Safestore Regulatory News (SAFE)

9 January 2017

Safestore Holdings plc

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

Results for the year ended 31 October 2016

A third consecutive year of double-digit EPS6 growth

Key measures

Highlights

Strong Financial Performance

· Group like-for-like2 revenue at CER1 up 8.1% with UK up 9.2% and Paris up 5.0%

· Cash Tax Adjusted Earnings per Share up 19.3% at 19.8p

· 21% increase in the final dividend to 8.05p (FY2015: 6.65p)

Operational Focus

· Balanced approach to revenue management

o Like-for-like average occupancy for the year up 3.5%

o Good like-for like pricing growth with UK rate up 4.5% and Paris rate up 2.3%

· 12 Space Maker stores acquired for £42.3m, immediately earnings enhancing

· Enquiry growth of 7.5% after implementation of new consumer website

· Opened five new stores (including Chiswick on 4 November 2016), completed one extension on time and on budget with a second extension completing in January 2017 and secured new freehold site in Mitcham, London

Strong and Flexible Balance Sheet

· Group loan-to-value ratio ("LTV"9) at 31%, interest cover ratio ("ICR"10) at 5.5x and full year underlying finance costs reduced by £1.3m notwithstanding acquisition of Space Maker

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

"The Group has delivered another strong financial year, building on the improvements made to its operating performance over the last three years. Over this three year period, we have grown EPS6 by 78% and increased our dividend per share by over 100%.

"During the last twelve months we have also strengthened our market leading positions in the UK and Paris with the acquisition of Space Maker in the UK and the opening of five new stores.

"As we enter the new financial year, we continue to see good levels of interest in self-storage and remain focused on the significant opportunity represented by our 1.62m square feet of currently unlet space. In addition, our balance sheet capacity and flexibility allows us to continue to seek selected development and acquisition opportunities. The company is in a strong position and we look forward to the future with confidence."

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, and the impact of foreign exchange swaps has been reversed, in order to present the reported results on a more comparable basis).

2 - Like-for-like adjustments have been made to remove the impact of the closure of Whitechapel and New Malden in 2015, and the 2016 openings of Wandsworth, Altrincham, Birmingham (including closure of our existing Birmingham store) and Emerainville. 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 31 October 2016, closing occupancy includes 37,000 sq ft of bulk tenancy (31 October 2015: 64,000 sq ft).

5 - MLA is Maximum Lettable Area. Group MLA has been adjusted to 5.59m sq ft (2015: 4.93m) following the acquisition of Space Maker and the openings of Wandsworth, Altrincham, Birmingham and Emerainville.

6 - Cash tax adjusted earnings per share 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).

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

8 - Profit before tax decreased by £23.3m to £94.9m (FY2015: £118.2m) as a result of the reported valuation gain on investment properties of £41.7m being £37.2m lower than the prior year (FY2015: £78.9m). Excluding the valuation gain, profit before tax for the year would have increased by £13.9m compared to the prior year.

9 - LTV ratio is Loan-to-Value 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).

10 - ICR is interest cover ratio, and is calculated as the ratio of underlying EBITDA after leasehold rent to underlying finance charges.

Summary

Safestore has delivered another strong financial performance through a combination of organic and acquisitive growth. Group revenue increased 8.1%1 on a like-for-like2 basis with a strong performance across the UK (+9.2%) and continued strength in Paris (+5.0%). The Group's like-for-like average occupancy increased by 2.3 percentage points ("ppts") to 72.3% with the average storage rate up 3.9%1.

Our operational performance across the UK has again been very strong this year. Our new consumer website was successfully launched resulting in good enquiry growth, which, combined with consistent conversion, has resulted in like-for-like new lets growth of 7.6% in the year. As a result, like-for-like occupancy in the UK was up 1.4ppts to 71.8%, driven by growth in both London & South East (+0.7ppts) and the rest of the UK (+2.3ppts).

In the UK, we successfully acquired and integrated the Space Maker portfolio during the year which was immediately accretive to earnings. In addition, four new stores in London-Chiswick, London-Wandsworth, Birmingham and Altrincham were opened on time and on budget.

In Paris, our performance has also been robust with revenue growing by 5.0%. Our balanced approach to revenue management resulted in rate growth of 2.3% and average occupancy growth of 2.5%. Like-for-like closing occupancy ended the year at 80.7% (2015: 81.8%), but like-for like average occupancy during the year was ahead of the prior year at 80.3% (2015: 78.0%). This is the eighteenth consecutive year of revenue growth in Paris with average growth over the last five years of c.5%. Our new store at Emerainville to the east of Paris opened on time and on budget in September 2016.

Group underlying EBITDA of £64.2m increased 12.1% at CER1 on the prior year and 12.4% 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 combined with reduced finance costs arising from the annualisation of the amendment and extension of the bank facilities completed in August 2015, resulted in a 19.3% increase in cash tax adjusted EPS6 in the period to 19.8p (FY2015: 16.6p).

Our property portfolio valuation, including investment properties under construction, increased in the year by 15.7% on a constant currency basis. After exchange rate movements the portfolio valuation increased by 22.1% to £954.2m with the UK portfolio up £107.0m, including £48.0m relating to the acquisition of the Space Maker portfolio, to a total UK value of £710.6m and the French portfolio increased €21.6m to €270.9m.

Reflecting the Group's strong trading performance, the Board is pleased to recommend a 21% increase in the final dividend to 8.05p per share (FY2015: 6.65p) resulting in a full year dividend up 20.7% to 11.65p per share (FY2015: 9.65p).

Outlook

Safestore has strengthened its leading market positions in both the UK and Paris during the year with the opening of five new stores (including Chiswick which opened on 4 November 2016) and the acquisition of Space Maker which has increased the Group's MLA5 by 14%. Early trading in all of our new stores is encouraging. We continue to see good levels of interest in self-storage and, with 1.62m square feet of unlet space available at 31 October 2016 (the equivalent of 40 stores), we have significant, low-cost growth potential ahead.

