Lok N Store Regulatory News (LOK)

28 April 2014

LOK'NSTORE GROUP PLC

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

Interim Results for the six months to 31 January 2014

Lok'nStore Group Plc, a leading company in the UK self-storage market announces interim results for the six months to 31 January 2014.

Financial Highlights

· Group Revenue 1 up 6.1% like-for-like, up 2.5% overall

· Group Adjusted EBITDA 2 up 10.9% like-for-like, up 3.6% overall

· Operating Profit up 20.4% like-for-like, up 9.6% overall

· Interim dividend 2 pence per share up 20%

Operational Highlights

Self-storage

· Store EBITDA up 12% like-for-like

· Unit pricing up 3.3% y-y

· Like-for-like unit occupancy up 8.1% y-y

· Store EBITDA margins up from 48.3% to 49.6% y-y

· Ancillary sales up 14.2% y-y

· Enquiries up 24% and move-ins up 21.4% like-for-like

Document storage

· Boxes stored up 15.1% annualised

· Tapes stored up 21.8% annualised

Property Highlights

· Continue to drive store opening programme with five new purpose built stores due to open over the next 18 months

· New Maidenhead store opened in December 2013

· Sale agreed of old Reading store site for residential development for £2.9 million

· Construction of new Reading store underway

· Purchased site in Bristol for new store

· Aldershot and Southampton due to open in 2015

Key Metrics

· Loan to value ratio of 30.9% 3 (31.01.2013: 32.7%)

· Funds from operations (FFO)4 £1.84 million up 6.2% y-y

· Annualised FFO per share of 15.1 pence per share up 8.7% (31.01.2013: 1.73 million 13.9 pence per share)

· Adjusted NAV £2.47 per share 5 (31.01.2013: £2.30 per share)

1 In March 2013 the Company sold an existing trading store in Ashford. For clarity and comprehensiveness we include a table in the Chairman's review below to show all the headline growth figures and like-for-like growth figures which strip out this impact including the small impact of the new Maidenhead store which opened in December 2013

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

3 Calculation based on net debt of £25.4 million (31.01.13: £26.2 million) and total property value of £82.3 million (31.01.13:£80.0 million)

4 Funds from Operations ('FFO') calculated as EBITDA minus Net Finance Cost on operating assets.

5 Adjusted net asset 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 period end. The shares currently held in the Group's employee benefits trust and in treasury are excluded from the number of shares.

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

"Trading in our existing stores has been strong in the first half of our financial year and has accelerated in recent months. Our new store pipeline is changing the complexion of our portfolio. The new flagship store in Maidenhead opened in December and early trading is buoyant giving us significant optimism that the new stores in Reading, Aldershot, Southampton and Bristol which are 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, good asset management and Lok'nStore's low level of debt means that this major expansion can be financed out of our existing bank facilities, and will be achieved while progressively increasing profits and dividends."

Chairman's Review

Strong Growth overlaid with rapid new store opening programme

Following a strong performance in 2013, trading in the first half of 2014 has remained buoyant for the Lok'nStore Group with a further acceleration in recent months. In January 2014, traditionally a slower period of the year for our trading, we saw the biggest monthly gain in our business since June 2006. We are seeing clear signs that the economy is now growing and the measures that the Company has taken to improve our operating efficiency over recent years give us a robust platform to build on.

Like-for-like* self-storage unit occupancy is up 8.1% year to year and prices achieved for rented self-storage units are up 3.3%. Group Adjusted EBITDA is up 10.9%, on a like-for-like basis (3.6% on a headline basis) and with low debt and interest costs this translates into Funds from Operations (FFO) per share up 8.7% at an annualised rate. With tight control over operating costs which increased by only 0.5% over the period, the Group's margins and profits have all increased to record levels and these are set out in the tables below.

Demonstrating the increasing activity among our customers enquiries are up 24% and move-ins are up 21.4% over the first half.

Our loan-to-value ratio (LTV) has been reduced to 30.9% and with £20 million of our net debt fixed at 3.525% we are currently operating at a blended rate of 3.33% giving us a firm foundation on which to grow the business.

