Lok N Store Regulatory News (LOK)

LOK'NSTORE GROUP PLC

("Lok'nStore" or "the Group")

Preliminary results

for the year ended 31 July 2014

Lok'nStore Group Plc, a leading company in the UK self-storage market announces results for the year ended 31 July 2014.

Group Financial Highlights

Revenue £13.91 million up 7.2% (2013: £12.97 million)

Adjusted EBITDA1 £4.62million up 11.6% (2013: £4.14 million)

Net debt £25.5 million (2013: £22.5 million)

Annual dividend 7 pence per share up 16.7% (2013: 6 pence per share)

Adjusted Net Asset Value per share2 up 9.6% to £2.71 (2013: £2.48)

Operational Highlights

Self-storage:

Unit occupancy up 12.4%

Unit Pricing up 5.8%

Unit Occupancy upto 69.5% of current lettable area (2013: 64.5%)

Store EBITDA £6.06million up 12.8% (2013: £5.38 million)

Store EBITDA margins up 2.6% to 50.7% (2013: 48.7%)

Ancillary sales up 15.5%

Document storage: 

Revenue £1.84 million (2013 £1.84 million)

Year-end boxes stored up 10.1% Tapes stored up 16.2%

Property Highlights

Total property values up 14.3%

New and purpose built stores lettable space increasing from 39.6% to 58.0% of portfolio

New Maidenhead store opened in December 2013 - trading well

Sale of old Reading store for residential development for £2.9 million

Construction of new Reading store complete October 2014

Acquired a site in Bristol in December 2013 for new store

New Aldershot and Southampton stores due to open in 2015

Key Metrics

Loan to value ratio down to 28.2%3 (2013: 28.5%)

Funds from Operations (FFO) 4 £3.97 million up 17.5% (2013: £3.4 million)

FFO per share of 16.1 pence per share up 14.4% (2013: 14.1 pence per share)

1 Adjusted EBITDA is defined as profits before depreciation, amortisation, losses or profits on disposal, share-based payments, acquisition costs, non-recurring professional costs, finance income, finance costs and taxation

2 Adjusted net asset value per share is the net assets adjusted for the valuation of leasehold stores and deferred tax divided by the number of shares at the year end. The shares held in the Group's employee benefits trust and treasury are excluded from the number of shares.

3 Calculation based on net debt of £25.5 million (2013: £22.5million) and total property value of £90.5 million (2013: £79.2 million).

4 Funds from Operations (FFO) calculated as EBITDA minus net finance cost on operating assets

Commenting on the Group's results, Andrew Jacobs CEO of Lok'nStore Group said,

"Trading has been strong and accelerated through the second half of our financial year. Our new store pipeline is changing the balance of our portfolio with new and purpose built stores increasing from 39.6% of the portfolio to 58.0% of our lettable space. The new flagship store in Maidenhead opened in December and is trading well and the new stores in Reading, Aldershot, Southampton and Bristol opening over the coming eighteen months will add further impetus to sales and earnings growth. These will all be purpose-built stores with our eye-catching modern design in highly prominent positions.

The strong growth of the business, and Lok'nStore's low level of debt means that this can be financed out of our existing bank facilities, while progressively increasing the dividend."

Chairman's Review

Strong growth, robust capital structure, increased NAV, increased dividend and rapid new store opening programme

Lok'nStore Group has traded well over the last several years and this improved further from the end of calendar 2013 resulting in robust growth of sales and earnings for the financial year to July 2014. This strong trading has been and will continue to be reinforced by store improvements to our existing stores combined with our programme of new, modern, purpose-built store openings including the recent opening of our new Maidenhead store, the replacement stores in Reading and Southampton, and the new stores in Aldershot and Bristol. This will result in a substantial increase in the proportion of our stores lettable space which is new or purpose built from 39.6% up to 58.0%. Our trading area will increase by 12.5%.

The growth of sales, profit and asset values combined with innovative asset management has combined to achieve a reduction in the loan-to-value (LTV) ratio of borrowing to asset values from 28.5% to 28.2% and an increase in annual dividend by 16.7% despite capital expenditure rising from £0.6 million last year to £6.5 million this year, a remarkable achievement.

Two other key performance indicators (KPI's), Funds from Operations (FFO) per share and Net Asset Value per share (NAV) have moved smartly ahead. With the high barriers to entry caused by the strong demand for property in South-East England and the difficulties of the local planning process, Lok'nStore's growing portfolio of high quality self-storage assets is set to deliver solid and increasing returns to investors.

Trading positive

Revenue for the year was £13.91 million, up 7.2% year on year (2013: £12.97 million) driven by self-storage unit occupancy which is up 12.4% and prices achieved for rented self-storage units which are up 5.8%. This strong turnover growth led to an 11.6% increase in Group Adjusted EBITDA. With low debt and interest costs this translates into Funds from Operations (FFO) per share growing by 14.4%. Tight control over operating costs has pushed the Group's margins and profits to record levels.

With the interest rate payable on £20 million of our net debt fixed at 3.525% we are currently operating at a blended interest cost of 3.33% giving us a firm foundation on which to grow the business.

Properties and Net Asset Value

The year-end property valuation equates to a total value of properties held of £90.5 million (2013: £79.2 million) a 14.3% increase in value. (Note that these values are not fully reflected in the statement of financial position which states the operating leasehold stores at cost less accumulated depreciation).