We remain focused on the continual improvement of the operational performance of the business and leveraging our leading market positions. Our balance sheet flexibility and strong cash generation also provide us with the opportunity to take advantage of further selective development and acquisition opportunities in our key markets subject to our rigorous investment criteria, as is evidenced by our recent acquisition of a development site in Mitcham, South West London

Self-storage continues to be a relatively immature industry, with significant potential for further growth. Safestore has a resilient business model and we believe that our scale and marketing expertise combined with our improved operational capability and strong balance sheet leaves us well placed to trade robustly through any macro-economic uncertainty that may lie ahead.

For further information, please contact:

A presentation for analysts will be held at 9.30am today at:

Instinctif Partners, 65 Gresham Street, London, EC2V 7NQ

For dial-in details of the presentation please contact:

Jessica Bennett (Jessica.bennett@instinctif.com or telephone on 020 7457 2020).

Notes to Editors

Chairman's Statement

I am pleased to announce, on behalf of the Board of Safestore, another strong set of results for the year ended 31 October 2016.

This has been another year of good progress across the business with management building further on the operational improvements made over the previous two years as well as implementing a number of growth initiatives. The opening of five new stores and the acquisition of Space Maker have strengthened our market leading store portfolio.

We have the balance sheet flexibility and capacity to continue to take advantage of carefully selected development and acquisition opportunities. I am confident that the business is well positioned for growth and to deliver additional value for shareholders.

Financial Results

Revenue for the year was £115.4m, 10.1% ahead of last year (FY2015: £104.8m) and up 8.1% on a like-for-like and constant currency basis respectively. This result was driven by a strong performance in the UK which grew like-for-like revenue by 9.2%, combined with another good performance by Une Pièce en Plus, our Parisian business, which grew like-for-like revenue by 5.0%.

Underlying EBITDA increased by 12.4% to £64.2m (FY2015: £57.1m) and 12.1% on a constant currency basis. Underlying EBITDA after rental costs increased by 15.2% to £55.4m (FY2015: £48.1m).

The annualisation of the August 2015 amendment and extension of our bank facilities resulted in a reduction in the year in the underlying finance charge of £1.3m or 11.4% to £10.1m (FY2015: £11.4m). Over the last three years we have reduced our finance charges by 45% or £8.3m.

As a result of the above factors, cash tax adjusted earnings per share grew by 19.3% to 19.8p (FY2015: 16.6p). EPS has grown by 8.7p or 78% over the last three years.

Capital Structure

The Group's balance sheet remains robust with a Group LTV9 ratio of 31% and an interest cover ratio of 5.5x. This represents a level of gearing we consider appropriate for the business to enable the Group to increase returns on equity, maintain financial flexibility and to achieve our medium-term strategic objectives.

Dividend

Reflecting the Group's strong trading performance, the Board is pleased to recommend a 21.1% increase in the final dividend to 8.05 pence per share (FY2015: 6.65 pence per share) resulting in an increase of 20.7% in the total dividend to 11.65 pence per share for the year (FY2015: 9.65 pence per share). The total dividend for the year is covered 1.70 times by cash tax earnings (1.72 times in 2015). The Group's dividend has increased by 103% in the last three years. Shareholders will be asked to approve the dividend at the Company's Annual General Meeting on 22 March 2017 and, if approved, the final dividend will be payable on 7 April 2017 to Shareholders on the register at close of business on 10 March 2017.

The Board remains confident in the prospects for the Group and will continue its progressive dividend policy in 2017 and beyond. In the medium term it is anticipated that the Group's dividend will grow at least in line with cash tax earnings6. 

People

In another year of progress, our people continue to be the key to the success of the business. I would like to take this opportunity to thank all my colleagues throughout the business for their hard work and dedication this year.

I would also like to take the opportunity to thank Keith Edelman for his seven years of service to the Board. He has been an invaluable member of the team and I appreciate his contribution over this period. I also welcome Claire Balmforth and Bill Oliver to the Board and look forward to working with them over the coming years.

Alan Lewis

6 January 2017

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 current healthy industry dynamics. 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 the 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 in the last few months (including Chiswick which opened on 4 November 2016), and the acquisition of Space Maker, we have strengthened our market leading portfolio. 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 other competitor.

In the last year, with the aforementioned new store openings and acquisition our MLA has increased by 13% to 5.59m sq ft at 31 October 2016, excluding Chiswick. At the current occupancy level of 71.0% we have 1.62m sq ft of unoccupied space, of which 1.37m sq ft is in our UK stores and 0.25m sq ft in Paris. This is the equivalent of 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.

In-house digital marketing expertise

Awareness of self-storage is increasing each year but remains relatively low. In the UK over 70% of our new customers are using self-storage for the first time. It is essentially a brand-blind product with only 12% of respondents in the 2016 Self Storage Association Annual Survey stating that a brand would influence their purchase decision. Typically customers requiring storage start their journey by conducting detailed 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 in-house 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 35% enquiry growth over the last four years.

A key objective of our marketing team has been to improve the volume of organic enquiries generated by the business and we will continue to invest in our Search Engine Optimisation ("SEO") capabilities. In November 2015 we launched a new dynamic customer website designed to further improve our industry leading web offering with enhanced search engine performance, optimisation for mobile devices and to allow for improved bespoke management of our rich website content. The website features a more responsive design and a social hub featuring a new blog and, since its launch, enquiry capture has improved by 14%. The Group's efforts in this area were acknowledged by its winning the 'Best Consumer Products/ Services Campaign 2016' at the Drum Search Awards.