Our new Maidenhead store opened in December 2013 and is trading well. We have commenced the development of our new store in Reading, and the Aldershot store will commence development in May 2014. Next year we intend to develop the new Southampton store and in January 2014 we announced the purchase of a new site in Bristol to add to our pipeline.

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

*In March 2013 we sold our existing trading store in Ashford. For clarity we include a table below to show all the headline growth figures and like-for-like growth figures which strip out this effect and the small impact of the new Maidenhead store:

Dividend

The Group's dividend payments reflect the growth in the underlying cash generated by the business and the final dividend will be declared when the Group's full year results are announced. At the interim stage we intend to pay approximately one third of the previous year's total dividend which equates to 2 pence per share, up 19.8% on the interim dividend last year.

Sales, Earnings and Occupancy Up

Revenue for the period was £6.71 million, up 2.5% on the same period last year (31.1.2013: £6.55 million) as our core self-storage business continued to grow. This was a 6.1% increase after adjusting for the sale and manage-back of our Ashford store in March 2013. Our self-storage occupancy rose particularly strongly during the period increasing by 8.1% over last year on a like-for-like basis with pricing up 3.3% year-on-year.

With costs firmly under control this turnover growth translates into strong profit growth. Total store EBITDA in the self-storage business, a key performance indicator of profitability and cash flow, increased 6.3% to £2.86 million (31.1.2013: £2.69 million). Group operating profit for the year is up 9.6% to £1.47million (31.1.2013: £1.34 million). On a like-for-like basis this increase was 20.4%.

Self-storage revenue for the period was £5.83 million, up 3.8% year on year (31.1.2013: £5.62 million). This was an 8.1% increase after adjusting for the sale of our Ashford store.  

Performance of Self-Storage Centres

Total occupancy increased by 4.1% and unit pricing increased 3.3% year-on-year. Strict cost discipline meant we again managed to contain costs on a Group basis to only a 0.5% increase which raised the overall EBITDA margin across all stores from 48.3% to 49.6% year-on-year. The EBITDA margin of the freehold stores achieved was 62.3% (31.1.2013: 60.6%) and the leasehold stores 35.1% (31.1.2013: 33.2%). The occupancy of the stores was up to 63.8% (31.1.2013: 60.4%) of current lettable area.

Ancillary Sales

Sales of insurance, boxes, packaging materials and other items increased year-on-year by 14.2% accounting for 11.3% of self-storage revenues.  We continue to promote our insurance to new customers with the result that 93% (31.1.2013: 89%) of new customers took our insurance over the period.

Document storage business

In our document storage business revenue and profit have fallen slightly however we are pleased to report that the business' operating metrics are improving in response to the Company's more customer facing marketing stance. Net boxes stored increased at an annualised rate of 15.1% in the first half, and tapes stored up 21.8% annualised. Although revenue and profit will take time to respond to this volume growth we are pleased to see this noticeable improvement.

We have now consolidated Saracen's warehouse capacity closing one of the three storage sites which incurred a cost in the period but will benefit earnings in the future. During the period we acquired the 9.6% minority interest in Saracen for zero cost.

Property matters

Purchase of new site in Bristol

On 6 January 2014, Lok'nStore announced the acquisition of 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.ft. 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 add to Lok'nStore's high-quality portfolio of modern purpose built self-storage centres in highly prominent locations. When it opens it will take Lok'nStore's total operating centres to 26 following the recent opening of the new Maidenhead store and the opening of the Reading, Southampton and Aldershot stores in the coming year.

Agreed Sale of old Reading site and new Reading store construction

On 17 October 2013 Lok'nStore announced it had agreed the sale of its trading site 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 old store is vacated in Autumn 2014. The transaction is not yet recognised as a disposal in this period since the Group retains the economic interest in revenues and profits in the store while the store continues to trade up until legal completion and also continues to retain the economic interest in the business and customers thereafter. The Group may receive an additional payment dependent on the value of sales achieved on the development of residential properties on the site. It is not possible to calculate the likely value at this time due to the uncertainty of the number of units that will be built and the likely sales values at the time of completion of the site.