Our new Maidenhead store opened in December 2013 and is trading well. We have almost completed the development of our new store in Reading, and the Aldershot store commenced development in July 2014. Next year we intend to develop the new Southampton and Bristol stores.

These new stores will add further momentum to the growth of sales and profits over the coming years demonstrating Lok'nStore's ability to create innovative solutions to drive the growth of the operating business within our current financial resources. 

Dividend

It is intended that the Company's future dividend payments will reflect the growth in the underlying cash generated by the business. The interim dividend will represent approximately one-third of the total for the year and final dividend two-thirds. This year to reflect the strength of the business, and notwithstanding the one-off impairment charge, we are recommending a full year dividend of 7 pence per share reflecting the strong underlying performance of the business. This is up from 6 pence for the full year last year, an increase of 16.7% which translates into a final dividend of 5 pence per share following payment of an interim dividend of 2 pence per share in June 2014. 

Resignation of Director

On 25 February 2014 Douglas Hampson, a non-executive director of Lok'nStore Group Plc, through his company Montecito Storage Investors LLC (Montecito) sold his entire holding of 4,033,909 ordinary shares in the Company. The shares were acquired by existing and new investors. Mr Charles Peal a non-executive director added 450,000 shares to his holding. Following the transaction Montecito and Mr Hampson no longer have an interest in the shares in the Company and Mr Hampson resigned from the Board. The Board thanks Mr Hampson for his valuable contribution during his tenure as a director.

Outlook

Lok'nStore is a robust business with a record of consistent profit growth and cash generation and has built a firm base for the coming years. Recent strong trading has been and will continue to be reinforced by our programme of new, modern, purpose-built store openings and upgrades. This will result in a substantial increase in the proportion of our stores which are new or purpose built combined with a significant increase in our trading space.

Given the strong growth of sales, profits and asset values combined with the benefits of innovative asset management we believe we can achieve this without significantly increasing the loan-to-value (LTV) ratio or borrowings while continuing to increase the dividend.

Our dedicated and dynamic executive management team have capitalised on the improved economy and are well placed to continue our growth over the coming years. With the high barriers to entry created by the strong demand for property in South-East England and the difficulties of the local planning process, Lok'nStore's growing portfolio of high quality self-storage assets is set to deliver solid and increasing returns to investors.

Simon G Thomas

Chairman

17 October 2014

The Strategic Report

The Strategic Report is a new feature of the Lok'nStore Annual Report and its purpose is to inform members of the Group and help them assess how the Directors have performed. Its intention is to provide a balanced and comprehensive analysis of the development and performance of the Group's business during the financial year and its position at its year-end, consistent with the size and complexity of the business.

The Strategic Report covers the following areas of our business:-

Ø What we do, our Strategy and the way our business works

Ø The UK Self-Storage Market

Ø The Performance of our Stores

Ø An Operational and Marketing Review

Ø A Property Review

Ø A Financial Review

Ø Principal Risks and Uncertainties in operating our Business

Our Strategy and the way our business works

Introduction

Lok'nStore Group Plc is one of the leading companies in the fast growing UK self-storage market. We opened our first self-storage centre in Horsham, Sussex in February 1995 and have grown consistently over the last 18 years, currently operating 24 self-storage centres and two serviced document stores in Southern England. 2 replacement stores and another new store will open in the coming year. We have been listed on the AlM Market since June 2000 and the board still accounts for 33% of the ordinary shares of the Company.

We offer self-storage serviced document storage and management services to third party store owners. Self-storage is available to both household and business customers at our highly branded Lok'nStore centres. Each centre is prominently located mainly in the affluent South-East of England in large towns and cities.

Our serviced document storage service offers businesses anything from secure storage of one media tape to full management of their business documentation with 24 hour retrieval. We excel in offering the best customer service at competitive prices for our customers.

Strategy

We develop and operate self-storage centres in prominent locations broadly in South-East England. Our tall buildings with their distinctive orange livery create highly visible landmarks which continue to be a big contributor of new business for Lok'nStore.

Demand for self-storage by both business and domestic customers is driven by a combination of specific need based on changing circumstances but also linked to local economic activity and prevailing consumer and business confidence. The strong performance of our business since 2008 despite a generally poor economy is testament to its underlying resilience and its ability to grow revenue and earnings in most economic environments. Since the pick-up in the economy we have seen acceleration in our performance and this shows through in our reported numbers.

Our stores are located in the more affluent South East. People and business are more space constrained in these relatively expensive areas. Barriers to entry in terms of competition for suitable sites and the difficulties in securing appropriate planning consents are also correspondingly higher.

The strengths of our business model are summarised in table form below:

The UK self-storage market

There remains significant opportunity in the UK self-storage market where there are an estimated 830 self-storage facilities providing approximately 30 million square feet of storage space. With a population of 62 million people in the UK this equates to 0.5 square feet per person, compared to 7.3 square feet per person in the USA (Self-Storage Association 2014 UK Annual Survey).

The sector remains in good health. The Deloitte 2014 Report for the Self-Storage Association says "there has been growth in the industry over the last 12 months both in terms of additional space and new facilities opening…… Interestingly none of ….the three largest operators opened any new facilities in 2013." Despite this the total storage space available grew by 4% in 2013. The Report estimates that total annual turnover for the UK self-storage industry in 2013 was £385 million from approximately 420 different operators, and they employed in excess of 2,000 staff (full time equivalent) in their self-storage facilities. As awareness of self-storage continues to grow more businesses and individuals will use self-storage in a market that is supply constrained with very few openings in the coming year.

