Safestore Regulatory News (SAFE)

21 January 2016

Safestore Holdings plc

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

Preliminary Results for the year ended 31 October 2015

A successful year, well placed for future growth

Key measures

Highlights

Strong Financial Performance

· Group like-for-like2 revenue up 11.5%1 with UK up 13.2% and Paris up 7.0%

· Closing occupancy up 3.8ppts at 72.6%

· Cash Tax Adjusted Earnings per Share up 23.0% at 16.6p

· 25.5% increase in the final dividend to 6.65p (FY2014: 5.30p)

· Robust start to the year, Group like-for-like revenue for the first two months up 7% at CER

Operational Focus

· New lets growth in the UK of 18.6%, resulting from strong enquiries and continued improvement in conversion rates

· Resilient pricing growth with UK rate up 6.7% and Paris rate up 2.4%

· National Accounts UK business customers occupancy up 22% over the year

· Six lease extensions completed, increasing average remaining lease life to 13.9 years and one freehold purchased

Strong and Flexible Balance Sheet

· Group Loan to Value ("LTV") lowered to 32% and full year underlying finance costs reduced by £2.3m or 16.8%

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

"I am pleased to report another successful year for Safestore which has culminated in our inclusion in the FTSE 250 Index. The operational initiatives implemented over the last two years continue to drive our financial performance and, as a result, we have reported cash tax adjusted earnings per share ahead of our original expectations for the full year and up 50% over two years.

As we enter the new financial year, we remain focused on the significant opportunity represented by our 1.35m square feet of currently unlet space, the equivalent of 30 stores. In addition, we look forward to the opening of two new flagship stores in London, in Chiswick and Wandsworth, and one in Birmingham. With strong cash generation and balance sheet capacity and flexibility, we can also take advantage of carefully selected development and acquisition opportunities."

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 St Denis Landy in Paris in 2014, and the 2015 closures of

New Malden and Whitechapel in the UK.

3 - Underlying EBITDA is defined as Operating Profit before exceptional items, 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 - Free cash flow is defined as cash flow before investing and financing activities but after leasehold rent payments.

5 - Cash tax adjusted earnings per share is defined as profit or loss for the year before exceptional items, 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).

6 - MLA is Maximum Lettable Area. Group MLA has been adjusted to 4.93m sq ft following the closure of New Malden in July 2015 and Whitechapel in October 2015, an extension at Edinburgh Fort Kinnaird and sundry minor adjustments in other stores.

7 - Closing occupancy excludes offices but includes 64,022 sq ft of bulk tenancy as at 31 October 2015 (31 October 2014 - 83,472 sq ft).

Summary

Safestore has delivered a good financial performance in the last financial year. Group revenue was up 11.5% on a like-for-like basis with strength across both the UK and Paris businesses. The Group's occupancy increased by 3.8 percentage points (ppts) to 72.6% with the average storage rate up 5.4%1.

Our operational performance across the UK continues to show good progression. Enquiry growth has again outpaced the market and improvements in conversion have resulted in new lets growth of 18.6% in the year. As a result, occupancy in the UK was up 3.6ppts to 70.2%, driven by growth in both London & South East (+3.2ppts) and the rest of the UK (+4.3ppts).

In Paris, our performance has also been strong resulting in increases in occupancy, rate and revenue. New lets, in the final quarter, were at record levels and occupancy is now 81.8%, a 4.6ppts increase compared to the prior year. This is the seventeenth consecutive year of revenue growth in Paris with average growth over the last five years of c.6%.

Group underlying EBITDA of £57.1m increased 9.2% in CER on the prior year and 7.7% on a reported basis reflecting the impact of the weakening Euro on Paris profitability. Cash tax adjusted EPS grew 23.0% in the period to 16.6p (FY2014: 13.5p) reflecting the strong EBITDA performance and reduced finance costs arising from the annualisation of the rebalancing of the capital structure completed in January 2014 and the amendment and extension of the bank facilities completed in August 2015.

