SFSHF - Self Storage In The U.K.: A Look At Big Yellow Group Plc For Dividends

Summary

• Big Yellow Group Plc (Big Yellow) has released its Q3 trading update.
• The recent pullback presents a solid entry point.
• Big Yellow also presents a solid long-term REIT holding for those seeking income.

The Company

Big Yellow Group Plc (LON:BYG) ( BYLOF ) is the largest self storage operator by market cap in the United Kingdom (£2.22B) and operates as a Real Estate Investment Trust ('REIT'). The group comprises 108 purpose-built facilities throughout the U.K. operating under 'Big Yellow' and 'Armadillo'. Its nearest competitor is Safestore Holdings ( SFSHF ) with a market cap of £2.12B.

The company's share price currently stands approximately 30% below its all-time high in 2022 and presents an opportunity for investors to benefit from a more favorable entry point and dividend yield.

Q3 Trading Update

Big Yellow released its Q3 trading update today, which has given an insight on how the group is performing in light of a rising interest rates and a challenging macro-environment plagued by high inflation.

The company's occupancy has decreased YoY in the current quarter from 85.5% to 80.4%. Although this seems like a significant drop, this is partly due to the acquisition of the remaining Armadillo stores it previously did not own.

While occupancy dropped, the group managed to increase average rental rates by 10% YoY to £31.85. This led to an increase in overall revenue for the group to £48.1m for the quarter and £142m year to date (increases of 6% and 12% respectively).

The group's maximum lettable area for their stores has increased by 4% to 6,295,000 sq. ft.

Dividends

The Group's policy is to distribute 80% of full year adjusted earnings. The interim dividend that has been declared is 22.3 pence per share, and if followed by the same for its final dividend, would equate to a dividend yield of 3.72%. This represents an 8% increase YoY and a higher than average yield on historical metrics for the company.

The company has a strong record of dividend payments, with increases every year since 2010.

Self Storage Outlook In The U.K.

Self Storage in the U.K. is a steadily growing market with current store numbers at approximately 2050, including 621 predominately container sites representing a growth of 2.65% increase of stores YoY. This equates to approximately 52 million square feet of net lettable space resulting in an industry annual turnover of £930m, an increase of 4.5% from 2021.

Data for occupancy and rental rates currently indicate a strong environment for the sector, with both at record levels with no sign of any significant changes.

Going forward, although the full effects of the current high inflationary environment are yet to be seen, the self storage industry has the ability to quickly adapt due to its unique business model of short-term rental contracts.

In an inflationary environment such as this, self storage benefits from the fact that we can move our asking prices to new customers at short notice and give inflationary increases to our existing customers on an annual basis.

(1H Earnings Report 2022)

In an environment that for most businesses is very uncertain, a self storage company such as Big Yellow can respond to pricing changes quickly and has the ability to weather market storms. This makes the company a favorable investment proposition for investors seeking stability in a market of uncertainty.

A Rising Interest Rate Environment

One of the main worries for investors right now is how a rapidly rising interest rate environment affects the companies that they own shares in.

Big Yellow indicated in their 1H results from September 2022 that net debt stood at £469.8m, an increase from £411.8 in March earlier that year. While this increase in debt has decreased the group's interest cover to 9.3 times, it still remains far above their internal minimum interest cover of 5 times and their covenant level of 1.5 times.

The results also noted that 41% (and shortly to be 50%) of their debt is fixed, limiting the effects of rising interest rates on company profitability.

Conclusion

Big Yellow has a strong track record of performing in all market conditions, which has allowed it to remain a market leader of self storage in the U.K. This points to the company as a safe-haven for investors looking for stability in the current economic climate while rental rates and occupancy of net lettable space stand at record levels.

The current share price presents a 30% discount to historical highs and has resulted in a higher than average dividend yield for investors seeking income-producing assets.

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