Lok'nStore also owns the adjacent site on which it is now building a new store to replace the current one. The new store will have 48,000 square feet of self-storage space, a 20% increase over the existing store. The highly prominent location is directly accessible by 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 successful 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.

The prominence and modern look of the new store with its distinctive orange livery will position Lok'nStore in a highly visible and easily accessible location adjacent to the A33 at the gateway to Reading and will add to our portfolio of large, modern, freehold purpose built self-storage centres across south-east England.

New Store Opening - Maidenhead

In December 2013 Lok'nStore opened a new state of the art self-storage centre in Maidenhead providing around 61,000 sq. ft. of self-storage space.

This is a long leasehold site (the lease term runs until April 2076) of 1.6 acres and is close to Maidenhead town centre and railway station and is very prominent to the retail park on 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, passing traffic and footfall of the storage centre which are key criteria for success. Maidenhead is an excellent location for Lok'nStore, an affluent town right in the middle of our geographical coverage with little local competition.

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

Management Contract - Aldershot

In June 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 early in 2015.

It is the second store management contract for the Group and 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 of this brand new purpose-built store, and will manage the building and operation of the store. The other investors, including the original land owner have invested the remaining £2 million. The property has the benefit of a planning permission for a self-storage facility and will be held in a separate limited liability partnership.

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.

Pipeline Sites

Lok'nStore now owns four development sites all with relevant planning permissions, two of which are for replacement stores at Reading and Southampton, and two are new locations in Bristol and Portsmouth North Harbour. All have current planning permissions. The Group has no immediate plans to progress development works at Portsmouth North Harbour.

Property Portfolio

These projects are part of our strategy of actively managing our operating portfolio and strengthening our distinctive brand, in order to optimise shareholder value.

We currently have 24 stores trading. Of these 21 stores are owned with twelve freehold or long leasehold and nine leasehold with three further sites at Woking, Crawley, and Ashford trading and operating under individual management contracts. With Aldershot opening towards the end of 2014 this will increase the number of stores we manage to 25 and will capitalise on our efficient operating systems and growing internet marketing presence. These agreements also demonstrate Lok'nStore's ability to attract investment partners and create innovative ownership to drive the growth of the operating business.

At the period end the property portfolio equates to a total value of properties held of £82.3 million (31.01: 2013: £80.0 million).

We prefer to acquire freeholds if possible, and where opportunities have arisen we will seek to acquire the freehold of our leasehold stores as we have done historically at Horsham, Reading, Poole and Swindon East. 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 store's development.

Property Assets and Net Asset Value

Lok'nStore's freehold and operating leasehold properties were independently valued by professional valuers Cushman & Wakefield (C&W) at £67.7 million as at 31 July 2013 and this valuation has been adopted at the period end. At 31 January 2014, adding our stores under development at Reading, Maidenhead, Portsmouth North Harbour, Southampton and Bristol at cost, our total property portfolio valuation is £82.3 million. (31.1.2013: £80.0 million). This translates into an adjusted net asset value of £2.47 per share (31.1.2013: £2.30 per share). The Board commissions independent valuations on its trading stores annually at its year-end reporting date.

Lok'nStore is committed to actively managing its portfolio and extracting further value from our prominently located development sites. The partnerships in Maidenhead and Aldershot demonstrate our tactical approach to funding and developing new stores. Management contracts such as Aldershot and Crawley and the 'sale and manage-back' at Ashford allow the Group to continue to expand the operating footprint of Lok'nStore while minimising capital outlay.

A deferred tax liability arises on the revaluation of the properties and a historic 'rolled over' gain arising from the disposal of the Kingston and Woking sites several years ago. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief. The site of the existing Reading store has now been sold with the benefit of its permission for residential development and the proceeds will be reinvested in our new store pipeline.