Our property portfolio valuation increased by 12.8% since October 2014 on a constant currency basis. After exchange rate movements the portfolio valuation increased by 10.2% to £781.5m with the UK portfolio up £71.3m at £603.6m and the French portfolio up €24.8m to €249.3m.

Reflecting the strong trading performance, the Board is pleased to recommend a 25.5% increase in the final dividend to 6.65p per share (FY2014: 5.30p) resulting in a full year dividend up 29.5% to 9.65p per share (FY2014: 7.45p).

Outlook

We have had a good start to the new financial year with Group like-for-like revenue up 7% at CER for the first two months.

Safestore has strong market positions in both the UK and Paris and, with 1.35m square feet of unlet space available, there remains significant organic growth in filling the existing portfolio. In addition, the opening of our planned new London freehold stores at Chiswick and Wandsworth and a long leasehold store in Birmingham will further strengthen our leading positions in London and the UK regions over the next year.

We remain focused on further improving the operational performance of the business leveraging our leading market positions. Our balance sheet flexibility also 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.

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:

Sophie Tucker (sophie.tucker@instinctif.com or telephone on Tel: 020 7457 2077).

Notes to Editors

· Safestore is the UK's largest self-storage group with 119 stores, comprising 95 wholly owned stores in the UK (including 56 in London and the South East with the remainder in key metropolitan areas such as Manchester, Birmingham, Glasgow, Edinburgh, Liverpool and Bristol) and 24 wholly owned stores in the Paris region. In addition, Safestore has 12 Space Maker stores under management in the UK.

· Safestore operates more self-storage sites inside the M25 and in central Paris than any 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 49,000 personal and business customers.

· Safestore (excluding Space Maker) has a maximum lettable area ("MLA") of 4.93 million sq ft (excluding the expansion pipeline stores) of which 3.58 million sq ft is currently occupied.

· Safestore employs around 525 people in the UK and France.

Chairman's Statement

I am pleased to announce, on behalf of the Board of Safestore, a strong set of results for the year ended 31 October 2015.

This has been another year of good progress across the business by the management team. The operational improvements made over the last two years continue to yield positive results, even after passing the anniversary of their implementation. I believe that the improvements made to our customer website and to the recruitment, training, coaching and incentivisation of our store teams will serve the business well in the future.

Following the amendment and extension of our banking facilities during the year, we have the balance sheet flexibility and capacity to take advantage of carefully selected development and acquisition opportunities. I am confident that the business is well positioned for growth and to deliver further value creation to shareholders.

Financial Results

Revenue for the year was £104.8m, 7.0% ahead of last year (FY2014: £97.9m) and up 11.5% on a like-for-like and constant currency basis. This result was driven by a strong performance in the UK which grew like-for-like revenue by 13.2%, combined with another good performance by Une Pièce en Plus, our Parisian business, which grew like-for-like revenue by 7.0%.

Underlying EBITDA increased by 7.7% to £57.1m (FY2014: £53.0m) and 9.2% on a constant currency basis. After rent costs, underlying EBITDA increased by 12.6% to £48.1m (FY2014: £42.7m).

The anniversary of our January 2014 refinancing, combined with the 2015 amendment and extension of our bank facilities, resulted in a reduction in the underlying finance charge of £2.3m or 16.8% to £11.4m (FY2014: £13.7m). Over the last two years we have reduced our finance charges by 38.0% or £7.0m.

As a result of the above factors, cash tax adjusted earnings per share grew by 23.0% to 16.6p (FY2014: 13.5p). EPS has grown by 5.5p or 50% over the last two years.

Capital Structure

During the summer we completed an amendment and extension of the Group's existing bank facilities. The UK and Euro facilities were extended by a further two years to June 2020 and the margin was reduced by 75 bps to 1.5% over LIBOR in the UK and EURIBOR in Paris. In addition, £30m of mandatory repayments, previously required under the facilities, were removed and an option to increase the quantum of the sterling facility by £60m was agreed.

