Safestore : Interim Results

Interim Results

Released : 18/06/2019

RNS Number : 5371C Safestore Holdings plc 18 June 2019

18 June 2019

Safestore Holdings plc

("Safestore", "the Company" or "the Group")

Interim results for the 6 months ended 30 April 2019

Solid H1 performance, on course to meet full year expectations

	6 months	6 months
Key Measures	ended 30	ended 30	Change1	Change-CER	2
	April 2019	April 2018
Underlying and Operating Metrics- total
Revenue	£73.1m	£69.2m	5.6%	5.9%
Underlying EBITDA3	£41.4m	£39.1m	5.9%	6.1%
Closing Occupancy (let sq ft- million)4	4.65	4.50	3.3%	n/a
Closing Occupancy (% of MLA)5	73.0%	71.5%	+1.5ppts	n/a
Average Storage Rate	£26.30	£25.91	1.5%	1.7%
Adjusted Diluted EPRA Earnings per Share6	13.5p	12.6p	7.1%	n/a
Free Cash flow7	£27.6m	£23.1m	19.5%	n/a
EPRA Basic NAV per Share	£4.06	£3.57	13.7%	n/a
Underlying and Operating Metrics- like-for-
like8
Revenue	£72.1m	£68.3m	5.6%	5.9%
Underlying EBITDA3	£41.2m	£38.7m	6.5%	6.7%
Closing Occupancy (let sq ft- million)4	4.60	4.47	2.9%	n/a
Closing Occupancy (% of MLA)5	74.3%	72.1%	+2.2ppts	n/a
Average Occupancy (let sq ft- million)4	4.57	4.40	3.9%	n/a
Average Storage Rate	£26.22	£25.78	1.7%	1.9%
Statutory Metrics
Profit before tax	£38.2m	£81.9m	-53.4%	n/a
Basic Earnings per Share	16.4p	40.3p	-59.3%	n/a
Dividend per Share	5.5p	5.1p	7.8%	n/a

Highlights

Solid Financial Performance

• Group revenue up 5.6% (5.9 % at CER2)
• Group like-for-like8 revenue at CER2 up 5.9% with UK up 5.6% and Paris up 6.3%
• Adjusted Diluted EPRA EPS6 up 7.1% at 13.5p
• 7.8% increase in the interim dividend to 5.5p
• Statutory Profit before tax down to £38.2m from £81.9m in 2018 driven by reduced gain on investment properties of £7.9m (2018: gain of £51.8m)

Operational and Strategic Progress

• Continued balanced approach to revenue management drives returns

1. Like-for-like8 closing occupancy of 74.3% (up 2.2ppts on 2018)

1. Like-for-like8 average occupancy for the period up 3.9%

• 1. Like-for-like8 average storage rate for the period up 1.9% in CER2
• Peterborough site acquired for new 42,000 sq ft store to be opened at the end of 2019
• Further new store openings scheduled in Paris Pontoise in Summer 2019, London Carshalton and Birmingham Merry Hill in the second half of 2019, and Paris Magenta, subject to planning, in the 2019/20 financial year
• Extension of Bedford and Barking stores in early 2020, adding 29,000 sq ft

Strong and Flexible Balance Sheet

• Group loan-to-value ratio ("LTV"9) at 31%, interest cover ratio ("ICR"10) at 8.7x

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

"Safestore's performance has been robust in the first half of the year and continues to build on the strong earnings and dividend growth achieved over the last five years. Since we recommenced our store acquisition and development programme in 2016, we have added 38 stores, including our new store pipeline of three sites in the UK in London Carshalton, Birmingham Merry Hill and Peterborough (subject to planning) and two sites in Paris at Pontoise and Magenta (subject to planning). Going forward, we expect to be able to continue to seize consolidation opportunities as well as new development sites that can be turned relatively quickly into new stores.

The self-storage market remains resilient to macroeconomic uncertainty and we continue to capture growing levels of demand in the UK and in Paris, with double digit new let growth on a like-for-like basis on both markets. As we enter our peak trading period we are well-placed to meet this demand with our 1.72m sq ft of currently unlet, fully invested space, and our pipeline of five stores that will add a further 252,000 sq ft.

Our scale continues to allow us to invest in our digital marketing platforms and service proposition, and this remains a key competitive advantage in a fragmented industry. Our balance sheet remains strong and efficient, with a low cost of debt. Our existing financing capacity, combined with the strong free cash generation of the business, allows us to continue to target selected development and acquisition opportunities. With our leading market positions across the UK and in Paris, the Company is in a strong position with significant low-cost growth potential. We remain on-course to meet the Board's full year expectations."

