuation of investment properties is covered in more detail in the property section below.
Operating profit
Operating profit decreased by £37.0 million or 55.2% to £29.9 million for FY2011 from £66.9 million in FY2010. This movement predominantly reflects the £34.7 million swing in the investment properties from a gain of £18.5 million last year to a loss of £16.2 million this year and the one off exceptional impairment charge of £2.2 million. Over and above this item, the £1.3 million increase in underlying EBITDA generated from the trading movements throughout the year is offset by the increased exceptional expenses this year. It should also be noted that the La Défense store, which was closed in the year owing to fire, contributed approximately €0.5 million of operating profit last year which has been mostly lost to the Group this year.
As a result of the fire, £0.2 million of costs relating to relocating the French head office and £0.4 million relating to the impairment of non-current assets have been included as exceptional items, along with £2.2 million relating to the impairment of the investment property. Also within exceptional items is £0.7 million of costs relating to the retirement of the former Chief Executive Officer.
Net finance costs
Net finance costs consist of interest receivable from bank deposits as well as interest payable and interest on obligations under finance leases as summarised in the table opposite above.
The reduced bank interest receivable reflects the lower interest environment prevailing throughout FY2011.
Bank and other interest payable increased by 3.5% to £18.6 million in FY2011 from £17.9 million in FY2010 although this is after capitalising interest of £0.3 million (FY2010: £0.4 million). The interest costs reflect the increase in bank loans together with the full year effect of the amortisation of debt issuance costs of the new bank facility agreement from March 2010.
The Group has interest hedge agreements in place to August 2013 swapping LIBOR on £233 million at an effective rate of 2.325% and EURIBOR on €24 million at an effective rate of 1.67%. The hedge agreements provide cover for 75% of the drawn debt leaving a 25% floating element. Included with bank and other interest payable is £4.0 million (2010: £4.7 million) paid in relation to derivate financial instruments.
In March 2010, the Group entered into a new increased bank facilities agreement of £350 million and €40 million to replace its existing facilities of £302 million for the UK and €60 million for France which were due to expire in July 2011. The bank syndicate comprises seven members. A principal repayment of £5.0 million is due in March 2012 with six monthly repayments thereafter of £7.5 million until expiry in August 2013.
In FY2010, the exceptional recycling of foreign exchange gains arose in respect of recycled foreign currency translation gains from the translation reserve which are now released.
Net finance costs
Financial year |
||
| 2011 £'000 |
2010 £'000 |
|
Bank interest receivable |
212 | 290 |
Bank and other interest payable |
(18,552) | (17,922) |
Net bank interest |
(18,340) | (17,632) |
Exceptional recycled foreign exchange translation gain |
— | 431 |
Exceptional recycling of cash flow hedge reserve |
— | (8,749) |
Fair value movement of derivatives |
1,825 | (4,829) |
Exceptional finance expense |
— | (2,004) |
Interest on obligations under finance leases |
(4,883) | (4,912) |
Net finance costs |
(21,398) | (37,695) |
Revenue by geography
In FY2010, due to the bank re-financing, cumulative brought forward interest swap movements of £8.7 million were recycled from reserves and included as a charge in the income statement. The Group decided to cease hedge accounting for all financial derivative instruments and hence valuation movements are included in the income statement as a result of the restructuring of existing interest swap agreements and the inception of new swap agreements. The income statement for FY2011 includes a credit of £1.8 million in respect of the fair value movement of derivatives (FY2010: a charge of £4.8 million).
In FY2010 exceptional finance expenses related to unamortised debt issuance costs (non-cash) of £2.0 million that were written off in respect of the previous bank facilities.
Interest on finance leases remained flat at £4.9 million (FY2010: £4.9 million) and reflects part of the rental payment under UK GAAP (the balance being charged through the investment (loss)/gain line and contingent rent in the IFRS income statement).
Gearing
Net debt at 31 October 2011 stood at £384.9 million up from £363.2 million at 31 October 2010. During the year, total capital increased by £26.7 million to £660.0 million at 31 October 2011 from £633.3 million at 31 October 2010. The net impact is that the gearing ratio was 58% at 31 October 2011 compared to 57% at 31 October 2010.
Refinancing
Our existing banking facilities run to 31 August 2013 and we have commenced discussion with our key lead banks and other potential partners about refinancing these facilities. Whilst only in their early stages initial responses have been encouraging.
Real estate investment trusts ("REITs")
In 2011 the UK Government announced proposed changes to legislation regarding REITs with the potential impact of removing a number of barriers to REIT status. REIT status provides exemption from certain aspects of UK taxation while placing a number of restrictions on the types of activities that can be undertaken by the business.
The Company currently benefits from carried forward tax losses and capital allowances which mitigate our tax position and have resulted in very limited cash tax payments to date. At present, the immediate tax advantages of conversion to REIT status are therefore limited and we believe our present status continues to remain appropriate.
We will continue to review the position and the optimal structure to generate value for shareholders.
"Given the strong cash flow characteristics of the business model, our robust funding and future commitments, the Board is pleased to recommend a final dividend of 3.55 pence per share bringing the total dividend to 5.30 pence per share for the year."
Dividend
Given the strong cash flow characteristics of the business model, our robust funding and future commitments, the Board is pleased to recommend a final dividend of 3.55 pence per share bringing the total dividend to 5.30 pence per share for the year. The Board remains confident in the prospects for the Group. This dividend reflects the appropriate balance between delivering short-term shareholder returns and building longer-term shareholder value by maintaining our investment in infrastructure and new store development.