The Group's balance sheet remains in good shape with a Group Loan-to-Value ratio ("LTV") of 32% and an interest cover ratio of 4.2x. This represents a level of gearing we consider is 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 strong trading performance, the Board is pleased to recommend a 25.5% increase in the final dividend to 6.65 pence per share (FY2014: 5.30 pence per share) resulting in an increase of 29.5% in the total dividend to 9.65 pence per share for the year (FY2014: 7.45 pence per share). This total dividend for the year is covered 1.72 times by cash tax earnings (1.81 times in 2014).

The Board remains confident in the prospects for the Group and will continue its progressive dividend policy in 2016 and beyond. In the medium term it is anticipated that the Group's dividend will grow at least in line with earnings. 

People

In another year of considerable progress, our people continued to be the key drivers of 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.

Alan Lewis

20 January 2016

Our Strategy

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 and the macro-economic environment. Over the last two years we have made significant progress on the strategy set out in January 2014. 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 the existing portfolio;

· Maintaining a strong and flexible capital structure; and

· Taking advantage of selective portfolio management and expansion opportunities.

Optimisation of Existing Portfolio

We have a high quality, fully invested estate in both the UK and Paris. Of our 119 stores, 80 are in London and the South East of England or in Paris with 39 in the other major UK cities. This means that we operate more stores inside the M25 than any other competitor.

However, at the current occupancy level of 72.6% we have 1.35m sq ft of unoccupied space, of which 1.17m sq ft is in our UK stores and 0.18m sq ft in Paris. This is the equivalent of 30 empty stores located across the estate. The available space is fully invested and the related operating costs are largely 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 through a motivated and dynamic store team; and

· Disciplined central revenue management and cost control.

Efficient Marketing Operation

Over the last 12 months, our marketing team performed strongly, demonstrating the clear benefit of scale in the generation of customer enquiries, which grew by 8.2% in the year.

Awareness of self-storage is progressing each year but remains 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 and customers requiring storage start their journey by conducting detailed online research using generic keywords in their locality. Online enquiries now represent 81% of our enquiries and 43% of our online enquiries originate from our mobile site, an increase of 23% in the last 12 months. It is, therefore, critically important to appear on the top rankings of 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.

The scale of our organisation is a major differentiator in a fragmented industry where only 28% of the market is owned by the six leading operators in the UK. As a result, it enables us to employ the appropriate in-house expertise and skills and to dedicate a budget of c.£5m (£4m in the UK and £1m in Paris) to achieve these results. This competitive advantage is illustrated by the 12 store Space Maker portfolio that we manage on behalf of its owners and which generates a significant proportion of its enquiries outside its own website through the Safestore digital platform.

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.

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 not dropped below 96%.

Motivated and Dynamic Store Team

In what is still a relatively immature and poorly understood product, customer service and selling skills at the point of sale are both 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 two years we have established a dynamic 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, we are merging our Sales Assistant and Assistant Manager roles into the new Sales Consultant role and 25% of this transition has already taken place.

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 4 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.

All store staff continue to benefit from on-going training and development. In 2015, we delivered 25,000 hours of training to sales staff and our internally developed online learning tool now contains more than 10,000 hours of additional training content.

Over the last 12 months 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. 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 improving performance by the stores in converting enquiries into new lets. The 8.2% enquiry growth referred to above converted into new lets growth of 16.8% across the Group over the last year and 38% compared to 2013.

Central Revenue Management and Cost Control

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 two years is linked to store team variable incentivisation and is monitored closely by the central pricing team.

During the last year, the implementation of new Business Intelligence software has enhanced 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 of revenue optimisation 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 average rate increases of 6.7% in the UK and 2.4% in Paris over the financial year, while increasing occupancy at the same time by 3.6ppts and 4.6ppts respectively.

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, in the last year, a central Maintenance Service Centre has been established to improve the coordination, sourcing and control of maintenance work required in the stores.

