Safestore : Interim results

Interim results

Released : 15/06/2017

RNS Number : 1236I Safestore Holdings plc 15 June 2017

15 June 2017

Interim results for the 6 months ended 30 April 2017

A good half year, significant refinancing completed

Highlights

Good Financial Performance

• Group Revenue up 15.7% (12.4% at CER1)

• Group like­for­like2 revenue at CER1 up 3.7% with UK up 3.9% and Paris up 2.9%

• Cash Tax Adjusted Earnings per Share up 15.6% at 10.4p

• 16.7% increase in the interim dividend to 4.2p (2016: 3.6p)

  Operational Focus

• Space Maker acquisition fully integrated and performing in line with expectations

• All five recently opened stores trading well

• New consumer website in Paris business, following the UK's success

• New site acquired at Combs­la­Ville in Paris opened in June 2017

• Mitcham site acquired in December 2016 and subject to planning, scheduled to open in FY18

  Strong and Flexible Balance Sheet

• Group loan­to­value ratio ("LTV"8) at 30%, interest cover ratio ("ICR"9) at 5.5x

• Refinancing completed on 31 May 2017 reducing effective interest rate to c.2.3% from 3.5% and extending the weighted average maturity of debt from 3.4 years to 7.5 years

Frederic Vecchioli, Safestore's Chief Executive Officer, commented:

"Safestore has performed well in the first half of the year and continues to build on the strong earnings and dividend growth achieved over the last four years. Notwithstanding the uncertain macro­economic backdrop, the Group continues to generate a record number of enquiries across its entire platform. In addition to solid growth in our existing business, our recently acquired Space Maker business and the five new stores opened during the last twelve months are trading well. I am delighted to announce the addition of another site in Paris, at Combs­la­Ville, which opened earlier this month.

"As we enter our peak trading period, we continue to see good levels of interest in self­storage in the UK and increasing momentum in Paris. We are well placed to meet this demand with our 1.7m square feet of currently unlet, fully invested space.

"I am delighted with our recent refinancing which further reduces our ongoing finance costs, increases our debt maturity and improves our balance sheet capacity and flexibility, allowing us to continue to seek selected development and acquisition opportunities. The company is in a strong position and remains on­course to meet the board's full year expectations."

Notes

1. ­ CER is Constant Exchange Rates (Euro denominated results for the current period have been retranslated at the exchange rate effective for the comparative period, in order to present the reported results on a more comparable basis).

2. ­ Like­for­like adjustments have been made to remove the 2016 openings of Wandsworth, Altrincham, Birmingham (including closure of our existing Birmingham store) and Emerainville, as well as Chiswick in the current financial year. In addition, the impact of the acquisition of Space Maker on 29 July 2016 has been adjusted.

3. ­ Underlying EBITDA is defined as operating profit before exceptional items, corporate transaction costs, change in fair value of derivatives, gain/loss on investment properties, contingent rent and depreciation. Underlying profit before tax is defined as underlying EBITDA less leasehold rent, depreciation charged on property, plant and equipment and net finance charges relating to bank loans and cash.

4. ­ Occupancy excludes offices but includes bulk tenancy. As at 30 April 2017, closing occupancy includes 36,750 sq ft of bulk tenancy (30 April 2016: 37,750 sq ft). 5 ­ MLA is Maximum Lettable Area. Group MLA at 30 April 2017 is 5.64m sq ft (30 April 2016: 4.93m sq ft).

1. ­ Cash tax adjusted earnings per share (EPS) is defined as profit or loss for the year before exceptional items, corporate transaction costs, change in fair value of derivatives, gain/loss on investment properties and the associated tax impacts as well as exceptional tax items and deferred tax charges, divided by the weighted average number of shares in issue (excluding shares held by the Safestore Employee Benefit Trust).

2. ­ Free cash flow is defined as cash flow before investing and financing activities but after leasehold rent payments.

3. ­ LTV ratio is Loan­to­Value ratio, which is defined as gross debt (excluding finance leases, but adjusted for the fair value of the US dollar cross currency swap) as a proportion of the valuation of investment properties and investment properties under construction (excluding finance leases).

4. ­ ICR is interest cover ratio, and is calculated as the ratio of underlying EBITDA after leasehold rent to underlying finance charges. 10 ­ Adjusted for the impact of cross currency swap agreements.

Reconciliations between underlying metrics and statutory metrics can be found in the financial review and financial statements sections of this announcement.