Our Business Model

The objective of our strategy is to continue to increase EBITDA per share over the coming years. We believe there is the opportunity for significant further growth and we will continue to focus our efforts on five key areas:

Ø Filling existing stores and improving pricing

Ø Developing new stores on a self-funded basis

Ø Opportunistic site acquisitions

Ø Increasing the number of stores we manage for third parties

Ø Developing our document storage offering through organic growth

Strategic Report (continued) 

The Performance of our Stores

Sales, Earnings and Occupancy Up

Our self-storage occupancy rose strongly during the year up 12.4% and this was combined with price increases of 5.8%. During the year occupancy of the self-storage units increased 5.0% to 69.5% (2013: 64.5%) of current lettable area (CLA). Self-storage revenue for the year was £12.07 million up 8.4% (2013: £11.14 million).

With costs firmly under control this revenue growth translates into strong profit growth. We again managed to increase the overall adjusted EBITDA margin across all stores by 1% from 49.7% to 50.7%. The adjusted EBITDA margins of the freehold stores were 62.7% (2013: 61.2%) and the leasehold stores achieved margins of 36.6% (2013: 30.8%).

Total store EBITDA in the self-storage business, a key performance indicator of profitability and cash flow of the business, increased 12.8% to £6.06 million (2013: £5.38 million).

At the end of July 2014 33.3% of Lok'nStore's self-storage revenue was from business customers (2013: 36.6%) and 66.7% was from household customers, (2013: 63.4%). By number of customers 19.0% of our customers were business customers (2013: 20.8%) and 81.0% household customers (2013: 79.2%).

Demonstrating the increased activity of our customers enquiries were up 23.1% and move-ins were up 20.9% over the year.

1 The average unexpired term of the Group's operating leaseholds is approximately 13 years and 8 months as at 31 July 2014 (14 years and 8 months: 31 July 2013).

2 Total freeholds account for 83.9% of property values

Ancillary Sales

Ancillary sales which consist of boxes and packaging materials, insurance and other sales increased 15.5% over the year accounting for 11.4% of self-storage revenues (2013: 10.7%).

We continue to promote our insurance to new customers with the result that 93% of our new customers purchased our insurance over the year, and this has resulted in an increase in the percentage of our customers who are insured through Lok'nStore to 78% (2013: 75%).

Document storage business

In our document storage business revenue has been maintained and profits have fallen slightly. However we are pleased to report that our business' operating metrics are improving rapidly in response to the Company's more customer facing marketing stance. This investment has resulted in excellent customer feedback and puts us in a good position to win new business, with boxes stored increasing 10.1% and tapes stored up 16.2%. Although revenue and profit will take time to respond to this volume growth we are pleased to see this noticeable improvement. We believe this focus will create long term value for customers and shareholders as our customer base grows.

We have now consolidated our serviced document warehouse capacity closing one of the three storage sites which incurred a cost in the period of £25,361 but will benefit earnings in the future. Following this consolidation and the fit-out of new warehouse racking we have the capacity to double the number of boxes stored within our existing premises. As part of this strategy additions of £0.21 million were made in the current year to fixtures, fittings and equipment (2013: £0.4 million).

Acquisition of Remaining Saracen Shares

During the year the Company acquired the remaining 9.6% non-controlling interest in Saracen Datastore Limited under the terms set out in the original Share Purchase Agreement for nil consideration.

Security

The safety and security of our customers and their goods remains our highest priority. We invest in CCTV, intruder and fire alarm systems and the remote monitoring of our stores out of hours. Importantly all of our stores are manned during opening hours.

Operational and Marketing Review

Marketing

During the year our marketing focused on the internet which produces an ever-increasing proportion of our enquiries; 59% of our enquiries now come from the internet (2013: 57%).

Printed directories account for a decreasing proportion of business over recent years and are now at a de minimis level. For the year total internet enquiries were up 28.4% on last year and total enquiries were up 24.6 % across all stores. We will continue to manage our marketing budget with a strong focus on cost control and value for money.

Despite the inexorable rise of internet marketing, around 37% (2013: 37%) of our business still comes from passing traffic and signage, so the visibility of our stores remains very important to our marketing efforts. With their prominent positions, distinctive design and bright orange elevations, our stores raise the profile of the Lok'nStore brand. We continue to invest in new signage and lighting at our existing stores as well as creating striking designs for our new stores to promote and enhance their' visual prominence.

Our store personnel are closely involved with sales and marketing initiatives and work with the head office team to ensure our marketing expenditure remains targeted and effective.

Website

The internet has rapidly taken over as the main media channel for our advertising and Lok'nStore has adapted to accommodate this change. Our website at www.loknstore.co.uk is one of the most established self-storage websites in the UK, having been operational since 2001. The website was re-launched in February 2012 and has been extremely successful in driving online traffic. We continue to improve our work in search optimisation and are using social networks to reinforce our various messages.

The site has clear navigation making it easy for customers to find their way around. Customers visiting the site are encouraged to book online to take advantage of our online reservation system. We have a "state of the art" space estimator which is a key tool for customers booking online, enabling them to make an informed choice about the size of unit required.

This is a very dynamic area and we are committed to continued rapid development. New features this year include an online chat facility and a 'click and collect' box shop. We believe the internet provides a strong competitive advantage for the major operators such as Lok'nStore with large marketing budgets compared with those of the smaller operators. During the year we spent 2.5% of self storage revenue on marketing.