Strong and Flexible Capital Structure

Over the past two years 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 Loan to Value ratio ("LTV") of 32% and our Interest Cover Ratio of 4.2x provides us with significant headroom compared to our banking covenants. The August 2015 refinancing extended our UK banking facilities to June 2020, reduced the margin on our UK and Euro debt to 1.5%, removed the requirement for mandatory debt repayments of £30m over the next three years and provided us with an additional uncommitted £60.0m credit facility. Including the uncommitted facility, we now have undrawn facilities of £137.8m.

Assuming a continuation of the business' recent improved trading performance, the reduction in proforma interest costs of over £8m per annum over the last two years and the removal of the mandatory debt repayments referred to above, the Group should generate free cash after dividends sufficient to fund the building of 1-2 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 LTV of between 30% and 40% for the foreseeable future.

Portfolio Management

Our approach to store development and acquisition in the UK and Paris will continue to be pragmatic, flexible and returns focused.

Our property team is 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.

Over the next year the Group plans to open three new sites in Chiswick, Wandsworth and Birmingham. All three stores have planning permission and work is progressing.

The Chiswick site is located on the A4 in West London and will provide a new flagship freehold store of 42,500 sq ft which should open in the fourth calendar quarter of 2016. Estimated costs to completion of this store are £6.1m.

In Wandsworth, we have an existing 10,000 sq ft store on Garrett Lane in South West London as well as an additional adjoining 0.25 acre parcel of land. We are in the process of redeveloping the site to include a new purpose-built 33,200 sq ft freehold store which is scheduled to open in the third calendar quarter of 2016 and is estimated to cost £3.3m to complete.

In Birmingham, we received planning consent to build a new flagship store on the A34 North of the centre of Birmingham which is due to open in the fourth calendar quarter of 2016. The store will provide an additional 51,000 of space and estimated costs to complete are £3.8m.

In Paris, where regulatory barriers to entry are likely to continue to severely 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 where adding new capacity is slightly easier, whilst managing occupancy and rates upwards in the more central stores. The strong selling organisation and store network established by Une Pièce en Plus in Paris uniquely enables it to implement this commercial policy.

In addition to new stores we are keenly focused on maximising the value of our existing estate. Where possible and economically viable, we continue to consider purchasing the freeholds of our leasehold assets. In the first half of the year we acquired the freehold of our leasehold High Wycombe store for £1.8m, which added over £2.5m to our asset valuation.

Over the course of the financial year we have extended leases on a further six leasehold properties at Guildford, Swanley, Harlow, Preston, Camden and Warrington, providing the business with long-term tenure on these properties. These lease re-gears have added approximately £6.6m to our asset valuation. In all but one case we received rent free periods as part of the extension of the lease.

Note: The valuation uplift reported in the above table is an estimate of the increase in value arising solely due to the lease extensions, and does not reflect any changes arising from other valuation assumptions.

We have now extended the leases on 17 stores or c.53% of our leased store portfolio in the UK since FY2012 and our average lease length remaining now stands at 13.9 years as compared to 12.1 years at October 2014.

As previously reported, at New Malden our landlord obtained planning permission for the redevelopment of the site and, pursuant to the lease amendment signed with the company three years ago, served its option to break the lease in return for a premium of £1.5m, which has been reflected in the store portfolio valuation. This was significantly higher than the asset valuation as an ongoing trading store. The store closed in the second half of the year.

In November 2013 we sold our Whitechapel site for net proceeds of £40.5m as part of the rebalancing of the Group's capital structure. The transaction involved a two year lease-back of the site at peppercorn rent which expired in October 2015 and the store is now closed.

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 75% 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 202 storage centres within the M25 as compared to only 85 in the Paris urban area. The GDPs generated in the London and Paris conurbations are roughly equivalent and are more than twice that of any other European equivalent.

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 65 stores, £68.2m revenue and £39.8m EBITDA, 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 95 stores in the UK, 56 of which are in London and the South East, and 24 stores in Paris.

In the UK, 69% 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 higher enabling these stores to typically achieve similar or better margins than the larger stores. In London we operate 41 stores 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. 75% 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, London, the South-East and Paris represent 67% of our owned stores, 76% of our revenues, as well as 53% 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.