Summary

Safestore has delivered a good financial performance in the first half of the year through a combination of solid organic growth, the acquisition of Space Maker and the opening of five new stores over the last twelve months. Reported Group revenue increased 12.4% at CER1 and like­for­like2 revenue increased by 3.7%. The Group's like­for­like average occupancy increased by 1.1 percentage points ("ppts") to 71.9% with the average storage rate up 1.9% at CER1.

Our operational performance across the UK has been robust in the half­year resulting in a 3.9% increase in like­for­like revenue. Our new consumer website, which was successfully launched at the end of 2015, is performing consistently, resulting in continued good enquiry growth. In the UK like­ for­like occupancy increased 0.9ppts to 69.5%, driven by a strong performance in regional UK.

The Space Maker portfolio, acquired in July 2016, is now fully integrated into the Group and performing in line with our expectations. In addition, the four new UK stores in London­Chiswick, London­Wandsworth, Birmingham and Altrincham are performing well against our expectations.

In Paris, our recently launched consumer website, building on the success of the UK site, is now fully operational. Our trading performance has been robust with like­for­like revenue growing by 2.9%. Our balanced approach to revenue management resulted in rate growth of 2.7% and average occupancy growth of 1.3% on a like­for­like basis. Like­for­like closing occupancy ended the period up 1.5ppts at 80.9% (2016: 79.4%). We are now in the nineteenth consecutive year of revenue growth in Paris. Our new store at Emerainville to the east of Paris opened on time and on budget in September 2016 and is trading in line with expectations and our Longpont extension, adding 22,600 sq ft to the store, was completed in January 2017. We opened our recently acquired new store, announced today, at Combs­la­Ville in Paris, earlier this month.

Group underlying EBITDA of £34.2m increased 12.3% at CER1 on the prior year and 16.7% on a reported basis reflecting the impact of the strengthening Euro on the profit earned on our Paris business. The Group's strong EBITDA performance is reflected in a 15.6% increase in cash tax adjusted EPS6 in the period to 10.4p (2016: 9.0p).

Our property portfolio valuation, including investment properties under construction, has increased by 4.5% on a constant currency basis since 31 October 2016. After exchange rate movements the portfolio valuation increased by 2.7% to £980.3m with the UK portfolio up £27.6m, to £738.2m and the French portfolio increased €16.9m to €287.8m.

Reflecting the Group's good trading performance, the Board is pleased to recommend a 16.7% increase in the interim dividend to 4.2p per share (2016: 3.6p).

Outlook

Safestore has a strong market presence in both the UK and Paris. Trading in our newly opened stores and in the recently acquired Space Maker business is encouraging. With 1.7m square feet of unlet space available at 30 April 2017 (the equivalent of 40+ stores), we have significant, low­cost growth potential ahead.

We remain focused on the continuous improvement of the operational performance of the business and leveraging our leading market positions to full effect. Our recent refinancing further improves our balance sheet flexibility and, combined with strong cash generation, provides us with the opportunity to take advantage of further selective development and acquisition opportunities in our key markets, subject to our rigorous investment criteria. We continue to build our new store pipeline with our acquisition of a development site in Mitcham, South West London in December 2016 and a site in Combs­la­Ville, south of Paris in April 2017.

Self­storage continues to be a relatively immature industry, with significant potential for further market growth. We continue to see good levels of interest in self­storage and believe that we are well placed to trade through current future macro­economic uncertainty given our resilient business model, scale and marketing expertise combined with our improved operational capability, geographical diversity and strong balance sheet.

A presentation for analysts will be held at 9.30am today at: Investec, 2 Gresham St, London EC2V 7QP

For dial­in details of the presentation please contact:

Gemma Mountford (gemma.mountford@instinctif.com or telephone on 020 7457 2020).

Notes to Editors

• Safestore is the UK's largest self­storage group with 134 stores, comprising 109 wholly owned stores in the UK (including 63 in London and the South East with the remainder in key metropolitan areas such as Manchester, Birmingham, Glasgow, Edinburgh, Liverpool and Bristol) and 25 wholly owned stores in the Paris region.

• Safestore operates more self­storage sites inside the M25 and in central Paris than any competitor providing more proximity to customers in the wealthiest and densest UK and Parisian markets.

• Safestore was founded in the UK in 1998. It acquired the French business "Une Pièce en Plus" ("UPP") in 2004 which was founded in 1998 by the current Safestore Group CEO Frederic Vecchioli.

• Safestore has been listed on the London Stock Exchange since 2007. It entered the FTSE 250 in October 2015.

• The Group provides storage to around 55,000 personal and business customers.

• Safestore has a maximum lettable area ("MLA") of 5.64 million sq ft. At 30 April 2017, 3.94 million sq ft was occupied.

• Safestore employs around 600 people in the UK and France.

