Safestore Holdings Plc : - Final Results

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30 January 2013

Safestore Holdings plc

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

Preliminary Results Announcement for the year ended 31 October 2012

Resilient performance - Converting to REIT status

Safestore Holdings plc ("Safestore", "the Company" or "the Group"), the largest self storage operator in the UK and Paris, is pleased to report on its Financial Results for the year ended 31 October 2012.

Operational Highlights

·      Closing occupancy1 up 2.5% to 3.29 million sq ft or 63.9% of Maximum Lettable Area ("MLA")

·      Strong growth in UK business customers, which now account for more than half our total occupancy

·      Initial impact of the introduction of VAT in the UK remains in line with original estimates

·      Four new stores opened during the year, completing the planned store expansion programme

·      Full refinancing of the Group completed

·      Group to apply for conversion to Real Estate Investment Trust ("REIT") status with effect from 1 April 2013

Financial Highlights7

·      Revenue up 5.5% and RevPAF2 & 3 up 5.2% in constant exchange rates ("CER")

·      Underlying EBITDA4 after strategic investments down 0.4% to £50.3m but up 0.8% in CER

·      EPRA5 adjusted EPS on a cash tax basis6 down 0.43 pence (3.9%) to 10.56 pence per share

·      Property valuation reduced by 4.0% to £685.8 million, reflecting imposition of UK VAT and adverse currency movements; with a resulting loss before tax, including refinancing costs, of £19.5 million (year ended 31 October 2011: profit before tax of £8.5 million)

·      Basic EPS - loss of 4.16 pence per share (year ended 31 October 2011: earnings of 6.95 pence per share)

·      Final dividend increased by 7.0% to 3.80 pence per share, bringing total dividend to 5.65 pence per share

Peter Gowers, Safestore's Chief Executive Officer, commented:

"Demand for self-storage in the UK and France has remained solid despite the economic environment. We have delivered resilient financial results and made good progress on our strategic plan to focus on organic growth.

Our cash generative characteristics and organic growth potential make Safestore well suited to REIT status and approval will be sought for conversion from 1 April 2013.

We anticipate a challenging year ahead with some short-term pressures expected from the economy and the imposition of VAT, both of which have contributed to a slower start to the new financial year. However, the solid underlying demand for self-storage together with our focus on driving returns from our existing stores, tight cost control and the tax advantages of REIT status, position us well to deliver increased value to shareholders."

1 Closing occupancy excludes offices but includes 82,800 sq ft of bulk tenancy as at 31 October 2012 (31 October 2011: 67,200 sq ft)

2 RevPAF is calculated as total Revenue divided by total Maximum Lettable Area ("MLA") excluding the five stores opened since 1 May 2011

3 RevPAF for the year ended 31 October 2011 has been restated from £18.99 because of the exclusion of trading for Gonesse which opened in H2 2011 consistent with the current reporting

4 EBITDA before exceptional items, contingent rent, fair value movement of derivatives and movement in investment properties ("underlying EBITDA")

5 European Public Real Estate Association ("EPRA")

6 EPRA adjusted EPS (cash tax only) removes the impact of deferred tax movements leaving only the tax charge which will actually be paid

7 All figures are stated net of VAT

For further information, please contact:

Safestore Holdings plc	Tel: [phone] on Wednesday 30 January 2013 and thereafter on 020 8732 1544
Peter Gowers, Chief Executive Officer

A presentation for analysts will be held at 9.30am today at College Hill, The Registry, Royal Mint Court, London, EC3N 4QN.

For dial-in details of the presentation please contact Sarah Vines at College Hill on 020 7457 2057

Notes to Editors

·	Safestore is the UK's largest self storage group with 135 stores. They include 98 wholly owned stores in the UK and 25 wholly owned stores in the Paris region together with 12 stores under management in the UK.
·	The Company provides storage to more than 43,700 personal and business customers.
·	Safestore (excluding Space Maker) has a maximum lettable area ("MLA") of 5.24 million sq ft (including the expansion pipeline stores) of which 3.29 million sq ft is currently occupied.
·	Safestore employs around 550 people.

SAFE HARBOUR

Certain statements in this announcement are forward looking statements.  By their nature, forward-looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements.  These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described herein.  Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future.  You should not place undue reliance on forward-looking statements, which speak only as of the date of this announcement. Except as required by law, the Company is under no obligation to update or keep current the forward-looking statements contained in this announcement or to correct any inaccuracies which may become apparent in such forward-looking statements. 

Chairman's Statement

We are pleased to report another year of strategic progress and financial resilience during the year ended 31 October 2012.

Strategic Progress

In January 2012 we outlined our 'More Space' strategy.  Early results have been encouraging, with gains in brand awareness, significant growth in business customers and greater occupancy.  At the store level, both sales and profitability have improved in constant exchange rates. The Group also completed its planned store expansion programme during the year.  We opened two new stores in London and two in Paris, all of which are performing in line with our expectations. 

While the strategy has delivered encouraging results, the Group has faced external pressures that have impacted overall financial performance.  Economic conditions in both the UK and France remain challenging.  While the UK economy essentially remained similar to last year, the unexpected imposition of a new 20% rate of VAT on the entire self-storage industry during the fourth quarter of our financial year placed pressure on new customer conversion.  In France, while our underlying business delivered good levels of growth in constant currency, we were negatively impacted by a ten per cent decline in the value of the Euro against Sterling during the second half of the year. 

Overall, we have delivered good progress on our strategy and resilient financial performance.  These solid results leave us confident in the fundamentals that underpin our industry, in which we have a leading market position, and in the strength of our business model, the quality of our operational teams and our prospects for the future.