Notes

1 - Where reported amounts are presented either to the nearest £0.1m or to the nearest 10,000 sq ft, the effect of rounding may impact the reported percentage change.

2 - 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).

3 - Underlying EBITDA is defined as operating profit before exceptional items, share-based payments, 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. Store EBITDA margin is defined as underlying EBITDA before administration costs as a proportion of revenue.

4 - Occupancy excludes offices but includes bulk tenancy. As at 30 April 2019, closing occupancy includes 14,000 sq ft of bulk tenancy (30 April 2018: 27,250 sq ft).

5 - MLA is Maximum Lettable Area. Group MLA at 30 April 2019 is 6.37m sq ft (30 April 2018: 6.29m sq ft).

6 - Adjusted Diluted EPRA EPS is based on the European Public Real Estate Association's definition of Earnings and is defined as profit or loss for the period after tax but excluding corporate transaction costs, change in fair value of derivatives, gain/loss on investment properties and the associated tax impacts. The Company then makes further adjustments for the impact of exceptional items, IFRS 2 share- based payment charges, exceptional tax items, and deferred tax charges. This adjusted earnings is divided by the diluted number of shares. The IFRS 2 cost is excluded as it is written back to distributable reserves and is a non-cash item (with the exception of the associated National Insurance element). Therefore neither the company's ability to distribute nor pay dividends are impacted (with the exception of the associated National Insurance element). The financial statements will disclose earnings both on a statutory, EPRA and Adjusted Diluted EPRA basis and will provide a full reconciliation of the differences in the financial year in which any LTIP awards may vest.

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

8 - Like-for-like adjustments have been made to remove the 2018 openings of Mitcham, Paddington Marble Arch and Poissy and the closures of Leeds Central, Merton and Paddington.

9 - LTV ratio is Loan-to-Value ratio, which is defined as gross debt (excluding finance leases as a proportion of the valuation of investment properties and investment properties under construction (excluding finance leases).

10 - ICR is interest cover ratio. It is calculated in accordance with the requirements of our borrowings covenants, which is the ratio of underlying EBITDA after leasehold rent to underlying finance charges (excluding the amortisation of debt issue costs) on a rolling twelve-month basis.

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 solid financial performance in the first half of the year, driven by organic growth. Reported Group revenue increased 5.9% at CER2 with like-for-like8 revenue growing at a similar rate. The Group's like-for-like closing occupancy increased by 2.2 percentage points ("ppts") to 74.3% with the average storage rate up 1.9% at CER2. Like-for-like Store EBITDA margin3, on a CER basis, grew by 0.4ppts to 65.3% (2018: 64.9%).

Our operational performance across the UK has been robust in the period resulting in a 5.6% increase in like-for-like revenue. Enquiry generation and store team conversion have been strong across all regions of the UK, resulting in like-for-like closing occupancy growing by 1.6ppts to 72.6% in the period. The UK like-for-like average rate grew by 2.6% in the period continuing its strong performance of the last four quarters.

In Paris, our trading performance has been strong with like-for-like revenue growing by 6.3%. This was driven by our average like-for-like occupancy performance which increased by 8.0% compared to the prior year. Like-for-like closing occupancy ended the period up 4.7ppts at 81.7% (2018: 77.0%). We are now in the twenty first consecutive year of revenue growth in Paris. Our new store at Poissy, which opened in the second half of 2018, is trading ahead of our business plan. Our like-for-like average storage rate in the period was down 0.8% although, excluding our recently opened lower price suburban Emerainville and Combs la Ville stores (opened in September 2016 and June 2017 and, therefore, defined as like-for- like), average rate was up 1.1% for the period.

Group underlying EBITDA of £41.4m increased 6.1% at CER2 on the prior year and 5.9% on a reported basis, reflecting the impact of the 0.8% weakening of the average Euro exchange rate compared to the prior period, on the profit earned on our Paris business. Rent costs benefited from favourable rent reviews in the period and, as a result, adjusted diluted EPRA EPS6 grew by 7.1% in the period to 13.5p (2018: 12.6p).

Our property portfolio valuation, before the impact of the 3.1% weakening in the Euro closing exchange rate, has increased by 1.6% since 31 October 2018. Overall, the portfolio is up £10.3m to £1,226.5m, the increase comprising a £14.5m revaluation gain and £5m of additions offset by a negative currency impact of £9.2m.

