Lok N Store Regulatory News (LOK)

29 October 2018

Lok'nStore Group Plc

Preliminary results correction

In the Preliminary results released today at 07.00 under RNS Number 3853F the dividend record date stated in Note 8 should have referred to 30 November 2018, not 30 December 2018. In all other respects this morning's announcement remains unaffected and is reproduced below in corrected form in full:

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

Preliminary results

for the year ended 31 July 2018

Lok'nStore Group Plc, a leading company in the UK self-storage market announces results for the year ended 31 July 2018.

Highlights of Lok'nStore Group plc results 2018

"Impressive growth and expanding new store opening programme"

Robust trading

ü Group Revenue £17.75 million up 6.6 % (2017: £16.65 million)

ü Group Adjusted EBITDA1 £7.30million up 12.3% (2017: £6.49 million)

ü Operating Profit £5.71 million up 33.9% (2017: £4.26 million) after exceptionals2

ü Profit before taxation £5.33 million up 34.3% (2017: £3.97 million)

Significant growth in asset value

ü Adjusted Total Assets3 up 18.2% to £181.4 million (2017: £153.5 million)

ü Adjusted Net Asset Value4 per share up 15.3% to £4.80 (2017: £4.16)

Cash flow drives 10.0% dividend increase - progressive dividend policy

ü Annual dividend 11 pence per share up 10.0% (2017: 10 pence per share)

ü Cash available for Distribution (CAD) 5 £5.60 million up 8.3% (2017: £5.17 million)

ü CAD 5 per share up 7.5% to 19.4 pence (2017: 18.1 pence)

Strong balance sheet, efficient use of capital, conservative debt

ü Net debt £32.3 million (2017: £17.4 million)

ü Loan to value ratio6 19.7% (2017: 14.0%)

ü Increased bank facility from £40 million to £50 million - runs until January 2023

13 stores in pipeline7 to deliver further growth in revenue, profits and assets

ü 3 new stores opened this year accounting for 29.2 pence of increase in NAV per share

ü 3 new stores opening this coming financial year

ü Plus 5 new sites secured

ü Expanding pipeline of 13 new landmark stores

ü Taking total to 42 stores once developed

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, 

"Lok'nStore Group has had an excellent year successfully implementing our strategic objectives. We have created a strong platform for an exciting period of growth for Lok'nStore with revenue, profits and asset values all moving ahead. Our adjusted net asset value per share has increased by a substantial 15.3% to £4.80 this year and we are raising the dividend by 10.0% to 11 pence per share."

"We have achieved a notable acceleration in our store pipeline to 13 sites which will increase operating space by 32.4% over the coming three years. This will add considerable momentum to sales and earnings growth.

Lok'nStore's strong balance sheet and strategy of opening new landmark stores position the Group well for future growth."

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 understand how the underlying business is performing. The following table identifies those measures and explains what we mean when we use them and importantly why we use them and what they tell you about our business and performance.

1. Group Adjusted EBITDA - Earnings before interest, tax, depreciation and amortisation - 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, exceptional items, finance income, finance costs and taxation.

2. Exceptional items - refers to 'one-off' items of a non-operational nature which arose during the year and are unlikely to be recurring. (Refer Note 2(c) of the Financial Statements).

3. Adjusted Total Assets - The value of adjusted total assets of £181.4 million (2017: £153.5 million) is calculated by adding the independent valuation of the leasehold properties of £18.2 million (2017: £16.7 million) less their corresponding net book value (NBV) £2.7 million (2017: £2.9 million) to the total assets in the Statement of Financial Position of £165.9 million (2017: £139.7 million). This provides clarity on the significant value of the leasehold stores as trading businesses which under accounting rules on operating leases are only presented at their book values within the Statement of Financial Position.

4. NAV - Net Asset Value per share - Adjusted net asset value per share is the net assets adjusted for the valuation of leasehold stores (properties held under operating 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.

5. 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 ongoing net operating cash that can be used to pay dividends to shareholders. The calculation of the Cash available for Distribution is set out in the Financial Review.

6. 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 £32.3 million as set out in note 24(b) (2017: £17.4 million) as a percentage of the total properties independently valued by JLL and including development land assets totalling £162.8 million (2017: £124.8 million) as set out in the Financial Review.

7. Pipeline sites - means sites for new stores that we have either exchanged contracts on or have agreed heads of terms on and are now with our lawyers for completion. We now have 13 pipeline sites which include 9 secured and 4 sites which are currently with lawyers.

8. Adjusted Store EBITDA is Adjusted EBITDA (see 1 above) before the deduction of central and head office costs. This important information provides an insight into 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 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 Chief Executive Officer's Review.

9. 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. The calculation of the Gearing percentage, also referred to as the net debt to equity ratio is set out in Note 16 of the Financial Statements.

10. Group Adjusted EBITDAR - EBITDAR is Earnings before interest, tax, depreciation amortisation and rent. The measure is designed to give clarity on the effect of the rent payable by leasehold stores and how its elimination enables an analytical comparison between freehold stores operating performance (which do not pay rent) and leasehold stores operating performance. This analysis is set out in a table in the Chief Executive Officer's Review.