Financial Resilience

Revenue for the year was £98.8 million, 4.0% higher than last year (FY2011: £95.1 million) and 5.5% higher in CER. The key drivers for revenue growth continue to be movements in self storage occupancy, rate per square foot and ancillary revenues:

·      Average occupancy was 272,000 sq ft  or 9.0% higher than last year at 3.28 million sq ft (FY2011: 3.01 million sq ft) with closing occupancy up by 80,000 sq ft or 2.5% to 3.29 million sq ft (FY2011: 3.21 million sq ft)

·      The average self storage rental rate decreased by 2.9% in CER and 4.6% in Sterling to £24.91 per sq ft (FY2011: £26.11 per sq ft)

·      Ancillary revenues were up 4.4% to £13.8 million (FY2011: £13.2 million)

Store EBITDA increased by 4.3% in the UK and 2.2% in France in constant exchange rates. Underlying EBITDA decreased by 0.4% to £50.3 million (FY2011: £50.5 million) after taking into account movements in foreign exchange rates and our targeted strategic investments in marketing, pricing and sales.

There was a £1.8 million reduction in EPRA defined Group Earnings, the standard measure across the Real Estate sector which excludes movements in our property valuation.  EPRA group Earnings were £14.3 million compared to £16.1 million for the year ended 31 October 2011.  Our underlying performance, measured by EPRA Earnings on a cash tax basis, fell by £0.8 million, or 3.9%, to £19.8 million from £20.6 million for FY 2011.

Our strategy and operational performance is covered in more detail in the Chief Executive's Report on pages 6 to 12.  Further details on the results for the Financial Year 2012 ("FY2012") and Financial Year 2011 ("FY2011") are included in the Financial Review on pages 13 to 21.

Property Valuation

As at 31 October 2012, the total value of the Group's property portfolio was £685.8 million, down £28.6 million from £714.4 million at 31 October 2011 and down £4.6 million from the half year valuation of £690.4 million at 30 April 2012. Underlying trading assumptions and capitalisation rates have remained similar to prior year levels.  The principal drivers of the valuation change have been the impact of the introduction of 20% VAT on self-storage in the UK and adverse movements in foreign exchange rates.  Further details of the property valuation and the movements therein are provided in the Finance Report.

Refinancing

The Group successfully refinanced its facilities during the first half of the year, extending maturities and diversifying our lending base.  The Group's facilities now include a term loan, a revolving credit facility and a substantial private placement of long-term loan notes in the United States.  Full details are set out in the Finance Report.

Conversion to REIT Status

The Company intends to convert to REIT status with effect from 1 April 2013. 

Safestore is an operational business that derives much of its income from the rental of property in the UK. As our current new store expansion programme comes to an end and the benefit of significant capital allowances begins to reduce, there are meaningful advantages to our shareholders from converting to REIT status.  These include reduced UK tax liabilities and a resulting improvement in cashflow and earnings. 

Since the passing of the UK Finance Act in 2012, the significant conversion charge for becoming a REIT has been abolished and the Board believes now is an appropriate time to convert to REIT status.

Shareholder approval for the required changes to the Articles of Association of the Company will be sought at an Extraordinary General Meeting to be held following the Annual General Meeting on 20 March 2013.  Further details will be circulated to shareholders in due course.

Further details relating to REIT status, its advantages and requirements can be found in the Chief Executive's report on page 12.

Dividend

Following our intended conversion to REIT status, the company will be required to distribute 90% of the profits generated from its UK property rental business by way of a Property Income Distribution ("PID").  Safestore's present dividend is more than twice the level of the PID that would currently be required were the company to be a REIT, and is supported by earnings not just from the UK property rental business but also by earnings which lie outside REIT status, including UK ancillary sales and the French business.

The Board remains confident in the prospects for the Group and is pleased to recommend a final dividend of 3.80 pence per share bringing the total dividend to 5.65 pence per share for the year. This final dividend represents an increase of 7.0% versus FY2011. 

Following REIT conversion, the board intends to maintain its progressive dividend policy, growing the dividend broadly in line with earnings over the economic cycle while maintaining appropriate dividend cover.

People

During the year, our team-members in both the UK and France 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.

We have announced today that after more than a decade with the Group, our Chief Financial Officer, Richard Hodsden has indicated his intention to step down from the Board and leave the Company.  Richard has been instrumental in the Group's development and the Board would like to express its sincere gratitude for the valuable contribution he has made to the success and development of the company.  We wish Richard the best with his future endeavours.

Richard will be succeeded by Andrew Jones, who joins us from Worldpay Limited. Andrew brings a valuable understanding of similar customer focused and yield managed operational businesses from his current role and earlier career at TUI Travel plc and Virgin.  We are very pleased to welcome Andrew to Safestore.

To ensure a smooth transition, Richard will remain with the Group until his successor is in place, which is expected to be not later than 31 July 2013. 

Full details of these changes to the board are set out in a separate announcement issued today.

Outlook

The economic environment continues to be challenging.  However, self-storage demand remains solid in both the UK and France. 

As we forecast, during the first few months of the new financial year, the imposition of VAT on the UK self-storage industry has resulted in lower UK occupancy and rate than last year's record levels.  While it remains too early to assess the full effect of VAT, the initial impact is consistent with the original estimates we set out in June 2012.  In France customer demand remains solid, although the slowing economy has led to greater growth from personal customers than from businesses in recent months. 