Whilst enquiry growth, as envisaged, was initially slower in the first quarter as we transitioned to the new website, enquiries for the full year were up 7.5% on the prior year. The restructured 'back-end' of the website has resulted in increased efficiency which has contributed to a reduction in the cost per enquiry.

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 81% of our enquiries in the UK and 63% in France. 54% of our online enquiries in the UK originate from mobiles or tablets, compared to 47% last year. It is, therefore, critically important to appear at the top of the rankings of customer searches made through the internet. The ranking in the search pages is a result of a complex function that combines the budget invested directly into the paid search and the capacity to allocate it efficiently on a real time basis, with 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 an annual budget of c. £5.3m (£4.3m in the UK and £1m in Paris) (FY2015: c. £5m) enable us to achieve the above results. Approximately 95% of our budget in the UK is spent on digital marketing.

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 95%.

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. Our Director of Operations, Head of HR, 60% of our UK Regional Managers and 50% of our UK Store Managers have joined the business in that period. In addition, in order to make the store team management structure more efficient, we decided to merge the Sales Assistant and Assistant Manager roles into a new Sales Consultant role. We have now completed 85% of this transition and since 2014 we have recruited 170 sales consultants.

The employees of Space Maker, which was acquired during the 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 also invested further resources to manage our building maintenance and facilities management program in a more efficient and cost effective manner.

New recruits to the business benefit from enhanced induction and training tools which have been developed in-house, enabling 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 'pay-for-skills' programme which allows accelerated basic pay increases dependent on success in demonstrating specific and defined skills. A key target of our program is to ensure that close to 100% of our store managers are promoted internally and our Management Development programme was launched in the period with 15% of our sales consultants participating.

All store staff continue to benefit from on-going training and development. In 2016, we delivered 27,500 hours of training to sales staff through face-to-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.

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.

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 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.

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 continual 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.

During the last year, we have continued to enhance the Business Intelligence software which we implemented in 2015. This has improved the team's ability to identify pricing opportunities, monitor competitive pricing in local markets and to establish optimal unit mix in individual stores.

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 like-for-like average rate increases of 4.5% in the UK and 2.3% in Paris over the financial year, while maintaining an average occupancy that was 3.8% up in the UK and 2.5% up in Paris over the previous year on a like-for-like 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

Since 2014 we have refinanced the business on two occasions 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. We will continue to seek opportunities to optimise our capital structure.

Our current LTV9 of 31% and our Interest Cover Ratio10 of 5.5x provides us with significant headroom compared to our banking covenants. We drew down a net £39m in 2016, primarily to finance the acquisition of Space Maker but, at October 2016, have £104m (including the remaining £15m uncommitted accordion facility) of available bank facilities. The weighted average maturity of our debt is 47 months at October 2016.

Taking into account the improvements we have made in the performance of the business and the reduction in interest costs of over £8m per annum over the last three years, the Group is now capable of generating free cash after dividends sufficient to fund the building of 1-3 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 LTV9 of between 30% and 40% for the foreseeable future.

Portfolio Management

As ever, our approach to store development and acquisition in the UK and Paris will continue to be pragmatic, flexible and focused on the return on capital.

Our property teams in both the UK and Paris have recently been strengthened and are continually seeking 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.

Five new stores opened on time and on budget

Between August and November 2016, the Group opened five new stores and completed the extension and refurbishment of our Acton store. An extension of our store in Longpont in Paris is in progress and is due to be completed in January 2017. All the completed projects were opened on time and on budget. Overall, the five new sites provide gross new MLA of 226,000 sq ft (190,000 sq ft net of existing space in Wandsworth and the conditional disposal of our Birmingham Central site).

The Chiswick site, which is located on the A4 in West London, opened on 4 November 2016 and provides a new flagship freehold store of 42,500 sq ft.

In Wandsworth, we had an existing 10,000 sq ft store on Garratt Lane in South West London as well as an additional adjoining 0.25 acre parcel of land. We closed our existing store at the end of 2015 and opened a new purpose-built 33,200 sq ft freehold store in August 2016.

In Birmingham, we opened a new flagship store on the A34 North of the centre of Birmingham in September 2016. The long leasehold store provides 51,000 sq ft of space.

We exchanged contracts in May 2016 on the sale of our Birmingham Central store for £3.6m to Unite Group plc, subject to the purchaser receiving satisfactory planning permission. Birmingham Central was a highly occupied 26,000 sq ft store and we successfully transferred the majority of our Birmingham Central customers to our new Birmingham store on completion of the build.

In June 2016, we completed the freehold purchase of a building located on an easily accessible site opposite Altrincham Retail Park. Altrincham and Sale is an affluent area with a population of 206,000 and significant inward investment. The 39,000 square foot store opened in September 2016 and we are confident that it will be a valuable addition to our portfolio.

In Paris, where regulatory barriers are likely to continue to restrict 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 the 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.

We announced in February 2016 the acquisition of a freehold site in eastern Paris adjacent to the A4 motorway at Marnes-la-Vallée in the town of Emerainville. The site contains an existing warehouse which has been converted into a c.60,000 sq ft self-storage facility and c.8,000 sq ft of serviced offices. The new store opened in September 2016.

The Altrincham and Emerainville stores demonstrate that, with a skilled property development team, it is possible to convert existing buildings into storage facilities in an expeditious and cost effective manner. In both cases, the time between exchanging contracts and opening the stores was less than twelve months.

We also completed the refurbishment and extension of our Acton store in the period. The Acton store was 89% occupied prior to the extension and we have added a further 4,900 square feet of space.

Early trading on all completed sites is encouraging and at least in line with our forecasts.

The capital spend on the above completed projects (excluding the historical cost of acquiring the Chiswick, Wandsworth and Birmingham sites) was £25.2m and was funded from the cash flow and existing debt facilities of the Group.

The Paris Longpont extension, which is due to be completed in January 2017, will add 22,600 square feet of new space. The store was 83% occupied prior to the commencement of works.

