Lok N Store Regulatory News (LOK)

14 October 2013

LOK'NSTORE GROUP PLC

 ("Lok'nStore" or "the Group")

Preliminary results

for the year ended 31 July 2013

Lok'nStore Group Plc, a leading company in the UK self-storage market announces results for the year ended 31 July 2013.

Financial Highlights

Net Asset Value per share up 8.8% to £2.48 (2012: £2.28)

Revenue £12.97 million up 1.6% (2012: £12.77 million)

Group adjusted EBITDA1 £4.14million up 4.1% (2012: £3.97 million)

Operating profit and profit before interest £2.57 million up 32.4% (2012: £1.94 million)

Net debt reduced 12.4% to £22.5 million (2012: £25.7 million)

1.32 million shares acquired for Treasury at £1.23 per share (average price)

Annual dividend 6 pence per share up 20% (2012: 5 pence per share)

Operational Highlights

Self-storage:

Revenue £11.14 million up 3.4% (2012: £10.77 million)  

Year-end unit occupancy up 10.4%

Pricing broadly flat at -0.5%

Occupancy of self-storage units increased to 64.5% of current lettable area (2012: 58.3%)

Store adjusted EBITDA £5.38million up 7.6% (2012: £5.0 million)

Store adjusted EBITDA profit margins up 2.2 percentage points to 48.7% (2012: 46.5%)

Document storage (Saracen): 

Adjusted EBITDA profit £0.31 million (2012: £0.47 million)

Operating costs reduced 1%

Property Highlights

New managed store in Crawley commenced trading in November 2012

Sale and manage back of Ashford store

Construction well advanced at new Maidenhead store scheduled to open end of 2013

Lease extension and rent reduction on another leased store

Properties valued up 4.2%*

Key Metrics

Loan to value ratio of 28.5% 2 (2012: 32.3%)

Funds from operations (FFO) 3 £3.4 million equivalent to 14.1 pence per share up 8.5% (2012: £3.2 million: 13.0 pence per share)

1 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

2 Calculation based on net debt of £22.5 million (2012: £25.7 million) and total property value of £79.2 million (2012: £79.7 million) as set out below

3 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, "Lok'nStore is trading well with increased occupancy driving cash flow per share and growth in net asset value. The Group has delivered record margins, operating profits and cash flow and we expect this momentum to continue.

Revenue and occupancy growth from our existing stores, combined with the opening of the new Crawley, Maidenhead and Aldershot stores will take us to 25 trading stores and backed by a strong balance sheet will underpin the continued growth of the business.

The Board's confidence is demonstrated by the 20% increase in the dividend to 6 pence per share."

Chairman's Review

Strong Performance

We are pleased to report another set of strong results for Lok'nStore Group for the year ended 31 July 2013. Net asset value per share before deferred tax provision is up 8.8% to £2.48 and Funds From Operations (FFO) per share are up 8.5%. We have reduced net debt by 12.4% and this has helped us reduce our loan-to-value ratio (LTV) to 28.5%. With 89% of our net debt at a fixed rate of 3.525% we have a firm foundation to build our business.

Like for like self-storage unit occupancy is up 10.4%. Group EBITDA is up 4.1% on last year which increases to 6.1%, on a like for like basis. With tight control over capital expenditure and operating costs, the Group's margins, operating profits and cash flow have all increased to record levels.

During the year we sold our Ashford store on a sale-and-manage-back basis to recycle our capital. The new managed store in Crawley opened in November 2012 and the development of the new Maidenhead store is almost complete with its opening scheduled for later in 2013. With the new managed Aldershot store opening in 2014 we have secured good momentum for our sales and earnings from a low-geared and secure balance sheet.

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 we are recommending a full year dividend of 6 pence per share up from 5 pence for the full year last year, an increase of 20%.

Appointment of Director

On 19 December 2012 Lok'nStore announced the appointment of Douglas Hampson as a Non-Executive Director of the Company. Douglas joined the Board following his investment in the Company. He has spent over 30 years in the self-storage industry, having set up the first self-storage facility in Europe in 1980. Douglas has founded and sold a number of self-storage businesses and his extensive knowledge of the self-storage sector businesses has been a valuable addition to our Board.

During the year Ian Wright stood down from the Board following the sale of Laxey Partners' entire holding in the Group.