We expect the year ahead to remain challenging with slightly lower sales than the prior year. In that context, we retain our tight focus on cost control and expect to deliver further cost efficiencies to mitigate the expected revenue pressure. Overall we expect performance for the current financial year to remain broadly consistent with the level experienced during the last financial year. 

With strong underlying demand potential and modest new supply growth, self-storage remains a growing sector.  As awareness of the product increases, our clear strategy, market leadership position and scale leave us well positioned to withstand the short-term challenges and capitalise on the opportunities ahead.

Richard Grainger
Chairman
30 January 2013

Chief Executive's Review

Introduction

Strategic and Financial Progress

We are pleased to report that Safestore has delivered further strategic progress and financial resilience during the year.

We continued to make good progress on the More SpaceSM strategy outlined in January 2012, with gains in brand awareness, business customer growth and improved pricing capabilities being delivered during the year.   

The Group also completed its planned store expansion programme, with the addition of four new stores during the year.  This good strategic progress resulted in gains in occupancy, revenue and store level EBITDA.

We tightly controlled administrative costs and made the planned strategic investments in strengthening marketing, national accounts, yield management and call centre operations during the year.  These strategic investments, together with the impact of weaker Euro exchange rates on the translation of our French earnings into Sterling, resulted in Group underlying EBITDA being slightly lower than last year.

The Group completed a full refinancing of its debt facilities in the first half of the year, extending the average maturities of its debt and diversifying its lending base.

The Self-Storage Market

Demand for self-storage is fuelled by two principal customer groups:

Personal Customers- individuals and families in the process of moving house, undertaking refurbishments or simply needing to free up more space at home as a result of lifestyle changes.

Business Customers- companies storing stock and archiving materials as an alternative to having their own warehouse or office and large companies using self-storage as a partner for logistics.

Both segments have remained resilient throughout the recent economic downturn.  We estimate that there are more than 8 million homes and businesses that may need more space in the UK. With penetration of self-storage in both the UK and France at much lower levels than in the more developed United States and Australia markets, we believe there is significant further demand potential.

New supply growth in our chosen markets is modest, with significant planning restrictions on new development, particularly in central London and Paris, and limited access to capital for many of our smaller rivals. 

Operationally, customers are increasingly turning to the internet as the start point for researching self-storage.  This, together with the opportunities to serve large businesses that use self-storage for nationwide logistics, raises the competitive importance of marketing scale and a widespread store network.

Our Store Network

We have a market leading position in the UK and Paris markets. As at 31 October 2012 our wholly owned portfolio included 123 stores - 98 in the UK and a further 25 in Paris.  This network gives us a unique footprint in both the UK and Paris, delivers marketing scale and positions us well to serve the needs of key customers.

During the year we opened four new stores in the key markets of London and Paris.  Two are in the London market at New Southgate in North London and Staines near London Heathrow Airport. Two are in the Paris market at Gonesse, close to Paris - Charles de Gaulle airport and Velizy to the south-west of the city.

The Group also has three development sites in the UK - at Chiswick and Wandsworth in London and Birmingham.  We continually review the value of these sites to the Group and while they remain very attractive, in line with our present strategic focus on organic growth, there are no current plans to open stores at these locations.

Our Strategy

In January 2012 we set out our 'More Space' strategy to deliver value to shareholders.

'More Space' focuses the Group on delivering organic growth, by using our scale, marketing power and pricing expertise to drive occupancy, RevPAF and profitability.  As we deliver this organic growth, our intention is to use the free cash flow generated principally to maintain a progressive dividend for our shareholders and progressively reduce our debt as appropriate.

Underpinning our strategy are four strategic priorities that guide action, target-setting and remuneration across Safestore:

1.   Strengthen the brand

2.   Build a powerful team

3.   Drive operational excellence

4.   Create value

Last January we announced our intention to make a planned strategic investment in strengthening our marketing, improving our national accounts, UK call centre and pricing teams and developing our website.  £1.8m of this investment was introduced during the year.  This focus and investment has been delivering tangible benefits and we made good progress on each of our strategic priorities during the year:

Strengthen the brand - improving brand visibility and customer reach

Safestore is the UK market leader for self-storage and we have opportunities to build on this position with improvements in our brand image and recognition.

During the year, we introduced a new look and feel for Safestore in the UK to support our positioning as a distinctive, premium, professional and friendly brand.  Greater prominence is now given to the colour blue, the Safestore name and the padlock symbol in our advertising, point of sale materials, website and in our stores.  These changes promote a more consistent appearance and help raise awareness of our brand. 

In line with this new look and feel, as part of our planned maintenance programme we took the opportunity to rebrand a number of high visibility stores during the year, including those at Staples Corner, Chingford, Fulham and Holloway in London; Orpington in Kent and Old Trafford in Greater Manchester. 

The new brand look and feel was deployed online with an upgraded website that now allows customers to see online prices for multiple stores.  This led to an increase in the percentage of visitors to our website that subsequently choose to enquire and significant growth in online enquiries.  Over 80% of all our enquiries now originate on the internet.

During the year Safestore ran its first television advertising campaign, airing principally in the London television regions.  The advertisement generated an unprecedented level of interest for the Group online, with more than one million views of the advert on the YouTube internet video site.  Taken together, the conventional television airtime and online media presence contributed to a 150% increase in unprompted awareness in the important London region. 

Our strategic focus on driving value from business customers has continued.  For the first time, business customers now account for more than half of our total space occupied in the UK.

A key driver of our growth has been our national accounts team.  During the year we increased the size of our national accounts sales force, to help us reach more large scale national customers across the UK.  By the year end, national accounts customers occupied more than 200,000 square feet or almost 7.9% of our total UK occupancy, an increase of 43% on the prior year.  Approximately 76% of the space occupied by national accounts is outside London, indicating the growing importance of our national network. 