During the period we also extended the lease on our Burnley store. We have now extended the leases on 18 stores or c.47% of our leased store portfolio (including Space Maker) in the UK since FY2012 and our average lease length remaining now stands at 13.7 years as compared to 13.9 years at FY2015.

In December, we acquired the freehold of a site in Mitcham, in South West London. Subject to planning permission, we plan to build a c.54,000 sq ft store on this site, scheduled to open in 2018.

Acquisition of Space Maker

At the end of July 2016 we announced the completion of the acquisition of Space Maker Stores Ltd ("SMS") from Allodial Capital Ltd and James Elton. The initial consideration, after certain downward adjustments, was £40.9m and £1.4m of deferred consideration has subsequently been paid resulting in a total consideration of £42.3m.

SMS was the ninth largest self-storage portfolio in the UK with 12 stores, located in Bournemouth (two stores), Colchester, Redhill, Romford, Brentford, Chelmsford, Exeter, Leeds, Plymouth, Portsmouth and Poole, and has a fully invested built out lettable area of c.496,000 sq ft. Six of the SMS stores are freehold or long leasehold and six are leasehold stores with an average remaining lease length of 15.9 years at 31 October 2016.

Safestore has a strong operational knowledge of the SMS portfolio, having managed the business since 2010 under a management services agreement ("MSA") until completion of the acquisition. The MSA, for which Safestore received £0.6m per annum, had been due to expire at the end of April 2016.

In the year to 30 April 2016, SMS delivered EBITDA (before management fees) of £3.9m (unaudited) on turnover of £8.7m. Based on the total consideration net of cash acquired with the business and SMS's unaudited EBITDA, the SMS portfolio has an implied first year net operating income yield of c.9.3%, before the impact of management charges, which would rise to c.12% if the SMS stores achieve 80% occupancy at the rental rate levels at acquisition.

The SMS portfolio was operating at 66% occupancy (of built out lettable area) at acquisition, which Safestore believes it can improve now that it is fully integrated into its own operational platform. The rebranding of the business is progressing to plan.

The SMS business, which had net assets with a fair value of £47.9m at acquisition, was acquired on a debt free basis and was funded from the Group's existing debt facilities, with £45m of the Group's £60m accordion facility converted into a committed revolving credit facility.

This acquisition was immediately accretive to Group earnings per share from completion and supports the Group's future dividend capacity.

Portfolio Summary

The self-storage market has been growing in the last 15 years across many European countries but few regions offer the unique characteristic of London and Paris, both of which consist of large, wealthy and densely populated markets. In the London region, the population is 13 million inhabitants with a density of 5,200 inhabitants per square mile in the region, 11,000 per square mile in the city of London and up to 32,000 in the densest boroughs. 

The population of the Paris urban area is 10.7 million inhabitants with a density of 9,300 inhabitants per square mile in the urban area but 54,000 per square mile in the City of Paris and first belt, where 72% of our French stores are located and which has one of the highest densities in the western world. 85% of the Paris region population live in central parts of the city versus the rest of the urban area which compares with 60% in the London region. There are currently c.234 storage centres within the M25 as compared to only c.87 in the Paris urban area.

In addition, barriers to entry in these two important city markets are high, due to land values and limited availability of sites as well as planning regulation. This is the case for Paris and its first belt in particular, which inhibits new development possibilities.

Our combined operations in London and Paris, with 68 stores, contribute £73.1m of revenue and £49.6m of store EBITDA and offer a unique exposure to the two most attractive European self-storage markets.

We have a strong position in both the UK and Paris markets operating 109 stores (including Chiswick) in the UK, 63 of which are in London and the South East, and 25 stores in Paris.

In the UK, 67% of our revenue is generated by our stores in London and the South East. On average, our stores in London and the South East are smaller than in the rest of the UK but the rental rates achieved are materially higher enabling these stores to typically achieve similar or better margins than the larger stores. In London we operate 44 stores (including Chiswick) within the M25, more than any other competitor.

In France, we have a leading position in the heart of the affluent City of Paris market with eight stores branded as Une Pièce en Plus ("UPP") ("A spare room") with more than twice the number of stores of our two major competitors combined. 72% of the UPP stores are located in a cluster within a five-mile radius of the city centre, which facilitates strong operational and marketing synergies as well as options to differentiate and channel customers to the right store subject to their preference for convenience or price affordability. The Parisian market has attractive socio-demographic characteristics for self-storage and we believe that UPP enjoys unique strategic strength in such an attractive market.

Together, as at 31 October 2016 London, the South-East and Paris represent 65% of our owned stores, 75% of our revenues, as well as 56% of our available capacity.

In addition, Safestore has the benefit of a leading national presence in the UK regions where the stores are predominantly located in the centre of key metropolitan areas such as Birmingham, Manchester, Liverpool, Bristol, Glasgow and Edinburgh.

Market

The self-storage market in the UK and France remains relatively immature compared to geographies such as the USA and Australia. The Self-Storage Association ("SSA") Annual Survey (May 2016) confirmed that self-storage capacity stands at 0.59 square feet per head of population in the UK and 0.15 square feet per capita in France. Whilst the Paris market density is greater than France, we estimate it to be significantly lower than the UK at around 0.36 square feet per inhabitant. This compared with 7.75 square feet per inhabitant in the USA and 1.8 square feet in Australia.

While capacity increased significantly between 2007 and 2010 with respondents to the survey opening an average of 32 stores per annum, new additions have been limited to an average of 18 stores per annum between 2011 and 2015.

New supply in London and Paris is likely to be limited in the short and medium term as a result of planning restrictions and the availability of suitable land.

Respondents to the survey indicated aspirations to develop an average of 31 stores per annum from 2016 to 2018. However, history has shown that actual developments have averaged less than 50% of respondents' aspirations over the last three years. This suggests that around 15 new stores are likely to be added in the coming year.