Properties and Net Asset Value

The year-end property valuation equates to a total value of properties held of £79.2 million (2012: £79.7 million) a 4.2% increase in value after taking account of the disposal of our Ashford store. (Note that these values are not fully reflected in the statement of financial position which value the leasehold stores using a different method).

Your Board continues to examine Lok'nStore's property portfolio for asset management opportunities as demonstrated by its recent agreement to extend the term on another of the Group's leasehold stores, the fourth such transaction over the last two years. Our property team remains alert to the opportunities that can appear in the current unsettled property market and an update of the current property opportunities is set out in the Property Review.

The new store in Crawley opened this year and the new store in Maidenhead will commence trading late in 2013. The new venture in Aldershot will open in 2014. These will increase the number of stores we manage to 25 and will capitalise on our efficient operating systems and growing internet marketing presence. These projects also demonstrate Lok'nStore's ability to attract investment partners and create innovative ownership structures to drive the growth of the operating business without stretching the balance sheet.

The UK self-storage market

There remains significant opportunity in the UK self-storage market where there are an estimated 830 self-storage facilities. This equates to approximately 30.1 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 7.5 square feet per person in the USA (2012 US Self-Storage Almanac).

The sector remains in good health. The Drivers Jonas Deloitte 2013 report for the Self-Storage Association says "the total annual turnover for the UK self-storage industry in 2012 was £380 million from approximately 400 different operators, and they employed in excess of 2,000 staff (full time equivalent) in their self-storage facilities. The self-storage sector has seen increased levels of corporate activity, with several transactions across Europe"

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. We continue to grow revenue against tightly controlled costs, and this together with the strong occupancy growth provides continued momentum for the business. With Group adjusted EBITDA up 4.1% and occupancy up over 10% on the previous year, the strength of the Group's business model has been securely established.

Our innovative approach to financing new stores will enable us to grow our operating footprint to 25 stores by next year with limited capital expenditure, and the sale of our Ashford store close to its valuation underlines the strength of the asset base.

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

1. Filling existing stores and improving pricing

2. Developing new stores on a self-funded basis

3. Opportunistic site acquisitions

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

5. Developing our document storage offering through organic growth

We have significant operating experience to execute these opportunities effectively and we can fund these from our existing cash flow and the headroom within our current bank facilities.

Lok'nStore's efficient operating business, strong cash flow, and secure asset base ensures it is well placed to grow and prosper over the coming years. We have a dedicated and dynamic executive management team which remains committed to delivering growth and working for the interest of all shareholders.

Increasing the annual dividend by 20% and maintaining a progressive dividend policy demonstrates the Board's continuing confidence.

Simon G Thomas

Chairman

11 October 2013

Chief Executive's Operating Review

Sales, Earnings and Occupancy Up

Revenue for the year was £12.97 million, up 1.6% year on year (2012: £12.77 million). This was a 2.8% 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 year increasing by 10% over last year with pricing broadly stable (down 0.5% 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 7.6% to £5.38 million (2012: £5.0 million). Group operating profit for the year is up 32.4% to £2.57 million (2012: £1.94 million).

Self-storage revenue for the year was £11.14 million up 3.4% (2012: £10.77 million). This was a 4.9% increase after adjusting for the sale of our Ashford store. During the year occupancy of the self-storage units increased 10.4% to 64.5% (2012: 58.3%) of current lettable area.

Performance of Self-Storage Centres

We have again managed to increase the overall adjusted EBITDA margin across all stores by 2.2 percentage points from 46.5% to 48.7%. The adjusted EBITDA margins of the freehold stores were 61.2% (2012: 59.1%) and the leasehold stores achieved margins of 30.8% (2012: 30.8%).

At the end of July 2013 36.6% of Lok'nStore's revenue was from business customers (2012: 38.1%) and 63.4% was from household customers, (2012: 61.9%). By number of customers 20.8% of our customers were business customers (2012: 22.4%) and 79.2% household customers (2012: 77.6%).

 * In respect of the Farnborough store revenue includes a contribution receivable from Group Head Office in respect of the space and facilities the store provides for the Head Office function. This income to the store and the corresponding charge to Head Office is netted down in the Group revenue figures. Revenue from sites under development is excluded.

