Lok N Store Regulatory News (LOK)

LOK'NSTORE GROUP PLC

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

Preliminary results

for the year ended 31 July 2016

Lok'nStore Group Plc, a leading company in the UK self-storage market announces results for the year ended 31 July 2016.

Highlights of Lok'nStore Group plc results 2016

"Impressive performance from landmark stores - with more to come"

Robust growth in asset value and record financial results ahead of expectations

· Adjusted Net Asset Value1 per share up 27.6% to £3.86 (2015: £3.02)

· Group Revenue £16.06 million up 4.1 % (2015: £15.42 million) - like for like (LFL) 2 up 7.6%

· Group Adjusted EBITDA3 £6.30million up 10.8% (2015: £5.68 million) - LFL up 14.0%

Strong cash flow supports 12.5% dividend increase - progressive dividend policy

· Annual dividend 9 pence per share up 12.5% (2015: 8 pence per share)

· Cash available for Distribution (CAD) 4 18.1 pence per share up 17.7% (2015:15.4 pence)

Strong balance sheet, efficient use of capital, low debt

· Net debt down to £23.5 million (2015: £25.3 million)

· Loan to value ratio down to 20.8%5 (2015: 25.8%)

Self-storage business performing strongly

· Self-storage revenue £13.44 million up 1.2% (2015: £13.28 million) - LFL up 5.1%

· Adjusted Store EBITDA £7.49 6 million up 4.2 % (2015: £7.19 million) - LFL up 6.6%

· Unit Pricing up 2.2 % LFL

· Unit occupancy up 2.0% LFL

Document storage profit more than doubles

· Revenue £2.17 million up 11.1% (2015: £1.96 million)

· Adjusted EBITDA £0.59million up 125% (2015: £0.26 million)

Growth from new stores and more new stores to come

· 3 Stores opened in Chichester, Bristol and Southampton

· 4 Sites acquired in Wellingborough, Gillingham, Hemel Hempstead and Broadstairs

· New sites will add 14% to trading space

For all of the definitions of the terms used in the highlights above refer to the notes section below

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

"2016 was an exciting year for Lok'nStore executing on all of our objectives across our strategy. Our adjusted net asset value per share has increased by 28% this year as a result of strong trading in existing stores, in combination with new store openings and the market's increasing appetite for well-located landmark self-storage centres.

"Our new store development programme continues to change the balance of our store portfolio with new and purpose built stores accounting for around 63% of the portfolio. During the year we opened three new stores which are all trading well and acquired sites for four further new landmark stores which will increase space a further 14%.

"Lok'nStore's low level of debt, our new banking facility on significantly improved terms and the strong growth of the business means that this rapid development programme can be financed from cash flow and existing bank facilities, while increasing the dividend by 12.5%."

Notes - What we mean when we say … (and why we use these key performance indicators (KPIs))

1. NAV - Net Asset Value per share - 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 shares are excluded from the number of shares.

2. LFL- Like for like - This measure is used to give transparency on improvements in the operating business unrelated to the opening of new stores or closure of old stores therefore giving visibility of the true trading picture. On 30 September 2015, Lok'nStore sold its store in Swindon on a sale and manage-back basis. Like-for-like (LFL) growth figures for the period strip out the effect of this sale and the opening of the new Bristol store during the period.

3. Group EBITDA - Earnings before interest, tax, depreciation and amortisiation - The measure is designed to give clarity on the operating cash flow of the business stripping away non-cash charges, finance charges and tax. Adjusted EBITDA is defined as EBITDA before losses or profits on disposal, share-based payments, acquisition costs, and exceptional items.

4. CAD - Cash available for Distribution - is calculated as Adjusted EBITDA minus total net finance cost, less capitalised maintenance expenses, New Works Team costs and current tax. This measure is designed to give clarity to the capacity of the business to generate net operating cash that can be used to pay dividends to shareholders.

5. LTV - Loan to value ratio - measures the debt of the business expressed as a percentage of total property assets giving a perspective on the gearing of the business. The calculation is based on net debt of £23.5 million (2015: £25.3 million) as a percentage of the total properties independently valued by JLL and including development land assets totalling £113.2 million (2015: £97.8 million) as set out in the Business and Financial Review section of the Strategic Report.