Income tax
Income tax for FY2011 was a credit of £4.5 million against an expense of £2.9 million for FY2010. The actual tax payable for FY2011 was £365,000 (FY2010: £17,000) due to the availability of capital allowances in both the UK and France and the offset of French tax losses. The utilisation of losses in France is now annually restricted to €1 million and 60% of the remaining profits following the introduction of recent legislative changes. In respect of deferred tax, an exceptional credit of £6.6 million (FY2010: £3.5 million) arose following re-measurement due to changes in UK Corporation Tax rates which is explained further in note 20.
Profit for the year ("earnings")
Earnings were £13.0 million compared to £26.3 million for FY2010.
EPRA adjusted earnings, which is the earnings figure after adding back the gain/loss on investment properties, exceptional items, changes in fair value of derivatives and the tax thereon, increased by £0.7 million or 4.8% to £16.1 million for FY2011 from £15.4 million for FY2010. Further details of this are given in note 9.
Portfolio valuation
| £m | £m | |
Portfolio valuation at 31 October 2010 |
687.2 | |
Adjusted for: |
||
– new stores opened in FY2011 |
25.2 | |
– UK like-for-like store valuation (see below) |
(7.9) | |
– French like-for-like store valuation (see below) |
8.4 | |
– exchange gain |
1.5 | |
| 27.2 | ||
Portfolio valuation at 31 October 2011 |
714.4 | |
Property valuation
Cushman & Wakefield has again valued the Group's property portfolio. As at 31 October 2011, the total value of the Group's portfolio (including £0.8 million of owner occupied properties) was £714.4 million. This represents an increase of £27.2 million or 4% over the £687.2 million valuation as at 31 October 2010. A reconciliation of the movement is set out above.
At the year end, the Group's property portfolio consisted of 119 trading stores. The freehold/long leasehold stores were valued at £576.5 million and the short leasehold properties, including the French commercial leases, were valued at £137.9 million. Freehold/long leasehold stores which make up 61% of the stores by number account for 81% of the valuation. The remaining 19% measured by value is attributable to the short leasehold portfolio.
The valuation at 31 October 2011 is £20.8 million up on 30 April 2011 which includes a £2.1 million exchange loss on the translation of the French assets at the relevant balance sheet dates. New stores have delivered around £6.2 million of additional value in the second half of the year with the like-for-like portfolio therefore delivering a valuation increase of £16.7 million. The existing UK store portfolio has delivered an increase of £2.8 million in the second half of the year enhanced by a £13.9 million increase in France.
The net impact of the valuation is for adjusted EPRA NAV per share to decrease marginally to 212.3 pence per share (31 October 2010: 212.6 pence per share).
Net cash flow
Financial Year |
||
| 2011 £'000 |
2010 £'000 |
|
Net cash inflow from operating activities |
25,649 | 27,761 |
Net cash outflow from investing activities |
(36,649) | (22,981) |
Net cash provided by financing activities |
10,107 | (15,354) |
Net (decrease) in cash and cash equivalents |
(893) | (10,574) |
The Group freehold exit yield for the valuation at 31 October 2011 was 7.82%, reflecting a 5 bps inward movement from 7.87% at 31 October 2010. The weighted average annual discount rate for the whole portfolio has followed a similar trend to exit yield.
In their report to us our valuer has drawn attention to valuation uncertainty resulting from exceptional volatility in the financial markets and a lack of transactions in the property investment market. Please see note 10 for further details.
Cash flows
The table above summarises the Group's cash flow activity during the FY2011 and FY2010 in accordance with IFRS.
Net cash inflow from operational activities
There are two main factors influencing the £2.1 million decrease in cash from operating activities in FY2011 compared to FY2010. This is made up of a combination of increased cash generated from operations offset by movements in working capital and increased interest payments.
Net cash outflow from investing activities
Cash outflow from investing activities has increased by £13.7 million to £36.6 million for FY2011 from £23.0 million for FY2010. Whilst there are several contributing factors affecting this movement it is mainly due to the increase in expenditure on investment and development assets. Expenditure on investment and development properties in FY2011 was £35.0 million, an increase of £11.7 million from £23.3 million in FY2010. The underlying level of expenditure on investment and development assets is running at very similar levels to last year, the main difference being the acquisition of the freehold interest in our Pentonville Road store for £11.5 million in the current financial year. In addition, we disposed of one non-core site in UK for £0.6 million in FY2010 with no similar disposals in FY2011.
Net cash inflow from financing activities
The cash flows from financing activities increased by £25.5 million in FY2011 to an inflow of £10.1 million from an outflow of £15.4 million in FY2010. This has several key factors which are set out on the face of the cash flow statement but mainly reflects the costs associated with the refinancing and realignment of the hedging arrangements concluded in FY2010.
Future liquidity and capital resources
The Group anticipates funding any future small to medium acquisitions or new store developments from available cash and borrowings. Borrowings under the existing bank facilities are subject to certain financial covenants and the Group is comfortably in compliance with its covenants at 31 October 2011 and, based on forecast projections, for a period in excess of twelve months thereafter. The debt facilities do not mature until August 2013.
Annual General Meeting
The meeting will be held on 21 March 2012 at the Group's registered office, Brittanic House, Stirling Way, Borehamwood, Hertfordshire WD6 2BT.
Richard Hodsden
Chief Financial Officer
26 January 2012