** Four stores are managed by Lok'nStore under a Management Services Agreement for third party owners, three are trading and one store is under development.

Ancillary Sales

Ancillary sales which consist of boxes and packaging materials, insurance and other sales increased 5.2% over the year accounting for 10.7% of self-storage revenues (2012: 10.4%).

We continue to promote our insurance to new customers with the result that 90% of our new customers purchased our insurance over the year and this has resulted in a 5.6% increase in the percentage of our customers who are insured through Lok'nStore to 75% (2012: 71%).

Marketing

During the year our marketing focused on the internet and this produces an increasing proportion of our enquiries; printed directories account for a decreasing proportion. For the year internet enquiries were up 41% on last year and total enquiries were up 34%. 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% (2012: 39%) of our business still comes from passing traffic and signage, so the visibility of our stores is also very important to our marketing efforts. With their prominent positions, distinctive design and bright orange elevations, our stores raise the profile of the whole Lok'nStore brand.

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

As discussed above the internet has rapidly taken over as the main media channel for our advertising and Lok'nStore has adapted to accommodate this change. Our new website at www.loknstore.co.uk was launched in February 2012 and has been extremely successful.

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 development. New features this year include online chat facility and 'click and collect' box shopping. We believe the internet particularly provides a strong competitive advantage for the major operators with many stores and large marketing budgets compared with those of the smaller operators.

Document storage business

Lok'nStore has completed the integration of the back office systems as well as the marketing and human resource functions during the year. There were further property cost savings achieved in August 2013 as the Saracen business consolidated its warehouse capacity from 3 to 2 stores. Following this consolidation we have the capacity to double the number of boxes stored. As part of this strategy additions of £0.4 million were made in the current year to fixtures, fittings and equipment.

In line with our overall Company values we have adopted a more customer friendly strategy by simplifying our billing and pre-agreeing annual price increases to give our customers more certainty. This investment has resulted in excellent customer feedback and puts us in a good position to win new business, but has resulted in a 7.7% dip in sales in the year. We believe this focus will create long term value for customers and shareholders as our customer base grows. Notwithstanding this in the year under review we have reduced the operating cost of Saracen by 1% to protect our margins.

Momentum to continue

Lok'nStore is trading well with increased occupancy driving cash flow per share and growth in net asset value. The Group has delivered record margins, operating profits and cash flow and we expect this momentum to continue.

Andrew Jacobs

Chief Executive Officer

11 October 2013

Property Review

Strong Cash Flows and Asset Base Underpin Opportunities

Lok'nStore's secure asset base, strong cash flow and tactical approach to its property portfolio provides the Group with opportunities to improve the terms of its property usage in all stages of the economic cycle. Lok'nStore has both freehold and leasehold properties, and manages stores for third parties.

In the year under review we opened one managed store in Crawley and sold our existing Ashford store on a sale and manage back deal. We now have 4 stores under management.

Our property team will continue to pursue further value creating asset management opportunities to secure our trading operations, to improve cash flow and to reduce or limit our property costs.

Sale and manage-back of Ashford store

On 28 March 2013 Lok'nStore completed the sale of its store in Ashford, Kent for £2.9 million in cash, achieving a sale price equivalent to 99.3% of the carrying value at July 2012.

Lok'nStore is continuing to manage the store as a branded Lok'nStore operation on behalf of the investor, and receives a management fee, as well as an additional performance fee should the store beat certain targets or is ultimately sold. The structure of the deal allows us to recycle our capital and grow our operating footprint without stretching our balance sheet or diluting our equity.

The sale and manage-back contract of the Ashford store increases the number of Lok'nStore managed stores to four on behalf of three different clients.

Management Contracts

Aldershot: In June 2012 Lok'nStore signed an agreement to develop and manage a new self-storage centre in Aldershot, Hampshire. Lok'nStore will advance approximately £2.5 million of development funds of the estimated £4.5 million total cost of development of this 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 already has the benefit of a planning permission for a self-storage facility and we are currently working to improve and enhance the existing planning permission prior to commencement of construction works. An improved planning permission which will secure enhancements to the overall proposition is in progress and has been agreed in principle subject to finalisation of the S106 Agreement. Lok'nStore will generate a return by receiving a return on its capital and by charging a management fee for the construction, operation and branding of the store

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 2014.