Build a Powerful Team - Improving Alignment and Productivity

During the year we strengthened the UK call centre team that supports our stores.  The team handles direct enquiries to our free phone number, and enquiries made when stores are closed to ensure a rapid response.  The team handled almost 29,000 enquiries in the last financial year, helping support store revenue growth.

Drive Operational Excellence - Optimising Pricing

In operational terms, our main focus was the introduction of a new pricing model with attendant changes to our software systems.  In the past, the self-storage industry generally offered a simple model of a fixed price, with a number of weeks free.  However, this structurally reduced the attractiveness of the product for highly valuable long-term users and offered limited flexibility in pricing different room sizes and durations of stay.  During the second half of the year we launched a new pricing platform that gives us greater flexibility and this will be a key driver of price efficiency during 2012-2013.

Create Value - Effective Asset Management and Capital Structure

Effective management of our property portfolio remains a key focus for the team.  During the year we regeared a number of leases on our properties including those at Sunderland, Croydon, Hanworth and New Malden.  We also let under-utilised space unsuitable for self-storage at a number of locations as well as delivering a number of successful rates appeals.  A number of our self-storage locations may have alternative use potential and work continues to evaluate and exploit these as appropriate.

During the year the Group completed a successful refinancing of its facilities, which now include a term loan, a revolving credit facility and a long-term US private placement component. The Group was in compliance with the associated covenants to its debt facilities at 31 October 2012. Full details of the new arrangements are set out in the Financial Review.

Operational Review - Group

During the year, our strategic progress contributed to further revenue and store EBITDA growth. 

During the first half of the year we saw good revenue growth, driven by a balance of strong occupancy gains and lower rental rates than the prior year.  In the second half of the year, we saw slower occupancy performance but improving rental rates up until the introduction of 20% VAT on UK self-storage.  The French business, while performing well in constant currency, was affected by the declining value of the Euro during the second half of the year.

Our effective pricing strategy, which balanced rental rates and occupancy throughout the year, led to improvements in the total square foot let across the business. We delivered steady gains in our developing stores and large stores, while broadly maintaining occupancy levels in the established stores and mature stores, after taking into account the impact of the imposition of VAT. The closing occupancy levels as a percentage of MLA are as shown below:

	Number of Stores 31 October 2011	Occupancy 31 October 2011	Number of Stores 31 October 2012	Occupancy 31 October 2012
Developing	12	46.5%	11	48.1%
Established	18	53.9%	20	60.4%
Mature	81	68.8%	84	66.7%
Large	8	67.1%	8	68.4%
Total	119	64.4%	123	63.9%

Performance in each of our trading areas is set out below.

Operational Review - UK

Resilient performance

In the UK we have 98 stores and 4.10 million sq ft of MLA.  All our owned and leased UK stores are branded as Safestore.

Despite the continuing economic challenges and the imposition of 20% VAT on self-storage from 1 October 2012, we saw a resilient performance during the year.  In line with our 'More Space' strategy, the focus during the year was on making use of our national scale and marketing power to drive improved levels of occupancy, particularly from businesses, at the optimal rental rate.

Enquiry levels have remained high throughout the year, with continued customer demand for self-storage. 

Total sales were up 5.3% to £74.8 million (FY 2011: £71.1 million). We saw a 9.8% or 228,000 sq ft increase in average occupancy during the year. Year-end closing occupancy was up 1.8% or 44,000 sq ft on last year's record occupancy level to 2.54 million sq ft (FY 2011: 2.50 million sq ft). Business customer occupancy has been particularly strong. As at 31 October 2012, 1.41 million sq ft or 55.5% of all our UK occupied space was filled by business customers and 1.13 million square feet or 44.5% from personal customers.

In line with our pricing strategy and the mix effect on rate of a growing share of our occupancy being delivered in recently opened stores with lower average price points, our average rental rate decreased by 4.0% to £23.43 (FY 2011: £24.40). 

Store EBITDA was up 4.3% to £44.2 million and was impacted by the opening costs for the final two stores in our UK expansion programme.  RevPAF (excluding the two stores opened since May 2011) was up 6.0% to £18.56 (FY 2011: £17.51).

Impact of VAT on self-storage remains within initial estimates

In March 2012, the UK government set out a proposal to introduce a new 20% tax on all self-storage rentals in the UK with effect from 1 October, 2012.  This represented a significant change, reversing the long-standing exemption from VAT that the UK self-storage sector enjoyed in common with other real estate businesses. 

The Company acting together with the UK Self-Storage Association (SSA) sought to challenge the decision during the formal consultation period.  However, the government maintained its position and the measure took effect on 1 October 2012. An exceptional cost of £175,000 is included in the accounts for charges relating directly to the imposition of the new tax as well as our participation in the consultation process and legal review.   

Since 1 October 2012, the Group has been obliged to charge full 20% VAT on all eligible self-storage rentals in the UK.  In effect this increases the total cost of the product to our customers by 20%, although many business customers may have the ability to reclaim the VAT if they are VAT registered. 

Our strategy has been to pass on the cost of the VAT increase to our customers wherever possible.  We have, however, offered some selective discounts for certain high value customers. 

As we forecast, this unplanned and very rapid change in the industry's tax status has impacted performance. During the fourth quarter of the year we saw approximately 51,000 more square feet vacated than we would have had expected had the VAT measure not been in place.  Since the year-end, we have seen a reduction in the pace of new let growth although this has been accompanied by a moderate improvement in average move-in rate.