Reflecting the Group's good trading performance, the Board is pleased to recommend an 7.8% increase in the interim dividend to 5.5p per share (2018: 5.1p).

Outlook

Entering into Q3, we are continuing to progress our sales and generate year on year like-for-like new lets growth in what was a strong quarter last year. Safestore has a strong market presence in both the UK and Paris which continues to be strengthened by new store developments and acquisitions. Trading in the stores that we have opened since 2016 continues to be strong. Our recently opened stores in London Mitcham, Paddington Marble Arch and Paris Poissy have started well and are performing in line with or ahead of their business plans. We look forward to further openings, spread over the rest of the year, in Paris Pontoise, London Carshalton and Birmingham Merry Hill. In addition, subject to planning permission, we hope to open stores in central Paris at Boulevard Magenta in 2020 and in Peterborough in late 2019. With 1.72m sq ft of fully invested unlet space available at 30 April 2019 (the equivalent of c.40 stores) and a pipeline of 0.25m sq ft, we have significant but low-cost growth potential ahead.

As ever, our priority remains the ongoing improvement of the operational performance of the business and leveraging our leading market positions to full effect. We will continue our strategy of managing revenue growth, with our central pricing team leveraging our dynamic pricing systems to optimise tactical store level rate and occupancy decisions. Our strong and flexible balance sheet, healthy cash generation sufficient to fund the building of 2-4 new stores per annum, and proven management expertise, 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.

Our business model remains highly resilient. Combined with our scale, geographical diversity, strong balance sheet and marketing expertise, we believe that we are well placed for continued future growth in what remains a young and expanding industry where consumer awareness is growing steadily. As we progress into our peak Q3 trading period, we are on course to meet the Board's full year expectations.

For further information, please contact:
Safestore Holdings PLC
Frederic Vecchioli, Chief Executive Officer	020 7457 2020
Andy Jones, Chief Financial Officer
www.safestore.com
Instinctif Partners
Guy Scarborough/Catherine Wickman	020 7457 2020

A presentation for analysts will be held at 09:30am today at:

Instinctif Partners, 65 Gresham Street, London EC2V 7NQ

For dial-in details of the presentation please contact:

Guy Scarborough ([e-mail] telephone on 020 7457 2020).

Notes to Editors

• Safestore is the UK's largest self-storage group with 146 stores at 30 April 2019, comprising 119 wholly owned stores in the UK (including 67 in London and the South East with the remainder in key metropolitan areas such as Manchester, Birmingham, Glasgow, Edinburgh, Liverpool and Bristol) and 27 wholly owned stores in the Paris region.
• Safestore operates more self-storage sites inside the M25 and in central Paris t h a n a n y competitor providing more proximity to customers in the wealthiest and densest UK and French 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 index in October 2015.
• The Group provides storage to around 64,000 personal and business customers.
• As at 30 April 2019, Safestore had a maximum lettable area ("MLA") of 6.37 million sq ft (excluding the expansion pipeline stores) of which 4.65 million sq ft was occupied.
• Safestore employs around 650 people in the UK and France.

Our Strategy

The Group's strategy remains unchanged. 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 self-storage sector. As we look forward, we consider that the Group has the potential to significantly 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

Since 2016, Safestore has strengthened its market-leading portfolio in the UK and Paris with the Space Maker and Alligator acquisitions as well as the organic development of new sites. In total, 38 stores have been added including 24 existing stores, nine new developments and our current pipeline of five stores. We have a high quality, fully invested estate in both the UK and Paris. Of the Group's 146 stores, 94 are in London and the South East of England or in Paris with 52 in the other major UK cities. The Group now operates 44 stores within the M25, which represents a higher number of stores than any of our competitors.

In the last year, our MLA has increased by 1.3% to 6.37m sq ft at 30 April 2019. At the current occupancy level of 73.0%, we have 1.72m sq ft of unoccupied space, of which 1.44m sq ft is in our UK stores and 0.28m sq ft in Paris. This is the equivalent of c.40 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's 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.

Digital Marketing Expertise

Awareness of self-storage is increasing each year but still remains relatively low with 52% (FY2018: 54%) of the UK population either knowing very

little or nothing about self-storage (source: 2019 SSA Annual Report). In the UK around 75% of our new customers are using self-storage for the first time. It is largely a brand blind purchase with, typically, customers requiring storage starting their journey by conducting online research using generic keywords in their locality (e.g. "storage in Borehamwood", "self-storage near me").