Strategic Report (continued) 

Stores Property Review

Strong cash flows and solid asset base create opportunities

Lok'nStore's strong operating cash flow, solid asset base, and tactical approach to its store property portfolio provide the Group with opportunities to improve the terms of its property usage in all stages of the economic cycle. Our focus on the trading business gives us many opportunities and our property decisions are always driven by the requirements of the trading business. Lok'nStore has both freehold and leasehold stores and manages 4 stores for on behalf of three different clients.

Acquisition of site for new store in Bristol

In January 2014 Lok'nStore acquired a site in Longwell Green, Bristol. The site of approximately 0.9 acres is in a busy retail park and has planning permission to build a 50,000 sq. feet self-storage centre in Lok'nStore's modern and distinctive design. The total cost of the store when built and fitted-out, will be around £4 million and will add to Lok'nStore's high-quality portfolio of purpose built self-storage centres in prominent trading locations. When open it will take Lok'nStore's total stores to 26 following the recent opening of the new Maidenhead store and the opening of the new Reading, Southampton and Aldershot stores in the coming year.

Sale of previous Reading store and opening new Reading store

In October 2013 Lok'nStore agreed the sale of its store in Reading for an initial consideration of £2.9 million. The consideration is a 7.4% premium to the 31 July 2013 valuation and will be paid in cash on completion when the store is vacated in autumn 2014. The transaction is not yet recognised as a disposal (but is an asset held for sale) in this period since the Group retains the economic interest in revenues and profits in the store while the store continues to trade until legal completion and also continues to retain the economic interest in the business and customers thereafter.

Lok'nStore also owns the adjacent site on which it has now substantially completed the building of a new store. The new store will have 48,000 square feet of self-storage space, a 20% increase. The highly prominent location is directly accessible from the busy main road which connects Reading town centre to the M4 motorway. The transaction allows the Group to construct its new store while continuing to operate its existing trading business during this period. The cost of constructing and fitting the new store will be funded from the combination of the sale proceeds and store earnings during the transition period demonstrating the Group's ability to expand its operating footprint out of existing financial resources. When the new building is complete the existing customers will be transferred to the new store.

New Maidenhead store opened

In December 2013 Lok'nStore opened a new state-of-the-art store in Maidenhead providing around 60,000 sq. ft. of self-storage space.

This is a long leasehold site (the lease term runs until April 2076) of 1.6 acres close to Maidenhead town centre and railway station and is very prominent to the retail park near the main road joining the town centre with the M4 motorway. The store which also provides space on the ground floor for a Lidl food store is of similar style and appearance to other recently opened Lok'nStore centres, with Lok'nStore's strong branding adding to the visual attractiveness of the site. This collaboration with Lidl will increase the visual prominence, brand recognition and footfall of the store which are key criteria for success. Maidenhead is an excellent location for Lok'nStore, an affluent town with little local competition.

The innovative financing of the scheme has required only a modest capital input from Lok'nStore and enables us to continue to expand the Group's operating footprint without stretching the balance sheet.

Management contract - Aldershot

In 2012 Lok'nStore signed an agreement to develop and manage a new self-storage centre in Aldershot, Hampshire. The store will be located in a prominent location on the main Aldershot roundabout above the A331 with significant levels of passing traffic, and is expected to commence trading in 2015.

The store will be managed for outside investors under the Lok'nStore brand. Lok'nStore will contribute approximately £2.5 million of development funds of the estimated £4.5 million total cost of development and will manage the building and operation of the store.

Lok'nStore will generate a return by charging a return on the development capital, and a management fee for the construction, operation and branding of the store. This project is consistent with Lok'nStore's strategy of expanding the operating footprint of the business while maintaining its strong balance sheet.

Impairment of site

The Group has no immediate plans to progress works at our site at Portsmouth North Harbour and may not ultimately develop the site as a purpose built self-storage centre. Accordingly, the carrying cost of the site has been written down by £1.6 million to a level which reflects its alternative use value.

Store portfolio

These projects are part of our strategy of actively managing our store operating portfolio to ensure we are maximising value. This includes strengthening our distinctive brand, increasing the size and number of our stores and replacing stores or sites where it will increase shareholder value. We prefer to own freeholds if possible, and where opportunities arise we will seek to acquire the freehold of our leasehold stores. However we are happy to take leases on appropriate terms and benefit from the advantages of a lower entry cost, with further options to create value later in the site's development. Our most important consideration is always the trading potential of the store rather than the type of property tenure.

We currently have 24 stores trading. Of these 21 stores are owned with twelve freehold or long leasehold and nine leasehold and three further sites operating under individual management contracts. With Aldershot opening in 2015 this will increase the number of stores we operate to 25 and will capitalise on our efficient operating systems and growing internet marketing presence. These arrangements demonstrate Lok'nStore's ability to attract investment partners and create innovative ownership to drive the growth of the operating business.

At the year end the average length of the seven leases which were valued at July 2014 decreased by 12 months to 13 years and 8 months (2013: 14 years and 8 months). Eight out of nine of our leasehold stores are inside the Landlord and Tenant Act providing us with a strong security of tenure. The leasehold sites produced 33.1% of the store EBITDA in the year (2013: 31.7%).

Store property assets and Net Asset Value

Lok'nStore's freehold and operating leasehold stores have been independently valued by Cushman & Wakefield (C&W) at £79.1 million (NBV £30.1 million) as of 31 July 2014 (2013: £67.7 million: NBV £30.6 million). Property valuation is referred to further in the Financial Review section of the Strategic Report and is detailed in note 10b of the notes to the financial statements.