In the UK we own three development sites with planning permission at Chiswick and Wandsworth in London and in central Birmingham. We plan to open all three sites during the 2016 calendar year. The sites will add c.117,000 sq ft of incremental space to our portfolio. In addition, we plan to extend our Acton site adding a further 4,900 sq ft of space.

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 2015) confirmed that self-storage capacity stands at 0.56 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 7.3 square feet per inhabitant in the USA and 1.6 square feet in Australia.

While capacity increased significantly between 2007 and 2010 with an average of 32 stores per annum being opened, new additions have been limited to an average of 9 stores per annum between 2011 and 2014.

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 SSA survey indicated that obtaining new sites in London was likely to remain difficult in the near term.

Respondents to the survey indicated aspirations to develop an average of 35 stores per annum from 2015 to 2017. However, history has shown that actual developments have averaged less than 50% of respondents' aspirations over the last three years suggesting that around 17 stores are likely to be added in the coming year representing a likely 1.7% capacity increase in the UK market of 1,022 stores (including container storage). New supply should not exceed 1% in London and is likely to be negligible in Paris.

The supply in the UK market, according to the SSA survey, remains relatively fragmented. Safestore is the leader by number of stores with 95 wholly owned sites, followed by Big Yellow with 70 wholly owned stores, Access with 55 stores, Storage King and Lok'n Store with 24 stores each and Shurgard with 22 stores. In aggregate, the six leading brands account for 28% of the UK store portfolio. The remaining c.700 self-storage outlets (including 159 container based operations) are independently owned in small chains or single units.

The Paris market is significantly more concentrated with three main operators. 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 55% (62% in 2014) 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 and improving economic conditions, makes for an attractive industry backdrop.

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.

The SSA survey also highlighted the increasing importance for operators of a strong online presence. 69% of those surveyed (67% in 2014) confirmed that an internet search would be their chosen means of finding a self-storage unit to contact, whereas knowledge of a physical location of a store as reason for enquiry dropped to 24% of respondents (25% in 2014).

Safestore's customer base is resilient and diverse and consists of 49,000 domestic, business and National Accounts customers across London, Paris and the UK regions.

Business Model

As discussed above, Safestore 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. With more favourable economic conditions and limited new supply coming into the self-storage market, the industry is well positioned for growth.

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 119 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 2015 of 13.9 years (FY2014: 12.1). 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 46% 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 50% enquiry growth over the last four years. Towards the end of 2015 the Group launched a new dynamic and mobile-friendly website, designed to provide the customer with an even clearer, more efficient experience.

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 96% 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 50% 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 44% compared with 2013. The space let to National Accounts customers has increased by 22% compared with 2014 and, at 331,000 sq ft, constitutes 12% of our total occupied space in the UK business. 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 49,000 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 2015 we had 1.17m sq ft of unoccupied space in the UK and 0.18m sq ft in France, equivalent to over 30 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 - considerable strategic progress driving strong results

The UK business performed strongly with like-for-like revenue up 13.2%. At the end of the year, UK occupancy was 70.2%, an increase of 3.6 percentage points on the prior year.

Our key focus in the UK, throughout the year, has remained on our store operational performance and on improving the conversion of enquiries at an appropriate rate to maximise revenues. New lets growth of 18.6% over the year has continued to drive performance, with 76,000 sq ft of occupancy added despite the planned closures of Whitechapel and New Malden which had combined occupancy of 85,000 sq ft at October 2014.

During the year we passed the anniversary of our 2014 pricing policy changes and, as expected, the rate of growth reduced as we progressed through the period, albeit more slowly than we had anticipated. As a result, we were pleased to achieve 6.7% rate growth for the year.

We remain focused on our cost base. During the year we invested a planned further £1m in marketing resulting in a full year expenditure of £4.2m which helped to drive strong enquiry growth. This was largely offset by a 10.5% reduction in rental costs arising from the New Malden store closure, successful lease re-gears resulting in rent free periods and the acquisition of the freehold of our High Wycombe store.