11. 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 1a), giving a perspective on the cost efficiency of the business when compared to the cost ratio of the previous year.

Chairman's Statement

Last year we committed to a period of rapid and sustainable growth based on the strong platform we have built. It is my pleasure to introduce this year's results which show that we are fulfilling that commitment.

During the year we opened 3 new landmark stores which are all trading above expectations and have contributed to both the growth in turnover and the significant rise (15.3%) in our Adjusted Net Asset Value per share to £4.80 (2017: £4.16). Of this 64.4 pence increase, 29.2 pence was accounted for by the new store openings demonstrating the value creative capacity of our landmark store opening strategy. Our new store pipeline is 9 sites and we have 4 more progressing with our lawyers. Of these, 6 are scheduled to open in 2019 and 3 in 2020. This acceleration in new store openings is reflected in the increase in capital expenditure to £21.9 million this year up from £6.3 million last year (Refer note 10(b)). When these stores open they will add further to our profits and asset value.

The detail behind these results is discussed further in our Chief Executive's review and the Financial Review. For me the performance of Lok'nStore this year can be summarised under three headings:

· Strong operating performance resulting in an increase in turnover and profits

· Growing asset value driven by existing store performance and growth in new stores

· Many more stores under development and more acquisitions on the horizon

The increasing value of our assets is emphasised by further transactions in the market positively reflecting the demand for established self-storage assets, especially of the quality of our newly built stores. In their July 2018 Market Commentary Report JLL estimate, "there have been around €350m of self-storage transactions over the last 12 months in Europe" and note that they are "seeing a broad base of specialist self-storage investors, private equity and institutions looking to invest in the sector - with real appetite for scale of over £100m."

Managed Stores

Our growth strategy includes increasing the number of stores we manage for third party owners. This enables the Company to earn revenue without having to commit our capital, to amortise fixed central costs over a wider operating base and drive further traffic to our website which benefits our entire operation. Our current pipeline includes an additional 4 managed stores which will take the total number of managed stores to 12.

For the first time in these accounts (note 2(c)) we are recognising carried interest fee receivable of £361,000 relating to a managed store demonstrating the value of this strategy.

Committed People

None of these results are possible without the commitment of our members of staff who deserve our thanks and importantly our continued investment in them. This year we have provided over 5,000 hours of training via our Academy and you can read more about this in our corporate social responsibility report. We have also reviewed our pay levels to ensure that all of our employees are paid fairly and we continue to promote equity ownership to our staff via our Share Investment Plan and the granting of options.

We will continue to invest in our people because it makes business sense, directly contributing to our strategic and operational objectives which are to:

· Steadily increase cash available for distribution (CAD) per share enabling a predictable growth of the dividend from a strong asset base with conservative levels of debt

· Fill existing stores and improve pricing

· Acquire more sites to build new landmark stores

· Increase the number of stores we manage for third parties

Board Governance

In March 2018 the London Stock Exchange published AIM Notice 50 requiring companies to comply with a recognised corporate governance code. Your Board has decided to apply the Quoted Companies Alliance's (QCA) Corporate Governance code which takes a proportionate principle based approach to the application and reporting of good governance. We believe this code is appropriate to the size and nature of the Company. Please refer to the Corporate Governance sections of this report and our website for more information.

The composition of the Board is also my responsibility and once again this year I spent time reviewing the Board's configuration with our team. An account of this work is given under board performance and evaluation; it has reconfirmed to me that the current composition of your board continues to be in the best interest of Shareholders as a whole.

Progressive Dividend Policy

For the seventh consecutive year and in line with our stated aim to provide a predictable growth in dividend, we are proposing to increase the annual dividend pay-out by one penny. The Group will therefore pay a final dividend of 7.67 pence per share on 11 January 2019 following the payment of an interim dividend of 3.33 pence per share in June 2018 making a total annual dividend of 11 pence per share, up 10% from 10 pence last year.

I hope you enjoy reading this year's report and that you will feel as confident and optimistic as I do about the future of Lok'nStore Group plc.

Simon G Thomas

Chairman

26 October 2018

The Strategic Report

· The UK Self-Storage Market

· Our Business Model

· Our Strategic Objectives

· Chief Executive Officer's Review

· Property Review

· Financial Review

· Principal Risks and Uncertainties

The UK Self-Storage Market

The Self-Storage Association UK Annual Industry Survey 2018 reports that the UK Self-Storage industry is made up of about 1,505 sites offering 44.6 million square feet of space. It calculates an 8.8% increase in space used by customers in 2017.

Market overview

As reported in the Self-Storage Association UK (SSA UK) Annual Industry Survey 2018 the UK self-storage market continues to grow but remains under-developed relative to Australia and the US. In the UK, there are an estimated 1,505 self-storage facilities providing approximately 44.6 million square feet of storage space. With a population of 65.2 million people in the UK this equates to only 0.7 square feet per person compared to 9.3 square feet per person in the USA and 1.8 square feet in Australia.