Adding our stores under development at cost, our total property valuation is £90.5 million (historic cost value £46.4 million) (2013: £79.2 million; historic cost value £42.6 million). This translates into an adjusted net asset value of £2.71 per share up 9.6% on last year (2013: £2.48 per share).

Strategic Report (continued) 

Financial Review

Trading

Total revenue for the year grew 7.2% to £13.91 million (2013: £12.97 million). Group operating profit for the year is up 20% to £3.08 million (2013: £2.57 million) after adding back the impairment of a development land asset charged to the Income Statement. Document storage revenue was £1.84 million (2013: £1.84 million). Document storage adjusted EBITDA, before inter-company management charges, was £0.24 million (2013: £0.31 million).

Taxation

Historically, there has been no corporation tax to pay due to the availability of tax losses. The Group's tax losses have now been utilised with de minimis tax losses available to carry forward for offset against future profits. The Group will therefore pay tax on the majority of its earnings this year and has made a tax provision in this year of £0.34 million.

Earnings per share

Earnings per share has been impacted by the £1.6 million impairment to a development land asset and the tax charge. Basic earnings per share before the one-off impairment charge were 7.39 pence (2013: 5.75 pence per share) and diluted earnings per share were 7.21 pence (2013: 5.72 pence per share). Underlying operating profit is 20% higher than last year. Basic earnings per share after impairment were 0.81 pence (2013: 5.75 pence per share). Diluted earnings per share were 0.79 pence (2013: 5.72 pence per share).

Treasury shares

Although the Group did not purchase any Treasury shares during the year we are proposing to renew our on-going authority to buy back shares at this year's AGM to ensure the Group continues to have flexibility to make further purchases should it be considered to be in the best interests of shareholders to do so.

Management of interest rate risk

Lok'nStore has £27.7 million of debt currently drawn against its £40 million revolving credit facility. £20 million is at a fixed interest rate with £10 million fixed rate swap at a fixed 1 month sterling LIBOR rate of 1.2% and £10 million swap at a fixed 1 month sterling LIBOR rate of 1.15%. With 1 month LIBOR around 0.5%, this leaves a balance of £7.7 million floating at a current all-in rate of around 2.83% and results in an overall weighted average rate of 3.33%. The £20 million fixed rate is treated as an effective cash flow hedge and its fair value on a mark-to-market basis has fluctuated historically. Its current fair value of £0.05 million is currently stated as a non-current asset (2013: £0.27 million liability). (See Note 15).

Operating costs

For the previous five years we have reduced our group operating costs year on year. This year through disciplined management we have again reduced property costs and contained overhead growth to 2.3%. Staff costs increased by 12.2% through a combination of strong sales bonuses and additional national insurance costs arising on the exercise of employee share options. Group operating costs amounted to £9.0 million for the year, a 5% increase from last year (2013: £8.57 million). Overall operating costs as a percentage of revenue have decreased and represent 64.7% as a cost ratio. (2013: 66.1%). This disciplined approach to costs ensures that as much as possible of the revenue growth achieved contributes to increasing our profits.

Cash flow and financing

At 31 July 2014 the Group had cash balances of £2.2 million (2013: £4.2 million). There was £27.7 million of gross borrowings (2013: £26.8 million) representing gearing of 56.5% (2013: 55.8%) on net debt of £25.5 million (2013: £22.5 million). After adjusting for the uplift in value of leaseholds which are stated at depreciated historic cost in the statement of financial position, gearing is 45.4% (2013: 45.2%). After adjusting for the deferred tax liability carried at period end of £10.9 million gearing drops to 38.0% (2013: 37.8%).

Cash inflow from operating activities before investing and financing activities was £5.2 million (2013: £4.3 million). As well as using cash generated from operations to fund some capital expenditure, the Group has a five year revolving credit facility. This provides sufficient liquidity for the Group's current needs. Undrawn committed facilities at the year-end amounted to £12.3 million (2013: £13.2 million).

By excluding £0.5 million (2013: £0.4 million) of the interest costs of carrying the development sites from the total net interest charge of £1.1 million (2013: £1.1 million) the interest on the operating portfolio is £0.6 million for the year (2013: £0.7 million). Funds from operations (FFO) represented by EBITDA minus interest on the operating portfolio is therefore £3.97 million (2013: £3.38 million) equating to 16.1 pence per share, up 14.4% on last year (2013: 14.1 pence per share).

A component of the interest cost incurred by the Group arises from the £11.4 million of development sites that the Group is currently carrying. The interest against this cost has not been capitalised but if it was the Group's adjusted profit would have been approximately £0.5 million higher for the year (2013: £0.4 million) on the assumption that the £11.4 million is fully funded by borrowings.

The Group has grown through a combination of new site acquisition, existing store improvements and relocations, and has concentrated on extracting value from its existing assets and developing through collaborative projects and management contracts. Capital expenditure during the year totalled £6.5 million (2013: £0.6 million). This was primarily the construction and fitting out at Maidenhead and Reading, the purchase of our new site in Bristol and also included small expenditures at existing stores and further racking at the Saracen Olney warehouse. It also included planning and other professional costs incurred in maximising the potential of our planning permissions.

The Company has no further capital commitments beyond the completion of its Reading store, its £2.5 million development commitment at Aldershot, further racking at the Saracen Olney warehouse and some minor works to existing properties. (Refer note 29a: Capital Commitments).