As a result EBITDA after leasehold rent costs for the UK business was £35.5m (FY2014: £31.0m), an increase of £4.5m or 14.5%.

Paris - 17 years of consistent revenue growth

Our Paris business delivered another year of growth in occupancy, rate and revenue, demonstrating the quality and market leading position of our estate. Like-for-like revenue, on a CER basis, was up 7.0%. Our average rate, on a CER basis, improved by 2.4% on the prior year and the square feet occupied was 46,000 sq ft ahead of the prior year. As a result, occupancy as a percentage of MLA increased by 4.6 percentage points to 81.8%.

The impact of a 10% weakening in the average Euro exchange rate resulted in a 2.7% reduction in like-for-like revenue in sterling. The currency impact was partly mitigated by the foreign exchange swaps in place on €12m of Paris profitability, at an average rate of €1.234:£1. The benefit of these hedging arrangements amounted to £0.9m and is reflected within the EBITDA for Paris when reported in sterling, but not in the revenue line.

Our strategy of achieving an appropriate balance of rate and occupancy growth has been successful and we are now in the eleventh consecutive quarter of year-on-year rate growth and seventeenth year of uninterrupted revenue growth in local currency.

The cost base in Paris remained well controlled during the year and, as a result, EBITDA in France grew to €21.2m (FY2014: €20.0m) prior to the benefit of the Euro hedging arrangements, an improvement of €1.2m or 6.0% on 2014. If the benefit of the foreign exchange swaps is included, underlying EBITDA grew by 12.5% and EBITDA (after leasehold costs) grew by 20.3%.

Frederic Vecchioli

20 January 2016

Financial Review

Underlying Income Statement

The table below sets out the Group's underlying results of operations for the year ended 31 October 2015 and the year ended 31 October 2014.

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

Underlying EBITDA increased by 7.7% to £57.1m (FY2014: £53.0m), reflecting a 7.0% increase in revenue, which is partly offset by a 6.2% increase in the underlying cost base (see below).

Leasehold rent reduced by 12.6% from £10.3m to £9.0m, due to the re-gear of a number of leases on favourable terms, the freehold purchases of High Wycombe and St Denis, and the closures of New Malden and St Denis Landy. Finance charges reduced by 16.8% from £13.7m to £11.4m, reflecting the steps taken by management to strengthen the Group's capital structure over the last two years. As a result, we achieved a 27.4% increase in underlying profit before tax to £36.3m (FY2014: £28.5m).

Given the Group's REIT status in the UK, tax is normally only payable in France. The tax charge for the year increased to £1.8m (FY2014: £1.2m), principally as a result of the increase in profit earned by the Paris business.

Management considers that the most representative earnings per share ("EPS") measure is cash tax adjusted EPS5 which has increased by 23.0% to 16.6p (FY2014: 13.5p). EPRA EPS also reflects the deferred tax on underlying trading and increased by 28.0% to 16.0p from 12.5p in 2014.

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, which increased by £54.8m from £24.1m in 2014 to £78.9m in 2015, as well as adjustments for depreciation, contingent rent and changes in the fair value of derivatives. The Group incurred no exceptional charges during the year (FY2014: £1.0m).

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.

Underlying EBITDA in the UK increased by £3.9m, or 10.6%, to £40.6m (FY2014: £36.7m), underpinned by an £8.1m increase in revenue, which was driven primarily by a 6.7% increase in the average storage rate plus a 3.0% increase in closing occupancy, despite the planned closures of Whitechapel and New Malden. UK costs increased by £4.2m, mainly as a result of planned increased expenditure for store maintenance, employee incentives and enquiry generation. Underlying UK EBITDA after leasehold rent increased by 14.5% to £35.5m (FY2014: £31.0m), reflecting savings in rent charges.