6. Store adjusted EBITDA is Adjusted EBITDA (see 3 above) before the deduction of central and head office costs.

7. Exceptional items - arose during the year from a further £2 million received from the disposal of the old Reading store site and £0.12 million of costs relating to the disposal of the old Swindon site(s).

8. Gearing - refers to the level of a company's debt related to its equity capital, usually expressed in percentage form. It is a measure of a company's financial leverage and shows the extent to which its operations are funded by lenders versus shareholders. Gearing can be measured by a number of ratios and we use the debt-to-equity ratio in this document.

9. Capex - capital expenditure

Chairman's Review

Strong growth and robust capital structure

Lok'nStore Group has had an exciting year successfully implementing all of our strategy objectives. Revenue, profits and particularly asset values have moved ahead rapidly. A substantial increase in the proportion of our store space which is new or purpose built will add further momentum to the growth of sales and profits with plenty of new capacity contributing to growth over the coming years.

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 from 25.8% to 20.8%. While we invested £7 million in stores this year this was more than covered by £8.5 million (gross) of capital receipts.

To reflect this healthy performance we are proposing to increase the annual dividend pay-out by 12.5%. Cash available for distribution (CAD) per share which guides the dividend pay-out has moved ahead 17.7% to 18.1 pence per share.

Adjusted Net Asset Value (NAV) per share has also moved ahead sharply as our new valuers Jones Lang LaSalle (JLL) have reflected the strength of market demand for prime self-storage assets in their valuations, in addition to the uplift achieved from our new store openings and improved trading at existing stores. The year-end property valuation valued our trading stores at £112.7 million. With other land and property assets this equates to a total value of land and properties held of £116.2 million (2015: £97.8 million), an 18.8% increase in value.

Trading positive

Group revenue for the year was £16.06 million, up 4.1% year on year (2015: £15.42 million). Like for Like Revenue stripping out the effect of the sale of the Swindon operations and the opening of the new Bristol store was up 7.6%.

This strong revenue growth led to a 10.8% increase in Group Adjusted EBITDA profit. Tight control over operating costs which are broadly unchanged has also contributed in pushing the Group's margins and profits to record levels.

New £40 million Banking Facility reflects financial strength of business

In January 2016 the Group agreed a new banking facility with Royal Bank of Scotland plc on significantly improved terms. The new £40 million five year revolving credit facility replaced the existing facility which was due to expire in October 2016, and will provide funding for site acquisitions and working capital. The interest margin, non-utilisation fee and arrangement fee have all been significantly reduced leading to a large saving over the life of the facility.

Appointment of New Director demonstrates operational focus

The Group is pleased to announce the appointment of Neil Newman as an Executive Director. Neil (39) brings significant managerial and operational experience to the Board having worked in the business since 2006. He is currently Group Sales Director and retains this title on the Board. Neil's contribution to Lok'nStore over the recent years has been significant and we look forward to his continuing contribution to our future growth at Board level.

Dividend

It is intended that the Company's future dividend payments will reflect the growth in the underlying cash generated by the business as reflected in the cash available for distribution (CAD) which is up 17.7% in the period. The interim dividend will represent approximately one-third of the total for the year and final dividend two-thirds.

This year we are recommending a full year dividend of 9 pence per share. This is up 12.5% from 8 pence for the full year last year. The Group will therefore pay a final dividend of 6.33 pence per share on 21 December 2016 following the payment of an interim dividend of 2.67 pence per share in June 2016.

Performance and Outlook

The table below sets our achievements for the last year against our objectives:

Following this year of solid successes we have created a strong platform for significant further growth for Lok'nStore.

Our main objective is to steadily increase the cash available for distribution (CAD) enabling a predictable growth of the dividend from a strong asset base and conservatively geared balance sheet.

In order to achieve this our focus will be on four key areas:

1. Fill stores and improve pricing to continue increasing cash flow from the existing stores

2. Acquire more sites to build new landmark stores

3. Increase the number of stores we manage for third parties

4. Grow our document storage business

Finally, I should like to thank all of our employees for the contribution they have made to the Group's success. Lok'nStore is a robust business with a record of consistent profit growth and cash generation. With our experienced and dedicated staff we have built a firm base for the coming years and we are looking to the future with confidence.

