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Business and Financial Review

Since the referendum result, we have seen a slight moderation in demand with lower move-in and move-out activity, resulting in less churn in the business. Self storage is a business where we typically have three to four weeks’ visibility and although our book of business is relatively healthy, there remain uncertainties around the economy.

We saw a higher net loss in occupancy in October this year as a result of move outs early in the month but our level of notices is now significantly lower than last year, and November’s occupancy performance is trading slightly ahead of last year. We do expect to return to occupancy growth in our seasonally stronger March quarter.

Store move-ins	2016	2015	%	Net move-ins	Net sq ft
April	5,409	5,229	3%	(54)	(12,000)
May	6,189	6,514	(5%)	1,079	42,000
June	7,911	8,298	(5%)	2,859	80,000
July	7,352	7,532	(2%)	793	48,000
August	6,848	7,413	(8%)	239	6,000
September	6,502	6,760	(4%)	(2,569)	(30,000)
Total	40,211	41,746	(4%)	2,347	134,000
October	5,762	6,258	(8%)	(1,284)	(64,000)

The 64 mature stores are 79.7% occupied compared to 78.3% at the same time last year. The 6 established stores have grown in occupancy from 69.2% to 75.4%. The 3 developing stores added 29,000 sq ft of occupancy in the period to reach closing occupancy of 60.0%. Overall store occupancy has increased over the 12 months from 76.7% to 78.5%.

Excluding Cambridge (opened January 2016), Nine Elms and Twickenham 2 (acquired April 2016), like-for-like closing occupancy was 79.0%, representing growth of 2.7 percentage points from 1 April.

	Occupancy at 30 September 2016 %	Occupancy growth from March 2016 000 sq ft	30 September 2016 000 sq ft	31 March 2016 000 sq ft	30 September 2015 000 sq ft
64 mature stores	79.7%	165	3,153	2,988	3,027
6 established stores	75.4%	16	306	290	281
3 developing stores	60.0%	29	114	85	70
Total – all 73 stores	78.5%	210	3,573	3,363	3,378

Of our occupied space today, 15% is occupied by customers who are longer stay lifestyle users decluttering into small rooms as an extension to their accommodation; 50% are using it for less than 12 months as a result of an event in their life, which could be inheritance, moving, carrying out work; and the balance of 35% are businesses, typically SMEs.

If we look at the demand into our stores over the six months, there has not been a significant change compared to the prior period, with approximately 42% of move-ins linked to the housing market; either customers renting storage space whilst moving within the rental sector or the owner occupied sector. During the period 10% of our customers who moved in took storage space as a spare room for decluttering and approximately 37% of our customers used the product because some event has occurred in their lives generating the need for storage; they may be moving abroad for a job, have inherited possessions, are getting married or divorced, are students who need storage during the holidays, or homeowners developing into their lofts or basements. The balance of 11% of our customer demand during the period came from businesses.

There is a growing trend towards self-employment and smaller business start-ups in the UK, dynamics which are positive for self storage. Additionally, businesses in the UK are increasingly seeking flexible office and storage space as a means of operation, shying away from longer inflexible leases. The deindustrialisation of big cities also points to a structural growth in demand for storage for businesses.

Our third quarter is historically the weakest trading quarter and in recent years we have typically lost two to three percentage points of occupancy before a return to growth in the new year. Since the end of September we have lost 84,000 sq ft (1.8% of maximum lettable area “MLA”), compared to 47,000 sq ft (1.1% of MLA) lost at this stage last year. As stated above, most of this loss was in October, and November’s occupancy performance is trading slightly ahead of last year.

All 73 stores open at the period end are trading profitably at the EBITDA level, including Cambridge which made a positive monthly EBITDA within six months of the store opening.

Pricing and rental yield

Our core proposition remains a high quality product, competitively priced, with excellent customer service, providing value for money to our customers. We offer a headline opening promotion of 50% off for up to the first 8 weeks, and we continue to manage pricing dynamically, taking account of customer demand and local competition.

The like-for-like closing net achieved rent per sq ft at 30 September 2016 was £26.37, up 2.8% compared to 30 September last year. Over the six months to 30 September 2016, net rent in the like-for-like stores grew by 1.8%.

As our portfolio is now at a higher level of occupancy, our pricing model is reducing promotions and increasing asking prices where individual units are in scarce supply. This lowering of promotions, coupled with price increases to existing and new customers, leads to an increase in net achieved rents. The table below illustrates this, showing the growth in net rent per sq ft for the portfolio over the period (the table below excludes Cambridge which opened in January 2016 and Nine Elms and Twickenham 2).

Average occupancy in the six months	Number of stores	Net rent per sq ft growth over the six months to 30 September 2016
0 to 60%	2	(0.4%)
60 to 70%	9	1.8%
70 to 80%	31	2.3%
Above 80%	28	2.7%

The rental growth for the stores with an average occupancy above 80% equates to 5.4% on an annualised basis.

Security of income

Our principal financial aims remain to grow cash flow, earnings and dividend. We believe that self storage income is essentially evergreen income with highly defensive characteristics driven from buildings with very low obsolescence risk. Although our contract with our customers is in theory as short as a week, we do not need to rely on contracts for our income security. At 30 September 2016 the average length of stay for existing customers was 23 months. For all customers, including those who have moved out of the business, the average length of stay has remained at 8 months. In our portfolio, 30% of our customers by occupied space have been storing with us for over two years, and a further 18% of customers have been in the business for between one and two years.

