Lok N Store Regulatory News (LOK)

LOK'NSTORE GROUP PLC("Lok'nStore" or "the Group")

Preliminary Results for the year ended 31 July 2023

Lok'nStore, the AIM listed self-storage company, is pleased to announce its Preliminary Results for the year ended 31 July 2023.

Highlights

v  Solid growth of Same Store Revenue

v  Increase in Net Asset Value per share

v  10.1% increase in annual dividend

v  Dynamic new store opening schedule driving future growth

§ Two new Landmark stores opened

§ Three further Landmark stores to open in FY24

v  £20.5 million equity raise

v  Low net debt and LTV

Reminder - We sold four stores on a sale and manage-back arrangement on 31 January 2022 adding circa £37 million to cash, reinforcing our strong financial footing. ('the Sale')

· Our Same Store analysis strips out the Sale and the new stores opened. 

· Our Same Store Self Storage analysis also strips out the effect of this sale, new stores and management income from Managed Stores.

This Same Store analysis and all other Alternative Performance Measures (APM's) denoted by superscripts are explained in the key performance indicators (KPIs) definitions below.

Strong revenue growth

Same Store14

ü Same Store Self Storage Revenue15 £25.30 million up 12.1% (2022: £22.57 million)

ü Same Store Self Storage Adjusted EBITDA1 £14.5 million up 4.0% (2022: £13.9 million)

Headline

ü Group Revenue £27.1 million up 0.9% (2022: £26.9 million)

ü Group Adjusted EBITDA1 £15.1 million down 7.9% (2022: £16.3 million)

Driven by solid operating metrics

ü Pricing up 6.8% to £27.37 per sq. ft (2022: £25.62 per sq. ft)

ü Closing occupancy in stores over 3 years old 80.6% (2022: 82.9%)

ü Move in's up 4.9% year on year

ü Managed store recurring revenue £1.5 million up 11.9% (2022: £1.3 million)

Management of Costs

ü The external cost increases experienced in year, specifically in energy, insurance and interest charges - we expect the rate of these cost increases to abate

ü Same Store store15 EBITDA margins although lower remain robust at 57.2% (2022: 61.3%)

Twelfth consecutive year of dividend increase

ü Annual dividend increased by 1.75 pence to 19.00 pence per share up 10.1% (2022: 17.25 pence per share) - covered 1.5x by CAD

 Net Asset Value up

ü Adjusted Net Asset Value5 per share up 1.4% to £9.86 per share (2022: £9.72 per share)

Disciplined capital allocation underpins our strong balance sheet and low net debt  

ü £20.5 million (gross) equity raised in July 2023

ü £42.1 million cash at year-end (2022: £46.5 million)

ü Net debt (excluding lease liabilities and deferred finance costs) reduced to £12.3 million (2022: £20.3 million)

ü Loan to Value ratio6 (net of cash) down to 3.7% (2022: 6.6%)

Dynamic pipeline8 of new Landmark stores will deliver further growth

ü Two new Landmark stores opened - 108,890 sq.ft of new owned space added up 9.7%

ü Three new Landmark stores on site will add over 162,000 sq. ft of new trading space.

Well positioned for the future

ü Trading momentum continues post year end with stores revenue up 6.3% for August and September 2023 compared to the same corresponding two-month period last year.

ü Flexibility to respond to market circumstances

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

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

"Lok'nStore's business has once again moved ahead with Same Store Self Storage revenue up 12.1%. Demand for UK self-storage assets remains strong, and this, coupled with our new store openings, has driven our Net Asset Value up by 1.4% to £9.86 per share. We are proposing a 10.1% increase in the annual dividend, the twelfth year of increased dividends in a row. The net debt is low and LTV is only 3.7%.

"Trading since the year-end continues to be in line with expectations. We have opened two new Landmark stores and are on site at three more which will open within the next 12 months which can be completed using cash. These new stores will add further momentum to sales, earnings and net asset growth."

Enquiries:

Chair's Statement

I am delighted to be reporting another year of good results for Lok'nStore, delivering a strong operating and financial performance.

These results can be summarised as:

· Solid growth of Same Store14 revenue

· Increase in Net Asset Value per share

· Rate of cost increases abating

· 10.1% increase in annual dividend

· Low net debt and LTV

· Dynamic new store opening schedule driving future growth

§ Two new Landmark stores opened

§ Three further Landmark stores to open in FY24

These results demonstrate Lok'nStore's delivery of growth in long-term shareholder return through all stages of the economic cycle. The significant and continued investor interest in the UK self-storage sector demonstrated by market transactions underpins the increased value of our assets and our strategy to open more Landmark stores.

The detail behind these results is discussed further in our Financial Review.

Further Strengthening the Balance Sheet

On 7 July 2023, the Company raised total gross proceeds of approximately £20.5 million through the issue of 2,679,739 new Ordinary Shares via a Placing and REX Retail Offer, at a price of 765 pence per Ordinary Share. The Fundraising Shares represented approximately 8.9% of the Company's issued share capital.

As a result, we have new shareholders as well as existing institutional shareholders who have increased their shareholdings. We are also particularly pleased that existing smaller retail shareholders participated via the REX offer. I would like to thank existing shareholders for their support and welcome our new shareholders to the Company.

In the previous financial year 2022, the Group completed the Sale. This transaction added sales proceeds of c. £37 million to cash balances.

These two strategic actions reinforced the Company's excellent financial position with low net debt. A conservative capital structure and a strong Balance Sheet remain a key focus. We report a year-end LTV ratio (net of cash) of only 3.7% (2022: 6.6%) and a low level of net debt of only £12.3 million, down from £20.3 million in the previous year (refer to note 26b).

Continued revenue growth driven by strong demand

In the year we have replaced all the revenue generated from the four established stores sold last year which is a great performance and at a headline level we report a 0.9% increase in Group Revenue. Same-Store Group Revenue remains strong with growth of 6.6% over last year.

Customer demand remains significantly above levels seen pre-pandemic and this year has continued to move ahead with total move-ins up 4.9% compared to last year. This continuing strong demand from new customers combined with our dynamic pricing management has resulted in a total increase in pricing over the past three years of 31.2%. Our pricing moved forward by 6.8% in the last 12 months. 

Management of cost increases

At a headline level, total Group Operating Costs amounted to £11.8 million for the period (2022: £10.4 million) up by 14.2%. On a Same Store basis costs have increased by 17.8% compared to last year.

As previously reported at the half year, we have seen significant external cost increases primarily through energy costs, which have risen in the year by £1.2 million compared to the same period last year, a trebling of the previous year's energy costs. In the coming year we expect this major change in energy costs to abate and then decline in FY25.

Interest costs have also risen significantly. The cash costs of bank interest paid (before capitalisation of interest costs, non-utilisation fees and loan amortisation fees) in the year was £3.1 million compared to £1.3 million last year. The average costs of debt over the year was 4.77%. With rates rising throughout the year the Group's current cost of debt at year-end was 6.19%. Currently, interest on our active drawn loans is 6.68%. 

We now have clarity on future business rates, following the publishing of the revaluation listing which took effect from April 2023. This will result in our business rates increasing £0.49 million per annum from April 2023 and by a further £0.20 million per annum from April 2024.

We have robust EBITDA margins which provide a shelter to the business against these external cost increases. This is supported by our ability to move our own pricing forward.

We have a strong record of disciplined cost control. In FY24 we expect Same-Store operating costs to increase more modestly, driven mainly by revised business rates with other costs increases more muted. From FY25, we expect operating costs to increase more slowly with cost increases mainly being driven by the expansion of store numbers so revenue growth flows into earnings.

Increase in Net Asset Value

I am pleased to report an increase of 1.5% in the Adjusted Net Asset Value per share to £9.87 per share (2022: £9.72 per share) (31 January 2023 £9.15 per share).

Since the last year-end at 31 July 2022 we have seen significant changes in the debt markets. As a result, Jones Lang LaSalle (JLL), consider that the yields and discount rates which were applied at the July 2022 year-end have changed.  On our owned freehold trading stores we have seen exit yields increase on average by 33 basis points to 5.79%, with discount rates increasing by 45 basis points to 7.47%.

These changes have been fully offset by improved cash flows and the extension of the lease at our Eastbourne store. This demonstrates the impact operating performance has on asset values and why one of our key objectives remains to fill existing stores and continue improving pricing.