Simon G Thomas

Chairman

14 October 2016

The Strategic Report

The Strategic Report covers the following areas of Lok'nStore's business:-

Ø Strategy

Ø The UK Self-Storage Market

Ø Lok'nStore's Business Model

Ø Operating and Marketing Review

Ø Property Review

Ø Financial Review

Ø Principal Risks and Uncertainties in operating our Business

Strategy

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 1995 and have grown consistently over the last 20 years, currently operating 26 self-storage centres and two serviced document stores in Southern England.

We have been listed on the AlM Market since June 2000 and the board accounts for 35% of the Total Voting Rights (TVR) in the ordinary shares of the Company.

We offer self-storage and serviced document storage from our own stores, and management services to third party self-storage 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.

We develop and operate self-storage centres in prominent locations broadly in South-East England. Our eye-catching 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.

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

Lok'nStore aims to build more landmark self-storage centres primarily across South-East England, to steadily increase the cash available for distribution (CAD) enabling a predictable growth of the dividend from a strong asset base and conservatively geared balance sheet. We believe there is the opportunity for significant further growth.

The UK self-storage market

There remains significant opportunity in the UK self-storage market where there are an estimated 882 self-storage facilities providing approximately 37.6 million square feet of storage space. With a population estimated at 64 million people in the UK this equates to only 0.6 square feet per person, compared to 7.7 square feet per person in the USA (Self-Storage Association 2016 UK Annual Survey).

The sector remains in good health. The Cushman & Wakefield 2016 Report for the Self-Storage Association says, "The industry enjoyed a year of healthy growth in 2015 adding around 1.9 million sq. ft. of space on top of putting on around 1.3 million sq. ft. of space in 2014....". The Report estimates that…." total annual turnover for the UK self-storage industry in 2014 was around £440 million (2014: 402 million) from approximately 490 different operators." When compared to Europe the UK has around 46% of the total space in Europe.

As awareness of self-storage continues to grow, more businesses and individuals will use self-storage in a market that is supply constrained.

Lok'nStore's Business Model

Strategic Report (continued) 

Operating and Marketing Review

Self-storage business performing strongly

· Self-storage revenue £13.44 million up 1.2% (2015: £13.28 million) - LFL up 5.1%

· Adjusted Store EBITDA £7.49 million up 4.2 % (2015: £7.19 million) - LFL up 6.6%

· Management fees from Managed Stores up 150.1% at £439,254 (2015: £175,630)

With costs firmly under control revenue growth translates into healthy profit growth. We again managed to increase the overall adjusted EBITDA margin across all stores by 1.6 percentage points from 53.7% to 55.3%. The adjusted Store EBITDA margins of the freehold stores were 64.6% (2015: 63.4%) and the leasehold stores 41.7% (2015: 40.7%).

Total adjusted store EBITDA in the self-storage business, a key performance indicator of profitability and cash flow of the business, increased 4.2% to £7.49 million (2015: £7.19 million). Like for like growth in store EBITDA was 6.6%.

At the end of July 2016, 34% of Lok'nStore's self-storage revenue was from business customers (2015: 33.5%) and 66% was from household customers, (2015: 66.5%). By number of customers 18.5% of our customers were business customers (2015: 18.9%) and 81.5% household customers (2015: 81.1%).

1 The average unexpired term of the Group's operating leaseholds is approximately 11 years and 8 months as at 31 July 2016

(12 years and 8 months: 31 July 2015).

Ancillary Sales

Ancillary sales which consist of boxes and packaging materials, insurance and other sales increased 5.3 % over the year accounting for 11.2 % of self-storage revenues (2015: 10.8%).

We continue to promote our insurance to new customers with the result that 91% (2015: 92%) 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 80% (2015: 78%).

Document storage profit more than doubles

· Revenue £2.17 million up 11.1% (2015: £1.96 million)

· Adjusted EBITDA £0.59 million up 124.3% (2015: £0.26 million)

· Year-end boxes stored up 8.7%

· Year-end tapes stored up 13.4%

Revenue and adjusted EBITDA have increased in our document storage business as operating metrics improve in response to the Company's more customer facing marketing stance. This approach has resulted in excellent customer feedback and puts us in a good position to win new business, with boxes stored increasing 8.7% and tapes stored up 13.4%.

Strategic Report (continued) 

Operating and Marketing Review

Last year we consolidated our serviced document warehouse capacity, closing one of the three storage sites. This year we have undertaken a further fit-out of new warehouse racking in our site in Olney and we now have the capacity to significantly increase the number of boxes stored within our existing premises. As part of this strategy, additions of £0.34 million were made in the current year to fixtures, fittings and equipment (2015: £0.46 million).