Taken together, the impact of VAT on existing and new business appears within the original estimates we provided in June 2012, which were for an annual revenue impact of £5 million to £6 million and an EBITDA impact in the order of £2 million to £3 million.  We will however continue to monitor the situation closely.

Operational Review - France

Strong constant currency growth affected by adverse exchange rate movements

We now have 25 stores in France, accounting for 1.04 million sq ft of MLA.  All our French stores are branded as Une Pièce en Plus ("A Spare Room").  This network gives us a leading presence in the Paris region, a market with close to 12 million people, attractive socio-demographics for self-storage and high barriers to entry due to the lack of available land and the competition with other uses, as well as new planning restrictions.

With a strong brand and unrivalled store network right in the heart of the affluent areas of the city of Paris, we saw strong performance despite the slowing of the French economy.  We continued to focus on maintaining performance in our already highly occupied central stores, while benefiting from our recent expansion into strategically located new stores around the suburban markets of the city. 

Enquiries remained solid.  Total revenue was up 6.3% to ?29.3 million (FY 2011: ?27.6 million). The business delivered a 6.6% or 44,000 sq ft increase in average occupancy, with closing occupancy 5.0% or 35,000 sq ft higher than the prior year at 746,000 sq ft (FY 2011: 711,000 sq ft). As at 31 October 2012, 0.30 million sq ft or 39.7% of all our French occupied space was filled by business customers and 0.45 million square feet or 60.3% from personal customers.  Average rental rate was broadly flat at ?36.72 per sq ft (FY 2011: ?36.64).  Store EBITDA was up 2.2% to ?20.7 million, reflecting the incremental costs of new stores that opened part way through the year and have yet to reach break-even.

RevPAF (excluding the three stores opened since May 2011) was up 2.5% to ?27.59 (equivalent RevPAF at 31 October 2011 was ?26.92).  This good performance in constant currency was, however, significantly impacted by a negative movement in the Euro Sterling exchange rate, which fell by almost 10% during the second half of the year, compared to the same period last year.  As a result, RevPAF, in Sterling was down 3.5% to £26.01 (FY 2011: £26.94).

Operational Review - Cost of Sales and Administrative Costs

Tight management of costs and carefully targeted strategic investment

Operationally, Safestore has a straightforward business model.  Each store typically has 3-4 full-time equivalent team members and the stores are supported by a number of regional managers and the head office teams.

The principal cost of sales items are therefore:

·      Rent for our leasehold stores

·      Sales and marketing (principally advertising and online search)

·      Staff costs (annual salaries, taxes and incentive payments)

·      Utilities (principally electricity and phone)

·      Local business taxes (business rates in the UK)

We have tightly controlled cost of sales, with more efficient online marketing and careful control of team costs.  After stripping out the impact of new store costs and strategic expenditure, underlying Cost of Sales have increased by 4.1%.  This was principally driven by the increasing costs of utilities and local business taxes. More details are given in the Finance Report.

Administrative costs principally include staff costs for head office teams including the directors, marketing and other public company related costs.  During the year, we strengthened the teams for national accounts, pricing and field support, and reduced the costs of our property development team in line with our organic growth focus. 

After stripping out the impact of the strategic investment noted above, one off provision releases and the impact of foreign exchange, underlying administrative costs were up by 3.1%. Once again, more detail is given in the Finance Report.

Operational Review - Capital Expenditure

Safestore's principal capital expenditure items are the continued provision of safety and security for our customers and team-members, store maintenance, reconfiguration of store layouts to drive sales and selective new store openings.

During the year, capital expenditure was £19.2 million, of which £6.2 million was principally safety and security, store improvements and reconfiguration and £13.0 million related to new stores. Following the completion of our four new stores during the year we do not anticipate there to be any material capital expenditure in relation to new stores during the current financial year.

Conversion to REIT status

Safestore generates the majority of its UK profits from the rental of self-storage property.  At present, the Company is assessed for UK Corporation Tax on these profits and then our Shareholders may be assessed for income tax on the dividends they receive from the company. 

Over recent years, owing to carried forward tax losses and capital allowances the Company has not been a cash tax payer in the UK, although we have provided for deferred taxes.  However, as the Company concludes its store expansion programme and the capital allowances that presently reduce our UK tax liability begin to wind down, Safestore's UK tax liability would normally begin to rise, raising a potential 'double-tax' liability for our shareholders that is greater than the liability if shareholders were to simply invest in the properties directly.

The UK government believes that this 'double-tax' situation hinders a healthy property market and, therefore created the Real Estate Investment trust ("REIT") status.  REIT status is open to property companies generating the majority of their profits from UK property income and removes the corporation tax liability and some capital gains tax liabilities providing certain conditions are met, including a mandatory requirement to pay a property income distribution ("PID") of 90% of the distributable UK property profits.  

In order to encourage investment in property and the use of REIT status, as part of the Finance Act 2012 the UK Government altered the rules relating to eligibility.  These changes included the removal of the previous charge that was levied to become a REIT, which had been up to 2% of the value of the assets within the REIT.

Under the new rules, the Board believes that REIT status has attractions for the Company and its shareholders:

       -     removes the 'double-tax' faced by current shareholders

       -     increases free cash flow, by removing a number of tax liabilities

       -     increases the ease of comparability to other property based companies

       -     improves transparency

       -     potentially extends the shareholder base to include certain REIT-only investment funds

The Company therefore intends to convert to REIT status.  As REIT status requires a change to the Company's articles of association, principally in order to comply with legal provisions relating to the size of individual shareholdings in the Company, the Board will seek Shareholder approval for the changes at an Extraordinary General Meeting on 20 March 2013.  Once this approval is obtained, the Company will formally submit its application for REIT status.