We believe there is a clear benefit of scale in the generation of customer enquiries, specifically the ability to invest in, and optimise appearance in search engines for relevant user searches. In an increasingly competitive online environment, the ability to invest in technical advances to consumer websites and continually improve advertising targeting logic provides larger operators with a significant advantage over smaller rivals. The Group has continued to develop its leading digital marketing platform with increased efficiency delivering at Group level a 10.4% like-for-like new let growth at a reduced marketing costs in revenue percentage (4.8% of revenue in H1 2019 versus 5.5% in H1 2018).

Online enquiries represent over 82% (2018: 83%) of our enquiries in the UK, and over 74% in France (2018: 74%). Approximately 55% of our online enquiries in the UK now originate from smartphones, compared to just over 50% last year, highlighting the need for continual investment in improving customer experiences as behaviour and expectations evolve.

In 2019, Safestore achieved a Feefo customer service rating of 95% based on the customers who rated their experience as "Excellent" or "Good". Having achieved this service level online, in the store and on the phone, Safestore was again recognised with a "Gold Trusted Merchant" award - given to businesses achieving over 95% - for the sixth year running. In France, more than 93% of customers are satisfied with their customer service experience, rating it 4 stars and above.

High quality training and coaching drives store teams' motivation and performance

Our enthusiastic, well-trained and customer-centric sales team remains a key differentiator and a strength of our business. Understanding the needs of our customers and using this knowledge to develop in-store trusted advisers is a fundamental part of driving revenue growth and market share.

Safestore has been an "Investors in People" (IIP) organisation since 2003 and our aim is to be an employer of choice in our sector, as we passionately believe that our continued success is dependent on our highly motivated and well trained colleagues. In April 2018, Safestore was awarded the Gold accreditation under the IIP programme, a significant improvement from the Bronze accreditation awarded in 2015. This puts Safestore as one of the top employers of 14,000 IIP accredited companies. In addition, Safestore was subsequently shortlisted as a finalist for the IIP Gold Employer of the year 250+ category, putting us in the top ten of all companies that have achieved Gold accreditation. Investors in People enables organisations to benchmark against the best in the business on an international scale. We are proud to have our colleagues recognised to such a high standard not only in our industry but across 14,000 organisations in 75 countries.

We are committed to growing and rewarding our people and tailor our development, reward and recognition programs to this end. Our IIP recognised coaching program, launched in 2018, was upgraded in 2019 to reflect the increase in the calibre and performance of our teams and was well received by our colleagues in January of 2019. Our internal sales training framework also received its 2019 enhancements to reflect the elevated performance of 2018 and target our high expectations of 2019. The program was rolled out in May in preparation for the third and fourth quarters' selling seasons.

The training and development of our store and customer facing colleagues is an essential part of our daily routines. In 2018, we delivered a further 29,000 hours of training through face-to-face sessions and via our internally developed online learning tool. In 2019, we continue to build on this commitment. This Learning Management System also provides the opportunity for team members to receive rigorously enforced health and safety, fire and compliance training, ensuring that our staff are up-to-date in relation to their technical knowledge and continue to operate a safe environment for both our colleagues and customers. These tools, systems and resources have allowed us to effectively communicate changes quickly and manage compliance robustly.

All new recruits to the business benefit from enhanced induction and training tools which have been developed in-house and enable us to quickly identify high potential individuals and increase their speed to competency. They receive individual performance targets within four weeks of joining the business and are placed on the 'pay-for-skills' programme which allows accelerated basic pay increases dependent on success in demonstrating specific and defined skills. The key target of our programme remains that close to 100% of our store manager appointments are from within the business via our Store Manager Development programme, and we are pleased with our progress to date.

November 2016 saw the launch of our internal Store Manager Development programme designed to provide the business with its future store managers. Our most recent programme delegates have the opportunity to gain a nationally recognised qualification from ILM (Institute of Leadership & Management) at Level 3 with candidates due to graduate this year.

Our performance dashboard allows our store and field teams to focus on the key operating metrics of the business providing an appropriate level of management information to enable swift decision making. Reporting performance down to individual employee level enhances our competitive approach to team and individual performance. We continue to reward our people for their performances with bonuses of up to 50% of basic salary based on their achievements against individual new lets, occupancy, ancillary sales and pricing targets. In addition, a Values and Behaviours framework is overlaid on individuals' KPI performance in order to assess team members' performance and development needs on a quarterly basis.