Managed Store Service

Over recent years we have been developing our management services to third party storage owners. In the year we sold one store to a third party owner on a sale-and-manage back basis, we opened a new managed store and we acquired two new sites for management contract clients taking our total managed stores to eight.

For managed stores we receive a standard monthly fee, a performance fee based on certain objectives and a fee on successful exit. In some cases we charge acquisition, planning and branding fees. This allows us to earn revenue from our expertise and knowledge of the self-storage industry without having to commit our capital, to amortise various fixed central costs over a wider operating base, and to drive more visits to our website moving it up the rankings and benefitting all the stores we both own and manage.

In 2016 we earned £439,254 (2015: £175,630) from our managed stores in management fees, a substantial contribution to our profit.

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.

Marketing

During the year our marketing efforts have been focused on the internet and the presentation of our buildings to attract passing traffic. Total enquiries were up 6.6% across all stores. 

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 landmark stores to promote and enhance their visual prominence.

The internet continues to be the main media channel for our advertising. Our website at www.loknstore.co.uk is one of the most established self-storage websites in the UK. The website was significantly upgraded during the year to further improve customer experience across desktop, tablet and smartphone devices. This is a very dynamic area and we are committed to its continued development. 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 self-storage operators.

Property Review

Growth from new stores and more new stores to come

· New Bristol, Southampton and Chichester stores opened - early trading strong

· 4 new sites acquired adding 14% more space

· New and purpose built stores lettable space 63.5% of portfolio

· Continually reviewing new store opportunities

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 26 freehold, leasehold and managed stores trading. Of these, 20 stores are owned with 12 freehold or long leasehold, 8 leasehold and 6 further sites operate under management contracts.

Acquisition of two landmark sites for new stores

Located in Wellingborough and Gillingham, the two sites are in prominent retail locations with large catchment areas and little established competition. The total capital investment of approximately £10 million will be financed from cash flow and the new banking facility signed in January 2016. The stores are scheduled to be open at the end of 2017. When developed these stores will add around 110,000 sq. ft. to the trading portfolio increasing the company's capacity of owned stores by 10%. They will take the proportion of Lok'nStore's space which is new or purpose built to 63.5%.

Strategic Report (continued) 

Property Review

Two new stores to be developed under management contracts

Two new management contracts were signed in July 2016 to develop and operate two new stores. The new sites are in prominent retail locations in Hemel Hempstead and Broadstairs. Opening for both stores is scheduled for 2017. When developed, these Managed Stores will add around 70,000 sq. ft. to the trading portfolio.

Efficient use of capital

· Additional £2 million received for sale of old Reading store

· £3 million received for sale of Portsmouth development land

· Sale and manage-back of Swindon store for £3.5 million

· Total disposal proceeds of £8.5 million (gross)

These capital receipts, combined with the managed store model enable Lok'nStore to continue to rapidly grow the operating footprint of the business while firmly capping borrowing and leverage.

Store portfolio

These projects are part of our strategy of actively managing our store operating portfolio to ensure we are maximising both trading potential and asset 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 property tenure.

With Wellingborough, Gillingham, Hemel Hempstead and Broadstairs set to open in 2017 this will increase the number of stores we operate to 30 and will capitalise on our efficient operating systems and growing internet marketing presence.

At the year end the average length of the 7 leases which were valued at July 2015 decreased by 12 months to 11 years and 8 months (2015: 12 years and 8 months). 7 out of 8 of our leasehold stores are inside the Landlord and Tenant Act providing us with a strong security of tenure. The leaseholds produced 30.5% of the total store EBITDA in the year (2015: 32.1%).

Store property assets and Net Asset Value

· Total assets now circa £134 million (2015: £111 million)

· Adjusted net asset value of £3.86 per share up 27.6% on last year

Lok'nStore's freehold and operating leasehold stores have been independently valued by Jones Lang LaSalle (JLL) (2015 : Cushman & Wakefield) at £112.7 million (NBV £ 46.9 million) as at 31 July 2016 (2015: £88.9 million: NBV £28.1 million). The change in 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 and land and buildings held at Director valuation, our total property valuation is £116.2 million (2015: £97.8 million). This translates into an adjusted net asset value of £3.86 per share up 27.6% on last year (2015: £3.02 per share).