In the Parisian business, underlying EBITDA after leasehold rent increased by £0.9m or 7.7% to £12.6m (FY2014: £11.7m). However, this performance was masked by the weakening of the Euro during the year. In local currency, underlying EBITDA in Paris, before taking account of the Euro swap income of £0.9m (FY2014: £nil), grew by 6.0%, from €20.0m in 2014 to €21.2m in 2015, despite the loss of revenue following the closure of St Denis Landy in October 2014. Underlying EBITDA after leasehold rent increased by 11.2% to €15.9m (FY2014: €14.3m).

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 2015 and 2014.

The Group's revenue increased by 7.0% or £6.9m in the year. The Group's occupied space was 122,000 sq ft higher at 31 October 2015 (3.58 million sq ft) than at 31 October 2014 (3.46 million sq ft), and the average rental rate per square foot for the Group was 2.5% higher in 2015 at £24.85 than in 2014 (£24.24).

When the Group's revenue is adjusted for the closure of St Denis Landy in Paris in 2014, and the 2015 closures of New Malden and Whitechapel in the UK, like-for-like revenue increased by 8.9%2. The increase in like-for-like revenue on a CER basis1 was 11.5%, reflecting the weakening of the Euro during the year.

In the UK, revenue increased by £8.1m or 11.3%, and on a like-for-like basis it was up by 13.2%. The let sq ft was 76,000 sq ft higher at 31 October 2015 than at 31 October 2014, despite the planned closures of Whitechapel and New Malden which had combined occupancy of 85,000 sq ft at October 2014, and the average rental rate was up 6.7% from £22.21 in 2014 to £23.70 in 2015.

Revenue in the Parisian business increased by 5.0% on a constant currency basis. However, the weakening of the Euro during the financial year had an adverse currency impact of approximately £2.5m on translation, which resulted in a 4.6% decrease when reported in Sterling. Closing occupancy increased by 6.4% to 0.83 million sq ft, and the rental rate was €38.94 for the year, an increase of 2.4% (FY2014: €38.01).

Analysis of Cost Base

Cost of sales

The table below details the key movements in cost of sales between 2014 and 2015.

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

The weakening of the Euro during the year resulted in a decrease in the sterling equivalent of the Parisian cost of sales of £0.5m, and the foreign currency swap generated income of £0.9m.

The Group's cost base has benefited from actions taken by management over the last two years to reduce costs. However, cost increases were experienced during the year principally for sales volume related cost of sales, such as store maintenance, employee incentives, merchandise and third party storage.

Administrative Expenses

The table below reconciles reported administrative expenses to underlying administrative expenses and details the key movements in underlying administrative expenses between 2014 and 2015.

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 items in the prior year, costs principally associated with the restructuring of the Group's senior management team, were not repeated during the current year.

Underlying administrative expenses increased by £2.7m to £17.0m (FY2014: £14.3m). The increase mostly arises in the UK, and is primarily as a result of planned increased expenditure to generate customer enquiries (£1.1m) and a higher cost of employee remuneration (£0.9m) to reflect the strong revenue and profit performance of the business during the year.

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.

The movement in investment properties principally reflects the combination of yield movements within the valuations together with the impact of changes in the cash flow metrics of each store. In a normal year the key variables are rate per sq ft, stabilised occupancy, number of months to reach stabilised occupancy and the yields applied.

In the current financial year the UK business contributed £66.7m to the positive valuation movement and the Paris business contributed £16.3m, reflecting improving trading metrics in both businesses.

Operating Profit

Operating profit increased by £58.6m from £75.6m in 2014 to £134.2m in 2015. The increase predominantly reflects the £54.8m increased gain on investment properties, as well as the £4.1m improvement in underlying EBITDA.

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 £7.2m in 2015, to £16.0m from £23.2m in 2014.