  Our Strategy

  The Group's strategy remains the same as stated in our last annual report. We believe that the Group has a well located asset base, management expertise, infrastructure, scale and balance sheet strength to exploit the healthy industry dynamics of the self­storage sector. As we look forward, we consider that the Group has the potential to significantly further increase its earnings per share by:

  • Optimising the trading performance of its existing portfolio;

  • Maintaining a strong and flexible capital structure; and

  • Taking advantage of selective portfolio management and expansion opportunities.

    Optimisation of Existing Portfolio

    With the opening of five new stores and the acquisition of Space Maker over the last twelve months, we have strengthened our market leading portfolio in the UK and Paris. We have a high quality, fully invested estate in both the UK and Paris. Of our 134 stores, 88 are in London and the South East of England or in Paris with 46 in the other major UK cities. We now operate 44 stores within the M25 which represents a higher number of stores than any of our competitors.

    In the last year, with the aforementioned new store openings and acquisition our MLA has increased by 14.4% to 5.64m sq ft at 30 April 2017. At the current occupancy level of 69.8% we have 1.70m sq ft of unoccupied space, of which 1.46m sq ft is in our UK stores and 0.24m sq ft in Paris. This is the equivalent of over 40 empty stores located across the estate. The available space is fully invested and the related operating costs are essentially fixed and already included in the Group cost base. Our continued focus will be on ensuring that we drive occupancy to utilise this capacity at carefully managed rates.

    There are three elements that are critical to the optimisation of our existing portfolio;

  • Enquiry generation through an effective and efficient marketing operation;

  • Strong conversion of enquiries into new lets; and

  • Disciplined central revenue management and cost control.

    In­house digital marketing expertise

    Awareness of self­storage is increasing each year but remains relatively low with 58% of the UK population either knowing very little or nothing about self­storage (source 2017 SSA Annual Report).

    In the UK around 75% of our new customers are using self­storage for the first time. It is essentially a brand­blind product with only 12% of respondents in the 2017 Self Storage Association Annual Survey stating that a brand would influence their purchase decision. Typically customers requiring storage start their journey by conducting online research using generic keywords in their locality.

    We believe there is a clear benefit of scale in the generation of customer enquiries. The Group has continued to invest in its consumer website as well as in­house expertise which, combined with the employment of carefully selected external partners, has resulted in the development of a leading digital marketing platform that has generated 37% enquiry growth over the last four years. In that period, enquiries originating from internet searches have increased by 42%.

    The Group has recently launched a new trading website for the Paris business, building on the success of the new UK site. Online enquiries now represent 82% of our enquiries in the UK (2016: 80%) and 73% in France (2016: 62%). 56% of our online enquiries in the UK originate from mobiles or tablets, compared to 52% last year. The ranking in the search pages is a result of a complex function that combines (i) the budget invested directly into the paid search and the capacity to allocate it efficiently on a real time basis, with (ii) the budget invested indirectly into the numerous actions that optimise the website, which, together with its size and traffic, determines its relevance and quality score for the search engines. Our in­ house expertise and skills and significant annual budget enable us to achieve the above results. Approximately 95% of our marketing budget in the UK is spent on digital marketing.

    A key objective of our marketing team has been to improve the volume of digital enquiries generated by the business and we will continue to invest in activities that promote a strong search engine presence. In addition to driving volume, we have managed to reduce the cost per enquiry continuously over the past few years.

    Feefo, the independent merchant review system, which allows customers to leave their feedback on the quality of our customer service, has been integrated into our website since 2013. Over this period, our customer satisfaction score has averaged above 96%.

    Motivated and effective store teams benefiting from improved training and coaching

    In what is still a relatively immature and poorly understood product, customer service and selling skills at the point of sale remain essential in

    earning the trust of the customer and in driving the appropriate balance of volumes and unit price in order to optimise revenue growth in each store.

    Over the last three years we have established an enthusiastic, dynamic and effective store team. The employees of Space Maker, which was acquired during last year, are now fully integrated into the Safestore training and incentive framework and the twelve stores have each been geographically integrated into one of our eleven regions. Two new Divisional Managers, reporting to our Director of Operations, have been internally recruited to further support our experienced team of Regional Managers.

    In the last twelve months we have invested further resources to better manage our building maintenance and facilities management programme. By way of example, the efficiencies and progress made in this area have allowed us to start our LED lighting roll­out earlier than expected.