The location of our stores, brand, security, and most importantly customer service, together with the diversity of our 53,000 customers, serve better than any contract.

Revenue

Total revenue for the period was £54.8 million, an increase of £4.6 million (9%) from £50.2 million in the prior period. Like-for-like revenue for the six month period was £53.8 million, an increase of 7% from the prior period. Like-for-like revenue excludes Cambridge which opened in January 2016 and Nine Elms and Twickenham 2, which were both acquired from Lock and Leave in April 2016.

Other sales (included within the above), comprising the selling of packing materials, insurance and storage related charges, represented 17.0% of storage income for the period (2015: 17.6%) and generated revenue of £7.8 million for the period, up 6% from £7.4 million in 2015 (see Portfolio Summary).

The other revenues earned are management fee income from the Armadillo Partnerships and tenant income on sites where we have not started development.

Operating costs

Cost of sales comprises principally of direct store operating costs, including store staff salaries, utilities, business rates, insurance, a full allocation of the central marketing budget, and repairs and maintenance.

The breakdown of the portfolio’s operating costs compared to the prior period is shown in the table at the bottom of the page (see Portfolio Summary).

Store operating costs have increased by £0.6 million compared to the same period last year. The operating costs of the new stores at Cambridge, Nine Elms and Twickenham 2 account for £0.5 million of the increase, with the remaining increase inflationary, in part offset by the reduction in the Group’s irrecoverable VAT (see below).

During the period, the Group agreed a new Partial Exemption Special Method with HMRC. This method increases the Group’s VAT recoverability from 89.0% to 99.4%. This saves approximately £350,000 per annum on the Group’s operating costs, in addition to reducing the irrecoverable VAT on construction projects. There is a credit in respect of prior periods of £0.3 million from the date the application was submitted, which is an item in the adjustments to the Group’s recurring profit for the period.

Following the recent rating review, we have calculated that the impact on the Group’s rates bill for the year ending 31 March 2018 will be an increase of 8%, (£0.8 million). Our forecasts were assuming an increase in rates over the next five years, and the improvement in our VAT position mentioned above will serve to mitigate part of this increased cost.

Administrative expenses in the income statement have increased by £0.5 million. £0.3 million of the increase is as a result of the write-off of the Group’s acquisition costs for the purchase of Lock and Leave, which has been adjusted from recurring profit. Recurring administrative expenses have increased by £0.2 million due to inflation and an increased investment in IT infrastructure. The non-cash share based payments charge represents £1.1 million of the overall £5.2 million expense.

Category	Period ended 30 September 2016 £000	Period ended 30 September 2015 £000	% increase	% of store operating costs in period
Cost of sales (insurance and packing materials)	1,237	1,073	15%	8%
Staff costs	4,434	4,017	10%	28%
General & Admin	558	581	(4%)	3%
Utilities	752	724	4%	5%
Property Rates	5,044	4,995	1%	32%
Marketing	2,062	2,056	0%	13%
Repairs / Maintenance	1,272	1,167	9%	8%
Insurance	384	423	(9%)	2%
Computer Costs	221	208	6%	1%
Irrecoverable VAT	7	167	(96%)	–
Total	15,971	15,411	4%

Store EBITDA

Store EBITDA for the six month period included in the income statement was £36.9 million, an increase of 11% from the prior period (2015: £33.1 million).

The overall store EBITDA margin increased to 68.5% (2015: 67.0%).

Interest

The interest on bank borrowings during the period was £5.8 million, £0.3 million higher than the same period last year, due to the higher average debt levels in the period, partly offset by a lower average cost of borrowing compared to the same period last year.

There was no capitalised interest in the period (2015: £0.3 million), as the Group was not building any stores during the current period.

Results

The 13% increase in adjusted profit before tax to £27.0 million is reconciled in the table below:

Movement in adjusted profit before tax	£m
Adjusted profit before tax for the six months to 30 September 2015	23.9
Increase in gross profit	3.8
Increase in administrative expenses	(0.2)
Increase in share of associates’ recurring profit	0.1
Increase in net interest payable	(0.3)
Decrease in capitalised interest	(0.3)
Adjusted profit before tax for the six months to 30 September 2016	27.0

The Group’s statutory profit before tax for the period was £57.7 million, a decrease of 3% from £59.6 million for the same period last year. This decrease is due to the lower revaluation surplus in the period, in part offset by the increase in adjusted profit before tax.

The table below reconciles the statutory profit before tax to the adjusted profit before tax:

Profit before tax analysis	Six months ended 30 September 2016 £m	Six months to 30 September 2015 £m
Profit before tax	57.7	59.6
Adjusted for: Gain on revaluation of investment properties	(31.6)	(34.8)
Change in fair value of interest rate derivatives	1.0	(0.5)
Acquisition costs written off	0.3	–
Prior period VAT recovery	(0.3)	–
Share of non-recurring gains in associates	(0.1)	(0.4)
Adjusted profit before tax	27.0	23.9

Diluted EPRA earnings per share was 16.9 pence (2015: 15.1 pence), an increase of 12% from the same period last year.