Statement of Financial Position

Net assets at the year-end were £45.2 million (2013: £40.4 million). Freehold property values at 31 July 2014 were £64.5 million (including Maidenhead) compared to £54.5 million at 31 July 2013.  

Market Valuation of Freehold and Operating Leasehold Land and Buildings

Our eleven freehold properties and one long leasehold are held in the statement of financial position at fair value and have been valued by Cushman and Wakefield LLP (C&W). Refer to note 10b) - property, plant and equipment and also to the accounting policies for details of the fair value of trading properties. The valuations of the leasehold stores held as 'operating leases' are not taken onto the statement of financial position. However seven of these have also been externally valued and these valuations have been used to calculate the adjusted net asset value position of the Group.

On 31 July 2014 professional valuations were prepared by valuers C&W in respect of eleven freehold, one long leasehold and seven operating leasehold properties. The valuation was prepared in accordance with the RICS Valuation - Professional Standards, published by The Royal Institute of Chartered Surveyors ("the Red Book"). The valuation has been provided for accounts purposes and, as such, is a Regulated Purpose Valuation as defined in the Red Book. The external valuation methodology provides for a purchaser acquiring a centre incurring purchase costs of 5.8% initially and sale plus purchaser's costs totalling 7.8% are assumed on the notional sales in the tenth year in relation to the freehold stores. In practice we believe that it is unlikely that the bulk of Lok'nStore's properties would be acquired other than in a corporate structure, in which case transaction costs would likely be lower (see note 10b in the notes to the financial statements for a more detailed description of the valuation methodology).

A deferred tax liability arises on the revaluation of the properties and on the rolled-over gain arising from the disposal of the Kingston and Woking sites in 2007. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief. It is highly probable that the site of the existing Reading store will be sold with the benefit of its permission for residential development and the proceeds will be reinvested in our new store pipeline. It is not the intention of the Directors to make any other significant disposals of operational self-storage centres, although individual disposals may be considered where it is clear that added value can be created by recycling the capital into other opportunities.

The Board will continue to commission independent valuations on its trading stores annually to coincide with its year-end reporting.

Under IFRS the valuations of our freehold property assets are included in the Statement of Financial Position at their fair value, but the IFRS rules do not permit the inclusion of any valuation in respect of our leasehold stores to the extent that they are classified as operating leases. The value of our operating leases in the valuation totals £14.6 million (2013: £13.2 million). Instead we have reported by way of a note the underlying value of these leasehold stores in future revaluations and adjusted our Net Asset Value (NAV) calculation accordingly to include their value. This will ensure comparable NAV calculations.

Analysis of Total Property Value

Adjusted Net Asset Value per Share

Adjusted net assets per share is the net assets of the Group business adjusted for the valuation of leasehold stores and deferred tax divided by the number of shares at the year-end. The shares currently held in the Group's employee benefits trust (own shares held) and in treasury are excluded from the number of shares.

At July 2014 the adjusted net asset value per share increased to £2.71 from £2.48 last year, up 9.6%. This increase is a result of higher property values, cash generated from operations, offset in part by an increase in the shares in issue due to the exercise of share options by management and staff during the year.

1 The seven leaseholds valued by Cushman & Wakefield are all within the terms of the Landlord and Tenant Act (1954) giving a degree of security of tenure. The average length of the leases on the leasehold stores valued was 13 years and 8months at the date of the 2014 valuation (2013 valuation: 14 years and 8 months).

2 A deferred tax adjustment in respect of the uplift in the value of the leasehold properties has been included. Although this is a memorandum adjustment as leasehold properties are included in the Group's financial statements at cost and not at valuation, this deferred tax adjustment is included in the adjusted net asset value calculation in order to maintain a consistency of tax treatment between freehold and leasehold properties.

Summary

Lok'nStore is a robust business which generates increasing cash flow from its strong asset base. With a low LTV of 28.2% and our interest rate risks substantially hedged through to 2016 we have a firm base for growth. The value of the Group's property assets continue to increase underpinning a flexible business model with relatively low credit risk and tightly controlled operating costs.

Strategic Report (continued) 

Principal Risks and Uncertainties in operating our Business

Finance

Lok'nStore finances its current needs through a combination of strong operational cash flows and debt.

Cash deposits are placed with Lloyds TSB plc on a no-notice treasury deposit account which tracks base rate and currently yields 0.5% p.a. on all deposited balances. The Group's cash position is reviewed daily and cash is transferred daily between these accounts and the Group's operational current accounts as required.

The main risks arising from the Group's financial instruments are interest rate risk and liquidity risk. The policies for managing these risks are regularly reviewed and agreed by the Board. Historically, no trading in financial instruments had been undertaken but during 2012 the Group entered into two separate swap arrangements. Full details are set out in the Financial Review. Further information on our treasury arrangements is set out in note 15.

The financial risk management objectives and policies of the Group, along with details of exposure to liquidity and cash flow risk are set out below and in note 15 (Financial Instruments) to the financial statements.

Risk Management

Risk management has been a fundamental part of the development of Lok'nStore. We maintain a risk register which identifies and categorises our risks and provides an assessment of risk based on a combination of 'likelihood' and 'consequences and impact' on the business. This is reviewed regularly by management and the Board and underpins our structured approach to identifying, assessing and controlling risks that emerge during the course of operating the business. Its purpose is to support better decision-making through understanding the risks inherent in both the day-to-day operations and the strategic direction of the Group and their likely impact. This is a continuing and evolving process as we review and monitor the underlying risk elements relevant to the business.