The valuations of our freehold property assets are included in the Consolidated Statement of Financial Position at their fair value, and which does not include any valuation in respect of our leasehold stores to the extent that they are classified as operating leases. The value of our operating leases at 31 January 2014 totals £13.2 million (31.1.2013: £11.8 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

1 Ashford store sold for £2.9 million

2 Two Leasehold stores were not valued as their remaining unexpired terms were insufficient to yield a value under the Cushman & Wakefield valuation methodology.

3 Bristol site acquired in December 2013

Adjusted Net Asset Value per Share

Adjusted net assets per share is the net assets of the Group adjusted for the valuation of leasehold stores and deferred tax divided by the number of shares at the period 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.

* 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 14 years and two months at the period end (31.01.2013 valuation: 14 years).

** 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. 

Statement of Financial Position

Net assets at the period end were £40.9 million (31.1.2013: £38.9 million). Freehold property values at 31 January 2014 were £54.5 million compared to £56.1 million at 31 January 2013. The total estimated interim dividend to be paid in the current financial period is £489,780 (31.1.2013: £399,290) based on the number of shares currently in issue as adjusted for shares held in the Employee Benefit Trust and for shares held on treasury. This interim dividend is paid on account of an annual dividend which is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

Earnings per share

Basic earnings per share were 2.87 pence (31.1.2013: 1.96 pence per share). Diluted earnings per share were 2.81 pence (31.1.2013: 1.95 pence per share).

Taxation

Almost all of 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 period of £206,597. (Refer note 6).

Cash Flow and Financing

At 31 January 2014 the Group had cash balances of £2.26 million (31.1.2013: £3.5 million).

There was £27.7 million of gross borrowings (31.1.2013: £29.7 million) representing gearing of62.2% (31.1.2013: 67.2%) on net debt of £25.4 million (31.1.2013: £26.2 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 50.4% (31.1.2013: 55.7%). After adjusting for the deferred tax liability carried at period end of £9.8million gearing drops to 42.1% (31.1.2013: 45.5%).

Cash inflow from operating activities before investing and financing activities was £1.6 million(31.1.2013: £1.5 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 period end amounted to £12.3million (31.1.2013: £10.3 million).

By excluding the interest costs of carrying the development sites from the total net interest charge of £554,532 the interest on the operating portfolio is £339,408 for the period. Funds from operations ('FFO') represented by EBITDA minus interest on the operating portfolio is therefore £1.84 million equating to 15.1 pence per share (annualised) up 8.7% on last year (2013: 13.9 pence per share annualised).

Management of Interest Rate Risk

Lok'nStore has £27.7 million of debt currently drawn against its £40 million revolving credit facility of which £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 stated as a liability (See Note 15b).

Operating Costs

Group operating costs (excluding cost of sales of retail products) amounted to £4.34 million for the period, up 0.5% (31.1.2013: £4.32 million).

* Includes expenses relating to Southern Engineering and Machinery Company Ltd a wholly owned subsidiary which owns the Southampton site.

Retirement of Director

Douglas Hampson, a non-executive director of Lok'nStore Group Plc, sold his entire holding of 4,033,909 ordinary shares in the Company after the period end on 21 February 2014, (held through his company Montecito Storage Investors LLC ("Montecito")).

The shares were acquired by existing and new investors. Mr Charles Peal a non-executive director also 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.

Corporate and Social Responsibilities

Lok'nStore conducts its business in a manner that reflects honesty, integrity and ethical conduct. We believe that the long-term success of the business is best served by respecting the interests of all our stakeholders. Management of social, environmental and ethical issues is of high importance to Lok'nStore. These issues are dealt with on a day-to-day basis by the Group's managers with principal accountability lying with the Board of Directors. We look for opportunities to address our responsibility to the environment, and we pay close attention to our energy use, carbon dioxide emissions, water use and waste production. At each year-end Lok'nStore commissions a full assessment of the Group's environmental impact.

Customers

We believe in clarity and transparency. Brochures and literature are written in plain English, explaining clearly our terms of business without hiding anything in the 'small print'. We are open and honest about our products and services and do not employ pressure selling techniques or attempt to take advantage of any vulnerable groups. If we make a mistake we acknowledge it, deal with the problem quickly, and learn from our error. We listen to our customers as we know that they can help us improve our service to them. In return 21% (31.1.2013: 22%) of our move-ins come from previous customers, existing customers taking more space, and customer referrals.