The supply in the UK market, according to the SSA survey, remains relatively fragmented. Safestore is the leader by number of stores with 109 wholly owned sites, followed by Big Yellow with 73 wholly owned stores, Access with 58 stores, Lok'n Store with 26 stores, Shurgard with 25 stores and Storage King with 24 stores. In aggregate, the top ten leading operators account for 33% of the UK store portfolio. The remaining c.700 self-storage outlets (including 195 container based operations) are independently owned in small chains or single units. In total there are 490 storage businesses operating in the UK.

Our French Business, UPP, is mainly present in the core wealthier and more densely populated inner Paris and first belt areas, whereas our two main competitors, Shurgard and Homebox, have a greater presence in the outskirts and second belt of Paris.

Consumer awareness of self-storage is increasing but remains low, providing an opportunity for future industry growth. The SSA survey indicated that 58% (55% in 2015) of consumers either knew nothing about the service offered by self-storage operators or had not heard of self-storage at all. The opportunity to grow awareness, combined with limited new industry supply makes for an attractive industry backdrop.

Self-storage is a brand-blind product. In a new question in the 2016 SSA survey, only 12% of people responded positively that a brand would influence their purchase decision. In addition, 59% of respondents were unable to name a self-storage business in their local area. The lack of relevance of brand in the process of purchasing a self-storage product emphasises the need for operators to have a strong online presence. This requirement for a strong online presence was also reiterated by the SSA survey where 68% of those surveyed (69% in 2015) confirmed that an internet search would be their chosen means of finding a self-storage unit to contact, whilst knowledge of a physical location of a store as reason for enquiry was c.28% of respondents (c.24% in 2015).

There are numerous drivers of self-storage growth. Most private and business customers need storage either temporarily or permanently for different reasons at any point in the economic cycle, resulting in a market depth that is in our view the reason for its exceptional resilience. The growth of the market is driven both by the fluctuation of economic conditions, which has an impact on the mix of demand, and by growing awareness of the product.

Our domestic customers' need for storage is often driven by lifestyle events such as births, marriages, bereavements, divorces or by the housing market including house moves and developments and moves between rental properties. It is estimated that UK owner-occupied housing transactions drive around 10-15% of new lets.

Our business customer base includes a range of businesses from start-up online retailers through to multi-national corporates utilising our national coverage to store in multiple locations while maintaining flexibility in their cost base. 

Safestore's customer base is resilient and diverse and consists of around 55,000 domestic, business and National Accounts customers across London, Paris and the UK regions. 

Business Model

Safestore's business model remains unchanged in the last year.

The Group operates in a market with relatively low consumer awareness. It is anticipated that this will increase over time as the industry matures. To date, despite the financial crisis and the implementation of VAT on self-storage in 2012, the industry has been exceptionally resilient. In the context of uncertain economic conditions as the UK approaches Brexit, the industry remains well positioned with limited new supply coming into the self-storage market.

With more stores inside London's M25 than any other operator and a strong position in central Paris, Safestore has leading positions in the two most important and demographically favourable markets in Europe. In addition, our regional presence in the UK is unsurpassed and contributes to the success of our industry leading National Accounts business. In the UK, Safestore is the leading operator by number of wholly owned stores.

Our capital-efficient portfolio of 134 wholly owned stores in the UK and Paris consists of a mix of freehold and leasehold stores. In order to grow our business and secure the best locations for our facilities we have maintained a flexible approach to leasehold and freehold developments. 

Currently, one-third of our stores in the UK are leaseholds with an average remaining lease length at 31 October 2016 of 13.7 years (FY2015: 13.9). Although our property valuation for leaseholds is conservatively based on future cash flows until the next contractual lease renewal date, Safestore has a demonstrable track record of successfully re-gearing leases several years before renewal whilst at the same time achieving concessions from landlords.

In England, we benefit from the Landlord and Tenant Act that protects our rights for renewal except in case of redevelopment. The vast majority of our leasehold stores have building characteristics or locations in retail parks that make current usage either the optimal and best use of the property or the only one authorised by planning. We observe that our Landlords, who are property investors, value the quality of Safestore as a tenant and typically prefer to extend the length of the leases that they have in their portfolio, enabling Safestore to maintain favourable terms. 

In Paris, where 44% of stores are leaseholds, our leases typically benefit from the well enshrined Commercial Lease statute that provides that tenants own the commercial property of the premises and that they are entitled to renew their lease at a rent that is indexed to the National Construction Index published by the state. Taking into account this context, the valuer values the French leaseholds based on an indefinite property tenure, similar to freeholds.

Our experience is that being flexible in its approach has enabled Safestore to operate from properties that would have been otherwise unavailable and to generate strong returns on capital invested.

Safestore excels in the generation of customer enquiries which are received through a variety of channels including the internet, telephone and 'walk-ins'. In the early days of the industry, local directories and store visibility were key drivers of enquiries. 

The Internet is now by far the dominant channel, accounting for 81% of our enquiries in the UK and 63% in France. Telephone enquiries comprise 12% of the total (27% in France) and 'Walk-ins' amount to only 7% (10% in France). This key change is a clear benefit to the leading national operators that possess the budget and the management skills necessary to generate a commanding presence in the major search engines. Safestore has developed a leading digital marketing platform that has generated 54% enquiry growth over the last four years. Towards the end of 2015 the Group launched a new dynamic and mobile-friendly UK website, which has achieved its aim of providing the customer with an even clearer, more efficient experience. In the last month, a similar website has been launched in our Paris business.

Although mostly generated online, our enquiries are predominantly handled directly by the stores and, in the UK, we have a Customer Support Centre ("CSC") which now handles 16% of all enquiries, in particular when the store staff are busy handling calls or outside of normal store opening hours.