    New recruits to the business benefit from enhanced induction and training tools which have been developed in­house and enable us to quickly identify high potential individuals. All new recruits receive individual performance targets within four weeks of joining the business and certain new recruits are placed on the 'pay­for­skills' programme which allows accelerated basic pay increases dependent on success in demonstrating specific and defined skills. A key target of our programme is to ensure that close to 100% of our store managers are promoted internally and our Management Development programme was launched in November 2016 with 15% of our sales consultants participating. The first 16 candidates are due to graduate from the programme in November 2017 and the second intake commenced their programme on 31 May 2017.

    All store staff continue to benefit from on­going training and development. In 2016, we delivered 27,500 hours of training to sales staff through face­to­ face sessions and via our internally developed online learning tool. This Learning Management System also provides the opportunity for team members to receive rigorously enforced Health and Safety and compliance training, ensuring that our staff are up to date in relation to their technical knowledge in these areas. These modules are continually updated to target the areas of most opportunity and maintain colleague engagement. Cyber security continues to be an increasing global threat. Safestore's online training modules relating to a new security policy were completed by all Safestore employees in the first half of 2017 and will continue to be updated in the light of any enhanced threats.

    Over the last two years we have developed a customised coaching programme for Store Managers. The training is delivered by Regional Managers and is focused on continual improvement in sales performance. Along with an enhanced selling skills module we have devised and launched a refresher programme that is currently being rolled out to all our store colleagues. This programme is being delivered by our training store managers regionally to ensure an efficient and cost effective delivery.

    The performance of all team members is monitored closely via a series of daily, weekly and monthly Key Performance Indicators. A new dashboard was introduced in the last year which has enabled increased focus at store and regional level on the key operating metrics of the business. Bonuses of up to 50% of basic salary can be earned monthly based on performance against new lets, occupancy, ancillary sales and pricing targets. In addition, a Values and Behaviours framework is overlaid on individuals' financial performance in order to assess team members' performance and development needs on a quarterly basis.

    The benefit of these initiatives is reflected in an improved performance by the stores in converting enquiries into new lets. Conversion of enquiries is now consistently strong and has improved by c.19% since 2013. Our customers are at the forefront of everything we do and our twelve month rolling Feefo customer service score of 96% reflects our ongoing commitment to their satisfaction.

    As an "Investors in People" organisation since 2003 our aim is to be an employer of choice in our sector and we passionately believe that our continued success is dependent on our highly motivated and well trained colleagues.

    Central Revenue Management and Cost Control

    We continue to pursue a balanced approach to revenue management. We aim to optimise revenue by improving the utilisation of the available space in our portfolio at carefully managed rates. Our central pricing team is responsible for the management of our dynamic pricing policy, the implementation of promotional offers and the identification of additional ancillary revenue opportunities. Whilst price lists are managed centrally and can be adjusted on a real time basis when needed, the store sales teams have the ability to offer a Lowest Price Guarantee in the event that a local competitor is offering a lower price. The reduction in the level of discount offered over the last three years is linked to store team variable incentives and is monitored closely by the central pricing team.

    Our strategy to optimise revenue is implemented by continually reviewing the appropriate mix of occupancy and rate growth targets, store by store. The work of the central pricing team has contributed to like­for­like average rate increases of 1.7% in the UK and 2.7% in Paris over the period, while maintaining an average occupancy that was 1.9% up in the UK and 1.3% up in Paris over the previous year on a like­for­like basis.

    Rate growth is predominantly influenced by:

  • The store location and catchment area;

  • The volume of enquiries generated online;

  • The store team skills at converting these enquiries into new lets at the expected price; and

  • The pricing policy and the confidence provided by analytical capabilities that smaller players may lack.

    We believe that Safestore has a very strong proposition in each of these areas.

    Costs are managed centrally with a lean structure maintained at the Head Office. Enhancements to cost control are continually considered and the cost base is challenged on an ongoing basis.

    Strong and Flexible Capital Structure

    On 31 May 2017 we completed the refinancing of the Group's US Private Placement Notes ("USPP") and an amendment and extension of its existing bank facilities to extend the average maturity and lower the cost of the Group's debt financing. Since 2014 we have refinanced the business on three occasions and believe we now have an optimised capital structure that is appropriate for our business and which provides us with the flexibility to take advantage of carefully evaluated development and acquisition opportunities.

    The key terms of the new and amended arrangements are as follows:

    US Private Placement Notes

  • The previous $65.6m 5.83%10 2019 USPP and $47.3m 6.74%10 2024 USPP were repaid in full;

  • New Euro and Sterling denominated USPP notes were issued with the following tenor and coupons:

    • €50.9m 7 year notes at a coupon of 1.59%;

    • €74.1m 10 year notes at a coupon of 2.00%; and

    • £50.5m 12 year notes at a coupon of 2.92%.