The structure of the UK industry is changing. When the industry first emerged companies were predominately single owner occupied sites often located in industrial areas but larger operators (defined as operators managing 10 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, according to the SSA UK, larger operators now own or manage around 30% of facilities which translates to 40% of market share in terms of revenue and space. Currently Lok'nStore is the 4th largest operator in the UK with 29 stores providing 1.4 million square feet of space.

Drivers of demand for self-storage

Demand for self-storage by both business and household 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 support a house sale, but increasingly householders are using storage on a semi-permanent basis to free up space at home or store belongings they don't 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 seasonal sales or office moves or refurbishments.

Lok'nStore's opportunity in the market

The Self-Storage Association UK (SSA UK) Annual Industry Survey 2018 notes that public awareness of and demand for self-storage is increasing. We know that on average customers chose a store within 5 miles of their home or business. With a pipeline of 9 secured stores and a further 4 stores progressing through the acquisitions process, Lok'nStore is well placed to attract these customers and add further momentum to the growth of our sales and profits.

Combining the Company's competitive strengths (recognised brand, excellent customer service, rigorous cost control) and the attractive market dynamics of the storage sector (growing sector, under supply, proven resilience during an economic downturn) with our strong balance sheet and flexible operating and ownership model (see our portfolio strategy on page 10), we believe Lok'nStore can take advantage of the opportunities presented and grow at a rapid rate without significantly increasing risk.

Our Business Model

Our overriding 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.

Our Strategic Objectives

Chief Executive Officer's Review

Lok'nStore Group has had an excellent year successfully implementing all of our strategic objectives. Revenue, profits and asset values have all moved ahead steadily. Our rapidly expanding 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 with plenty of new capacity contributing to growth over the coming three years. 

Robust trading

Group revenue for the year was £17.75 million, up 6.6% year on year (2017: £16.65 million) driven by occupancy increases in both old and new stores. This revenue growth led to a 12.3% increase in Group Adjusted EBITDA. Tight control over operating costs leading to a 2% increase in self-storage margins has also contributed in pushing the Group's profits to record levels.

ü Self-storage revenue £14.78 million up 5.6% (2017: £13.99 million)

ü Adjusted Store EBITDA £8.42 million up 9.3 % (2017: £7.70 million)

ü Unit occupancy up 7.7%

ü Unit pricing up 0.5%

With costs firmly under control revenue growth translates into healthy profit growth. Total adjusted store EBITDA in self-storage, a key performance indicator of profitability and cash flow of the business, increased 9.3% to £8.42 million (2017: £7.70 million). The overall adjusted EBITDA margin across all stores was nearly 2 percentage points higher at 57.0% (2017: 55.1%) with the adjusted Store EBITDA margins of the freehold stores at 64.1% (2017: 63.4%) and the leasehold stores at 44.1% (2017: 41.5%).

Over the course of the year unit occupancy rose by a healthy 7.7% and unit pricing increased 0.5%. Out of 29 stores open 15 were trading at above 70% occupancy. At the end of July 2018 33.9% of Lok'nStore's self-storage revenue was from business customers (2017: 33.5%) and 66.1% was from household customers, (2017: 66.5%). By number of customers 17.8% of our customers were business customers (2017: 18.1%) and 82.2% household customers (2017: 81.9%).

By the year-end we had 8 managed stores following the opening of the Hemel Hempstead store in November 2017.

The average unexpired term of the Group's operating leaseholds is approximately 11 years and 1 month as at 31 July 2018 (10 years and 8 months: 31 July 2017). The leaseholds produced 27.6% of the total store EBITDA in the year (2017: 28.5%).

In the table below we show how the performance of the stores varies between freehold and leasehold stores. Currently 67.2% of Lok'nStore owned trading space is freehold and 32.8% is leasehold. Inevitably the leaseholds trade on lower margins due the rent payable, but nevertheless the 44.1% margins 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. The freehold stores produce 72.4% of the store EBITDA and account for 88.8% of valuations (including secured pipeline stores).

When the secured pipeline is fully developed the freeholds will account for 55.8% of trading space, leaseholds will be 19.5% and managed stores 24.7%. This mix of tenures with their different risk and return characteristics provides strength in the balance sheet and opportunities to create value throughout the cycle, and is always driven solely by consideration of the operating business.

Portfolio Analysis and Performance Breakdown

In the table below we show how the performance breaks down between the age brackets of the stores. Clearly older stores have had time to fill up and produced a 67% EBITDAR profit (earnings before interest, tax, depreciation, amortisation and rent) margins. Over time as new stores goes through their life cycle they will progress towards the same margins as the fully established stores and add substantially to revenues and profits.

Operating Performance at a glance (Lok'nStore owned stores only)

Table covers Lok'nStore owned stores only

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

Ancillary Sales

Ancillary sales which consist of boxes and packaging materials, insurance and other sales increased 4.0% (2017: 2.6%) over the year accounting for 11.0% of self-storage revenues (2017: 11.2%).