Our pricing platform provides the store and CSC staff with system-generated real time prices managed by our centrally based yield management team. Local staff have certain levels of discretion to flex the system-generated prices but this is continually monitored.

Customer service standards are high and customer satisfaction feedback is consistently very positive. Over the last 12 months we have achieved over 95% customer satisfaction, based on 'excellent' or 'good' ratings as collected by Feefo via our customer website.

The key drivers of sales success are the capacity to generate enquiries in a digital world, the capacity to provide storage locations that are conveniently located close to the customers' requirements and the ability to maintain a consistently high quality, motivated retail team that is able to secure customer sales at an appropriate storage rate, all of which can be better provided by larger, more efficient organisations.

We remain focused on business as well as domestic customers. Our national network means that we are uniquely placed to further grow the business customer market and in particular National Accounts. Business customers in the UK now constitute 49% of our total space let and have an average length of stay of 30 months. Within our business customer category, our National Accounts business continues to grow with storage revenue increasing by 71% compared with 2013. The space let to National Accounts customers has increased by 16% compared with 2015 and, at 385,000 sq ft, constitutes 12% of our total occupied space in the UK business. Approximately two-thirds of the space occupied by National Accounts customers is outside London, demonstrating the importance and quality of our well invested national estate.

The business now has in excess of 55,000 business and domestic customers with an average length of stay of 30 months and 22 months respectively.

The cost base of the business is relatively fixed. Each store typically employs three staff. Our Group Head Office comprises business support functions such as Yield Management, Property, Marketing, HR, IT and Finance.

Since the completion of the rebalancing of our capital structure in early 2014 and the subsequent amendment and extension of our banking facilities in Summer 2015, Safestore has secure financing, a strong balance sheet and significant covenant headroom. This provides the Group with financial flexibility and the ability to grow organically and via carefully selected new development or acquisition opportunities.

At 31 October 2016 we had 1.4m sq ft of unoccupied space in the UK and 0.2m sq ft in France, equivalent to over 40 full new stores. Our main focus is on filling the spare capacity in our stores at optimally yield-managed rates. The operational leverage of our business model will ensure that the bulk of the incremental revenue converts to profit given the relatively fixed nature of our cost base.

Trading Performance

UK- balanced approach to revenue management results in strong growth

The UK has delivered another strong year growing revenue by 9.4%. The acquisition of Space Maker on 29 July 2016 has contributed to this growth but is offset by the closures of Whitechapel and New Malden in the previous year so, on a like-for-like basis, revenue grew by 9.2% in the year. Our first quarter's ownership of the Space Maker portfolio has gone to plan with the business fully integrated into the Group from an operational perspective and the rebranding of the stores well advanced.

Like-for-like new lets increased by 7.6% for the full year reflecting good customer enquiry growth, helped by our new website, and consistent conversion performance in our stores.

Total occupancy grew by 397,000 sq ft (2015: 76,000 sq ft) over the year reflecting the acquisition of Space Maker and a net like-for-like occupancy growth of 57,000 sq ft which comprised an 84,000 sq ft underlying increase in occupancy partially offset by a planned 27,000 sq ft reduction in the lower yielding discounted bulk occupancy. The addition of three new stores in the last two months of the year (Wandsworth, Birmingham and Altrincham) diluted total closing occupancy which ended the year at 69.7% (2015: 70.2%) but like-for-like closing occupancy grew by 1.4ppts to 71.8% (2015: 70.4%). Like-for-like average occupancy for the year grew by 3.8%.

We take a balanced approach to revenue management and our occupancy growth was accompanied by a 4.5% increase in the like-for-like average storage rate for the year. Sequentially, our Q4 like-for-like average rate was 2.2% higher than the rate achieved in Q3 2016.

We opened three new stores towards the end of the financial year in Wandsworth, Altrincham and Birmingham (and closed our existing Birmingham Central store) and our Chiswick store opened on 4 November 2016. In addition, we completed the extension of our Acton store. These developments were completed on time and on budget and added c. 135,000 sq ft of net new space to our portfolio. Early trading at these sites has been encouraging and in line with management's expectations. The Group now operates 109 wholly owned stores in the UK.

We remain focused on our cost base. During the year, our cost base increased by around 4.1% or £1.6m driven by the variable costs related to incremental revenue, the acquisition of Space Maker and an increase in business rates, offset by reductions arising from the closures of Whitechapel and New Malden in 2015.

As a result EBITDA after leasehold rent costs for the UK business was £41.6m (FY2015: £35.5m), an increase of £6.1m or 17.2%.

Paris - another year of solid revenue growth

Our Paris business had a solid year growing like-for-like revenue by 5.0%. The impact of the significant weakening of Sterling in the period resulted in the Sterling equivalent like-for-like revenue growing by 12.4% for the full year.

Pricing was robust and our like-for-like average rate was up 2.3% for the full year. Like-for-like closing occupancy ended the year at 80.7% (2015: 81.8%). Our average occupancy for the year was up 2.5% on 2015.

Our new store at Emerainville in the east of Paris opened on time and on budget at the end of the financial year adding 60,000 sq ft of MLA to our portfolio. Given that the store has only recently started to trade, its opening has a dilutive effect on total closing occupancy. The extension of our Longpont store, which will add 22,600 sq ft of new space, is due to complete in January 2017.

We continue to pursue our proven strategy of growing the revenue of our market leading Parisian portfolio by achieving an appropriate balance of rate and occupancy growth and we are now in the eighteenth year of uninterrupted revenue growth in local currency.

The impact of a 7% strengthening in the average Euro exchange rate resulted in a 12.4% increase in revenue in sterling. In the previous year, the Group had hedging arrangements in place which resulted in a £0.9m benefit which is reflected in the prior year EBITDA for Paris when reported in sterling, but not in the revenue line.