Crawley: In July 2012, the Group signed an agreement to manage a new self-storage centre in Crawley, Sussex on behalf of an investor. The store opened in November 2012 and is located in a prominent location facing on to a busy roundabout on Gatwick Road in the centre of the Manor Royal business area. Lok'nStore is generating a return by charging a management fee with performance incentives. Completion of the transaction took place on 10 August 2012. This new larger site follows the same investor's already successful store in Woking, Surrey which has been managed by Lok'nStore since 2007.

Development Sites

Lok'nStore 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 Maidenhead and Portsmouth North Harbour. All of these planning permissions are current. The Group has no immediate plans to progress development works at Portsmouth North Harbour and Southampton.

Maidenhead: This is a long leasehold site (the lease term runs until April 2076) of 1.6 acres for which we originally secured planning permission for a store of up to 83,000 sq. ft. of self-storage. Following discussions to improve the value of the property further we signed an agreement to share the site with Lidl, the discount supermarket and granted a lease to them for a consideration of £1.55 million.

We are now building this new self-storage centre which will have around 60,000 sq. ft. of self-storage space with Lidl sharing the ground floor space with Lok'nStore's operation. Lok'nStore will also occupy the entirety of the three floors above. The store will open in December 2013.

The site 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 will be of similar style and appearance to other recently opened Lok'nStore sites, with Lok'nStore's strong branding adding to the visual attractiveness of the site. This collaboration will increase the visual prominence, brand recognition, passing traffic and footfall of the storage centre which are key criteria for success. 

The innovative financing of the scheme agreed with Lidl, will require only a modest capital input from Lok'nStore and so allows us to continue to expand the Group's operating footprint without stretching the balance sheet. We believe Maidenhead is an excellent location for us, an affluent town right in the middle of our geographic coverage with little local competition. The town is also set to benefit from its position as the western terminal of Crossrail.

Reading: On 8 January 2008 Lok'nStore obtained planning permission for high-density residential development on the freehold site of its existing Reading store. The permission is for 112 flats on the 0.66 hectare site. On 4 October 2011 this planning permission was renewed providing a further 3 years to execute on this project.

The Group also has planning permission for a new 53,500 sq. ft. self-storage centre on its site opposite the existing store, an increase in space of 29%. Building has now commenced on this project with the new store scheduled to open in the middle of 2014.

When market circumstances are appropriate the site of the existing store will be sold with the benefit of its permission for residential development and the proceeds will largely fund the development of the new store. The existing business will be transferred to the new store when it is complete. 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.

Portfolio

We currently own and operate 20 stores with capacity of around 1.04 million sq. ft. of storage space when fully fitted. Further sites at Woking and Crawley are run under management contacts and with the managed store in Aldershot and the sale of the Ashford store under a sale and management arrangement this takes the sites operated under management contacts up to four. With the owned store in Maidenhead opening in the coming financial year, the stores under Lok'nStore's management will increase to 25.

At the year end the average length of the seven leases which were valued at July 2013 increased by two months to 14 years and 8 months (2012: 14 years and 6 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 32% of the store EBITDA in the year (2012: 30%)

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.

Property Assets and Net Asset Value

Lok'nStore's freehold and operating leasehold properties have been independently valued by Cushman & Wakefield (C&W) at £67.7 million (NBV £30.6 million) as of 31 July 2013 (2012: £67.9 million: NBV £32.8 million). As we sold the Ashford store during the year this equates to an underlying increase of 4.2% in the value of the property assets. Property valuation is referred to further in the Financial Review 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 £79.2 million (historic cost value £42.6 million) (2012: £79.7 million; historic cost value £44.65 million). This translates into an adjusted net asset value of £2.48 per share up 8.8% on last year (2012: £2.28 per share).

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

Andrew Jacobs

Chief Executive Officer

11 October 2013

Financial Review

Trading

Total revenue for the year grew to £12.97 million (2012: £12.77 million), an increase of 1.6% or 2.8% excluding the Ashford store which was sold in March 2013. Pre-tax profit for the year was £1.43 million (2012: £0.93 million) up 54%. Document storage revenue was £1.84 million (2012: £2.0 million). Document storage adjusted EBITDA before inter-company management charges, was lower at £0.31 million (2012: £0.47 million).