Serviced document storage revenue and profits up

ü Revenue £2.38 million up 2.4% (2017: £2.33 million)

ü Adjusted EBITDA £0.662 million up 23.7% (2017: £0.54 million) (after adjustment for Lok'nStore Management charges)

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.

Marketing

Store visibility remains pivotal to our marketing efforts. Our new landmark stores are located in highly prominent locations and we continually invest in new signage and lighting at our existing stores.

During the year our marketing efforts have continued to focus on the presentation of our buildings to attract passing traffic and internet marketing. With their prominent positions, distinctive design and bright orange elevations, our stores raise the profile of the Lok'nStore brand and generate a substantial proportion of our business. 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, 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, 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 relatively large marketing budgets.

Pipeline of new stores

Against this background of ever improving operating performance we have invested £21.7 million in store development this year and we have now seen a rapid increase in our new store pipeline to 9 secured stores by the reporting date, which will take the total to 38 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. We have 4 further store acquisitions progressing through the legal process.

When we break the speed of fill-up of our stores into their age groups, we see that over time the stores have filled up faster with the most recently opened stores filling fastest of all. We believe that this shows that the UK self-storage market is still in its infancy with low penetration and increased consumer awareness leading to faster fill. It also shows the strength of Lok'nStore's newly developed landmark store model.

Managed stores

Lok'nStore manages an increasing number of stores for third party owners. Under this model Lok'nStore provides a turnkey package for investors wishing to own the underlying self-storage assets. The investor supplies all 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.

The operating expenses of the store are paid for by the third party out of the store revenue with Lok'nStore receiving various fees and performance bonuses. Lok'nStore has no costs directly associated with this function and no equity capital at risk. Therefore this activity generates an increasing return at minimal risk increasing the overall risk adjusted return of the Group as a whole.

Notable in this year's accounts (note 2(c)) is a carried interest receivable of £361,000 in relation to a management contract, over and above the £534,000 store management fees noted elsewhere. This is the first time the Group has recognised such a gain. As the number of managed stores increases rapidly over the coming years the revenue from them will rise commensurately.

Future

Lok'nStore Group has had an excellent year successfully implementing our strategic objectives. We have created a strong platform for an exciting period of growth for Lok'nStore with revenue, profits and asset values all moving ahead.

Against this background of a strong performance from our existing stores, we have also achieved a notable increase in our pipeline to 13 new stores. This will increase operating space by 32.4% over the coming three years, adding considerable momentum to sales and earnings growth.

Lok'nStore's strong operating performance and robust balance sheet underpin our strategy of new landmark store openings positioning the Group well for future growth.

Andrew Jacobs

Chief Executive Officer

26 October 2018

Property review

Store and portfolio strategy

In the self-storage industry each operating store is a profitable unit in its own right. Therefore our strategy is to continue to increase the number of stores we operate without stretching our balance sheet. The core focus of this strategy is the acquisition of highly prominent freehold locations in busy towns in Southern England where we will build well branded landmark stores.

Flexible approach to site acquisition

All of the projects detailed 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 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 development. We also consider selling established stores on sale and manage back contracts in order to recycle the capital and protect the balance sheet. 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.

Lok'nStore now operates 29 stores and 2 serviced document stores in Southern England.  Of the 29 stores Lok'nStore owns the freehold or long leasehold interest in 14 stores, 7 stores are held under commercial leases with all of our leasehold stores inside the Landlord and Tenant Act providing us with a strong security of tenure. The average unexpired term of the Group's operating leaseholds is approximately 11 years and 1 month as at 31 July 2018. 

A further 5 freehold stores are under development which will be owned by Lok'nStore.

Additionally we have 8 managed stores for third party owners and a further 4 managed stores under development. One of the features of Lok'nStore's strategy is to increase the number of stores we manage for third parties selling our expertise in storage solutions management, operating systems and marketing, leveraging our brand and skill rather than retaining a proprietary interest in the land. From a very low base Lok'nStore has grown this managed store revenue to around £0.5 million currently (up 27.3%) but with the pipeline of secured sites and further additional sites anticipated for the foreseeable future we expect this revenue stream to continue to grow strongly.

When this secured development pipeline of 9 sites has been completed Lok'nStore will operate from 38 stores and 2 serviced document stores, including 12 managed stores. In addition 4 further new store opportunities are progressing with lawyers.

The 9 secured pipeline sites represent a combination of owned and managed stores. These will add 465,000 sq. ft. of new capacity adding 39% to freehold trading space and 54% to the managed store portfolio delivering a 32% increase in overall trading space.  

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 tenure is always driven by the requirements of the trading business.

Growth from new stores and more new stores to come

ü Early trading at our new Hemel Hempstead, Gillingham and Wellingborough stores has been excellent

ü Dover store to open December 2018

ü Exeter store to open spring 2019

ü Cardiff store to open spring 2019

ü Ipswich store to open summer 2019

Acquisition of sites for new landmark stores - sites acquired during FY2018

ü Bedford - scheduled to open in 2020 55,000 sq.ft.

ü Bournemouth - scheduled to open in 2020 80,000 sq.ft.

ü Cheshunt - scheduled to open in 2020 60,000 sq.ft.