The increase in the property values of properties which were also valued last year was 19.2%

Strategic Report (continued) 

Financial Review 

Record financial results on all measures

· Group Revenue £16.06 million up 4.1 % (2015: £15.42 million) - like for like (LFL) up 7.6%

· Group Adjusted EBITDA £6.30million up 10.8% (2015: £5.68 million) - LFL up 14.0%

· Operating profit (pre-exceptional items7) £4.41 million up 14.1% (2015: £3.86 million) LFL 18.3%

· Operating profit £6.23 million up 70.3% (2015: £3.66 million)

· Profit after taxation £4.28 million up 117% (2015 : £1.97 million)

Trading

Total revenue for the year grew 4.1% to £16.1 million (2015: £15.42 million). Group operating profit for the year is up 70% to £6.23 million (2015: £3.66 million).

Taxation

The Group will pay tax on its earnings at an effective tax rate of 20% and has made a tax provision of £0.6 million. (2015: £0.54 million)

Earnings per share

Basic earnings per share (EPS) were 16.60 pence (2015: 7.84 pence per share). Diluted EPS were 16.24 pence (2015: 7.64 pence per share). If 2016 figures are adjusted to eliminate the 2016 property sale gain of £1.94 million, the 2016 EPS is adjusted to 9.08 pence per share and the 2016 diluted EPS to 8.88 pence per share.

Treasury shares

The Group did not purchase any Treasury shares during the year. We are proposing to renew our ongoing 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.

Operating costs

Through disciplined management we have again reduced property costs and contained overall cost growth to less than 0.1% despite staff costs increasing by 1.1% 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 £9.4 million for the year, a 0.1% increase from last year (2015: £9.4 million). Overall operating costs as a percentage of revenue have decreased and represent 58.9% as a cost ratio. (2015: 61.2%).

Strong balance sheet, efficient use of capital, low debt

· New £40 million Bank facility on lower interest margin

· Net debt down to £23.5 million (2015: £25.3 million)

· Loan to value ratio (LTV) down to 20.8% (2015: 25.8%) 

· Gearing down

New £40 million Bank facility on improved terms

Following the agreement of new facilities with Royal Bank of Scotland on improved terms the new £40 million five year revolving credit facility replaced the existing facility which was due to expire in October 2016, and will provide funding for site acquisitions as well as working capital for the development of the business over the medium term. 

Under this new five year facility the Group is not obliged to make any repayments prior to its expiration in January 2021 and further provides during the term of the facility for the possibility of an optional extension of the five year term by a maximum of a further two years. The facility also provides for the possibility of an additional accordion of up to £10 million which if taken up during the term of the facility will increase facilities available to £50 million.

Strategic Report (continued) 

Financial Review 

The following interest rates applied during the financial year:

At current levels of borrowing this translates into a 0.95% points saving on outstanding borrowings and 0.38% saving on the unborrowed balance of the facility. At current borrowing levels this would equate to a £316,249 saving on an anualised basis.

Management of interest rate risk

Lok'nStore has £28.8 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% for the year, this leaves a balance of £8.8 million floating at a current all-in rate of around 2.56% and results in an overall weighted average rate over the financial year of 2.88.%. The £20 million fixed rate swap is an interest rate hedge and its fair value on a mark-to-market basis fluctuates. Its current fair value of £0.037 million is currently stated as a current liability (2015: non-current liability: £0.12 million). Both swaps run up to 20 October 2016 whereupon they lapse and the Groups all-in floating rate will drop to (currently) 1.67%.

Cash flow and financing

At 31 July 2016 the Group had cash balances of £5.3 million (2015: £2.4 million). Cash inflow from operating activities before investing and financing activities was £3.8 million (2015: £6.0 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 £11.2 million (2015: £12.3 million).

Gearing 

There was £28.8 million of gross borrowings (2015: £27.7 million) representing gearing of 32.9 % (2015: 47.7%) on net debt of £23.5 million (2015: £25.3 million). If leaseholds, which are stated at depreciated historic cost in the statement of financial position, are stated at their Jones Lang LaSalle (JLL) valuation, gearing drops to 27.6% (2015: 39.2%). If the deferred tax liability carried at year- end of £15.4 million is excluded gearing drops further to 23.4% (2015: 33.0%).

Strong cash flow supports 12.5% dividend increase

· Annual dividend 9 pence per share up 12.5% (2015: 8 pence per share)

· Cash available for Distribution (CAD) from operations £4.71 million up 20.8% (2015: £4.98 million)

· Cash available for Distribution (CAD) of 18.1 pence per share up 17.7% (2015: 15.4 pence per share)

Cash available for Distribution (CAD) 

Cash available for Distribution (CAD) provides a clear picture of ongoing cash flow available for dividends. To illustrate this fully the table below shows the calculation of CAD.

Analysis of Cash Available for Distribution (CAD)

Strategic Report (continued) 

Financial Review 

Capital expenditure and capital commitments

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 £6.99 million (2015: £3.58 million). This capital expenditure was more than fund by the capital receipts of £8.5 million.

The Group has capital expenditure contracted but not provided for in the financial statements of £1.10 million (2015: £3.03 million) . The Company was also committed to complete on its new Wellingborough site following completion of all relevant planning matters.

Statement of Financial Position

Net assets at the year-end were £71.5 million (2015: £53.0 million). Freehold and long leasehold properties independently valued at 31 July 2016 were £96.1 million (2015: £74.1 million). Refer to the table of property values below.

Market Valuation of Freehold and Operating Leasehold Land and Buildings

It is the Group's policy to commission an independent external valuation of its properties at each year-end. In previous years this work had been undertaken by Cushman & Wakefield (C&W). This year the Group selected Jones Lang LaSalle Limited (JLL) to undertake this work due to their greater exposure to the transactions undertaken in the market.

Our eleven freehold properties and one long leasehold are held in the statement of financial position at fair value and have been valued by JLL. 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 valued and these valuations have been used to calculate the adjusted net asset value position of the Group. The value of our operating leases in the valuation totals £16.6 million (2015: £14.8 million) and we have reported by way of a note the underlying value of these leasehold stores in our revaluations and adjusted our Net Asset Value (NAV) calculation accordingly to include their value. This ensures comparable NAV calculations.

A deferred tax liability arises on the revaluation of the properties and on the rolled-over gain arising from the disposal of some trading stores. 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 proceeds from the sale of the Reading store sold with the benefit of its permission for residential development have been reinvested into new store development. It is not the intention of the Directors to make any other significant disposals of operational stores, 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.

Analysis of Total Property Value

1  Includes related fixtures and fittings (refer note 10b)

2 The seven leaseholds valued by JLL 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 11 years and 8 months at the date of the 2016 valuation (2015 valuation: 12 years and 8 months). One leasehold store is not valued by JLL due to the relatively short unexpired period of its lease.

3  For more details (refer note 10b - Directors valuation)

Total freeholds account for 85.7% of property values (2015:84.9%).

Strategic Report (continued) 

Financial Review 

Adjusted Net Asset Value per Share

· Adjusted Net Asset Value per share up 27.6% to £3.86  (2015: £3.02)

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 2016 the adjusted net asset value per share (before deferred tax) increased an impressive 27.6% to £3.86 from £3.02 last year. This substantial increase is a result of higher property values as our new valuers recognised the strength of our landmark stores, cash generated from operations and additional sale proceeds from the disposal of our Reading site, 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 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 with low debt and gearing which generates a rapidly growing cash flow from its substantial asset base. The UK self-storage market is still immature and presents an excellent opportunity for further growth of the business.

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 Royal Bank of Scotland plc on a no-notice treasury deposit account which tracks base rate and yields a rate equivalent to RBS bank base rate 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. Full details are set out in the Financial Review. Further information on our treasury arrangements is set out in note 16.

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 16 (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 now rising in the UK. 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 the 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. Across all of the stores we operate self-storage customers are a broad mix of both domestic and business.

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 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 only £33,210 (2015: £38,891) of bad debts recognised during the year representing around 0.21% of Group revenue (2015: 0.25%). There was £8,116 of additional costs associated with recovery (2015: £8,714). 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.

