As ever, our approach to store development and acquisition in the UK and Paris will continue to be pragmatic, flexible and focused on the return on capital.
Our property teams in both the UK and Paris have recently been strengthened and are continually seeking investment opportunities in new sites to add to the store pipeline. However, investments will only be made if they comply with our disciplined and strict investment criteria.
Five new stores opened on time and on budget
Between August and November 2016, the Group opened five new stores and completed the extension and refurbishment of our Acton store. An extension of our store in Longpont in Paris is in progress and is due to be completed in January 2017. All the completed projects were opened on time and on budget. Overall, the five new sites provide gross new MLA of 226,000 sq ft (190,000 sq ft net of existing space in Wandsworth and the conditional disposal of our Birmingham Central site).
The Chiswick site, which is located on the A4 in West London, opened on 4 November 2016 and provides a new flagship freehold store of 42,500 sq ft.
In Wandsworth, we had an existing 10,000 sq ft store on Garratt Lane in South West London as well as an additional adjoining 0.25 acre parcel of land. We closed our existing store at the end of 2015 and opened a new purpose-built 33,200 sq ft freehold store in August 2016.
In Birmingham, we opened a new flagship store on the A34 North of the centre of Birmingham in September 2016. The long leasehold store provides 51,000 sq ft of space.
We exchanged contracts in May 2016 on the sale of our Birmingham Central store for £3.6m to Unite Group plc, subject to the purchaser receiving satisfactory planning permission. Birmingham Central was a highly occupied 26,000 sq ft store and we successfully transferred the majority of our Birmingham Central customers to our new Birmingham store on completion of the build.
In June 2016, we completed the freehold purchase of a building located on an easily accessible site opposite Altrincham Retail Park. Altrincham and Sale is an affluent area with a population of 206,000 and significant inward investment. The 39,000 square foot store opened in September 2016 and we are confident that it will be a valuable addition to our portfolio.
In Paris, where regulatory barriers are likely to continue to restrict new development inside the city, we will continue our policy of segmenting our demand and encouraging the customers who wish to reduce their storage costs to utilise the second belt stores. We will also manage occupancy and rates upwards in the more central stores and ensure that pricing recognises the value customers place on the convenience of physical proximity. The strong selling organisation and store network established by Une Pièce en Plus in Paris uniquely enables it to implement this commercial policy.
We announced in February 2016 the acquisition of a freehold site in eastern Paris adjacent to the A4 motorway at Marnes-la-Vallée in the town of Emerainville. The site contains an existing warehouse which has been converted into a c.60,000 sq ft self-storage facility and c.8,000 sq ft of serviced offices. The new store opened in September 2016.
The Altrincham and Emerainville stores demonstrate that, with a skilled property development team, it is possible to convert existing buildings into storage facilities in an expeditious and cost effective manner. In both cases, the time between exchanging contracts and opening the stores was less than twelve months.
We also completed the refurbishment and extension of our Acton store in the period. The Acton store was 89% occupied prior to the extension and we have added a further 4,900 square feet of space.
Early trading on all completed sites is encouraging and at least in line with our forecasts.
The capital spend on the above completed projects (excluding the historical cost of acquiring the Chiswick, Wandsworth and Birmingham sites) was £25.2m and was funded from the cash flow and existing debt facilities of the Group.
The Paris Longpont extension, which is due to be completed in January 2017, will add 22,600 square feet of new space. The store was 83% occupied prior to the commencement of works.
During the period we also extended the lease on our Burnley store. We have now extended the leases on 18 stores or c.47% of our leased store portfolio (including Space Maker) in the UK since FY2012 and our average lease length remaining now stands at 13.7 years as compared to 13.9 years at FY2015.
In December, we acquired the freehold of a site in Mitcham, in South West London. Subject to planning permission, we plan to build a c.54,000 sq ft store on this site, scheduled to open in 2018.
Acquisition of Space Maker
At the end of July 2016 we announced the completion of the acquisition of Space Maker Stores Ltd (“SMS”) from Allodial Capital Ltd and James Elton. The initial consideration, after certain downward adjustments, was £40.9m and £1.4m of deferred consideration has subsequently been paid resulting in a total consideration of £42.3m.
SMS was the ninth largest self-storage portfolio in the UK with 12 stores, located in Bournemouth (two stores), Colchester, Redhill, Romford, Brentford, Chelmsford, Exeter, Leeds, Plymouth, Portsmouth and Poole, and has a fully invested built out lettable area of c.496,000 sq ft. Six of the SMS stores are freehold or long leasehold and six are leasehold stores with an average remaining lease length of 15.9 years at 31 October 2016.
Safestore has a strong operational knowledge of the SMS portfolio, having managed the business since 2010 under a management services agreement (“MSA”) until completion of the acquisition. The MSA, for which Safestore received £0.6m per annum, had been due to expire at the end of April 2016.
In the year to 30 April 2016, SMS delivered EBITDA (before management fees) of £3.9m (unaudited) on turnover of £8.7m. Based on the total consideration net of cash acquired with the business and SMS’s unaudited EBITDA, the SMS portfolio has an implied first year net operating income yield of c.9.3%, before the impact of management charges, which would rise to c.12% if the SMS stores achieve 80% occupancy at the rental rate levels at acquisition.
The SMS portfolio was operating at 66% occupancy (of built out lettable area) at acquisition, which Safestore believes it can improve now that it is fully integrated into its own operational platform. The rebranding of the business is progressing to plan.
The SMS business, which had net assets with a fair value of £47.9m at acquisition, was acquired on a debt free basis and was funded from the Group’s existing debt facilities, with £45m of the Group’s £60m accordion facility converted into a committed revolving credit facility.
This acquisition was immediately accretive to Group earnings per share from completion and supports the Group’s future dividend capacity.