ü Leicester - scheduled to open end of 2019 60,000 sq.ft.

ü Cardiff - see above

We have 4 more pipeline sites currently with lawyers.

Growing Store property assets and Net Asset Value

ü Adjusted total assets now circa £181.4 million3 (2017: £153.5 million) up 18.2% on last year

ü Adjusted net asset value of £4.80 per share up 15.3% on last year (2017: £4.16 per share)

Lok'nStore has a strong and growing asset base. Our freehold and operating leasehold stores have been independently valued by Jones Lang LaSalle (JLL) at £146.2 million (Net Book Value (NBV) £55.4 million) as at 31 July 2018 (2017: £119.6 million: NBV £45.3 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 £165.2 million (2017: £127.8 million). This translates into an adjusted net asset value of £4.80 per share up 15.3% on last year (2017: £4.16 per share).

The increase in the property values of properties which were also valued last year was 6.33% (2017: 6.14%).

Financial Review

Record financial results on all measures

ü Group Revenue £17.75 million up 6.6 % (2017: £16.65 million)

ü Group Adjusted EBITDA £7.30 million up 12.3% (2017: £6.49 million)

ü Operating profit (before exceptional items2) £5.17 million up 16.9% (2017: £4.38 million)

ü Operating profit (after exceptional items2) £5.71 million up 33.9% (2017: £4.26 million)

The Group has again delivered strong financial results.

Earnings per share

Basic earnings per share (EPS) were 13.05 pence up 18.4% (2017: 11.02 pence per share). Diluted EPS were 12.83 pence up 20.6% (2017: 10.64 pence per share). If 2018 figures are adjusted to eliminate the 2018 exceptional items of £0.59 million, the 2018 EPS is adjusted to 11.0 pence per share (2017: 11.43 pence per share) and the 2018 diluted EPS to 10.81 pence per share (2017: 11.03 pence per share).

Purchase of treasury shares: The Group did not buy or sell 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 purchases should it be considered to be in the best interests of shareholders to do so.

Operating costs

ü Cost ratio11 reduced to 57% (2017: 59%)

We have a strong record of reducing our Group operating costs each year. We cautioned in our 2017 year end results that although we maintain a disciplined approach to costs, continuing to reduce them is increasingly challenging while delivering an acceleration of our store opening programme.

Group operating costs amounted to £10.1 million for the period, a 2.7% increase year on year (2017: £9.84 million) which derived from higher aggregate costs as we opened new landmark stores. We are also spending more on internet marketing. Nevertheless our tight discipline on costs has enabled us to reduce our cost ratio by 2.0% points to 57%.

In respect of property costs which mainly constitute rent and rates we had in the previous year felt the effects of higher rates bills as we opened our new landmark stores and had incurred rates on a development site. We have now negotiated rate reductions on these stores resulting in an overall cost reduction this year in property costs. Rents have remained broadly static but overall are lower in this period as the closure of a store has eliminated rent costs (2017: £70,944). Utility costs are lower as a result of a renegotiation of our energy tariffs. Overall property costs are down 3.2%.

Staff costs increased by 6.6% as we staffed the new stores and paid performance bonuses to all our store staff for exceptional sales growth. We also incurred additional national insurance costs arising on the exercise of employee share options.

The principal increase in overhead costs have been driven by a higher level of legal and professional costs due to work on rent reviews, business rate reductions and abortive costs arising on prospective store acquisitions that did not proceed.

Overall the cost increases are driven by the expansion of the business and we are seeing little other cost pressures. Significantly, if we exclude the costs of the new stores overall costs increased by a modest 1.4% compared to last year.

Strong balance sheet, efficient use of capital, conservative level of debt

ü Increase in £40 million Bank facility to £50 million on same terms

ü £21.7 million invested in new store pipeline

ü Net debt £32.3 million (2017: £17.4 million)

ü Loan to value ratio (LTV) 19.7% (2017: 14.0%)

ü Cost of debt averaged 1.85% in the year on £32.3 million drawn (2017: 1.66%)

Lok'nStore is a robust business with an excellent credit model, low debt and gearing and which is strongly cash generative from an increasing asset base. Its increased bank facilities at low rates of interest position the business for new store development.

Increase in £40 million Banking Facility to £50 million

Following the agreement of a two year extension on its existing banking facility with Royal Bank of Scotland last year, the Group has now agreed an increase in its £40 million facility to £50 million which will provide continued funding for site acquisitions as well as working capital for the development of the business over the medium term. 

The Group is not obliged to make any repayments prior to the facilities expiration in January 2023 and bank covenants and interest margin on existing facilities are unaffected by this increase in the facility size. 

Management of interest rate risk

Under the current bank facility the Group is not committed to enter into hedging instruments but rather to keep such matters under review. Given our relatively low level of indebtedness, low Loan to Value ratio and high interest cover, combined with the wider uncertainties within the economy, it is not the intention of the Group to enter into an interest rate hedging arrangement at this time.

Cash flow and financing

At 31 July 2018 the Group had cash balances of £5.0 million (2017: £11.4 million). Cash inflow from operating activities before investing and financing activities was £7.0 million (2017: £5.5 million). As well as using cash generated from operations to fund some capital expenditure, the Group has a revolving credit facility which runs to 2023. This provides sufficient liquidity for the Group's current needs. Undrawn committed facilities at the year-end amounted to £12.7 million (2017: £11.2 million).

Gearing 

At year end there was £37.3 million of gross borrowings (2017: £28.8 million) representing gearing of 31.3 % (2017: 19.6%) on net debt of £32.3 million (2017: £17.4 million) Refer note 16 - Capital management. The leaseholds are stated at depreciated historic cost in the statement of financial position. If these leaseholds are adjusted for the uplift in value to their Jones Lang LaSalle (JLL) valuation, gearing drops to 27.2% (2017: 16.9%). If the deferred tax liability carried at year-end of £19.7 million (2017: £16.4 million) is excluded gearing drops further to 23.4% (2016: 14.6%).

Strong cash flow supports 10.0% dividend increase

ü Annual dividend 11 pence per share up 10.0% (2017: 10 pence per share)

ü Cash available for Distribution (CAD) from operations £5.60 million up 8.3% (2017: £5.17 million)

ü Cash available for Distribution (CAD) of 19.4 pence per share (2017: 18.1 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.

1 Net finance costs represent finance costs paid per the cash flow statement of £0.42 million less bank interest received of £0.08 million adjusted for capitalised interest of £0.2 million to give the true cash flow effect.

Total CAD has increased by 8.3% as a result of higher EBITDA profit and despite a higher net finance charge due to the repayment of the development loan in November 2017. Interest received in the year relating to this loan was £62,500 (2017: £250,000).

Capital expenditure and capital commitments

The Group has grown through a combination of new site acquisition, existing store improvements and relocations. Capital expenditure during the year totalled £21.74 million (2017: £6.63 million). This was primarily the completion of construction works at our development sites in Gillingham and Wellingborough which are now open and trading as well as completing the acquisition of our Bournemouth, Bedford, Cardiff, Cheshunt, Gloucester and Ipswich sites. £0.2 million (2017: nil) of interest was capitalised against development assets.

The Group has capital expenditure contracted but not provided for in the financial statements of £3.4 million (2017: £2.6 million).

Statement of Financial Position

Net assets at the year-end were £103.3 million up 15.9% (2017: £89.1 million). Freehold and long leasehold properties were independently valued at 31 July 2018 at £128.0 million up 24.4% (2017: £102.9 million). Refer to the table of property values below.

Review of distributable reserves and rectification of prior dividends (the Relevant Dividends)

The Board has become aware of certain technical issues relating to the levels of distributable reserves within the Lok'nStore Group and the payment of interim and final dividends by Lok'nStore Group plc to our shareholders during the period from 2013 to 2016 ('the Relevant Dividends').

Lok'nStore's Group structure is that almost all of the self-storage operations and assets and cash sit within the principal operating subsidiary Lok'nStore Limited. Lok'nStore Group plc is of itself a non-trading holding company. Throughout this period at all relevant times, the Group had adequate distributable reserves in subsidiary companies to enable payment of the Relevant Dividends, and each year payment of the final dividends was approved by the Company's shareholders at its annual general meeting.

However, a review of historical intra-group transactions revealed that internal dividends were not paid up from Lok'nStore Limited through the Group structure to Lok'nStore Group plc in the period from 2013 to 2016 and thereby did not create distributable reserves in Lok'nStore Group plc in the manner that had been intended. As a consequence, the Relevant Dividends paid by Lok'nStore Group plc were not paid out of distributable reserves and were therefore not paid in accordance with the Companies Act 2006.

We are undertaking a series of procedural steps in order to rectify this issue and put the Company and its subsidiaries, in the position that was originally intended with respect to the creation of distributable reserves in Lok'nStore Group plc.

We will put a resolution to shareholders at the forthcoming Annual General meeting to be held on 11 December 2018 which, if passed, would put all potentially affected parties, in so far as possible, in the position they would be had the Relevant Dividends been paid in accordance with the requirements of the Companies Act 2006. Full details will be included in the circular and notice of general meeting to be sent to shareholders.

Taxation

The Group will pay tax on its earnings and has made a tax provision of £0.92 million (2017: £0.79 million), an effective tax rate of 17.4% (2017: 20%). The deferred tax provision is calculated at forward corporation tax rates of 17% and is substantially a tax provision against the potential crystallisation (sales) of revalued properties and past 'rolled over' gains and amounts to £19.7 million (2017: £16.4 million) See note 18.

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 financial year-end.

Our thirteen 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 10(b) - 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 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 £18.2 million (2017: £16.7 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. It is not the intention of the Directors to make any 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 store 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 to 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 1 month at the date of the 2018 valuation (2017 valuation: 10 years and 8 months).

3 For more details refer note 10b - Directors valuation

4 Includes £114,507 of capitalised interest

Total freeholds and long leasehold account for 89.1% of property valuations (2017: 87.0%).