February 2019 saw the launch of our "Make The Difference Forum" when 15 of our colleagues were voted to be the "people champions" and attend our peoples forum. This new initiative allows our champions to be the representative voice for each of the 12 Regions and Head Office in order to influence change and drive improvement for 'Our Business, Our Customers and Our Colleagues'.

People Champions will:

• Consult and collect the views and suggestions of all colleagues that they represent;
• Engage in the bi-annual 'Make the difference' forum, raising and representing the views of their colleagues;
• Consult with and discuss feedback with management and the leadership team at Safestore.

Our Values and behaviours framework concentrates our culture on our Customers. Customers continue to be at the heart of everything we do,

whether it be in store, online or in their communities. Our Gold standard Feefo customer service score along with our "Excellent" Trustpilot rating reflects our ongoing commitment to their satisfaction.

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.

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 are adjusted on a real time basis, 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 five years is linked to store team variable incentives and is monitored closely by the central pricing team.

Average rates are 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 very granular pricing policy and the confidence provided by analytical capabilities and systems that smaller players might 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

Since 2014 we have refinanced the business on three occasions, each time on improved terms, and believe we now have a 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.

At 30 April 2019, based on the current level of borrowings and interest swap rates, the Group's weighted average cost of debt is 2.25% and 83% of our debt facilities are at fixed rate or hedged. The weighted average maturity of the Group's drawn debt is 5.7 years at the current period end and the Group's LTV ratio is 31% as at 30 April 2019.

This LTV and interest cover ratio of 8.7x for the rolling twelve month period ended 30 April 2019 provide us with significant headroom compared to our banking covenants. We have £83m of undrawn bank facilities at 30 April 2019.

Taking into account the improvements we have made in the performance of the business and the reduction in underlying finance charges of c.£10m per annum over the last five years, the Group is now capable of generating free cash after dividends sufficient to fund the building of two to four new stores per annum, depending on location and availability of land.

The Group evaluates development and acquisition opportunities in a careful and disciplined manner against rigorous investment criteria. Our investment policy requires certain Board approved hurdle rates to be considered achievable prior to progressing an investment opportunity. In addition, the Group aims to maintain a Group LTV ratio of between 30% and 40% for the foreseeable future.

Portfolio Management

Our approach to store development and acquisitions in the UK and Paris continues to be pragmatic, flexible and focused on the return on capital.

Our property teams in both the UK and Paris continue to seek investment opportunities in new sites to add to the store pipeline. However, investments will only be made if they comply with our disciplined and strict investment criteria. Our preference is to acquire sites that are capable of being fully operational within 18- 24 months from completion.

Since 2016, the Group has opened nine new stores. Chiswick, Wandsworth, Mitcham, Paddington Marble Arch (all in London), Birmingham and Altrincham in the UK and Emerainville, Combs-la-Ville and Poissy in Paris. We have also completed the extensions and refurbishments of our Acton and Longpont (Paris) stores. All of these stores are performing in line with or ahead of their business plans.

New Stores

In January 2019, we completed the acquisition of a freehold former retail building in Peterborough. The site is one mile east of the City Centre. Subject to planning permission, we will convert the existing building into a 42,000 sq ft self-storage facility and currently estimate that the store will open in the final calendar quarter of 2019.

In October 2017, we completed the freehold acquisition of a 1.34 acre industrial site at Merry Hill. The site is about ten miles west of the centre of Birmingham, in a very prominent location close to Merry Hill regional shopping centre. We subsequently received planning consent and have commenced construction. We expect to open this new purpose-built 55,000 sq ft store towards the end of 2019.

In the second half of 2018, we obtained planning for and completed the acquisition of a site in Carshalton in South London. Construction is underway and we anticipate opening this 40,000 sq ft store at the end of 2019.

In Paris, where regulatory barriers are likely to continue to restrict meaningful new development inside the city, we will continue our policy of segmenting our demand and encouraging the customers who wish to reduce their storage costs to utilise our second belt stores. We will also manage occupancy and rates upwards in the more central stores and ensure that pricing recognises the value customers place on the convenience of physical proximity. The strong selling organisation and store network established by Une Pièce en Plus in Paris uniquely enables it to implement this commercial policy to complement the strong second belt markets in which we operate.