Underlying finance charge

The underlying finance charge (net bank interest payable) reduced by £2.3m to £11.4m, reflecting the annualisation of the interest savings from the January 2014 capital restructuring, as well as further interest savings from the amendment and extension undertaken in August 2015. Net bank interest payable also includes the amortisation of debt issue costs, which has increased to £0.2m (FY2014: £0.1m), due to the £1.4m of additional debt issue costs incurred as a result of the August 2015 re-financing, which are being amortised over 5 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 2015 and attracts a bank margin of 1.50%. The Group has interest rate hedge agreements in place to June 2020 swapping LIBOR on £90.0m at an effective rate of 1.447%.

As at 31 October 2015, £20m of the £80m UK revolver and €45m (£32.1m) of the €70m Euro revolver was 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 74% of the Group's drawn debt. Overall, the Group has an effective interest rate on its borrowings of 3.90% at 31 October 2015, which has reduced from 4.34% since the previous year end, as a result of the amendment and extension in August 2015.

Non-underlying finance charge

Interest on finance leases was £3.8m (FY2014: £4.2m) 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, the leasehold rental charge for 2015 of £9.0m is £1.3m lower than the charge of £10.3m in 2014, reflecting the benefit of rent reductions negotiated over the last few years as well as four fewer leasehold stores, due to the freehold purchases of High Wycombe and St Denis, and the closure of New Malden during the year and St Denis Landy at the end of the 2014 financial year.

The fair value movement on derivatives increased to a net gain of £1.9m in 2015 (FY2014: £0.3m), principally driven by gains in the US dollar cross currency swaps as a result of the strengthening US dollar, partly offset by losses arising on the interest rate swaps. Net exchange losses, arising mainly on US dollar denominated borrowings, decreased from £3.7m in 2014 to £2.8m in 2015.

The prior year included £2.1m of exceptional finance expenses arising on the capital restructuring in January 2014, which were not repeated during 2015. As noted above, the debt issue costs of £1.4m incurred as a result of the amendment and extension undertaken in August 2015 are being amortised over the period to June 2020, within the underlying finance charge.

REIT Status

The Group converted to REIT status in 2013. Since then, the Group continues to benefit from a zero tax rate on its UK self-storage income. The Group is normally only liable to UK tax on the profits attributable to the residual business, consisting of the sale of ancillary products such as insurance and packaging products, which in 2015 incurred a UK tax charge of £0.2m.

The Group's Parisian business remains liable to tax on the profits from its self-storage and ancillary businesses as it is not entitled to relief under UK REIT rules, as its business does not relate to UK property income.

Tax

The tax charge for the year is analysed below:

The income tax charge in the year is £9.5m (FY2014: £5.6m). In the current year, the underlying current tax charge relating to the Parisian business amounted to £1.6m (FY2014: £1.2m) and £0.2m (FY2014: £nil) related to the UK business. Underlying deferred tax related to the Parisian business and amounted to a charge of £1.2m (FY2014: £2.1m).

The deferred tax impact of the gain on investment properties was a charge of £6.3m (FY2014: £1.8m) relating to the Parisian business.

Profit after tax

As a result of the movements explained above, profit after tax for 2015 was £108.7m as compared with £46.8m in 2014. Basic EPS was 52.4 pence (FY2014: 23.2 pence) and diluted EPS was 52.0 pence (FY2014: 23.0 pence). Management considers cash tax adjusted EPS to be more representative of the underlying EPS performance of the business and this is discussed above.

Dividends

The Group's full year dividend of 9.65 pence is 29.5% up on the prior year dividend of 7.45 pence. The Property Income Dividend ("PID") element of the full year dividend is 9.65 pence.

Shareholders will be asked to approve the final dividend of 6.65 pence (FY2014: 5.30 pence) at the Annual General Meeting on 23 March 2016. If approved by Shareholders, the final dividend will be payable on 8 April 2016 to Shareholders on the register at close of business on 11 March 2016.

Property Valuation

Cushman & Wakefield LLP has valued the Group's property portfolio. As at 31 October 2015, the total value of the Group's portfolio was £775.5m (excluding investment properties under construction of £6.0m). This represents an increase of £71.5m or 10.2% compared with the £704.0m valuation as at 31 October 2014. A reconciliation of the movement is set out below: