Business Review
Business Objectives The main elements of our strategy remain:
Financing Objectives 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. The level of bank debt in the business is closely monitored against the Board's policy guidelines, which currently require that the ratio of net debt to gross property assets is no greater than 50% and interest cover not less than 2 times based on net operating income, comfortably ahead of its banking covenants. However, it is acknowledged that there may be limited periods where income cover temporarily falls slightly below 2 as a result of known factors, for example a number of new store openings, as new freehold stores typically make a loss for the first three to six months before breaking even at the net operating income level. Risk Management Self Storage Market Risk Of the customers moving into the business in the last year, our surveys indicate approximately 54% is in some way linked to the housing market of which 26% are customers renting storage space whilst moving within the rental sector, and the balance moving within the owner occupied sector. We have seen an increase in demand from customers within the rental sector during the year, in part caused by the decline in the housing market and availability of credit. Customers within the rental sector will typically stay longer in the stores than the shorter demand profile of house move customers. 12% of our customers who moved in during the year rent storage space as a spare room for lifestyle purposes and approximately 20% of customers used the product because some event has occurred in their lives generating the need for storage; they may be moving abroad for a job, have inherited furniture, are getting married or divorced, are students who need storage during the holidays, or homeowners developing into their lofts or basements. The balance of 14% of our customers are businesses ranging from start ups and market traders to retailers and larger multinationals storing stock, documents, equipment, or promotional materials all requiring a convenient flexible solution to their storage, either to get started or to free up more expensive space. The demand from business customers, who typically occupy larger rooms, has been relatively robust, as they seek a cost effective, flexible solution to their storage requirements, preferring self storage to the commitment of a long lease. Self storage is an immature market in the UK compared to other markets such as the United States and Australia, and we believe has further opportunity for growth. Awareness of self storage and how it can be used by domestic and business customers is relatively low throughout the UK, although higher in London. The rate of growth in branded self storage on main roads in good locations has historically been limited by the difficulty of acquiring sites at affordable prices and obtaining planning consent. The lack of availability of credit within the economy has further reduced this rate of growth in recent months. Big Yellow only invests in prime locations, developing high quality self storage centres in the large urban conurbations where the drivers in the self storage market are at their strongest and the barriers to competition exist. We have a large current storage customer base of approximately 28,500 spread across the portfolio of open stores and many thousands more have used Big Yellow over the years. In any month, customers move in and out at the margin resulting in changes in occupancy. Despite the current environment, this has remained a seasonal business and typically one sees growth over the spring and the summer months, with the seasonally weaker periods being the winter months. The performance in terms of occupancy, revenue and EBITDA of our stores can be seen from the Portfolio Summary. The average length of stay in Big Yellow's stores is increasing. At 31 March 2009 the average length of stay for existing customers was 18.0 months; a marked increase on 15.6 months in the prior year. For all customers, including those who have moved out of the business, the average length of stay has increased from 8.0 months to 8.4 months. This translates into a loyal customer base. In our 32 same store portfolio, 36% of our customers have been storing with us for over three years. A further 19% in these stores have been in the business for between one and three years. |
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Property Risk The planning process remains difficult with some planning consents taking in excess of twelve months to achieve. We do take planning risk where necessary, although the more distressed property market will in our view provide more opportunity to buy sites on a conditional basis. Big Yellow's management has significant experience in the property industry generated over many years and in particular in acquiring property on main roads in high profile locations and obtaining planning consents. In the year under review we acquired just one site, in Stockport, within Big Yellow Limited Partnership. We now have a portfolio of 70 stores and sites of which 54 are currently open and a further 13 have planning consents. We have surplus land of £25 million which we are seeking to sell in the next 18 months. We manage the construction of our properties very tightly. The building of each site is handled through a design and build contract, with the fit out project managed in-house using an established professional team of external advisors and sub-contractors who have worked with us for many years to our Big Yellow specification. We achieved two significant sustainability milestones during the year. Our Sheen store achieved the highest ‘Excellent' rating on the Building Research Establishment's Environmental Assessment Methodology (BREEAM), in the industrial buildings category, and our new store at Twickenham achieved an A+ rating on carbon emissions, indicating that it has net zero CO2 emissions. Treasury Risk The Group monitors compliance with its banking covenants closely. During the year it complied with all its covenants, and is forecast to do so for the foreseeable future. Our portfolio is relatively high yielding and we believe a flexible approach to our hedging is appropriate for our strategic aims, given our conservative balance sheet. Interest Cover and Balance Sheet Risk Credit Risk Taxation Risk Real Estate Investment Trust ("REIT") Risk Human Resources Risk Reputational Risk Customer average length of stay – 31 March 2009