Market Risk

Self-storage is a developing market with further opportunities for significant growth. Awareness of self-storage and how it can be used by customers is well understood in the United States, but historically has been relatively low throughout the UK. Survey and anecdotal evidence suggest this awareness is rising quickly in the UK now. The rate of growth in branded self-storage operations in good trading locations continues to be limited by the challenge of acquiring sites at appropriate prices and obtaining planning permission.

Lok'nStore invests in prime locations where its criteria for site selection are met and which will enable it to develop high quality stores which are prominent with high visibility and strong branding. We believe this will place us in a strong trading position and may discourage competitors from entering that local market. However it is possible that Lok'nStore may be unable to execute this strategy which will inhibit its growth. Further it is possible that an increasing number of competitors in the industry may negatively impact Lok'nStore's existing operations.

We have a large customer base spread across 24 stores including those customers who have used Lok'nStore regularly over the years. Many of these periodically return as their circumstances and their storage needs change. Our self-storage customers are a broad mix of both domestic and business, generating around 66.7% and 33.3% respectively of our revenue (2013: 63%:37%).

Property Risk

The acquisition of new sites for development into self-storage centres is a key strategic objective of the business. We will continue to face significant competition for site locations from other uses such as hotels, car showrooms and offices as well as from the other self-storage operators.

The process of gaining planning permissions remains challenging. Lok'nStore may take on the risk of obtaining planning permission when acquiring sites in the face of competitive bids. In these cases we are obliged to undertake the planning, environmental and other property due diligence under tight timescales which creates greater risk in the process.

Nevertheless Lok'nStore's management has gained significant experience in operating in this property environment, acquiring sites on main roads in prominent locations and obtaining appropriate planning permissions.

We manage the construction of our properties carefully. The building of each store is handled through a design and build contract with established contractors. We employ an external team of professionals to monitor the progress of each development. The fitting of mezzanine floors and steel units is generally project managed in-house using an established external professional team of sub-contractors who understand Lok'nStore's particular specifications.

Credit Risk

Lok'nStore's self-storage credit model is strong with customers paying four weekly in advance in addition to an initial four weeks rental deposit. We retain a legal lien over customers' goods which can be sold to cover their unpaid bills.  Credit control remains tight with £34,692 (2013: 60,709) of bad debts recognised during the year representing around 0.20% of revenue (2013: 0.47%). There was £5,603 of additional costs associated with recovery (2013: £9,097). Given the tight credit conditions in the wider economy our own credit control indicators are resilient, showing no appreciable signs of weakening during the year with the number of late letters issued declining year-on-year and bad debts remaining at low levels.

Tax Risk

We regularly monitor proposed and actual changes in legislation in the tax regime affecting principally corporation tax, capital gains tax, VAT and Stamp Duty Land Tax (SDLT). We work with our professional advisors and through trade bodies to understand and mitigate or benefit from their effects.

Corporate Social Responsibility and Employee Risk

The Corporate Social Responsibility and Employee Risk within the business are discussed within the Corporate Responsibility Report.

Reputational Risk

Lok'nStore's business reputation is very important to the Group. Our management and staff work hard to protect and develop it. We always try to communicate clearly with our customers, suppliers, local authorities and communities, employees and shareholders and to listen and take account of their views. The Lok'nStore websites (www.loknstore.co.uk www.loknstore.com and www.saracendatastore.co.uk) are important avenues of communication and a source of information for employees, customers and investors. Employee communication is augmented by quarterly staff newsletters.

Approved by the Board of Directors and authorised for issue on 17 October 2014 and signed on its behalf by:

Consolidated Statement of Comprehensive Income

For the year ended 31 July 2014

1  Adjusted EBITDA and operating profit are defined in the accounting policies section of the notes to the financial statements.

Consolidated Statement of Changes in Equity

For the year ended 31 July 2014

Company Statement of Changes in Equity

For the year ended 31 July 2014

Statements of Financial Position

Approved by the Board of Directors and authorised for issue on 17 October 2014 and signed on its behalf by:

Consolidated Statement of Cash Flows

For the year ended 31 July 2014

No statement of cash flows is presented for the Company as it had no cash flows in either year.

Accounting Policies

General Information

Lok'nStore Group plc is an AIM listed company incorporated and domiciled in England and Wales. The address of the registered office is One London Wall, London EC2Y 5AB, UK. Copies of this Annual Report and Accounts may be obtained from the Company's head office at 112 Hawley Lane, Farnborough, Hants, GU14 8JE, or the investor section of the Company's website at http://www.loknstore.co.uk

Basis of accounting

The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) Interpretations as adopted by the European Union and comply with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board and International Financial Reporting Interpretation Committee relevant to its operations and effective for accounting periods beginning on or after 1 August 2013.

The financial statements have been prepared on the historic cost basis except that certain trading properties and derivative financial instruments are stated at fair value.

Adoption of new and revised standards

IFRS 13: Fair Value Measurement has been adopted in the year but has had no material impact in these financial statements.

Standards in issue but not yet effective

At the date of approval of these financial statements, the following principal standards and interpretations which were in issue but not yet effective:

The Directors do not anticipate that the adoption of these Standards will have a significant impact on the financial statements of the Group.

There were no other Standards or Interpretations, which were in issue but not yet effective at the date of authorisation of these financial statements, that the Directors anticipate will have a material impact on the financial statements of the Group.

Basis of consolidation

Intra-group transactions, balances, and unrealised gains and losses on transactions between Group companies are eliminated on consolidation, except to the extent that intra-group losses indicate an impairment.

Critical accounting estimates and judgements

The preparation of consolidated financial statements under EU-IFRS requires management to make estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual outcomes may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

a) Estimate of fair value of trading properties

The Group values its self-storage stores using a discounted cash flow methodology which is based on current and projected net operating income. Principal assumptions underlying management's estimation of the fair value are those relating to stabilised occupancy levels; expected future growth in storage rents and operating costs, maintenance requirements, capitalisation rates and discount rates. A more detailed explanation of the background and methodology adopted in the valuation of the Group's trading properties is set out in note 10b. The carrying value of land and buildings held at valuation at the reporting date was £51.4 million (2013: £50.8 million) as shown in the table in note 10b.

In their report to us, our valuers Cushman & Wakefield LLP (C&W) have drawn attention to valuation uncertainty resulting from a lack of transactions in the self-storage investment market. Please see note 10b for more details.

The Board concur with this view.

b) Assets in the course of construction and land held for pipeline store development ('Development property assets')

The Group's development property assets are held in the statement of financial position at historic cost and are not valued externally. In acquiring sites for redevelopment into self-storage facilities, the Group estimates and makes judgements on the potential net lettable storage space that it can achieve in its planning negotiations, together with the time it will take to achieve maturity occupancy level. In addition, assumptions are made on the storage rent that can be achieved at the store by comparison with other stores within the portfolio and within the local area. These judgements, taken together with estimates of operating costs and the projected construction cost, allow the Group to calculate the potential net operating income at maturity, projected returns on capital invested and hence to support the purchase price of the site at acquisition. Following the acquisition, regular reviews are carried out taking into account the status of the planning negotiations, and revised construction costs or capacity of the new facility, for example, to make an assessment of the recoverable amount of the development property. The Group reviews all development property assets for impairment at each reporting date in the light of the results of these reviews. Once a store is opened, it is valued as a trading store.

The Group holds planning permissions on its entire pipeline of sites as a result of the work undertaken to complete the pre-planning and planning phases required. During this year it has been engaged with the four sites to examine whether the potential of the existing permissions could be further maximised. The movement in costs is as a result of this work.

The carrying value of development property assets at the reporting date was £11.4 million (2013: £11.5 million - £2.8 million of which was classified as property lease premiums). Please see note 10c for more details.

c) Estimate of fair value of intangible assets acquired in business combination

The relative size of the Group's intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives important to the Group's financial position and performance. At 31 July 2014 intangible assets, excluding goodwill, amounted to £2.81 million (2013: £2.98 million).

The valuation method used and key assumptions are described in note 10a.

The useful life used to amortise intangible assets relates to the expected future performance of the assets acquired and management's judgement of the period over which economic benefit will be derived from the asset. The estimated useful life of customer relationships principally reflects management's view of the average economic life of the customer base and is assessed by reference to customer churn rates. Typically, the customer base for a serviced archive business is relatively inert. Corporate customers do not tend to switch service providers and indeed they incur box withdrawal charges should they do so. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge.

d) Non-current assets held for sale

Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable.

Notes to the Financial Statements

For the year ended 31 July 2014

Analysis of the Group's revenue is shown below:

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board to allocate resources to the segments and to assess their performance.

All of the Group's activities occur in the United Kingdom.

Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced archive and records management activity.

Segment revenue comprises of sales to external customers and excludes gains arising on the disposal of assets and finance income. Segment profit reported to the Board represents the profit earned by each segment before acquisition costs and other non-recurring set-up costs, finance income, finance costs and tax. For the purposes of assessing segment performance and for determining the allocation of resources between segments, the Board uses a measure of adjusted EBITDA (as defined in the accounting policies) and reviews the non-current assets attributable to each segment as well as the financial resources available. All assets are allocated to reportable segments. Assets that are used jointly by segments are allocated to the individual segments on a basis of revenues earned. All liabilities are allocated to individual segments other than borrowings and tax. Information is reported to the Board of Directors on a product basis as management believe that the activity of self-storage and the activity of serviced archive and records management expose the Group to differing levels of risk and rewards due to the length, nature, seasonality and customer base of their respective operating cycles.

The segment information for the year ended 31 July 2014 is as follows:

Corporate transactions and the treasury function are managed centrally and therefore are not allocated to segments. Sales between segments are carried out at arm's length. The serviced archive segment with over 360 customers has a greater customer concentration with its ten largest corporate customers accounting for 31.4% (2013: 32.5%) of revenue its top 50 accounting for 59.3% (2013: 62.4%) and its top 100 accounting for 74.7% (2013: 77.6%) of revenue. The self-storage segment with over 7,750 customers has no individual self-storage customer accounting for more than 1% of total revenue and no group of entities under common control (e.g. Government) accounts for more than 10% of total revenues.

1 Capital expenditure includes fixed asset additions (note 10b).

1 Capital expenditure includes fixed asset additions (note 10b) and additions to property lease premiums (Note 10c)

The amounts presented to the Board with respect to total assets and total liabilities are measured in a manner consistent with the financial statements and are allocated based on the operations of the segment. Borrowings are managed centrally on a Group basis and are therefore not allocated to segments.

Cost of sales represents the direct costs associated with the sale of retail products (boxes, packaging etc.), the ancillary sales of insurance cover for customer goods and the provision of van hire services, all of which fall within the Group's ordinary activities.