The Exit Yield and Discount Rates applied in the valuations are validated by transactional evidence. There is continued strong institutional investor appetite in the UK self-storage sector. JLL comment that "The self-storage market has had strong market activity since July 2022 which reflects the continued appetite for the sector but the higher cost of debt in the present finance market is having an impact. The sector's operational resilience in the current climate is making it a popular asset class with investors - this is accentuated with its structural undersupply".

Our new Bedford and Peterborough Landmark stores had their maiden external valuation in July 2023, which were accretive to asset value. We have two further Owned Stores in Staines and Basildon opening in FY24 and expect these to add momentum to Net Assets with their maiden external valuations at July 2024.  More details on the valuation of our trading stores can be found on in note 12(a) of the financial statements.

Further Dividend Growth 

The Directors are proposing a final dividend of 13.25 pence per share an increase of 8.2% (2022: 12.25 pence) following the interim dividend payment of 5.75 pence per share in June 2023, bringing the total distribution for the year to 19 pence per share, an increase of 1.75 pence per share up 10.1% (2022: 17.25 pence per share) and our twelfth year of increase in a row.

Subject to approval at the Company's AGM on 7 December 2023 the final dividend will be paid on 5 January 2024 to shareholders on the register on 24 November 2023. The ex-dividend date will be 23 November 2023. The final deadline for Dividend Reinvestment Election by investors is 8 December 2023.

Investment in new Stores

This year we invested £17.3 million in new store development adding 12% to our owned stores trading space. We opened two new owned stores in Bedford and Peterborough. Trading at our new stores continues to meet expectations and this underpins our confidence that our pipeline will add further to sales and earnings growth.

We are on site at three Stores, in Staines, Basildon, and Kettering (managed) which will all open in the coming 12 months. The remaining capital expenditure required to complete the Staines and Basildon stores is £12.7 million, all of which can be paid out of cash. We are due to go on site shortly at Bromborough, Wirral on behalf of a third-party Managed Store client. 

Self-storage generally benefits from the short lead time between breaking ground and store opening of around twelve months. We have only committed future capital expenditure at the two owned stores where we are on site, both of which will be open within the next 12 months. We have a high degree of flexibility regarding start dates for further building at other sites. We can therefore adapt our development programme quickly to react to changing economic circumstances.

The pipeline progress is discussed further in the Property Review.

Cash Flow, Debt and Bank Covenants

At 31 July 2023, the Group had cash balances of £42.1 million. Cash inflow from operating activities before investing and financing activities was £15.8 million in the year to 31 July 2023 (2022: £18.6 million).

The Group has a £100 million five-year revolving credit facility which, together with cash, provides all the financing needs for the current secured pipeline and runs until April 2026. The Group is not obliged to make any repayments on its loan facility prior to its expiration in April 2026.

The average cost of bank debt on drawn facilities for the year was 4.77% (2022: 1.71%). All of the Group's total drawn bank debt of £54.4 million (2022: £66.8 million) is unhedged. At the date of this Report the Group's current cost of debt is running at 6.68% as rates have moved higher since the year-end.

At the year-end senior interest cover was 4 times finance charges on gross debt tested on a 12-month rolling basis, against a bank covenant of 2.5 times. At the year-end our loan-to-value ratio based on net bank debt was 3.7% versus a bank covenant of 60% providing a large cushion of comfort.

Post Balance Sheet: On 11 August 2023, the Group paid down £19.02 million out of its recent equity placing proceeds reducing the balance on its revolving credit facility, pending redrawing over time for its future deployment on the Group's pipeline stores.

Managed Stores

Our strategy includes growing the number of stores we manage for third party owners. This enables the Group to earn revenue without having to commit capital, to amortise fixed central costs over a wider operating base and drive further traffic to our website which benefits our entire operation.

During the year, we generated total Managed Store income of £1.66 million, with recurring fees of £1.47 million (2022: £1.31 million) up 11.9%. This was driven by increased revenues generated from the Managed Stores and also the four stores we sold on manage back contracts on 31 January 2022.

In the management fees table in the Managing Director's Review, we separate recurring management fees from non-recurring fees. Non-recurring fees relate to one off fees generated from planning, store opening, construction and advisory and supplementary fees.

Lok'nStore manages 16 stores for third-party owners. Our current new store pipeline includes two Managed Stores, taking the total number to 18.

Our Team

We rely on our amazing people to deliver these impressive results and I would like to thank them for all of their hard work and dedication. I am delighted to say that all of our colleagues continue to benefit from the success of the business and we continue to promote equity ownership to our colleagues through our Shares in Partnership Equity Ownership scheme and the granting of share options.

I am proud that during the year we introduced a comprehensive non-contributory Employee Assistance Program which has a death in service life insurance for all colleagues combined with an associated package of benefits. These include direct access to a GP and availability of confidential counselling services, as well as access to a range of online tools covering tax and legal advice, childcare, fitness and personal coaching advice.

Board changes

The Board was delighted to announce the appointment of Tom Lampard, the Group's Property Director, to the Board of Directors of the Group with effect from 6 February 2023.

Tom joined Lok'nStore in March 2012, and has worked in a variety of roles across the Group. Since July 2017, Tom has worked in the Group's property acquisitions team, most recently as Director of Acquisitions, sourcing and securing land and buildings to expand the Group's significant new store pipeline. Tom is an integral member of the management team significantly contributing to the Group's growth over recent years.

As part of the board's ongoing review of governance and with immediate effect, Jeff Woyda will become chair of the Audit Committee with Charles Peal becoming a member of the committee. I would like to thank Charles for his hard work and dedication as chair of the Audit Committee over the last few years.

Post Balance Sheet: The Board was delighted to announce the appointment of Bridget Barker to the Board of Directors of the Group with effect from 14 September 2023. Bridget is an experienced lawyer having gained over 35 years' experience at Macfarlanes, a leading and well-established City of London law firm, where she specialised in investment funds, financial services and regulatory legal work with a focus on private equity and real estate funds. Latterly she was head of the Investment Management Group at Macfarlanes. Since leaving Macfarlanes, Bridget has pursued various non-executive roles and consulting appointments at organisations such as Praesidium, Mirabaud 1819 Advisory Group and Mainspring Fund Services. Bridget is currently the CEO of Race Against Dementia, a charity established to raise money to fund breakthrough and innovative dementia research. 

Share trading volumes and liquidity

It has been a feature for some time that high shareholder concentration in our shares has contributed to lower share transaction volumes and has limited their market liquidity. In addition, prospective and existing investors have sometimes been unable to secure a meaningful sized holding.

In May 2023, I sold 1,250,000 Ordinary Shares of 1p each ("Ordinary Shares") in the Company at a price of 800 pence per Ordinary Share.

As a result of this transaction and following the Placing in July 2023 I, along with persons closely associated with me, still own, in aggregate, 4,359,550 Ordinary Shares representing 14.5 per cent of the Company's total voting rights. 

In May 2023, Simon Thomas sold 100,000 Ordinary Shares at a price of 815 pence per Ordinary Share resulting in his beneficial interest in the Company decreasing to 1,292,800 Ordinary Shares representing 4.3 per cent of the Company's total voting rights.

These transactions have broadened the Group's institutional shareholder base and potentially increased the liquidity in the trading of the Groups 's shares. I remain the largest shareholder and Simon Thomas remains the fifth largest shareholder, demonstrating our continued support for the business.

Environmental, Social and Governance

We are committed to decarbonising our business with an Operational Net Zero target of 2040.

In recent years, the Lok'nStore Environmental committee, consisting of colleagues in various roles across the business, including four Board members, has been focused on practical improvements we can make to our environmental footprint.

We are working hard to create an environmentally sustainable business for all our customers, our colleagues, local communities and the wider environment. We have made good progress on all of our environmental targets this year and these are discussed in detail in our Environmental and Social Report.

Our Objectives

Our objectives are to:

· Fill existing stores and improve pricing

· Steadily increase the dividend from a strong asset base with conservative levels of debt

· Develop our pipeline into new Landmark stores

· Acquire more sites to build new Landmark stores

· Increase the number of stores we manage for third parties

Outlook

This year's results are good and trading since the year-end remains in line with management expectations.

Lok'nStore continues to experience year to year revenue growth on a Same Store basis and this will be enhanced by the three stores opened in FY22 and two stores opened this year. The opening of another two new owned stores over the coming year will provide further momentum.

We expect the rate of external cost increases that we have experienced this year to abate and we expect operating costs to revert to a position where cost increases are mostly driven by the expansion of the number of stores meaning that revenue growth flows into earnings.