Outlook

Trading in the first half of our financial year has been strong with a further acceleration in recent months.

Our new flagship store in Maidenhead opened in January and early trading gives us confidence that the new stores in Reading, Aldershot, Southampton and Bristol opening over the coming eighteen months will add further impetus to sales and earnings. Lok'nStore's portfolio is changing rapidly with 5 new purpose built stores in prominent trading locations coming on stream raising the overall quality of the portfolio further.

The strong growth of the existing business, good asset management and Lok'nStore's conservative debt ratios means that this major expansion can be financed out of our existing bank facility, and with relatively low net capital expenditure will provide enhanced returns for our shareholders.

Our target is to continue to increase Adjusted EBITDA, FFO per share and dividends over the coming years. We believe there is significant further growth focusing on six key areas:

1. Fill up existing stores and optimise pricing

2. Developing new stores on a self-funded basis

3. Developing the other new sites we already own

4. Opportunistic new site acquisitions such as the recent Bristol purchase

5. Increasing the number of stores we manage for third parties

6. Building our document storage offering

Lok'nStore is a strong and efficient operating business with a record of consistent profit growth and cash generation. We are already capitalising on the rapidly improving economy and with our growth in high quality new stores we are well placed to deliver increasing shareholder value over the coming years.

Simon G Thomas

Chairman

25 April 2014

Consolidated Statement of Comprehensive Income

For the six months ended 31 January 2014

* 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 six months ended 31 January 2014

Consolidated Statement of Financial Position

As at 31 January 2014

Company Registration No. 4007169

Approved by the Board of Directors and authorised for issue on 25 April 2014 and signed on its behalf by:

Andrew Jacobs Ray Davies

Chief Executive Officer Finance Director

Consolidated Statement of Cash Flows

For the six months ended 31 January 2014

Accounting Policies

General Information

Lok'nStore 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 the 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.com.

Basis of preparation

The interim results for the six months ended 31 January 2014 have been prepared on the basis of the accounting policies expected to be used in the 2014 Lok'nStore Group Plc Annual Report and Accounts and in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the European Union ('EU') ('IFRS').

The same accounting policies, presentation and methods of computation are followed in these interim condensed set of financial statements as have been applied in the Group's latest annual audited financial statements.

The interim results, which were approved by the Directors on 25 April 2014, are unaudited. The interim results do not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006.

Comparative figures for the year ended 31 July 2013 have been extracted from the statutory accounts for the Group for that period, which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis of matter, did not contain a statement under section 498(2) or (3) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

Going concern

The Directors can report that, based on the Group's budgets and financial projections, they have satisfied themselves that the business is a going concern. The Board has a reasonable expectation that the Company and the Group have adequate resources and facilities to continue in operational existence for the foreseeable future based on Group cash balances and cash equivalents of £2.3 million (31.1.2013: £3.5 million), and undrawn committed bank facilities at 31 January 2013 of £12.3 million (31.1.2013: £10.3 million), and cash generated from operations in the period to 31 January 2014 of £1.6 million (31.1.2013: £1.5 million). The Group has a five year £40 million revolving credit facility with Lloyds TSB plc. The facility has been in place since 20 October 2011 and runs until 19 October 2016. The Group is not obliged to make any repayments prior to expiration. The financial statements are therefore prepared on a going concern basis.

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for goods and services provided in the ordinary course of the Group's activities, net of discount, VAT and after eliminating sales within the Group.