Significant increase in Adjusted Net Asset Value per Share

ü Adjusted Net Asset Value per share up 15.3% to £4.80  (2017: £4.16)

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 July 2018 the adjusted net asset value per share (before deferred tax) increased 15.3% to £4.80 from £4.16 last year. This increase is a result of higher existing property values as well as the maiden valuations of our new stores as the strength of our landmark stores is recognised, and cash generated from operations, offset in part by an increase in the shares in issue due to the exercise 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 a tax rate of 17% (2017: 17%). 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

The business operates within the UK self-storage sector which is still relatively immature. With a low loan to value and flexible bank facilities through to 2023 this market presents an excellent opportunity for further growth of the business. Recently opened landmark stores in Gillingham and Wellingborough and our strong pipeline of more landmark stores demonstrate the Group's ability to use those strengths to exploit the opportunities available.

IFRS update:

IFRS 16 Leases

Although not relevant for the year under review (or the next) when applied IFRS 16 will represent a significant change to the way that the Group will prepare its financial statements. The effective date of adoption is for accounting periods commencing after 1 January 2019 and will therefore apply to Lok'nStore's financial statements for the year ended 31 July 2020.

Nevertheless it is important now to give the users of our financial statements sufficient overview of the effects of IFRS 16 on the profit and loss, balance sheet, financial performance and cash flows of the Group as a significant lessee in respect of our leased stores.

IFRS 16 will primarily affect the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts.

The Statement of Profit or Loss:  will also be affected because the total expense is typically higher in the earlier years of a lease and lower in later years. Additionally, the rent operating expense currently reported in these financial statements at £1.44 million (2017: £1.49 million) will be replaced with interest and depreciation as a consequence of the 'capitalisation effect' of the leases, so the Group's key metric of Adjusted EBITDA will increase significantly by the removal of the rent expense from the operating profit and loss. Other performance measures including Operating Profit will also increase although reported interest and depreciation will be higher.

The Consolidated Statement of Cash Flows:  While overall underlying cash flow is unaffected by the changes the presentation within the Consolidated Statement of Cash Flows will change. Reported operating cash flows will be higher as cash payments for the principal portion of the lease liability are classified within financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flows.

The Statement of Financial Position: The Group's operating leases on its leased stores will be recognised as a 'right of use asset' and as a corresponding liability at the year-end. Each lease payment is allocated between the liability and finance cost. The finance costs are charged to profit and loss over the lease period so as to produce a constant periodic rate of interest on the remaining liability for the period. The right-of-use asset is depreciated over the lease term on a straight line basis. Assets and liabilities arising from a lease will initially be measured on a present value basis which will include the fixed rental payments less any lease incentives receivable. If the interest rate implicit in the lease cannot be readily determined the lease payments will be discounted by the Group's incremental borrowing rate (cost of debt) to obtain an asset of similar value over a similar term with similar security. Right of use assets will be measured at cost comprising the initial measurement of the lease liability plus any initial direct costs (if any). The Groups current operating lease commitments are reported in note 25.

The effect on financial ratios such as gearing or leverage will be to cause them to rise as the lease liability now forms part of net debt.

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 employees 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 and communities, employees 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 our annual report.

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 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, Group 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 and operating profit are defined in the accounting policies section of the notes to the financial statements.

Consolidated Statement of Changes in Equity

Attributable to owners of the Parent

Company Statement of Changes in Equity

Consolidated and Company Statements of Financial Position

As permitted by section 408 Companies Act 2006, the parent company's statement of comprehensive income has not been included in these financial statements. The profit and comprehensive income for the year ended 31 July 2018 was £3.6 million (2017: £5.5 million).

Approved by the Board of Directors and authorised for issue on 26 October 2018 and signed on its behalf by:

Andrew Jacobs Ray Davies

Chief Executive Officer Finance Director

Consolidated Statement of Cash Flows

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 Fleet Place, London, EC4M 7WS, UK. Copies of this Annual Report and Accounts may be obtained from the Company's head office at 112 Hawley Lane, Farnborough, Hants, GU14 8JE or the investor section of the Company's website at http://www.loknstore.co.uk. The principal activities of the Group are described in the Strategic Report.

Basis of accounting

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 2018 and 31 July 2017, 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 2018. 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 2018 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 2017 have been filed with the Registrar of Companies. The auditor's report for the year ended 31 July 2018 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.

Standards adopted in the year

Amendments to IAS 7 Disclosure Initiative (issued in January 2016 requires entities to provide information that enables users of financial statements to evaluate changes in liabilities arising from the entity's financing activities. The effect of the amendments on the Group's consolidated financial statements has been the inclusion of additional disclosures where appropriate.

Standards in issue but not yet effective

At the date of approval of these financial statements, the following principal standards and interpretations 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, although the Group will not be adopting the Standard until its year ended 31 July 2020 the Directors consider that this will have a significant impact on the financial statements of the Group at that time and have provided an initial overview of the impact on the 2020 financial statements which is set out on in this report.