There is no current corporation tax liability to pay due to the availability of tax losses. Almost all of the Group's tax losses have now been utilised with tax losses available to carry forward for offset against future profits of £0.2million. The Group will therefore pay tax on the majority of its earnings next year.

Basic earnings per share were 5.75 pence (2012: 3.01 pence per share). Diluted earnings per share were 5.72 pence (2012: 2.99 pence per share).

Purchase of shares for Treasury

During the year the Group purchased 1.32 million shares into Treasury at an average price of £1.23 per share. Clearly with the Group's opening Net Asset Value per share (NAV) at £2.28 any such purchases are significantly NAV enhancing on a per share basis and this has contributed to the increase in NAV per share to £2.48. We are proposing to renew our on-going authority to buy back shares at this year's AGM. Full details are provided in note 25 - Own Shares.

Management of Interest Rate Risk

The Board regularly reviews the Group's interest rate hedging position and monitors prevailing LIBOR and swap rates.

Last year we fixed a significant proportion of our floating rate debt by entering into a £10 million interest rate swap with Lloyds TSB Bank plc effective from 31 May 2012 at fixed 1 month sterling LIBOR rate of 1.2%. The swap fixes the interest rate on £10 million at an effective rate of 3.55% based on current 235 basis points (bps) margin up to the expiration of the current banking facility in October 2016. On 30 May 2012 the Group also entered into a £10 million interest rate swap with Lloyds TSB Bank plc also effective from 31 May 2012 at fixed 1 month sterling LIBOR rate of 1.15%. Similarly this fixes a second tranche of £10 million at an effective rate of 3.5% up to the expiration of the current banking facility in October 2016. Given the very low interest rate and the relatively small premium over our variable rate available on these swaps, the Board considered that it was a good time to secure the current low interest rates. An effective fixed interest rate of 3.525% on this portion of our debt protects our cash flow and demonstrates the Group's ability to secure market leading rates as a result of our financial strength and robust cash flow.

Lok'nStore has £26.8 million currently drawn against its £40 million revolving credit facility of which £20 million is now at a fixed interest rate. This leaves a balance of £6.8 million floating at a current all-in average rate of around 2.85% and results in an overall weighted average rate of 3.36%. The £20 million fixed rate is treated as an effective cash flow hedge and its fair value stated as a liability. See note 16b.

Operating Costs

For the previous five years we have reduced our group operating costs and this year through disciplined management we have managed to limit the increase this year to 0.4%. For the self-storage business operating costs amounted to £8.57 million for the period, a small increase from last year. This year we reduced operating costs at Saracen by 1% compared to last year. This rigorous approach to costs ensures that the majority of the turnover growth that we have achieved contributes to Group profits.

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

Cash Flow, Interest and Financing

At 31 July 2013 the Group had cash balances of £4.2 million (2012: £4.0 million). Net debt, defined as gross debt before deferred financing costs less total cash and cash equivalents, has been reduced from £25.7 million to £22.5 million.

At 31 July 2013 we had £26.8 million of gross borrowings (2012: £29.7 million) representing gearing of 55.8% on net debt of £22.5 million (2012: 66.1%). After adjusting for the uplift in value of leaseholds which are stated at depreciated historic cost in the statement of financial position, gearing is 45.2% (2012: 54.9%). After adjusting for the deferred tax liability carried at year-end of £9.7 million gearing drops to 37.8% (2012: 45.2%).

Cash inflow from operating activities before investing and financing activities was £4.3 million(2012: £3.1 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 £13.2 million (2012: £10.3 million).

We are required to capitalise interest against our development pipeline in accordance with changes to International Financial Reporting Standards.The Group's date of adoption was 1 August 2009, (the first annual year commencing after the IAS 23 effective date of 1 January 2009). All of the Group's current qualifying assets predate the date of adoption and accordingly under the transitional adoption arrangements no borrowing costs have been capitalised against them in the year. A component of the interest cost incurred by the Group arises from the £11.5 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 £386,538 higher for the year (2012: £275,859) on the assumption that the £11.5 million is fully funded by borrowings.