Subject to HMRC approval, REIT status is then expected to take effect from 1 April 2013.  Following that date, Safestore will cease to provide for Corporation Tax on its UK property income. 

The Company will, however, continue to be assessed for appropriate taxes on its UK ancillary incomes and French property and ancillary income, which are not eligible for UK REIT status as they do not relate to UK property income.

Under REIT status, the Group will be well positioned to create value from its new organic growth strategy.

Peter Gowers
Chief Executive Officer
30 January 2013

Financial Review

International Financial Reporting Standards ("IFRS")

This report is prepared in accordance with IFRS and details the key performance measures during the year.

Results of operations

The table below sets out the Group's results of operations for the year ended 31 October 2012 and the year ended 31 October 2011, as well as the year on year change.

	Year ended 31 October
	2012	2011
	£'000	£'000	% Change
Revenue	98,836	95,060	+4.0%
Cost of sales	(34,665)	(31,222)
Gross profit	64,171	63,838	+0.5%
Administrative expenses	(9,818)	(15,476)
Operating profit before loss on investment properties	54,353	48,362	+12.4%
Loss on investment properties (including exceptional impairment charge in FY2011)	(37,536)	(18,417)
Operating profit	16,817	29,945	-43.8%
Net finance costs (including exceptional items)	(36,280)	(21,398)
(Loss)/profit before income tax	(19,463)	8,547
Income tax credit (including exceptional items)	11,670	4,481
(Loss)/profit for the year	(7,793)	13,028

Revenue

Revenue for the Group is primarily derived from the rental of self storage space, the sale of ancillary products such as insurance and merchandise such as packing and storage products in both the UK and France.

The table below sets out the Group's revenues by geographic segment for FY2012 and FY2011.

	Year ended 31 October
	2012 £'000	% of Total	2011 £'000	% of Total	% Change
United Kingdom	74,898	75.8%	71,014	74.7%	+5.5%
France	23,938	24.2%	24,046	25.3%	-0.4%
Total revenue	98,836	100.0%	95,060	100.0%	+4.0%

The Group's revenue increased by £3.8 million (an increase of 4.0%) from £95.1 million in FY2011 to £98.8 million in FY2012. As covered in the Chief Executive's Report, the key drivers for revenue growth have been the increase in average occupancy (272,000 sq ft year on year), the reduction in average rate per sq ft (4.6% year on year) and ancillary revenues (+4.4% year on year).

There has been a significant currency impact during the year with an average exchange rate of ?1.223:£1 for FY2012 against an average rate of ?1.152:£1 for FY2011 which has impacted revenue adversely by circa £1.3 million.

Cost of sales

Cost of sales consists primarily of our store costs, staff salaries, business rates, utilities, insurance and maintenance. The Group's cost of sales increased by £3.4 million or 11.0% from £31.2 million in FY2011 to £34.7 million in FY2012.

	£'000	£'000
Cost of Sales ("CoS") FY2011		(31,222)
-     Compensation for store relocation	(609)
		(609)
Adjusted like for like CoS FY2011		(31,831)
-     New store operating costs	(1,170)
-     Incremental strategic investments	(363)

There are three key elements to the cost increase:

·      The operating costs associated with the new stores opened in the year of £1.2 million

·      Incremental strategic investments, mainly call centre related, of approximately £0.4 million

·      Underlying cost of sales has increased by £1.3 million or 4.1%.

Administrative expense

During the year our underlying administrative expense increased by approximately £0.6 million to £13.9 million in FY2012 from £13.3 million in FY2011 as set out in the table below:

	FY 2012	FY 2011
	£'000	£'000
Reported Administrative expenses	(9,818)	(15,476)
Adjusted for:
-     Exceptional items*	(4,875)	1,333
-     Depreciation	445	168
-     Contingent Rent	758	642
-     Changes in fair value of derivatives	(384)	8
Underlying Administration Expenses	(13,874)	(13,325)
Underlying Administrative Expenses for FY2011		(13,325)
Strategic expenditure		(1,403)
VAT provision released in year		528
FX (including currency swaps)		744
Other Administrative Cost Movements (3.1%)		(418)
Underlying Administrative Expenses for FY2012		(13,874)

*Exceptional items are detailed below

Underlying Administrative Expenses have increased by £0.6 million. The main elements of the increase are:

·      Approximately £1.4 million of the increase is directly attributable to strategic investments made in the marketing, yield management and national accounts functions during the year.

·      We have benefited in the year by £0.5 million relating to the release of a historic VAT provision no longer required and £0.8 million from the positive impact of foreign currency translation including over £0.5 million from currency swaps in the year.

·      The balance of £0.4 million relates to a 3.1% increase in the general underlying administrative expenses of the business.

EBITDA before exceptional items, contingent rent, change in fair value of derivatives and loss on investment properties

Underlying EBITDA is calculated as follows for FY2012 and FY2011:

	Financial Year
	2012 £'000	2011 £'000
Operating profit	16,817	29,945
Adjusted for
Loss on investment properties	37,536	16,187
Impairment of investment property	-	2,230
Depreciation	445	168

The Group's Underlying EBITDA decreased by £0.2 million or 0.4% to £50.3 million in FY2012 from £50.5 million in FY2011. This decrease principally reflects the increase in revenues discussed above partly offset by the higher cost base and strategic investments in FY2012.

Loss on investment properties

The loss on investment properties consists of the fair value revaluation gains and losses with respect to the investment properties under IAS40, finance lease depreciation for the interests in leaseholds, and one off items as detailed below.