There were no other Standards or Interpretations issued 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 (and 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 £5.0 million (2017: £11.4 million), undrawn committed bank facilities at 31 July 2018 of £12.7 million (2017: £11.2 million), and cash generated from operations in the year ended 31 July 2018 of £7.0 million (2017: £5.5 million).

Following the agreement last year of a two-year extension to its facilities with Royal Bank of Scotland on equivalent terms, the Group can continue to operate its £50 million revolving credit facility with RBS plc for a further 5 years. The facility has been in place since 15 January 2016 and will run until 14 January 2023. 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 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 commissions an external valuation of its self-storage stores. This valuation uses 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 £108.5 million (2017: £87.5 million) as shown in the table in note 10(b).

b) Assets in the course of construction and land held for 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 £16.6 million (2017: £5.1 million).  Please see note 10b for more details.

c) Estimate of useful lives of intangible assets acquired in business combination

The relative size of the Group's intangible assets excluding goodwill make the estimates of useful lives important to the Group's financial position and performance. At 31 July 2018 intangible assets, excluding goodwill, amounted to £2.15 million (2017: £2.32 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 charges should they do so. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge.

d) Classification of self-storage facilities as owner occupied properties rather than investment properties.

The Directors consider that Lok'nStore Group Plc is the parent company of a "Trading business" and is not wholly or mainly engaged in making investments. The holding of land is not a core activity.

The Group is an integrated storage solutions business offering a range of services to its customers. We provide services to our customers under contracts for the provision of storage services which do not give them any property or tenancy rights and a large number of the stores we operate are from properties where we do not own the land or the buildings. The assets we do own are valued on the basis of the trading cash flows that the operating businesses generate.

The range of services provided to customers has increased progressively with significant revenue earned from records management and serviced archive activities. Additionally, the Group has developed its managed stores business where it uses its operational and logistic expertise to manage stores for third party owners. In recent years the Group has developed new managed stores in Aldershot, Broadstairs, Chichester, Crawley and Hemel Hempstead all of which are owned by third-party investors and managed by Lok'nStore. There is a further pipeline of 4 managed stores which will open next year.

Previously owned sites at Woking, Ashford and Swindon have been the subject of sale and manage-back transactions by which Lok'nStore has retained the management of the business when a third party owner acquired the business, land and buildings. All of this trading activity as well as the self-storage income earned from our leasehold stores activity demonstrate that the holding of land is not a core activity because the trading operation is not dependent on the ownership of land.

Furthermore the Group has always and continues to comply with all of the usual accounting and tax protocols consistent with a trading business. Lok'nStore operates 29 stores and 2 serviced document stores in Southern England. Of the 29 stores, Lok'nStore owns the freehold or long leasehold interest in 14 stores, 7 of the stores are held under commercial leases, with the remaining 8 managed stores operating under management contracts for third party owners. One of the features of Lok'nStore's strategy is to increase the number of stores we manage for third parties selling our expertise in storage solutions management, operating systems and marketing, through management fees rather than retaining a proprietary interest in land and buildings.

The classification of self-storage facilities as owner occupied properties rather than investment properties has resulted in the recognition of fair value gains in 2018 (net deferred of tax) of £13.0 million (2017: £6.84 million) in Other Comprehensive Income rather than the Income Statement.

Notes to the Financial Statements

1(a) Revenue

Analysis of the Group's revenue is shown below:

1(b) 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 2018 is as follows:

The segment information for the year ended 31 July 2017 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 500 customers has a greater customer concentration with its ten largest corporate customers accounting for 33.6% (2017: 34.4%) of revenue, its top 50 customers accounting for 60.0% (2017: 61.1%) and its top 100 customers accounting for 74.5 % (2017: 76.2%) of revenue. The self-storage segment with over 10,600 (2017: 9,670) 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.

2(b) 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.

2(c) Other Income and costs

2018:

1 Carried interest Fees receivable:

Upon the sale of one of the 'Managed stores' Lok'nStore will be entitled to receive a fee of 5% of the proceeds of the sale (less reasonable selling costs). Due to the uncertainty of the property market and the timing of the ultimate sale the directors have in previous years believed that it would not yet be appropriate to recognise this as an asset, on the basis that it could not be reliably measured. However there is a backstop date of 2022 at which time a realisation (or a payment based on an independent valuation) must be made to Lok'nStore. Accordingly, the directors have given due consideration as to the current fair value of the Carried interest - fee receivable and have recognised £361,460 as a non- current financial asset in the financial statements.

2 Receipts from warranty claims relates to receipts due and payable under a mediated settlement agreement.

2017:

3 Property disposal costs relate to the closure and surrender of the lease on Unit 4 Leatherhead site and the consolidation of its warehouse capacity into Unit 6 Leatherhead.

4 Store relocation costs relate to the closure and surrender of the lease on the Staines store and the relocation of customers to alternative stores within the store portfolio.

5 Directors retirement costs relate to the retirement of CM Jacobs on 4 July 2017

3 Finance income

Interest receivable arises on cash and cash equivalents (see note 16) and on development loan capital deployed (see note 12).

4 Finance costs

5 Profit before taxation