By excluding the £386,538 of interest costs of carrying the development sites from the total net interest charge of £1,142,203 the interest on the operating portfolio would be £755,665 for the year. Funds from operations (FFO) represented by £4,136,512 EBITDA minus interest on the operating portfolio is therefore £3,380,847 equating to 14.1 pence per share, up 8.5% on last year (2012: 13 pence per share).

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. Consequently, capital expenditure ("capex") during the year totalled only £0.6 million. This included some limited capex at existing stores, planning and other professional costs incurred in maximising the potential of the existing planning permissions. We also invested £0.4 million in further racking fit-out and fire vault capacity at the Saracen Olney warehouse.  Additionally, the construction of our new Maidenhead store commenced and building costs at the balance sheet date amounted to £1.17 million. The Company has no further capital commitments beyond the completion of its Maidenhead store, its £2.5 million development commitment at Aldershot and some minor works to existing properties. Refer note 30a: Capital Commitments.

Statement of Financial Position

Net assets at the year-end were £40.4 million (2012: £39.0 million). Freehold property values at 31 July 2013 were £54.5 million compared to £56.1 million at 31 July 2012 following the sale of our Ashford store.

Market Valuation of Freehold and Operating Leasehold Land and Buildings

Our eleven freehold properties are held in the statement of financial position at fair value, and have been valued externally 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 leasehold stores are held as 'operating leases' and the valuations of these are not taken onto the statement of financial position. However seven of these have also been externally valued and these external valuations have been used to calculate the adjusted net asset value position of the Group.

On 31 July 2013 professional valuations were prepared by valuers C&W in respect of eleven freehold 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. In due course the site of the existing Reading store is likely to 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 £13.2 million (2012: £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

* Two Leasehold stores were not valued (2012: two) as their remaining unexpired terms were insufficient to yield a value under the Cushman & Wakefield valuation methodology.

** Ashford store sold during the year for £2.9 million.

*** Includes the current Reading store at its trading store valuation. The Reading site with planning permission for a new store is stated at cost and is included in sites in development at cost.

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 2013 the adjusted net asset value per share increased to £2.48 from £2.28 last year, up 8.8%. This increase is a result of higher property values, cash generated from operations and the share buy-back reducing 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 8 months at the date of the 2013 valuation (2012 valuation: 14 years and 6 months).

** 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 28.5% 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.

Ray Davies

Finance Director

11 October 2013

Consolidated Statement of Comprehensive Income

For the year ended 31 July 2013

* 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 2013

Company Statement of Changes in Equity

For the year ended 31 July 2013

Statements of Financial Position

31 July 2013

Company Registration No. 04007169

Approved by the Board of Directors and authorised for issue on 11 October 2013 and signed on its behalf by:

Consolidated Statement of Cash Flows

For the year ended 31 July 2013

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 2012.

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

Standards in issue but not yet effective

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

*Not yet endorsed by the EU.

** Effective in the EU for financial years starting on or after 1 Jan 2014. 

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.

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 £50.8 million (2012: £51.9 million) as shown 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 £11.5 million (2012: £11.9 million) of which £2.8 million (2012: £3.18 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 July 2013 intangible assets, excluding goodwill, amounted to £2.98 million (2012: £3.1m).

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.

Notes to the Financial Statements

For the year ended 31 July 2013

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.

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 2013 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 315 customers has a greater customer concentration with its ten largest corporate customers accounting for 32.5% (2012: 39%) of revenue its top 50 accounting for 62.4% (2012: 68.8%) and its top 100 accounting for 77.6% (2012: 84.0%) of revenue. The self-storage segment with over 6,750 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.

§ Capital expenditure includes fixed asset additions. Refer 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.

2b Cost of sales of retail products

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.

2c Other costs

3 Finance income

All interest receivable arises on cash and cash equivalents (see note 15).

4 Finance costs

5 Profit before taxation

Amounts payable to Baker Tilly UK Audit LLP and their associates for audit and non-audit services:

6 Employees

Share based remuneration is separately disclosed in the statement of comprehensive income. Wages and salaries of £110,262 (2012: £106,213) have been capitalised as additions to property, plant and equipment as they are directly attributable to the acquisition of these assets. All other employee costs are included in staff costs in the statement of comprehensive income.

In relation to pension contributions, there was £3,839 (2012: £2,948) outstanding at the year-end.

Directors' remuneration