Strategic Report (continued) 

Principal Risks and Uncertainties in operating our Business

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 Group 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 14 October 2016 and signed on its behalf by:

Andrew Jacobs Ray Davies

Chief Executive Officer Finance Director

Consolidated Statement of Comprehensive Income

For the year ended 31 July 2016

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 2016

Company Statement of Changes in Equity

For the year ended 31 July 2016

Consolidated Statements of Financial Position

31 July 2016 Company Registration No. 04007169

Approved by the Board of Directors and authorised for issue on 14 October 2016 and signed on its behalf by:

Andrew Jacobs Ray Davies

Chief Executive Officer Finance Director

Consolidated Statement of Cash Flows

For the year ended 31 July 2016

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.

The preliminary financial information does not constitute full statutory accounts within the meaning of section 434 of the Companies Act 2006 but is derived from statutory accounts for the years ended 31 July 2016 and 31 July 2015, both of which are audited. The preliminary announcement is prepared on the same basis as set out in the statutory accounts for the year ended 31 July 2016. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), this announcement does not in itself contain sufficient information to comply with IFRSs.

The statutory accounts for the year ended 31 July 2016 will be delivered to the Registrar of Companies following the Company's Annual General Meeting and can be obtained from the investor section of the Company's website at http://www.loknstore.co.uk. Statutory accounts for the year ended 31 July 2015 have been filed with the Registrar of Companies. The auditor's report for the year ended 31 July 2016 was unqualified, did not include a reference to any matter to which the auditor drew attention by way of emphasis without qualifying their report and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

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 2015.

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

The following relevant new standards, interpretations and amendments have been adopted in the year but have no significant impact.

IFRS 10: Consolidated Financial Statements

IFRS 11: Joint Arrangements

IFRS 12: Disclosure of Interest in Other Entities

Amendment to IAS 19: Employee Benefits

Amendment to IAS 27: Separate Financial Statements

Amendment to IAS 28: Investments in Associates and Joint Ventures

Amendment to IAS 32: Offsetting Financial Assets and Financial Liabilities

Amendment to IAS 36: Impairment of Assets

Amendment to IAS 39: Financial Instruments: Recognition and Measurement

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:

Subject to the adoption in due course of IFRS 16, The directors do not anticipate that the adoption of these Standards will have a significant impact on the financial statements of the Group. With regard to IFRS 16, the Directors are currently assessing the impact on the financial statements.

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

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 July each year. Control is achieved where the Company has power over the investee, exposure or rights to variable returns from the investee and the ability to use its power to vary those returns.

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.

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 £5.3 million (2015: £2.4 million), undrawn committed bank facilities at 31 July 2016 of £11.2 million (2015: £12.3 million), and cash generated from operations in the year to 31 July 2016 of £3.8 million (2015: £6.0 million).

Following the agreement of new facilities with Royal Bank of Scotland on improved terms, the Group now operates a five year £40 million revolving credit facility with RBS plc. The facility has been in place since 15 January 2016 and runs until 14 January 2021. The Group is fully compliant with all bank covenants and undertakings and is not obliged to make any repayments prior to expiration. The financial statements are therefore prepared on a going concern basis.

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 £81 million (2015: £61.0 million) as shown in the table in note 10b.

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 carrying value of development property assets at the reporting date was £0.5 million (2015: £8.9 million). Please see note 10b 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 2016 intangible assets, excluding goodwill, amounted to £2.48 million (2015: £2.65 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.

Notes to the Financial Statements

For the year ended 31 July 2016

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 document storage 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 document storage 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 2016 is as follows:

The segment information for the year ended 31 July 2015 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 430 customers has a greater customer concentration with its ten largest corporate customers accounting for 34.6% (2015: 34.6%) of revenue, its top 50 customers accounting for 61.7% (2015: 63.3%) and its top 100 customers accounting for 77.0 % (2015: 79.9%) of revenue. The self-storage segment with over 9,200 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.

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.), and the ancillary sales of insurance cover for customer goods, all of which fall within the Group's ordinary activities.

2c Other Income and costs

1 Property disposal costs relate to the sale and manage back of the Swindon store.

2 Net settlement proceeds relate to an additional £2 million received for sale of old Reading store net of costs.

3 Irrecoverable property costs relate to site demolition costs not recoverable from the prospective purchaser of the Portsmouth North site.

3 Finance income

Interest receivable arises on cash and cash equivalents (see note 16) and on development loan capital deployed.

4 Finance costs

5 Profit before taxation

Amounts payable to RSM UK Audit LLP (formerly 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 £133,669 (2015: £132,543) 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 £11,705 (2015: £9,260) outstanding at the year-end.

Directors' remuneration