	Financial Year
	2012 £'000	2011 £'000
Movement on Investment Properties	(42,200)	(10,669)
Finance Lease Depreciation	(4,336)	(5,518)
Capital Goods Scheme VAT write back	9,000	-
Exceptional impairment of Investment Properties	-	(2,230)
	(37,536)	(18,417)

The movement in the Investment Properties 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 in the valuations are rate per sq ft, stabilised occupancy, number of months to reach stabilised occupancy and the yields applied. In the current financial year adverse valuation movement is primarily driven by the imposition of VAT on self storage in the UK which took effect on 1 October 2012. As a direct result of the imposition we will be able to reclaim VAT previously written off under the Capital Goods Scheme. We have estimated that the present value of the amount to be reclaimed is £9.0 million and will be reclaimable over the next 10 years.

The valuation of investment properties is covered in more detail in the property section below.

Operating profit

Operating profit decreased by £13.1 million or 43.8% to £16.8 million for FY2012 from £29.9 million in FY2011. This movement predominantly reflects the £19.1 million swing in the investment properties from a loss of £18.4 million last year to a loss of £37.5 million this year partly offset by the £6.0 million positive movement in exceptional items.

Net Finance Costs

Net finance costs consist of interest receivable from bank deposits as well as interest payable and interest on obligations under finance leases as summarised in the table below:

	Financial Year
	2012	2011
	£'000	£'000
Bank interest receivable	43	212
Bank and other interest payable	(18,875)	(18,552)
Net bank interest	(18,832)	(18,340)
Fair value movement of derivatives	(1,805)	1,825
Exceptional finance expense	(9,969)	-
Interest on obligations under finance leases	(5,674)	(4,883)
Net finance costs	(36,280)	(21,398)

The reduced bank interest receivable reflects the lower cash balances held through FY2012.

Bank and other interest payable increased by 1.7% to £18.9 million in FY2012 from £18.6 million in FY2011 although this is after capitalising interest of £0.2 million (FY2010: £0.3 million). The interest costs reflect the higher level of drawn bank debt in FY2012 together with the higher blended interest rate following the refinancing in May 2012.

The exceptional finance expense of £10.0 million (FY2011: £nil) represents the debt issue costs relating to the previous banking facility written off and the new debt issue costs of the new bank facilities. These costs have been expensed as prescribed by IAS 39.

Following the refinancing in May 2012, the Group replaced its existing interest hedge agreements to August 2013 with new hedge agreements to coincide with the new facilities. As a result the Group has interest hedge agreements in place to June 2016 swapping LIBOR on £197 million at an effective rate of 1.710% and EURIBOR on ?40 million at an effective rate of 1.361%. The hedge agreements provide cover for 80% of the drawn debt leaving a 20% floating element. Interest payable includes a charge of £1.8 million in respect of the fair value movement of derivatives (FY2011: £1.8 million credit).

Interest on finance leases was £5.7 million (FY2011: £4.9 million) and reflects part of the rental payment under UK GAAP. The balance is charged through the investment loss line and contingent rent in the income statement. Taking the movements as a whole, the UK GAAP rental charge is down by £0.5 million to £10.8 million this year from £11.3 million last year primarily resulting from lease re-gearings in the year and the acquisition of the freehold interest in one store in FY2011.

Gearing

Net debt at 31 October 2012 stood at £394.2 million up from £384.9 million at 31 October 2011. During the year, total capital decreased by £22.4 million to £637.6 million at 31 October 2012 from £660.0 million at 31 October 2011. The net impact is that the gearing ratio was 62% at 31 October 2012 compared to 58% at 31 October 2011.

Income tax

Income tax for FY2012 was a credit of £11.7 million against a credit of £4.5 million for FY2011. The actual cash tax payable for FY2012 was £450,000 (FY2011: £365,000), all of which arose in France. The low level of cash tax payable is due to the exceptional financing costs incurred during the year, the availability of capital allowances in both the UK and France and the offset of French tax losses. The utilisation of losses in France is now expected to be annually restricted to ?1 million and 50% of the remaining profits following the introduction of recent legislative changes. In respect of deferred tax, an exceptional credit of £6.3 million (FY2010: £6.6 million) arose following re-measurement due to changes in UK Corporation Tax rates which is explained further in note 5.

(Loss)/Profit for the year ("Earnings")

Earnings were a loss of £7.8 million compared to a profit of £13.0 million for FY2011.

EPRA adjusted earnings, which is the earnings figure after adding back the loss on investment properties, exceptional items, changes in fair value of derivatives and the tax thereon, decreased by £1.8 million or 10.9% to £14.3 million for FY2012 from £16.1 million for FY2011. Further details of this are given in note 7.

Property valuation

Cushman & Wakefield has again valued the Group's property portfolio. As at 31 October 2012, the total value of the Group's portfolio (including £0.8 million of owner occupied properties) was £685.8 million. This represents a decrease of £28.6 million or 4.0% compared to the £714.4 million valuation as at 31 October 2011. A reconciliation of the movement is set out below:

		UK	France	Total		France
		£m	£m	£m		?m
Value as at 1 November 2011		546.6	167.8	714.4		191.1
New stores opened in the year		14.1	10.5	24.6		12.9
Adverse currency translation movement		-	(14.0)	(14.0)		-
Revaluation of French like for like portfolio			-	-		0.1
Revaluation of UK like for like portfolio	#	(39.2)		(39.2)
Value as at 31 October 2012		521.5	164.3	685.8		204.1

# - The revaluation fall in the UK like for like portfolio is primarily related to the imposition of VAT on self storage in the UK with effect from 1 October 2012

The table above summaries the movement in the property valuations:

·      New stores opened in the period have increased the valuations by £24.6 million; £14.1 million in the UK for London - New Southgate and London - Staines and £10.5 million for Paris - Gonesse and Paris - Velizy.