The cost base in Paris remained well controlled during the year and, as a result, EBITDA in France grew to €22.4m (FY2015: €21.2m prior to the benefit of the Euro hedging arrangements), an improvement of €1.2m or 5.7% on 2015.

Frederic Vecchioli

6 January 2017

Financial Review

Underlying Income Statement

The table below sets out the Group's underlying results of operations for the year ended 31 October 2016 and the year ended 31 October 2015.

Management considers the above presentation of earnings to be representative of the underlying performance of the business.

Underlying EBITDA increased by 12.4% to £64.2m (FY2015: £57.1m), reflecting a 10.1% increase in revenue, and only a 7.3% increase to the underlying cost base. The contribution of the Space Maker business since acquisition to the Group's income statement largely compensates for the 2015 closures of New Malden and Whitechapel.

Leasehold rent reduced by 2.2% from £9.0m to £8.8m. Despite an additional six leases in respect of the Space Maker business for the last quarter, savings in rent principally reflect a full year of two fewer leases (at New Malden and High Wycombe), a full year of benefit from lease re-gears agreed during the prior period and the favourable settlement of outstanding rent reviews.

Finance charges reduced by 11.4% from £11.4m to £10.1m. This reflects the benefit of the Group's August 2015 refinancing, as well as reduced interest rates in the latter part of the year, and offsets an increase in borrowings during the year required to finance the Space Maker acquisition and our new store developments.

As a result, we achieved a 23.7% increase in underlying profit before tax to £44.9m (FY2015: £36.3m).

Given the Group's REIT status in the UK, tax is principally payable in France. The underlying tax charge for the year was £3.7m, which compares to the total of underlying current tax and underlying deferred tax of £3.0m in the prior year. The year-on-year increase is attributable to the increased underlying pre-tax profit in Paris and the translational impact of the strengthening of the Euro. The underlying deferred tax in the prior year has not been repeated in 2016.

Management considers that the most representative earnings per share ("EPS") measure is cash tax adjusted EPS which has increased by 19.3% to 19.8p (FY2015: 16.6p). EPRA EPS also reflects the deferred tax on underlying trading and increased by 23.8% to 19.8p from 16.0p in 2015.

Reconciliation of Underlying EBITDA

The table below reconciles the operating profit included in the income statement to underlying EBITDA.

The main reconciling items between operating profit and underlying EBITDA are the gain on investment properties and exceptional items, as well as adjustments for depreciation, contingent rent and changes in the fair value of derivatives.

The gain on investment properties was £41.7m, as compared to £78.9m in 2015. The Group has recognised a net exceptional credit of £4.3m in the year (FY2015: £nil), comprising a £5.6m credit relating to negative goodwill arising on the acquisition of Space Maker, less corporate transactions costs of £1.3m.

Underlying Profit by geographical region

The Group is organised and managed in two operating segments based on geographical region. The table below details the underlying profitability of each region.

Note: CER is Constant Exchange Rates (Euro denominated results for the current period have been retranslated at the exchange rate effective for the comparative period, and the impact of foreign exchange swaps has been reversed, in order to present the reported results on a more comparable basis).

Underlying EBITDA in the UK increased by £5.9m, or 14.5%, to £46.5m (FY2015: £40.6m), underpinned by a 9.4% or £7.5m increase in revenue, which was driven primarily by a 3.8% increase in the average storage rate plus a 4.5% increase in average occupancy. Underlying UK EBITDA after leasehold rent increased by 17.2% to £41.6m (FY2015: £35.5m).

In Paris, underlying EBITDA increased by €1.2m, or 5.7%, to €22.4m (FY2015: €21.2m), reflecting a €1.7m increase in revenue, arising from a 2.3% increase in the average storage rate and a 2.5% increase in average occupancy. Underlying EBITDA after leasehold rent in Paris increased by 10.1% to €17.5m (FY2015: €15.9m)

The combined results of the UK and Paris delivered a 15.5% increase in underlying EBITDA after leasehold rent at constant exchange rates at Group level. Adjusting for a favourable exchange impact of £0.9m in the current year and the £0.9m of swap income from Euro hedges recognised in the prior year, Group reported underlying EBITDA after leasehold rent has increased by 15.2% or £7.3m to £55.4m (FY2015: £48.1m).

Revenue

Revenue for the Group is primarily derived from the rental of self-storage space and the sale of ancillary products such as insurance and merchandise (e.g. packing materials and padlocks) in both the UK and Paris.

The split of the Group's revenues by geographical segment is set out below for 2016 and 2015.

The Group's revenue increased by 10.1% or £10.6m in the year. The Group's occupied space was 388,000 sq ft higher at 31 October 2016 (3.97 million sq ft) than at 31 October 2015 (3.58 million sq ft), and the average rental rate per square foot for the Group was 3.3% higher in 2016 at £26.17 than in 2015 (£24.85).

Adjusting the Group's revenue to a like-for-like basis (to reflect the closures of Whitechapel and New Malden in 2015, the 2016 openings of Wandsworth, Altrincham, Birmingham and Emerainville and the Space Maker acquisition), revenue has increased by 10.0%. Adjusting further for the strengthening of the Euro during the year, Group like-for-like revenue at constant exchange rates has increased by 8.1%.

In the UK, revenue grew by £7.5m or 9.4%, and on a like-for-like basis it was up by 9.2%. Occupancy was 397,000 sq ft higher at 31 October 2016 than at 31 October 2015, at 3.15 million sq ft (2.76 million sq ft). Like-for-like UK occupancy also grew, by 57,000 sq ft to 2.79 million sq ft at 31 October 2016. The average rental rate for the year was up 3.8% from £23.70 in 2015 to £24.60 in 2016.

In Paris, revenue increased by 5.0% to €35.4m (FY2015: €33.7m). However, the strengthening of the Euro during the financial year had a favourable currency impact of approximately £1.9m on translation, which resulted in a 12.4% increase when reported in Sterling. Average occupancy grew to 0.81 million sq ft (FY2015: 0.79 million sq ft), and the average rental rate grew by 2.3% to €39.85 for the year (FY2015: €38.94).