The Group recognises revenue when the amount of the revenue can be reliably measured and when goods are sold and title has passed. Revenue from services provided is recognised evenly over the period in which the services are provided.

a) Self-storage revenue

Self-storage services are provided on a time basis. The price at which customers store their goods is dependent on size of unit and store location. Customers are invoiced on a four-weekly cycle in advance and revenue is recognised based on time stored to date within the cycle. When customers vacate they are rebated the unexpired portion of their four weekly advance payment (subject to a seven day notice requirement).

b) Retail sales

The Group operates a 'pack shop' within each of its storage centres for selling storage related goods such as boxes, tape and bubble-wrap. Sales include sales to the public at large as well as self-storage customers. Sales of goods are recognised at point of sale when the product is sold to a customer.

c) Insurance

Customers may choose to insure their goods in storage. The weekly rate of insurance charged to customers is calculated based on the tariff per week for each £1,000 worth of goods stored by the customer. This charge is retained by Lok'nStore and covers the cost of the block policy and other costs. Customers are invoiced on a four-weekly basis for the insurance cover they use and revenue is recognised based on time stored to date within the cycle.

d) Van hire

The utilisation of vans and their hire to customers is solely to promote and encourage prospective customers to use our self-storage centres and to facilitate their moves as efficiently as possible. Vans are hired out typically for a day and only to Lok'nStore customers and are not hired out to the general public at large. Revenue is recognised at the point of hire when the deposit is taken.

e) Management fee income

Management fees earned for managing stores not owned by the Group are recognised over the period for which the services are provided.

f) Serviced archive and records management

Customers are invoiced typically monthly in advance for the archive storage of their boxes, tapes and files and revenue is recognised based on time stored to date within the monthly cycle. In respect of the provision of additional services, such as document box or tape collection and retrieval from archive, customers are invoiced typically monthly in arrears and revenue is recognised in line with the provision of these services.

EBITDA

Earnings before interest, tax, depreciation and amortisation (EBITDA), is defined as profits from operations before all depreciation and amortisation charges, losses or profits on disposal, share-based payments, acquisition and other non-recurring set-up costs, finance income, finance costs and taxation.

Store EBITDA

Store EBITDA is defined as EBITDA (see above) before central and head office costs.

Operating profit

Operating profit is defined as profit after all costs except acquisition and other non-recurring set-up costs, finance income, finance costs and taxation.

Critical accounting estimates and judgements

The preparation of consolidated financial statements under 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 9(b). The carrying value of freehold properties held at valuation at the reporting date was £54.5 million (31.1.2013: £56.1 million) as shown in the Analysis of Total Property Value table in the Chairman's Statement.

Cushman & Wakefield's ('C&W's') valuation report comments on valuation uncertainty resulting from the global banking crisis coupled with the economic downturn which has resulted in there being a low number of transactions in the market for self-storage property. C&W state that there is therefore greater uncertainty attached to their opinion of value than would be anticipated during more active market conditions. 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 on each site. During this period it has been engaged with the four sites to examine whether the potential of the existing permissions could be further maximised and in the case of Maidenhead preparatory work as we moved onto site to commence construction works. The movement in costs is as a result of this work.

The carrying value of development property assets at the reporting date was £14.6 million (31.1.2013: £12.1 million) of which £4.6 million (31.1.2013: £3.5 million) relating to the long lease at Maidenhead is classified as a property lease premium and is shown separately in the statement of financial position.

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 January 2014 intangible assets, excluding goodwill, amounted to £2.9 million. (31.1.2013: £3.1m). The valuation method used and key assumptions are described in Note 9(a).

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 of 20 years 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.

Notes to the Interim Report

For the six months ended 31 January 2014

1a Revenue

Analysis of the Group's revenue is shown below:

1b Segmental information

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. Historically, there has been one business segment as the Group's net assets, revenue and profit before tax were attributable to one principal activity, the provision of self-storage accommodation and related services.

Following the purchase of Saracen Datastore Limited on 30 June 2011, the Group also provides offsite records storage and document and tape archiving services. The acquisition broadens the offering to clients and is seen as an excellent entry point to a wide market segment complimenting Lok'nStore's existing self-storage activities.

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 six months ended 31 January 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 300 customers has a greater customer concentration with its ten largest corporate customers accounting for 32.9% of revenue its top 50 accounting for 64.2% and its top 100 accounting for 80.9% of revenue. The self-storage segment with over 6,700 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.