Stores The maturity profile across the 50 wholly owned stores open at the end of the year is set out in the Portfolio Summary on page 24 and shows a blended occupancy for the portfolio of 55% (1.7 million sq ft occupied), with the same stores at an average occupancy of 75% (2008: 82%). The fall in average occupancy reflects the more difficult trading conditions experienced through the year, and is primarily as a result of weakness in our mid-range room sizes typically used by owner-occupiers staying relatively short periods and moving within the housing market. Our ability to manage rental yields through price increases has meant that despite the impact of a 9% occupancy fall on the same store portfolio, the reduction in revenue year on year was limited to 4%. There are a further 16 freehold sites (including nine sites within Big Yellow Limited Partnership). These sites are at various stages of planning and construction which, when fully developed, will increase the total capacity of the portfolio to 4.5 million sq ft. 6 of the 16 sites in the development pipeline are located in Greater London, including Twickenham which opened in May, which we believe will continue to improve the quality of our store portfolio. There are five sites currently under construction in the Partnership and the trading results from recently opened stores in the north are encouraging. We continue to work on obtaining planning consents for all future stores. We expect to open six stores in the current financial year, one within the core Group, and five within the Partnership. During the year we moved in over 34,000 customers taking 2.1 million sq ft compared to 40,000 customers taking 2.4 million sq ft last year. This resulted in the wholly owned stores reducing in occupancy by 85,000 sq ft (37,000 sq ft increase last year). Of the 50 wholly owned stores open at the year end 47 are now trading profitably with the other 3 being recent openings. The Big Yellow store model is now well established. The "typical" store contains 60,000 sq ft and takes some 3 to 4 years to achieve 85% occupancy. The average room size is 60 sq ft and the average net rental achieved last year across the 50 wholly owned stores was £26.53 per sq ft per annum (the average rent in London is higher at £28.75 per sq ft per annum). The stores in lease-up achieved a higher average rental (£27.00 per sq ft) than the mature stores (£26.42 per sq ft), reflecting the greater London weighting of the lease-up stores. The store is initially run by three staff – adding a part time member of staff once the store occupancy justifies the need for the extra administrative and sales workload. Given that the operating costs of these assets are relatively fixed, larger stores in bigger urban conurbations, particularly London, drive higher revenues and higher operating margins. The drive to improve store operating standards and consistency across the portfolio remains a key focus for the Group. Excellent customer service is at the heart of our business objectives, as a satisfied customer is our best marketing tool. We measure customer service standards through a programme of mystery shoppers and ex-customer surveys. We have in place a team of Area Managers who have on average been with Big Yellow for six years. They develop and support the stores to drive the growth of the business. Adrian Lee, Operations Director, is the Board member responsible for dealing with all customer issues. The store bonus structure rewards occupancy growth, sales growth and cost control through setting quarterly targets based on occupancy and store profitability, including the contribution from ancillary sales of insurance and packing materials. Information on bonus build up is circulated monthly and stores are involved in preparing their own targets and budgets each quarter, leading to improved visibility, a better understanding of sales lines and control of operating costs. 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. The total construction spend in the year was £36 million. We currently have six new stores on site, all of which will open in the financial year 2009/10. We believe that as a customer facing real estate business it is paramount to maintain the quality of our estate and customer offering. We therefore continue to invest in a rolling programme of store makeovers, preventative maintenance, store cleaning and the repair and replacement of essential equipment, such as lifts and gates. During the year we were pleased to sign a management agreement with a subsidiary of HSBC Bank plc to manage a portfolio of ten freehold stores, branded as Armadillo Self Storage. We have been operating the stores for two months. Our initial activity has consisted of moving the staff onto our centralised systems and training the staff on our way of working. We are currently working on rebranding all the stores with a new Armadillo Self Storage livery. The portfolio will shortly be integrated on our website and we look forward to working with HSBC to maximise value over the five year term of our management contract. Sales and Marketing We are at the forefront of online innovation, and in February 2009 we launched our new website, building on our unique online reservation and real-time pricing system. The website is structured around educating browsers and communicating our best quality facilities and value for money. As a result of this, our conversion rate of online enquiries has doubled. Traffic to the website has grown by 59% year-on-year, and all our advertising budget is now dedicated to online activity. During 2008, we invested in new tools to help us measure and continually optimise our online marketing. We are constantly looking to improve our e-commerce proposition and we will continue to lead the industry in this area. We commission annual awareness surveys and our Brand continues to grow strongly. Highlights from this year's survey include:
Source: YouGov, September 2008 A thorough understanding of self storage (ie a full awareness of the service provided and its benefits) grew more rapidly this year, with 50% of the UK population having at least a reasonable knowledge of the product. In spite of this growth, educating the public about our top quality service and facilities continues to be at the core of our marketing programme. We continually monitor local market conditions and review our promotions regularly. Our strategy is to offer targeted promotions to ensure we are offering the best value available to our customers, whilst ensuring that we achieve our rental yield objectives. Local marketing, selling standards and customer service at store level are also critical to building the brand and achieving customer loyalty and recommendations. We invest significantly in training and have a reward structure and performance monitoring systems which focus specifically on achieving sales and customer service objectives. During the year the Group spent approximately £2.6 million (4.5% of our revenue) on marketing, in line with the previous year. It is our intention to continue to invest 4.25% to 4.5% of our revenue to increase awareness of Big Yellow in existing and new markets, particularly as we expand into new cities across the country. Security We have implemented customer security procedures in line with advice from the Metropolitan Police and continue to work with the regulatory authorities on issues of security, reviewing our operational procedures regularly. The importance of security and the need for vigilance is communicated to all store staff and reinforced through training and we have continued to run courses to enhance the awareness and effectiveness of our procedures in relation to security, entitled "You and Your Customer". People We encourage a culture of partnership within the business and believe in staff participating in corporate performance through bonus schemes and share incentives. Many employees benefit from an HMRC approved Sharesave Scheme, which provides an opportunity to invest in the future success of Big Yellow at a discount to the prevailing share price at the date of each invitation. Our stakeholder pension scheme managed by Friends Provident, has been taken up by nearly 70% of employees eligible to join and a voucher awards scheme is used extensively across the business to recognise and reward our staff. We aim to promote employee wellbeing through a range of flexible working options to include flexitime, staggered hours, home working and sabbaticals. We provide a comprehensive range of medical support and advice though our occupational health providers and have arranged corporate gym membership on a national basis. We continue to recognise the importance of communication and consultation with an annual conference, regular formal and informal meetings and bi-monthly newsletters and operational updates. In addition, our Directors and senior management spend significant time in the stores and are accessible to employees at all levels. An annual Employee Attitude Survey provides management with key feedback and guidance as to where to focus its attention to further improve the working environment. We had 273 full, part time and casual employees in the business at the year end (2008: 226 employees), and recruiting and retaining the right calibre people remains critical to the continued success of the Company. We promote the individual development of staff through training and regular performance appraisals and delivered nearly 900 days training to employees in the last year, equating to an average of approximately 3.5 days training per employee. In the stores, nearly 60% of the managerial posts have been filled by internal promotions. The Remuneration Committee has been conducting a benchmark review of the Executives' remuneration with a view to developing a long term share based bonus plan for next three to five years. Further details are included in the Remuneration Report and will be included in the Notice of the Annual General Meeting. In March of this year, we were delighted to have been recognised as one of the Sunday Times 100 Best Companies To Work for 2009 and also to have achieved Two Star Status for the Best Companies Accreditation. Corporate Social Responsibility Corporate Social Responsibility Policy The Board commits itself to:
Operationally, Big Yellow commits to:
The CSR Manager will facilitate the Board and Group Operations to achieve these commitments by establishing more specific objectives within the existing management structure and implementing guidance to meet agreed continuous improvement targets. The CSR Manager is also responsible for recording key performance indicators for annual reporting and review by the Board. A detailed review of our work in corporate social responsibility is included within the CSR Report on pages 32 to 38. |
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