·      The exchange rate at 31 October 2012 was ?1.241:£1 compared to ?1.139:£1 at 31 October 2011. This movement in the foreign exchange rate has resulted in a £14.0 million adverse currency translation movement in the period. This will impact the Net Asset Value ("NAV") but has no impact on the Loan to Value ("LTV") covenant as the assets in Paris are tested in Euro.

·      The revaluation of the French like for like property portfolio was flat, year on year.

·      The revaluation of the UK like for like property portfolio shows a reduction of £39.2 million compared to October 2011 although this valuation decrease is primarily attributable to the impact of the imposition of VAT on self storage in the UK. It is not possible to absolutely quantify the impact in isolation given the integrated approach undertaken by the Company in response to this challenge. We know that, at the half year the special valuation assumptions around VAT reduced the UK valuations by £24 million and it is reasonable to assume that the impact at 31 October 2012 has increased from this level.

·      The Group freehold exit yield for the valuation at 31 October 2012 was 7.85% which is broadly flat with the exit yield of 7.83% adopted at 31 October 2011.

The weighted average annual discount rate for the whole portfolio has followed a similar trend to exit yields.

The Company's pipeline of expansion stores is valued at £5.4 million as at 31 October 2012.

The property portfolio valuation has declined by £4.6 million from the valuation of £690.4 million at 30 April 2012 which combines the impact of the opening of the new store at Paris - Velizy (+£6.1 million), a further deterioration in the Euro exchange rate (-£2.1 million) with the balance being mostly attributable to the impact of VAT on the UK portfolio valuations.

In their report to us, our Valuer has drawn attention to valuation uncertainty resulting from exceptional volatility in the financial markets and a lack of any transactions in the property investment market. Please see note 11 for further details.

The adjusted EPRA NAV per share is 188.6 pence, down 10.8% on October 2011. The main contributory factors in this movement are the adverse impacts of the movements in the Euro exchange rate and the impact of the imposition of the VAT of self storage in the UK.

Cash flows

The following table summarises the Group's cash flow activity during the FY2012 and FY2011 in accordance with IFRS:

	Financial Year
	2012 £'000	2011 £'000

Net cash inflow from operational activities

There are two main factors influencing the £4.8 million increase in cash from operating activities in FY2012 compared to FY2011. This is made up of a combination of increased cash generated from operations, the movement in exceptional items between FY2012 and FY2011 offset by movements in working capital and increased interest payments.

Net cash outflow from investing activities

Cash outflow from investing activities has decreased by £15.2 million to £21.5 million for FY2012 from £36.7 million for FY2011. Whilst there are several contributing factors affecting this movement it is mainly due to the decrease in expenditure on investment and development assets. Expenditure on investment and development properties in FY2012 was £20.2 million, a decrease of £14.8 million from £35.0 million in FY2011. The single biggest movement is the non-recurrence of the acquisition of the freehold interest in our Pentonville Road store for £11.5 million in the previous financial year.

Net cash inflow from financing activities

The cash flows from financing activities decreased by £26.2 million in FY2012 to an outflow of £16.1 million from an inflow of £10.1 million in FY2011. This has several key factors which are set out on the face of the cash flow statement but mainly reflects the costs associated with the refinancing.

Future liquidity and capital resources

Borrowings under the existing bank facilities are subject to certain financial covenants and the Group is in compliance with its covenants at 31 October 2012, and based on forecast projections, for a period in excess of 12 months from the date of this report.The debt facilities do not mature until August 2016 with US Private Placement facilities running to May 2019 and May 2024 respectively.

Refinancing/Bank Facilities

In May 2012, the Company refinanced its £385 million debt facilities due to mature in August 2013 with new increased facilities of £400 million. These new facilities comprise bank facilities of £270 million and ?70 million and a U.S. private placement of $115 million. There is no amortisation on the private placement and minimal amortisation on the bank debt. Subsequent to the year-end we reduced the UK Revolving Facility by £10 million in line with ending the existing store roll out programme.

The bank facilities have been extended to June 2016 with a bank margin ratchet between 2.5% and 3.5% based on interest cover performance, with an initial bank margin of 3.5% for the first six months of the facilities. For the private placement, $67 million was issued at 5.52% with 2019 maturity and $48 million was issued at 6.29% with maturity in 2024. The proceeds of the private placement issue have been fully swapped into fixed sterling.

The bank facilities and the US Private Placement share Interest Cover and Loan to Value Covenants.

Annual General Meeting

The meeting will be held on 20 March 2013 at the Group's registered office, Brittanic House, Stirling Way, Borehamwood, Hertfordshire WD6 2BT, following which a General Meeting to approve certain amendments to the Company's Articles of Associate to enable the Group to elect for REIT status shall be held. Notices for both meetings are expected to be sent to Shareholders shortly.

Richard Hodsden
Chief Financial Officer
30 January 2013

Consolidated income statement

for the year ended 31 October 2012

		Group
		2012	2011
	Note	£'000	£'000
Revenue	2	98,836	95,060
Cost of sales		(34,665)	(31,222)
Gross profit		64,171	63,838
Administrative expenses		(9,818)	(15,476)

1     Includes an exceptional credit of £6,308,000 (FY2011: £6,597,000) (see note 8).

The financial results for both years relate to continuing activities.