We have an exciting period of growth ahead. With Lok'nStore's resilient and flexible business model enabling the business to manage its conservative debt structure the Board is confident the Group will continue to thrive. This strength enables Lok'nStore to look confidently through the current external market turbulence.

Andrew Jacobs

Chair

27 October 2023

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

In addition to IFRS accounting performance measures we use some Alternative Performance Measures (APMs) to help us explain how the underlying business is performing.

Here we identify those measures and explain what we mean when we use them and, importantly, why we use them: -

1. Group Adjusted EBITDA (Group Adjusted Earnings before interest, tax, depreciation and amortisation) -  Adjusted EBITDA is defined as EBITDA before losses or profits on disposal, share-based payments, acquisition costs, non-underlying items and which demonstrates the cash generative qualities of the business.

2. Non-underlying items - Refers to one-off items of a non-operational nature which arose during the year, and which may relate to asset disposals, abortive site acquisition costs, or other costs and which are likely to be material and infrequent events. (Refer to note 4 of the Financial Statements).

3. Cash Available for Distribution (CAD) - Is calculated as Adjusted EBITDA less total net finance cost, less capitalised maintenance expenses, New Works Team costs and current tax. This measures the capacity of the business to pay dividends or pay down debt. The Cash Available for Distribution per share is CAD divided by the number of shares in issue less shares held in the Employee Benefit Trust (EBT) which do not attract a dividend. The calculation of the CAD and the CAD per share is set out in the Financial Review.

4. Adjusted Total Group Assets - The value of adjusted total assets of £392.9 million (2022: £370.9 million) is calculated by adding the independent valuation of the leasehold properties of £27.2 million (2022: £24.2 million) less their corresponding net book value (NBV) £6.9 million (2022: £7.2 million) to the total assets in the Statement of Financial Position of £372.6 million (2022: £353.9 million). This provides clarity on the significant value of the leasehold stores as trading businesses which, under the Group's accounting policy on leases, are only presented at their book values within the Statement of Financial Position.

5. Adjusted Net Asset Value per share (NAV per share) - Adjusted Net Asset Value per share is the net assets adjusted for the valuation of leasehold stores (properties held under leases) 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. The calculation of the Net Asset Value per share is set out in the Financial Review.

6. Loan to Value ratio (LTV) - Measures the net 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 (excluding deferred finance costs) of £12.3 million expressed as a percentage of the total freehold and leasehold properties independently valued by JLL of £301.9 million (2022: £279.0 million) and development land assets of £30.6 million (2022: £29.2 million) totalling £332.5million (2022: £308.2 million) as set out in the Financial Review in the Analysis of Total Property Value table.

7. Average Cost of Debt - The average cost of debt is calculated by taking the total interest paid on the Group's Revolving Credit Facility in the quarterly/weekly charging periods throughout the year and taking an average based on the whole financial year. Apart from the Group's Revolving Credit Facility, the Group has no other bank debt. The average cost of debt 4.77% (2022: 1.71%).

8. Pipeline Sites - Sites for new stores that either we have exchanged contracts on or have agreed heads of terms and are progressing with our lawyers towards a contract exchange. We have 13 pipeline sites of which 11 are contracted and two are progressing with lawyers. We currently have 26 Owned Stores trading with an additional 16 Managed Stores trading. When these 13 sites are fully developed, we will have a total of 55 stores - 37 will be owned by the Group and 18 will be Managed Stores managed on behalf of third-party owners.

9. Secured Pipeline Sites - The eleven sites for new stores on which we have exchanged legal contracts. Of these, nine stores are Lok'nStore Owned Stores and two will be Managed Stores.

10. Adjusted Store EBITDA is Group Adjusted EBITDA (see 1 above) before the deduction of central and head office costs. Unlike Group Adjusted EBITDA, this measure excludes the impact of IFRS 16 and includes property rentals payable as normal operating costs of each store. The measure is designed to give clarity on the recurring operating cash flow of the business and provides important information on the underlying performance of the trading stores and shows the cash-generating core of the business. Use of this metric enables us to provide additional information on store EBITDA contributions (after leasing costs) and the margins analysed between freehold and leasehold stores and according to the age of the stores. This analysis is set out in a table in the Financial Review.

11. Gearing refers to the level of debt compared to 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. The calculation of the gearing percentage, also referred to as the net debt to equity ratio, is set out in note 17 of the Financial Statements.

12. Group Adjusted EBITDAR is Group Adjusted EBITDA before the deduction of rent. The measure is designed to give clarity on the effect of the rent payable by leasehold stores and how its elimination enables a comparison between the operating performance of freehold stores (which do not pay rent) and leasehold stores which pay rent. This analysis is set out in a table in the Financial Review.

13. Cost Ratio calculates the ratio of the total operating costs of the business as set out in the   Financial Review, expressed as a percentage of total Group revenue (note 1), giving a perspective on the cost efficiency of the business when compared to the cost ratio of the previous year. The Cost Ratio has increased to 43.6% (2022: 38.5 %)

14. Same Store Group - This measure is used to give transparency on improvements in the operating business in the year unrelated to the opening of new stores, closure of old stores, and more particularly in the previous financial year, the Sale, commenting on stores that were open and trading at both 31 July 2022 and 31 July 2023 financial year-ends. The Same Store key performance measure helps to illustrate the performance of the underlying business.

15. Same Store Self-Storage - This measure is the Same Store Group measures but less management income received from the management of the Managed Store portfolio. This is used to give transparency on the underlying trading of the self-storage business.

See also the glossary

The UK Self-Storage Market at a Glance

The Self-Storage Association (SSA UK) UK Annual Industry Survey 2023, reported that the UK self-storage industry is made up of sites offering 55.5 million sq. ft. of space.

Market Overview

As reported in the SSA UK Annual Industry Survey 2023 the UK self-storage market continues to grow but remains under-developed relative to Australia and the United States.

In the UK there are an estimated 1,492 self-storage facilities, plus an additional 739 containerised sites, providing a total of 55.5 million sq. ft. of storage space. With a population of c.68 million people in the UK this equates to only 0.82 sq. ft. per person. Occupancy rates across the UK industry at 31 December 2022 of built space was stable at 83.3%.

The structure of the UK industry is changing. When the industry first emerged companies were predominantly single owner sites often located in industrial areas, but larger operators (defined as operators managing ten or more sites), such as Lok'nStore, have recently been developing purpose-built stores in retail-facing locations offering customers a higher standard of product and service.

The main barriers to entry to the market remain the difficulty in finding and securing suitable sites as well as gaining the appropriate planning consents. As a result, larger operators now own or manage around 30% of all facilities which translates to 40% of market share in terms of space. Currently, Lok'nStore is the fifth largest operator in the UK by number of stores, currently owing or managing 42 trading stores.

There remains strong market sentiment towards the sector with strong inflation proofed characteristics, a structurally under supplied market and a sector maturity providing investable assets of suitable scale. 

§ Self-storage performs well in times of economic uncertainty compared to other sectors

§ The robust nature of the business model / sector throughout the economic cycle has proved its ability to withstand exogenous shocks

§ Potential for increased allocation to self-storage as other sectors are impacted by volatility

§ An inflation hedge with low usage of utilities will favour the sector

§ Investors in the sector include those with low leverage

§ Debt markets should remain liquid due to income generation

§ Pricing corrections in land will create buying opportunities

§ Yield gap with US and AsiaPac markets remains wide

§ Still structurally undersupplied compared to demand drivers

Drivers of Demand for Self-Storage

Demand for self-storage by both household and business customers is driven by a specific need based on changing circumstances as well as economic activity and business confidence.

For household customers their need is often linked to a life event where they will need space temporarily, for example, to turn a box room into a home office, but increasingly householders are using storage on a semi-permanent basis to free up space at home or store belongings they do not have room for.

Business customers use self-storage for a variety of purposes including storage of goods, excess or seasonal stock, document archiving or storage of equipment and tools. Businesses tend to store for longer than household customers and take larger units, although they also take advantage of self-storage for temporary periods to support office moves or refurbishments.

During the pandemic, many of our customers were providing critical services distributing medical and other essential supplies. We include the NHS, GP surgeries, care and home support services and government departments amongst our customers.

Lok'nStore's Opportunity in the Market

The SSA UK Annual Industry Survey 2023 noted that public awareness of and demand for self-storage is increasing. We know that on average customers chose a store within five miles of their home or business. With a secured pipeline of eleven stores, and a continuing programme of evaluating further site opportunities, Lok'nStore is well placed to attract new customers and add further momentum to the growth of our sales and profits.

The Group's has a number of competitive strengths: recognised brand, excellent customer service, rigorous cost control, and the attractive market dynamics of the storage sector. With a growing sector, an under supplied market, embedded resilience during economic downturns combined with our strong balance sheet and flexible operating and ownership model (see our portfolio strategy), we believe Lok'nStore can take advantage of the opportunities presented and continue its growth without significantly increasing risk.

Our Business Model:

Our overriding objective is to increase the Cash Available for Distribution (CAD) enabling a predictable growth of the dividend from a rising asset base while maintaining a conservatively geared balance sheet.

Our strategy:

Managing Director's Review:

 "High quality cash flow generation and new store openings drive strong asset values "

Neil Newman-Shepherd

Managing Director

Lok'nStore Group has had another successful year. In coming years, our pipeline of new stores will substantially increase the proportion of our store space which is new or purpose-built and will add further momentum to the growth of sales and profits.

The Performance of Our Stores 

Same Store

ü Same Store Group Revenue £27.1 million up 6.6% (2022: £25.4 million)

ü Same Store Adjusted EBITDA1 £14.5 million up 4.0% (2022: £13.9 million)

ü Same Store Group Adjusted EBITDA1 £15.2 million down 1% (2022: £15.4 million)

ü Same Store Group Operating Profit before non-underlying2 items £9.2 million down 13.4% (2022: £10.6 million)

Headline

ü Group Revenue £27.1 million up 1% (2022: £26.9 million)

ü Group Adjusted EBITDA1 £15.1 million down 7.9% (2022: £16.3 million)

ü Group Operating Profit before non-underlying2 items £8.9 million down 21.9% (2022: £11.4 million)

ü Price up 6.8%

ü Store EBITDA Margins 56.1% (2022: 61.6%)

ü Managed Store revenue - recurring fees £1.5 million up 11.9% 

Revenue Momentum Continues (refer table below)

Revenue growth in FY23 has remained strong with self-storage revenue up 5.3%. Same-store self-storage revenue was up 12.1% on the previous year. H2 self-storage revenue increased by 11.2% against the previous year, slightly ahead of expectations.

Price per sq. ft of occupied space was up a further 6.8% in the year driven by continued strong demand and higher than previous levels of occupied space. Closing occupancy in stores over 3 years old, which strips out the effect of the 108,890 sq. ft. of new space added in the year, was 80.6% compared to 82.9% at 31 July 2022. Total occupied unit space was level with last year.

Performance - Same Store Analysis 14

As a result of the external cost increases we have seen in the year, particularly around energy the overall Adjusted EBITDA margin across all stores decreased to 56.1% from 61.6%. Adjusted Store EBITDA margins of the freehold stores decreased to 61.8% (2022: 66.5%).

On a Same Store basis, the overall Adjusted EBITDA margin across all stores decreased to 57.2% from 61.3%. The leasehold stores decreased to 46.1% (2022: 53.3%). Going forward, we expect these cost increases to abate and in the absence of external factors, we expect margins to move ahead again over time as new Landmark stores continue to fill and new stores open, resulting in gains in revenue falling to earnings.

As the business develops the balance of the stores continues to shift towards freehold Landmark stores and Managed Stores which have a higher-than-average Adjusted Store EBITDA margin at 61.8% and 100% respectively, versus 56.1% across all stores. The medium-term impact of this will be to continue to increase the average EBITDA margin of the Group overall. This effect is accentuated by operating more stores from a relatively fixed central cost base. In this context, the new stores in the pipeline will make a larger than average contribution to Group profits as they become established trading units.

The freehold stores produce 70.2% (2022: 71.8%) of the Adjusted Store EBITDA and account for 91.8% (2022: 91.4%) of valuations (including secured pipeline stores). Leaseholds trade on lower margins due to the rent payable, but nevertheless the 46.1% margin achieved is substantial, and leads to a higher return on capital than the freehold stores which require much larger capital expenditure to buy the land and buildings.

This mix of tenures with their different risk and return characteristics provides flexibility in the balance sheet and opportunities to create value throughout the property and economic cycle.

Ancillary Sales

Ancillary sales consisting of boxes, packaging materials, insurance and other sales were £2.49 million (2022: £2.49 million) accounting for 9.8% (2022: 10.3%) of self-storage revenues.

Portfolio Analysis and Performance Breakdown

In the table below, we show how the performance of the stores varies between freehold and leasehold stores. Currently, 46% of Lok'nStore branded trading space is Owned freehold, 19.5% is leasehold and 34.5% is Managed Stores.

*Applies to the 11 contracted stores only.

Over time as new stores and pipeline sites go through their life cycle, they will progress towards similar margins adding substantially to revenues and profits.

Operating Performance by age of store (Lok'nStore owned stores only)

In the Operating Performance table below, we show how the performance breaks down across the stores, based on the age of store. Older stores have had more time to fill-up and produce higher EBITDA returns.

1 In respect of the Farnborough Store (over 250 weeks), the total store revenue includes a £100,000 contribution receivable from Group Head Office.

Marketing

New customers are typically drawn to Lok'nStore by three key drivers:

Store visibility remains pivotal to our marketing efforts. With their prominent positions, distinctive design, and bright orange elevations our stores raise the profile of the Lok'nStore brand and help to generate a substantial proportion of our business. Our Landmark stores are in highly prominent locations, and we continually 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 and engage the local community.

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 delivers a high level of customer experience across desktop and mobile 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 relatively large marketing budgets.

New Landmark Stores

We have invested £17.3 million (2022: £12.2 million) in new store development this year.

On 17 February 2023, our new Landmark store opened in Bedford. The store is in a prominent location on the busy western side of the town, directly accessed from a busy roundabout servicing all arterial routes to Tesco, the town centre and neighbours Costa, Lidl and other retailers. 

Our new freehold Landmark store in Peterborough opened on 27 June 2023. The site occupies a central location in the city, prominently positioned on the access route to a large and busy retail park with neighbouring occupiers including B&Q, Aldi, Currys and Argos.

Early trading at both stores has been good. 

We are on-site at three Stores: Staines (long leasehold), Basildon (leasehold) and Kettering (managed), all of which will be open in the next 12 months, adding a further 162,100 sq. ft. of trading space to the undersupplied UK self-storage market. The Board anticipates that Staines and Basildon will be NAV accretive at their first-time valuation in July 2024.

We have a total new store pipeline of eleven secured stores. These will all be purpose-built Landmark stores in highly prominent locations and will add substantially to the Group's capacity for revenue, profit and asset growth. Further details on this pipeline can be found in the Property Review.

Managed Stores Recurring Revenue Increasing

Total Managed Store revenue in the year was £1.66 million (2022: £2.79 million). Last year, we received non - recurring management fees of £1.47 million from Managed Store owners following asset transactions. These fees are positive for Lok'nStore but are irregular in their nature and have not been repeated this year.

Stripping out the impact of this, recurring management fees were up by 11.9% to £1.47 million as we saw the full-year effect of the four sale and manage-back stores executed on 31 January 2022 last year. At the year-end, we had 16 Managed Stores operating, with the Kettering store currently on site and the Bromborough (Wirral) site due on site in the coming months. These two sites will add to recurring management fees in the coming years.

Income from non-recurring fees was down in the year to £0.19 million (2022: £1.47 million). Although these fees are irregular in nature, this demonstrates the contractually embedded value in the Managed Stores income stream. Non-recurring fees come from various sources such as including planning success fees, construction and advisory fees and fees crystallised when an asset transaction occurs. In 2022, the Group benefited from one-off asset transaction fees from three stores in the portfolio which did not recur this year.

The graph below shows how our historical management fees have grown and indicates a strong correlation between the recurring management fee income and the number of stores under management.

Our Store Colleagues

The Group's progress that I have reported above could not have been achieved without the commitment and dedication of our team members who have worked extremely hard throughout this year. We did see elevated levels of colleague turnover post-Covid but we now see levels of colleague turnover settle to pre-Covid levels and the level of vacancies in the business is now at normal levels.

I would personally like to thank our team members throughout the business for the hard work, enthusiasm and dedication in achieving these results.

Our Business Model Provides Strength and Adapts Quickly in an Uncertain World

We operate with a high EBITDA margin, sheltering the business from cost increases. Debt and leverage are low, and we have considerable cash on hand. Importantly, the Company can pause capital expenditure quickly if market conditions dictate and the ongoing business requires little maintenance capital expenditure. At the year-end, we are on-site at three stores (one Managed) where the capex required to complete the two Owned Store projects is £12.7 million, compared to the £42.1 million of cash on hand.

The Company has c.17,500 customers who come from a diverse social and economic background and whose reasons for storing are widely diverse. Customers pay on a rolling four weekly up-front basis. As a result, bad debt continues to be low at 0.3% of revenue. Each customer is relatively small with no self-storage customer accounting for more than 1% of revenue. Additionally, the UK self-storage market remains under-supplied, and demand remains strong.

Future

Lok'nStore has had a good year, with revenue moving ahead steadily, demonstrating the strength of the self-storage business model throughout the economic cycle. Trading has remained good and in line with expectations since the year-end.

We are currently experiencing some cost increases, but the business is sheltered from this effect by high EBITDA margins and our ability to raise rates charged. These cost increases are now starting to slow and, in some areas, reverse.

Against the background of a strong performance from our existing stores, we have a secured pipeline of eleven new stores all of which will add considerable momentum to sales and earnings growth in the future. Our flexible model allows us to develop these new Landmark stores when market circumstances and planning permissions dictate.

We will continue to deliver increasing returns from a secure asset and capital base leveraging from our established business model and operational expertise and digital platform. We will continue our focus on delivering the highest levels of service.

Neil Newman-Shepherd

Managing Director

27 October 2023

Property Review

Store and Portfolio Strategy

Our strategy is to continue to increase the number of stores we operate without stretching our balance sheet, capitalising on a UK self-storage market which is in a state of under-supply and comparative infancy. The core focus of this strategy is the acquisition of highly prominent freehold locations in busy towns and cities in England where we will build well-branded Landmark stores.

Lok'nStore's rising 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.

The net proceeds of the equity fundraising in June 2023 will support the continued development of the secured pipeline as well as providing valuable liquidity with which to position Lok'nStore favourably as a strong buyer in future site acquisition negotiations whilst maintaining the Group's conservative approach to debt.

Flexible Approach to Site Acquisition

All the projects noted below are part of our strategy of actively managing our operating portfolio to ensure we are maximising both trading potential and 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 are focused on allocating capital in the most efficient manner to achieve our objectives.

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 store's life cycle.

Sale and Manage-Back of Stores

We also consider selling established stores on sale and manage-back contracts in order to recycle the capital into the development of new Landmark stores and manage the balance sheet as part of our successful growth strategy and disciplined capital allocation. Indeed, some of our stores have been freehold, leasehold, and Managed Stores during their operating life cycle.

Our most important consideration is always the trading potential of the store rather than the property tenure and sale and manage-backs have these additional advantages: -

i) The critical mass of store numbers benefits the business (e.g. through Google search and sharing of other marketing costs)

ii) It spreads the central management costs

iii) Through the performance and exit fees we are exposed to the trading and capital upside without committing capital

The table below illustrates the rapid growth of store numbers and the changing tenure mix over time including the growth of Managed Stores over recent years.

At 31 July 2023, Lok'nStore operated 26 of its own stores. Of these Lok'nStore owns 17 freehold and nine leasehold stores. All nine leasehold stores are inside the Landlord and Tenant Act providing us with security of tenure. The average unexpired term of the Group's leaseholds valued by JLL is 12 years and 10 months as at 31 July 2023. We operate 16 further stores under management contracts.

Our Exciting Landmark Store Pipeline

We are on-site at three stores that will open during 2024 and we have two new store opportunities which are progressing with lawyers.

Our current pipeline of eleven contracted stores will add 29.4% of extra trading space to the overall portfolio, 39% to our Owned portfolio and 12.3% to the Managed portfolio.

All 11 stores in our Secured Pipeline9 are in prominent locations with large catchment areas and demonstrate the Group's ability to source high-quality sites adding to future sales and earnings growth. These eye-catching buildings, with their distinctive orange Lok'nStore branded livery and prominent signage, create highly visible landmarks, which continue to be a big source of new customers.

The lease on the Sunbury store expired on the 30 July 2022. We are in dialogue with the landlord regarding a new lease on the existing site or in a new site. In the meantime, we continue to trade from the current store which benefits from being protected by the provisions of the Landlord and Tenant Act.

Acquisitions During the Year

Milton Keynes: New Freehold

On 4 October 2022, we exchanged contracts, subject to planning, on a freehold development opportunity in Watling Street, Milton Keynes. This new highly visible roadside location in the north-west of the city complements our existing leasehold store, seven miles to the south-east. Once developed, the Landmark store will add circa 60,000 sq.ft. of lettable area.

Eastbourne: New Freehold

Contracts have been exchanged on a freehold site in Eastbourne, Sussex where we intend to submit planning for a 60,000 sq. ft Landmark store shortly. Completion is due by the end of the year upon vacation of the current occupier. This prominant location, adjacent to supermarkets and retail, is close to our existing leasehold store. The initial land cost will be £5.53 million and total net project costs are expected to be c.£12.0 million.

Eastbourne: Existing Leasehold Site

We recently announced the signing of a new lease at our existing Eastbourne store which runs for twenty years. We have the valuable opportunity to improve profitability in the Eastbourne market via a tenant only break clause after five years. As with all other leased stores within the Group's portfolio, the new lease benefits from being within the terms of the 1954 Landlord and Tenant Act. The current store has been trading successfully since its opening in 2003.

Bolton: Purchase Completed

At the end of May 2023, the Group completed the purchase of a site in Bolton for £1.8 million, for a new 57,578 sq. ft. Landmark store.

Further New Store Pipeline Progress

Following the Eastbourne freehold purchase, our total secured pipeline of 11 secured new stores will result in the Group operating 53 stores when fully developed, increasing the Owned Store trading space by 37.7%. This pipeline of new stores will add considerable momentum to sales and earnings growth once developed.

Building work continues at three of our new Landmark store developments in Staines (long leasehold), Basildon and Kettering (managed), all of which will be open in the next 12 months and where the remaining capital expenditure as at 31 July 2023 was £12.7 million, adding a further 162,100 sq. ft. of trading space.

Planning Permissions Update

Lok'nStore's highly experienced management team continues to progress the new store pipeline despite the planning system remaining lengthy and unpredictable. 

In January 2023, we were granted planning consent to build a Landmark store in Bolton, Greater Manchester. We are now in the process of tendering for the construction of this store which will provide 57,578 sq.ft. of new space. Located on land on the east side of Manchester Road, Bolton, this site will be in due course likely transferred to an existing Managed Store client and subsequently developed by Lok'nStore and operated on their behalf.

We have received an indicative intention to formally grant planning permission under delegated powers in Barking, Greater London, subject to the agreement of planning conditions. At c.84,000 sq. ft, when it opens this freehold Landmark store will be our biggest store to date.

We have also received a grant from the Planning Committee for our updated planning permission at our freehold site in Cheshunt, Hertfordshire, subject to the agreement of planning conditions. With this permission we intend to build a c.60,000 sq.ft. Landmark store along with retail space for a discount food retailer. The discount food retailer will pay a lease premium to Lok'nStore on completion of planning matters and a further payment to Lok'nStore on completion of the building. The net remaining capital expenditure to complete this project is c.£6.5 million.

Managed Stores

Bromborough: Contracts have been exchanged on a site for a new 49,500 sq. ft Landmark store in Bromborough, Wirral. The site, which already benefits from planning permission, will be owned by an existing Managed Store client. Through our well-established Managed Store programme, Lok'nStore will receive one-off fees for finding and securing the site, development advice and use of the Lok'nStore brand. Once open, we will receive a recurring monthly management fee as a percentage of revenue plus a valuable additional recurring performance fee once returns reach an agreed level. The developer went on-site in September 2023. The store is expected to open in late 2024.

Kettering: Building work continues at the new Landmark store development in Kettering which is on track to open in spring 2024.

Summary of Our Current Pipeline at 31 July 2023

During the year, we opened two new stores in Bedford and Peterborough. Early trading in all new stores has been very encouraging. We acquired two new sites during the year and have a further two sites progressing with lawyers.

Growing Store Property Assets and Net Asset Value

ü Adjusted Total Assets £392.9 million4 up 5.9% on last year (2022: £370.9 million)

ü Adjusted Net Asset Value of £9.86 pence per share up 1.4% on last year (2022: £9.72 per share)

ü Value of operating stores £301.9 million up 8.2% on last year (2022: £279.0 million)

ü Total property assets £334.0 million up 7.8% on last year (2022: £309.7 million)

ü Investment in new stores £17.3 million (including capitalised interest) (2022: £12.2 million)

Market Valuation of Freehold and Leasehold Land and Buildings

It is the Group's policy to commission an independent external valuation of its properties at each financial year-end. Our freehold stores have been independently valued by JLL at £274.7 million (2022: £254.8 million).

Accordingly, Adjusted Total Group Assets4 have moved up in the year to £392.9 million, up 5.9% on 31 July (2022: £370.9 million). A significant contributor to this increase was the uplift from the external valuation at 31 July 2023 combined with the trading strength of our business, as well as our investment in new stores.

In this 12 month period, we saw a 0.8% same-store uplift in the valuations of our freehold and leasehold trading stores of £2.23 million. This comparison excludes the maiden valuations on our new stores in Bedford and Peterborough.

On our Owned freehold trading stores we have seen exit yields increase on average by 33 basis points, with discount rates increasing by 45 basis points. These changes had the effect of reducing the valuation by £15.45 million. Improved cash flows in the stores that were valued last year added £14.20 million, which materially reversed the effects from the changing capitalisation rates.

The remaining £24.15 million of valuation comes from the maiden valuations of our Bedford and Peterborough stores and the regearing of the Eastbourne lease.

It remains the Group's established policy to undertake a comprehensive external valuation at each year-end and we will do so at the next year end at 31 July 2024.

Valuations

It is not the current intention of the Directors to make any further significant disposals of trading stores, although individual asset disposals may be considered where value can more easily be added by recycling the capital into new stores.

The valuations of our freehold property assets are included in the Statement of Financial Position at their fair value. The value of our leasehold stores in the valuation totals £27.2 million (2022: £24.3 million) but they are held at cost less accumulated depreciation in the Statement of Financial Position.

Our freehold and leasehold stores have been independently valued by JLL at £301.9

million (2022: £279.0 million). The value of adjusted total assets of £392.9 million (2022: £370.9 million) is calculated by adding the valuation of the leasehold properties less their corresponding net book value to the other assets in the business. This provides clarity on the significant value of the leasehold stores as trading businesses which under the Group's accounting policy rules on leases are only presented at their book values within the Statement of Financial Position.

At the year-end, Lok'nStore had 42 stores trading. Of these, 26 stores are Owned with 17 freeholds, nine leasehold and 16 under management contracts.

The average unexpired term of the Group's operating leaseholds valued by JLL is approximately 12 years and 10 months at 31 July 2023. All of our leasehold stores are inside the Landlord and Tenant Act providing us with a strong degree of security of tenure.

A deferred tax liability arises on the revaluation of the properties and on the rolled-over gain arising from the disposal of some properties. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief. 

We have reported by way of a note the underlying value of these leasehold stores in revaluations and adjusted our Net Asset Value (NAV) calculation accordingly to include their value. This ensures comparable NAV calculations. An analysis of the valuations achieved is set out in the table below.

1 Includes related fixtures and fittings (refer to note 12a).

2 The nine 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 9 years and 7 months at the date of the 2023 valuation.

3 Includes £1.54 million of capitalised interest during the period (2022: £0.59 million).

4 Loan to Value calculation based on these property values.

Total freehold properties account for 91.8% of all property values (2022: 92.2%).

Adding our stores under development at cost, and land and buildings held at Director valuation, our total property valuation is up 7.8% to £334.0 million (2022: £309.7 million). The increase in the values of properties which were also valued by JLL last year was 8.2% (2022: 22.6%).

The change in the property valuation is referred to further in the Financial Review section of the Strategic Report and is detailed in note 12(a) of the notes to the financial statements. The principal drivers for this increase are: -

· The trading stores have continued to trade at high occupancy. The stabilised occupancy assumed by JLL is materially unchanged at 87.79% (2022: 88.23%)

· Discount Rates and Exit Yields applied by JLL have increased this year reflecting changes in the debt market

· The increases in these capitalisation rates are lower than seen in other sectors of the property industry over the past 12 months. There is a significant amount of capital looking to access the self-storage market with major private equity and institutions having entered the market in recent years, including Schroders, Legal and General, The Carlyle Group, Angelo Gordon, GIC, Heitman and Nuveen. The Board is aware of a number of other institutions looking to enter the market either through direct acquisition or by funding new store developments.

· Transactional activity in the UK and across Europe remains strong

JLL reported in its 2023 Valuation report: "Self-storage is widely viewed as an inflation hedge. The sector has proved itself as a resilient asset class that generally performs well during economic stress events as was seen during the Global Financial Crisis and the Covid-19 pandemic".

Further changes in interest rates, risk free rates or changes in the macro-economic outlook may affect the capitalisation rates applied by External Valuers. In note 12a, we set out the likely effects of a 50 bps and a 100 bps increase / decrease in Discount Rate and Exit Yield used in this year's valuations.

Managed Stores

· Circa £150 million of store assets under management

· 11.9% increase in recurring management fees earned

Lok'nStore manages an increasing number of stores for third party owners. Under this model, Lok'nStore can provide a turnkey package for investors wishing to own trading self-storage assets. The investor supplies the capital for the project which Lok'nStore manages. Lok'nStore will buy, build and operate the stores under the Lok'nStore brand and within our current management structure.

For Managed Stores Lok'nStore receives a standard monthly management fee, a performance fee based on certain return hurdles and fees on a successful exit. We also charge acquisition, planning and branding fees. This allows Lok'nStore to earn revenue from our expertise and knowledge of the self-storage industry without committing our capital. We can amortise various fixed central costs over a wider operating base and drive more visits to our website, moving it up the internet search rankings and benefitting all the stores we both own and manage.

This strategy improves the risk adjusted return of the business by increasing the operating footprint, revenues and profits without committing capital. There is a strong correlation between the total management fee income and the number of stores under management.

We now manage in excess of £150 million of assets under this structure on which we generated managed store income of £1.66 million this year (2022: £2.79 million). Within this, recurring fees were up 11.9% and we expect recurring fees to continue increasing steadily over the coming years as more Managed Stores are opened. Second half income was stronger and includes additional fees from store openings and non-recurring fees contributed to benefit additional supplementary fees (initial branding fees etc). Managed Store income is generated from our existing platform and central management, resulting in an effective margin from this activity of 100%.

Financial Review:

"Prudent balance sheet management and continuing investment into Landmark stores"

Ray Davies Finance Director

The Group has reported record revenue and profits with KPI metrics up on the previous year.

Same Store

ü Same Store14 Group Revenue £27.1 million up 6.6% (2022: £25.4 million)

ü Same Store Group Adjusted EBITDA1 £15.2 million down 1% (2022: £15.4 million)

ü Same Store Group Operating Profit before non-underlying2 items £9.2 million down 13.4% (2022: £10.6 million)

Headline

ü Group Revenue £27.1 million up 0.9% (2022: £26.9 million)

ü Group Adjusted EBITDA1 £15.1 million down 7.9% (2022: £16.3 million)

ü Group Operating Profit before non-underlying2 items £8.9 million down 21.9% (2022: £11.4 million)

ü Store EBITDA Margins 56.1% (2022: 61.6%)

ü Operating Profit £8.6 million down 49.9% (2022: £17.2 million)

ü Cash available for Distribution (CAD)3 £9.13 million down 19.8% (2022: £11.39 million)

ü Cash available for Distribution (CAD) per share 28.4 pence (2022: 38.7 pence)

ü Final dividend up 8.2% to 13.25 pence per share (2022: 12.25 pence per share) 

ü Cash balance £42.1 million (2022: £46.5 million)

ü £100 million Bank RCF runs to April 2026

Revenue

Total Group Revenue for the year was £27.1 million, an increase of £0.2 million (0.9%) from £26.9 million in the prior year. Same Store Revenue for the year was £27.1 million, an increase of 6.6% (2022: £25.4 million).

Post-Balance Sheet. In FY24, the Group will change the way it provides contents protection to its customers and during the course of the year will transition to an Enhanced Liability Protection Service (ELPS) for our customers. Prior to this change, IPT at 12% will continue to be paid to our insurance provider based on our total insurance revenue and will continue to be paid to us by our customers. After the change, ELPS will be subject to VAT and not Insurance Premium Tax ("IPT"). 

As we transition to the ELPS scheme, we have decided not to pass the entirety of the 8% differential uplift on to our customers immediately, and hence, gross ELPS revenue next year will be lower but not materially so and will be recovered completely over the next year or two.

Operating Costs

Group operating costs amounted to £11.8 million for the year (2022: £10.4 million) up by 14.2%

Historically, overall cost increases have been mainly driven by the expansion of the business. As previously reported at our interim results in January 2023, we are now seeing some short term but significant external cost pressures., At a headline level, total Group operating costs amounted to £11.8 million for the year (2022: £10.4 million) up by 14.2%, which includes the profit and loss costs of opening new stores in Bedford, Peterborough, Warrington and Stevenage; offset by the reduction in costs from the Sale. On a Same Store basis, costs have increased by 17.8% against last year (refer store analysis of Group operating costs in the table below).

We saw significant external cost pressure in property costs this year, with total property costs increasing by £1.45 million. Energy cost accounted for £1.2 million of this uplift with a further £0.25 million from increased Insurance costs.

Our largest cost area, staff costs, increased by 1.9% as we staffed the new stores which was offset by lower performance bonuses to our store colleagues. On a Same Store basis this increase was just 0.1%. There was also a lower national insurance cost because of the combined effects of lower bonuses paid and fewer share options exercised by management and staff in the year. 

The 9.0% increase in overhead costs is due to a combination of factors. There has been a stepped increase in audit fees as the audit profession adjusts its fee rates in response to higher regulatory costs. Legal and professional costs related to work on rent reviews, corporate tax, and increased valuation costs for additional work commissioned by the Group for valuation work completed by JLL. Bank charges which now contain a full year amortisation charge (non-cash) in respect of bank fees charged last year for the £25 million accordion and the one-year RCF extension also increased costs. Amortisation charges for 2023 were £0.24 million (2022: £0.22 million). Other administrative costs (computer support, telephones, printing postage and stationery and marketing costs etc) show no material cost increases.

Looking forward, in FY24, we estimate that Same Store operating costs to increase by around 6.0% or £0.75 million, driven materially by revised business rates which will result in our 2023-24 business rates increasing £0.49 million with transitional relief and by a further £0.20 million plus future inflationary increases in FY25. This step change in business rates will be offset in part by the reduction in medium term energy costs we are seeing through our hedged purchasing and by improvements in our insurance costs achieved during the renewal process for 2023-24.

We have a strong record of disciplined control of our costs. From FY25, we fully expect operating costs to revert to a low growth position with cost increases driven by the expansion of the business.

Strong Balance Sheet, Efficient Use of Capital, Low Debt

ü  RCF of £100 million and runs to April 2026

ü  £17.3* million invested in new store pipeline (2022: £12.2 million)

ü  Net debt (excluding leases) £12.3 million (2022: £20.3 million)

ü  Loan to Value ratio (LTV) net of cash 3.7% (2022: 6.6%)

ü  Cost of debt averaged 4.8% in the year (2022: 1.71%) on £54.4 million debt (2022: £66.8 million)

* Includes £1.54 million of capitalised interest

The Group's RCF of £100 million is a joint agreement with ABN AMRO NV and NatWest Bank plc participating equally and runs until April 2026 providing funding for more Landmark site acquisitions. The Group is fully compliant with the two principal bank covenants (LTV and Senior Interest)

Management of Interest Rate Risk

Lok'nStore generates an increasing cash flow from its strong asset base with a low LTV net of cash of 3.7% and an average cost of debt of 4.8%. The value of the Group's assets underpins a resilient business model with stable and rising cash flows and low credit risk giving the business a firm base to fund future growth.

Post Balance Sheet - Temporary Debt Reduction of Debt (RCF)

On 11 August 2023, the Group paid down £19.02 million out of its recent equity placing proceeds reducing the balance on its RCF, pending redrawing over time for its future deployment on the Group's pipeline stores.

Interest Expense and Bank Borrowings

The Group pays a margin of 1.5% on its Interest and the all-in effective rate is calculated by reference to SONIA (Sterling Over Night Indexed Average) plus margin.

· Average cost of debt 4.8% (2022: 1.71%)

· Average cost of debt (on active revolving loans at 31 July 2023) 6.2% (2022: 2.71%)

· Current cost of debt at date of this Report 6.8%

With £54.4 million of gross debt currently drawn against the £100 million bank facility, the Group is not committed to enter into interest rate hedged instruments but continues to keep the matter under review. It is not the current intention of the Group to commit to a hedged instrument at this time given our low level of net debt, low Loan to Value ratio and high interest cover.

The gross bank interest expense (before capitalisation of interest costs, non-utilisation fees and loan amortisation fees) for the year was £3.1 million (2022: £1.30 million), due to higher average debt and higher average costs of borrowing. These average costs of borrowing have continued to rise after the year-end and the Group's current cost of debt is running at 6.8%.

The Group continues to monitor closely the effects of rising interest rates on its Senior Interest covenant, which is tested on a 12-month rolling basis, and the Group's flexible business model will enable it to take appropriate steps to mitigate its effects should it be required. Capitalised interest in the year on our store development programme was £1.54 million (2022: £0.59 million). Total finance costs in the Statement of Comprehensive Income increased to £2.56 million (2022: £1.33 million).

Lok'nStore will continue to report on the Cash Available for Distribution (CAD) which aims to look through the statutory accounts and give a clear picture of the ongoing ability of the Company to generate cash flow from the operating business that can be used to pay dividends, make investments in new stores, or pay down debt.

As agreed with the banks, both the Loan to Value and Senior Interest covenants set out in our bank facility continue to be tested excluding the effects of IFRS 16. For covenant calculation purposes, debt / LTV will continue to exclude right of use assets and the corresponding lease liabilities created by IFRS 16. When testing the Senior Interest Covenant, property lease costs will continue to be a deduction in the calculation of EBITDA, in accordance with the accounting principles in force prior to 1 January 2019.

Cash Flow and Financing

At 31 July 2023, the Group had cash balances of £42.1 million (2022: £46.5 million). Cash inflow from operating activities before investing and financing activities was £15.81 million (2022: £18.57 million). As well as using cash generated from operations to fund some capital expenditure, the Group's £100 million five-year Revolving Credit Facility provides sufficient liquidity for the Group's current needs. Undrawn committed facilities at the period-end amounted to £45.6 million (2022: £33.2 million).  Cash plus undrawn committed facilities amounts to £87.7 million, leaving the business with plenty of headroom.

Earnings Per Share

The calculations of earnings per share are based on the following profits and numbers of shares.

1 Further options that could potentially dilute EPS in the future are excluded from the above because they are not dilutive in the period presented. Full details of share options are included in note 22.

High Quality Cash Flow

The Group's high quality cash flow is demonstrated by:

· Sound operating fundamentals -

o  High store EBITDA margins 56.1% (freeholds 61.8%)

o  Excellent credit model - bad debts in FY23 less than c. 0.3% of Group revenue

o  Minimum of four weeks storage paid in advance and every 28 days thereafter

o  Over 90% of new customers pay by Direct Debit

o  Contractual lien operates over customer goods in the event of serious payment default

· Diversified customer base

o  17,500 customers with a wide mix of businesses and households covering many sectors and geographies

o  No customer concentration risk - no customer accounts for more than 0.5% of Group revenue

· Other features

o  Operates in 42 different localised markets

o  Very low inventory required

o  Very low capital re-investment required once initial build and fit-out has been completed

o  Low staffing requirements per store

Increasing Cash Flow Supports a 10.1% Annual Dividend Increase

ü Annual dividend 19 pence per share up 10.1% (2022: 17.25 pence per share)

ü Cash Available for Distribution of 28.4 pence per share (2022: 38.7 pence per share)

ü Cash Available for Distribution £9.13 million (2022: £11.39 million)

CAD provides a clear picture of ongoing cash flow available for dividends, new store development or debt repayment.

Analysis of the Underlying Business After Adjustment for Non-underlying Items

When comparing 31 July 2023 with last year, the Group benefited last year from a higher than usual level of exceptional gains principally resulting from the Sale totalling £5.9 million in the prior year.

In the table below we separate these non-underlying items and non-recurring management fee income to show the performance of the underlying business.

1 Represents non-recurring management fees

2 Refer note 4 of the notes to the financial statements for the analysis of non-underlying items

Taxation

The Group has made a current tax provision against earnings in this period of £1.2 million (2022: £1.7 million) based on a blended corporation tax rate of 8 months at 19%, and 4 months at 25%. (2022: 19%). The deferred tax provision which is calculated at forward corporation tax rates of 25% is substantially a tax provision against the potential crystallisation (sales) of revalued properties and past 'rolled over' gains, and amounts to £66.3 million (2022: £63.2 million).

The external revaluation of the trading stores at 31 July 2023 is the principal contributor to the uplift in the total deferred tax provision at the year-end. (See note 20).

Gearing11 (Excluding IFRS16 Lease Liabilities)

At 31 July 2023, the Group had £54.4 million of gross bank borrowings (2022: £66.8 million) and cash of £42.1 million (2022: £46.5 million) representing gearing of 5.3% (2022: 9.9%) on net assets of £230.5 million (2022: £205 million) - after adjusting for the uplift in value of short leaseholds which are stated at depreciated historic cost in the Statement of Financial Position gearing is 4.9% (2022: 9.1%).

Gearing11 (Including IFRS16 Lease Liabilities)

At 31 July 2023, the Group had £54.4 million of gross bank borrowings (2022: £66.8 million) and cash of £42.1 million (2022: £46.5 million) with £14.7 million of lease liabilities (2022: £10.9 million) representing gearing of 11.7% (2022:15.2%) on net assets of £230.5 million (2022: £205 million) - after adjusting for the uplift in value of short leaseholds which are stated at depreciated historic cost in the Statement of Financial Position gearing is 12.7% (2022: 17.0%).

Capital Expenditure

The Group has an active new store development programme. The Group has grown through a combination of building new stores, existing store improvements and relocations. We have concentrated on extracting value from existing assets and developing through collaborative projects and management contracts.

Capital expenditure during the period totalled £17.3 million (2022: £12.2 million). This was primarily the contract exchange of the Milton Keynes site, the purchase of the Bolton site and the exchange of contracts on the Eastbourne site. There are ongoing construction and fit out works at our sites in Staines and Basildon, final costs on Bedford and Peterborough prior to opening, as well as the completion of construction works at our Stevenage and Warrington stores. Planning and pre-development works at our Bournemouth, Altrincham, Barking and Cheshunt sites also featured.

The Group has capital expenditure contracted but not provided for in the financial statements of £13.1 million (2022: £11.2 million). We carefully evaluate the ongoing economic and trading position before making any further capital commitments and can reduce capex quickly if the market deteriorates.

Lok'nStore has a good credit model, with low debt and gearing and which is strongly cash generative from an increasing asset base. Increased bank facilities, on competitive margins, and extended to April 2026, positions the business well for the future.

Statement of Financial Position

Group net assets at the year-end were £230.5 million, up 12.3% (2022: £205.3 million)

The Parent Company's net assets have increased because of the £7.0 million dividend paid up from Lok'nStore Limited, the principal operating business of the Group.

Market Valuation of Freehold and Leasehold Land and Buildings

It is the Group's policy to commission an independent external valuation of its properties at each financial year-end.

Our freehold stores have been independently valued by JLL at £274.7 million (2022: £254.8 million), up 7.8%. Please refer to the table of property values in the Property Review.

Accordingly, Adjusted Total Group Assets4 have moved upwards sharply in the year to £392.9 million, up 5.9% (2022: £370.9 million). A significant contributor to this increase was the uplift from the external valuation at 31 July 2023 combined with the trading strength of our business, as well as our investment in new stores.

In this 12-month period, we saw a Same Store uplift in valuations of £2.6 million in our freehold and leasehold trading stores, a 0.94% increase. The like-for-like comparison excludes the Sale, and the maiden valuations on our new stores in Bedford and Peterborough.

It remains the Group's established policy to undertake a comprehensive external valuation at each year-end and we will do so at the next year-end at 31 July 2024.

Valuations

It is not the intention of the Directors to make any further significant disposals of trading stores, although individual disposals may be considered where value can more easily be added by recycling the capital into new stores.

The valuations of our freehold property assets are included in the Statement of Financial Position at their fair value. The value of our leasehold stores in the valuation totals £27.2 million (2022: £24.3 million) but they are held at cost less accumulated depreciation in the Statement of Financial Position.

A deferred tax liability arises on the revaluation of the properties and on the rolled-over gain arising from the disposal of some properties. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief.

We have reported by way of a note, the underlying value of these leasehold stores in revaluations and adjusted our Net Asset Value (NAV) calculation accordingly to include their value. This ensures comparable NAV calculations. An analysis of the valuations achieved is set out in the table below.

Increase in Adjusted Net Asset Value Per Share

Adjusted Net Assets per Share are the net assets of the Group 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 (zero) are excluded from the number of shares.

At 31 July 2023, the Adjusted Net Asset Value per share (before deferred tax) increased 1.4% to £9.86 from £9.72 last year.

This increase is a result of higher property values on our existing stores as the strength of our Landmark stores is recognised, combined with cash generated from operations less dividend payments, offset in part by an increase in the shares in issue due to the exercise of a small number of share options during the year.

1 A deferred tax adjustment in respect of the uplift in the value of the leasehold properties has been included, calculated by applying the substantively enacted corporation tax rate of 25% (2022: 25%). 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.

Move to SETS Trading Platform:

In February 2023, the Board approved a transition for trading of the Company's shares on AIM from the London Stock Exchange's SETSqx (Stock Exchange Electronic Trading Service: Quotes and Crosses) trading platform to its SETS (Stock Exchange Electronic Trading System) platform, effective 7 February 2023.

This move is intended to provide investors with access to the entire SETS system, providing liquidity via traditional order book trades, as well as firm two-way quotes from market makers.

Summary

Lok'nStore Group operates within the UK self-storage industry which is still an immature sector with strong growth prospects. With a low Loan to Value ratio and plenty of headroom on our bank facilities, this market presents an excellent opportunity for further growth of Lok'nStore's business.

Recently opened Landmark stores and our ambitious new store pipeline demonstrate the Group's ability to use those strengths to exploit the opportunities available throughout the economic cycle.

Our high margins, strong balance sheet and flexible business model enables Lok'nStore to confidently look through the current external market turbulence. 

We look to the future with confidence.

Ray Davies

Finance Director

 Principal Risks and Uncertainties:

Principal Risks and Uncertainties in Operating our Business

Risk management has been a fundamental part of the successful development of Lok'nStore. The process is designed to improve the probability of achieving our strategic objectives, keeping our team members safe, protecting the interests of our shareholders and key stakeholders, and enhancing the quality of our decision-making through understanding the risks inherent in both the day-to-day operations and the strategic direction of the Group, as well as their likely impact.

Management of our risks helps us protect our reputation, which is very important to the ability of the Group to attract customers, particularly with the growth of social media. We always try to communicate clearly with our customers, suppliers, local authorities, communities, team members, and shareholders, and to listen and take account of their views. We operate strict Health and Safety policies and procedures and more information on these can be found in the Environmental and Social Section.

Our Risk Management Governance

The Board has overall responsibility for the management of the Group's risks. As the Group's strategic direction is reviewed and agreed, the Board identifies the associated risks and works to reduce or mitigate them using an established risk management framework in conjunction with the Executive Management Team. This is a continuing and evolving process as we review and monitor the underlying risk elements relevant to the business.

Risk Management Framework

The risk register covers all areas of the business including property, finance, employees, insurance, customers, strategy, governance, and disaster recovery. The risks are categorised by risk area and numerically rated based on a combination of 'likelihood' and 'consequences and impact' on the business. The combination of these two becomes the 'risk factor' and any factor with a rating over 15 is reported to the Board.

Risk Management Team

Ray Davies, Finance Director, is the Board member responsible for ensuring that the risk management and related control systems are effective, and that the communication channels between the Board and the Executive Management Team are open and working correctly. The Executive Management Team is responsible for the day-to-day management of the risk factors. Responsibility for identifying, managing, and controlling the risk is assigned to an individual as shown on the risk register depending on the business area. Reporting against the risks forms part of the monthly Executive management meeting and the risk factor may be amended if applicable. There are also sub-committees for particular risk areas which meet regularly. The Risk Management and Reporting Structure is shown below.

Our Risk Management and Reporting Structure

Principal Risks

The principal risks our business faces and our key mitigations, are outlined in the table below.

 Consolidated Statement of Comprehensive Income

1  Adjusted EBITDA is defined in the accounting policies section of the notes to this Report.

Consolidated Statement of Changes in Equity

Attributable to owners of the Parent