Analysis of Cost Base

Cost of sales

The table below details the key movements in cost of sales between 2015 and 2016.

Note: Certain costs previously reported as administrative expenses, primarily relating to marketing and the customer service centre, are now reported within cost of sales.

In order to arrive at underlying cost of sales, adjustments are made to remove the impact of depreciation and contingent rent.

In constant currency and adjusting for the impact of the Euro swap income in 2015, underlying cost of sales grew by £1.8m, arising from sales volume related increases totalling c.£0.9m, including merchandise and insurance, store maintenance and enquiry generation, as well as increases in business rates (£0.5m, due to inflationary increases and non-recurring rebates received in the prior year) and premises insurance (£0.2m, as a result of higher premiums, partly driven by a higher rate of insurance premium tax).

Administrative Expenses

The table below reconciles reported administrative expenses to underlying administrative expenses and details the key movements in underlying administrative expenses between 2015 and 2016.

Note: Certain costs previously reported as administrative expenses, primarily relating to marketing and the customer service centre, are now reported within cost of sales.

In order to arrive at underlying administrative expenses, adjustments are made to remove the impact of exceptional items and changes in the fair value of derivatives.

Exceptional costs reported within administrative expenses include net costs relating to corporate transactions of £1.3m.

Underlying administrative expenses increased by £0.3m to £11.2m (FY2015: £10.9m), principally as a result of the translational impact of the strengthening of the Euro on the results reported for Paris.

Space Maker Acquisition

On 29 July 2016, the Group completed the acquisition of Space Maker Stores Limited for initial consideration of £40.9m plus £1.4m of deferred consideration, which has subsequently been paid, resulting in a total consideration of £42.3m. The consideration paid was less than the fair value of the identifiable net assets and, as a result, £5.6 million of negative goodwill has been recognised within operating profit in the income statement. In addition, £1.3 million of transaction related costs are included within administrative expenses. The net gain arising on business combinations of £4.3 million, recognised in the income statement, is considered to be exceptional.

Gain on Investment Properties

The gain on investment properties consists of the revaluation gains and losses with respect to investment properties under IAS 40 and finance lease depreciation for the interests in leaseholds and other items as detailed below.

In the current financial year the UK business contributed £37.1m to the positive valuation movement and the Paris business contributed £9.2m. The gain on investment properties principally reflects the continuing improvements in both average rental rate and occupancy, which drive positive changes in the cash flow metrics that are used to assess the value of the store portfolio.

Operating Profit

Operating profit decreased by £24.9m from £134.2m in 2015 to £109.3m in 2016, as a result of the £37.2m lower gain on investment properties, partially mitigated by the £7.1m improvement in underlying EBITDA and the net £4.3m exceptional gain arising on the Space Maker acquisition.

Net finance costs

Net finance costs includes interest payable, interest on obligations under finance leases, fair value movements on derivatives and exchange gains or losses. Net finance costs reduced by £1.6m in 2016, to £14.4m from £16.0m in 2015.

Underlying finance charge

The underlying finance charge (net bank interest payable) reduced by £1.3m to £10.1m, principally reflecting the annualisation of the interest savings from the amendment and extension of our loan facilities undertaken in August 2015, despite an increase in borrowings to finance the Space Maker acquisition. Net bank interest payable also includes the amortisation of debt issue costs, which has increased to £0.4m (FY2015: £0.2m), mainly due to additional debt issue costs incurred as a result of the August 2015 re-financing, which are being amortised over five years.

Based on the year-end drawn debt position the effective interest rate is analysed as follows:

The UK term loan of £126m is fully drawn as at 31 October 2016 and attracts a bank margin of 1.50%. The Group has interest rate hedge agreements in place to June 2020 swapping LIBOR on £100m at an effective weighted average rate of 1.34%.

As at 31 October 2016, £61m of the £125m UK revolver and €42m (£37.8m) of the €70m Euro revolver were drawn. The drawn amounts also attract a bank margin of 1.50%, and the Group pays a non-utilisation fee of 0.60% on the remaining undrawn balances.

The Group has interest rate hedges in place to June 2020 swapping EURIBOR on €30m at an effective rate of 0.309%.

The US Private Placement Notes are fully hedged at 5.83% for the 2019 notes and 6.74% for the 2024 notes.

The hedge arrangements provide cover for 70% of the Group's drawn debt. Overall, the Group has an effective interest rate on its borrowings of 3.58% at 31 October 2016, compared to 3.90% at the previous year end.

Non-underlying finance charge

Interest on finance leases was £3.7m (FY2015: £3.8m) and reflects part of the leasehold rental charge. The balance of the leasehold rental charge is expensed through the gain/loss on investment properties line and contingent rent in the income statement. Overall, our leasehold rental charge continued to reduce in 2016 to £8.8m, £0.2m lower than the charge of £9.0m in 2015. This decrease reflects the annualisation of lease re-gears negotiated over the last few years, two fewer leasehold stores (at New Malden and High Wycombe) and the favourable settlement of outstanding rent reviews, despite an additional £0.3m rent charge arising on the leased Space Maker stores, following the acquisition in July 2016.

The strengthening of the US dollar during the year had a significant impact on both the retransition of our US dollar borrowings and the fair value of our cross currency swaps which provide an economic hedge against them. The fair value movement on derivatives was an £18.4m net gain (FY2015: £1.9m), including gains totalling £20.8m arising on the US dollar cross currency swaps, partly offset by net losses arising on the interest rate swaps. Net exchange losses, arising mainly on our US dollar denominated borrowings, totalled £19.1m (FY2015: £2.8m).

Tax

The tax charge for the year is analysed below: