Lok'nStore Group Plc Annual Report 2017

Plain-text annual report

L o k ’ n S t o r e G r o u p P l c A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 J u l y 2 0 1 7 S t o c k C o d e : L O K Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Stock Code: LOK www.loknstore.com Lok'n Store-AR2017.indd 3 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:43 PM Welcome to Lok’nStore Group Plc We are a leading company in the fast growing UK self-storage market. We opened our first self-storage centre in February 1995 and have grown consistently over the last 20 years. We currently operate 26 self-storage centres and two serviced document stores in Southern England. Strengths of our Business ■ Strong and increasing asset base ■ The self-storage business is highly cash generative with high profit margins on established stores and all customers paying on a rolling 28 day basis ■ Lok’nStore has a track record of strong and growing cash generation driving a progressive dividend policy ■ New store openings ■ Significant growth in third party management services ■ The property requirements of self-storage coupled with challenging local planning regimes create significant barriers to entry, especially in Southern England where Lok’nStore operates ■ Experienced Board and Executive management team with clear strategic direction and proven business model Read more about our strategy on page 8 and our Business Model on page 10. “ We have created a strong platform for an exciting period of rapid growth for Lok’nStore increasing profits and assets and reducing our debt. We have secured a notable increase in our new store pipeline to 11 stores which will add around 45% more space to our operation over the coming years. Lok’nStore’s strategy of opening new landmark stores gives us confidence that Lok’nStore can continue to deliver rapidly growing dividends for our investors.” Andrew Jacobs CEO OF LOK’NSTORE GROUP Commenting on the Group’s results Lok'n Store-AR2017.indd 4 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:43 PM Contents OVERVIEW 3 Highlights 4 Chairman’s Review 6 Group at a Glance O V E R V I E W THE STRATEGIC REPORT 8 Operating and Marketing Review Summary of Strategy, Performance and Outlook 10 Business Model 11 14 Property Review 16 Financial Review 20 21 Corporate Social Responsibility Report Environmental Management and Performance Principal Risks and Uncertainties in operating our Business 26 GOVERNANCE REPORT 27 Corporate Governance 31 Board of Directors and Advisers 33 Directors’ Report 35 Directors’ Responsibilities in the Preparation of Financial Statements Independent Auditor’s Report to the Members of Lok’nStore Group Plc 36 FINANCIAL REPORT 38 Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Statements of Financial Position Consolidated Statement of Cash Flows 39 40 41 42 Notes to the Financial Statements 43 Accounting Policies 49 74 Glossary 76 Our Stores www.loknstore.com Stock Code: LOK 1 Lok'n Store-AR2017.indd 1 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:47 PM 25416.04 – 1 November 2017 5:47 PM – Proof 2Revenue £16.65mGroup Adjusted EBITDA £6.49mAdjusted Net Asset Value per share £4.16Loan to Value Ratio 14%Cash available for Distribution (CAD) per share 18.1p2Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017Lok'n Store-AR2017.indd 211/1/2017 5:47:53 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Positive trading ■Group Revenue £16.65m up 3.7% (2016: £16.06m) – like for like (LFL)1 up 5.6% ■Group Adjusted EBITDA2 £6.49m, up 3.1% (2016: £6.30m) – LFL up 5.4% ■Profit after taxation (adjusting for exceptional items)3 £3.17m, up 28.8%4 (2016: £2.46m)Rising cash flow supports 11.1% dividend increase – progressive dividend policy ■Annual dividend 10 pence per share, up 11.1% (2016: 9 pence per share) ■Cash available for Distribution (CAD)5 £5.17m, up 9.9% (2016: £4.71m)Significant growth in asset value ■Net Assets up 24.7% to £89.1m ■Adjusted Net Asset Value6 per share up 7.9% to £4.16 (2016: £3.86)Strong balance sheet, efficient use of capital, low debt ■Sale of all 2,466,869 Treasury shares held raising £9.9m cash at average 405 pence per share (purchase cost 152 pence) ■Net debt down to £17.4m (2016: £23.5m) ■Loan to value ratio down to 14%7 (2016: 20.8%) ■Extension of bank facility by 2 years until January 2023More new stores to come delivering further growth ■Expanding pipeline of 118 new landmark stores taking total to 37 ■3 new stores opening this financial year ■Plus 4 further new sites secured ■Current pipeline adds 338,300 sq. ft. (26.1%) of extra trading space Confident outlook ■Strong balance sheet and rapidly expanding new store pipeline position the Group well for future growth2017 HighlightsRobust platform for rapid future growthFor the definitions of the terms used in the highlights above refer to the notes section on page 74.3www.loknstore.com Stock Code: LOKOVERVIEWLok'n Store-AR2017.indd 311/1/2017 5:47:53 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Chairman’s Review“ We have a current pipeline of 11 new stores. This is by far the strongest pipeline I have seen during my time in the business.” We have been extremely busy again this year and have now built a platform for a period of rapid and sustainable growth. There are three components to this platform: a growing number of landmark stores, talented and committed people and a structurally undersupplied market where we are finding an unprecedented number of new store opportunities.Landmark storesAs we open the doors at more landmark stores, and as these stores represent an ever growing proportion of our portfolio, it becomes clear that this strategy is driving the excellent results which I am pleased to introduce here. The Internet is now the source of the vast majority of our enquiries but when it comes to new customers, passing traffic is actually more important and rises to 50% in our recently opened landmark stores compared to 40% for the portfolio as a whole. Talented and committed peopleState-of-the-art buildings in prominent and increasingly retail locations certainly attract more customers. But this is not enough on its own. Our 9,500 customers also expect and deserve excellent service and value for money. We have a Trust Pilot score of 9.5 which means that 95% of customers rate the service they received as “good” or “excellent”.Customer reviews and recommendations are now more important than they have ever been in the 23 years since Andrew and I started the business. I was delighted to receive a telephone call earlier this year from an old friend who, I hadn’t realised, is a customer at our Maidenhead store. She thought that the service she received was ‘just exceptional’; the staff ‘couldn’t have been more helpful’; they ‘went the extra mile’ and even provided ‘water for the dog’. I haven’t heard from her for a while but she called me especially to tell me this because ‘people can be quick to complain but are seldom vocal in their praise’.Often our customers use our storage facilities at very stressful times, perhaps following the death of a relative, after divorce or when a house purchase has fallen through or a new business is taking off. This is why we aim to be the most helpful and friendly storage company. To do this we need the very best people.Our people come from a variety of service sector backgrounds including retail, trade counters, hospitality and retail banking. To deliver exceptional trading results from our rapidly growing store base, we are recruiting and retaining the best talent. We offer our people: ■Skills development in Sales, Customer Service and Team Leadership ■A great work/life balance ■Great career prospects throughout our rapidly expanding portfolio ■Financial rewards consisting of a good basic salary and excellent bonus schemes for successIt is a great time to be part of Lok’nStore. This year the Lok’nStore Academy received an ‘Investing in Young People’ Award from Junior Chamber International. The Academy demonstrates commitment to training our stars of today and tomorrow, allowing our people to develop in familiar surroundings, trained by our storage industry experts who have a wealth of experience and knowledge.Since the Academy’s inception in 2015 over 20% of our workforce have completed or are working towards a National Vocational Qualification in Customer Service, Sales or Team Leadership. The energy and enthusiasm to deliver on our objectives is clear to see throughout the team. 4Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017Lok'n Store-AR2017.indd 411/1/2017 5:47:54 PMWelcome O V E R V I E W Demand for established self-storage assets is also becoming stronger and provides transactional evidence which is very supportive to valuations. Since early 2015 there have been 17 transactions for 81 stores worth £420m. There have been four notable portfolio transactions in the UK over the last 12 months involving 45 stores at a cost of £270m. Three of the buyers were trade buyers from the US, the UK and South Africa and one was bought by a UK financial institution. Our valuers Jones Lang LaSalle (JLL) have reflected the strength of market demand for prime self-storage assets in their valuations of our stores, in addition to the uplift achieved from our new store openings and improved trading at existing stores. JLL valued our trading stores at £119.6 million (2016: £112.7 million). With other land and property assets, this equates to a total value of land and properties held of £128.9 million (2016: £116.2 million), an 11% increase in value. These are exciting times indeed. Robust platform for future dividend growth We continue to implement our strategy objectives and these are detailed more fully in the Strategic Report. To reflect this performance we are proposing to increase the annual dividend pay-out by 11.1%. The Group will therefore pay a final dividend of 7.0 pence per share on 10 January 2018 following the payment of an interim dividend of 3.0 pence per share in June 2017 making a total annual dividend pay-out of 10 pence per share, up from 9 pence for the full year last year. This is the sixth consecutive year of substantial dividend growth. Simon G. Thomas Chairman 27 October 2017 Board changes On 5 July 2017 the Company announced the retirement of Colin Jacobs as an Executive Director of the Company. Colin has been with the business from its founding in 1995. I would like to thank Colin for his significant contribution to the development of the Company over the last 22 years and wish him well on behalf of the entire Board. Also effective from 5 July 2017 I have stepped down from the role of Executive Chairman and will now serve as Non- Executive Chairman. Our new store pipeline and the UK self-storage market The UK self-storage industry is generally acknowledged to be very supply-constrained with the latest Self Storage Association Annual Survey showing UK supply over the past five years only expanding by approximately 5.7%. We have a current pipeline of 11 new stores. This is by far the strongest pipeline I have seen during my time in the business. We are able to embark on this unprecedented level of growth because our debt levels are currently so low; a position that was much assisted by the sale of treasury shares earlier this year and the sale and manage-back deals of previous years. www.loknstore.com Stock Code: LOK 5 Lok'n Store-AR2017.indd 5 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:54 PM Group at a Glance We have 7 stores under development representing a combination of owned Stores and managed Stores. These 7 stores will add 338,800 sq. ft. of new capacity adding 26.1% to the existing trading space of 1.29 million sq. ft. 6 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 6 25416.04 – 1 November 2017 5:47 PM – Proof 2 11/1/2017 5:47:54 PM 112389201121314151517183134295191021222427232526284763533323025416.04 – 1 November 2017 5:47 PM – Proof 711238920112131415151718313429519102122242723252628476353332301Aldershot2Ashford3Basingstoke4Bristol5Broadstairs6Chichester7Crawley8Crayford9Eastbourne10Fareham11Farnborough12Harlow13Horsham14Luton15Maidenhead16Milton Keynes17Northampton Central18Northampton Riverside19Poole20Portsmouth21Reading22Southampton23Sunbury24Swindon25Tonbridge26Woking27Olney28LeatherheadNew Stores(Under development)29Bedford30Dover31Exeter32Gillingham33Hemel Hempstead34Ipswich35WellingboroughRead more about our strategy and marketplace on page 8.Lok’nStore’s Locations7www.loknstore.com Stock Code: LOKOVERVIEWLok'n Store-AR2017.indd 711/1/2017 5:47:54 PM25416.04 – 1 November 2017 5:47 PM – Proof 7The Strategic Report“ We believe there is the opportunity for significant further growth.”Summary of Strategy, Performance and Outlook Lok’nStore Group has had a solid year successfully implementing all of our strategy objectives. Revenue, adjusted EBITDA profits and asset values have all moved ahead steadily while we have again strengthened our balance sheet. 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 years. Positive tradingGroup revenue for the year was £16.65m, up 3.7% year on year (2016: £16.06m). Like for Like (LFL) revenue stripping out the effect of the closure of the Staines store was up 5.6%. Further details on the Staines closure is reported in the Property Review. This revenue growth led to a 3.1% increase in Group Adjusted EBITDA profit and a LFL increase of 5.4%. Tight control over operating costs has also contributed in pushing the Group’s profits to record levels.Extension of existing £40m Banking Facility to six yearsThe Group has agreed a two year extension on its existing banking facility. The £40m facility will now run until January 2023. Together with our £11.4m of cash and future cash generated from operations, this will provide funding for more landmark site acquisitions and working capital. The cost of our debt averaged 1.66% in the year on £28.8m drawn. Strong balance sheet During the year Lok’nStore sold its entire holding of 2,466,869 Treasury shares at an average of 405 pence per share to a range of institutional and individual investors raising £9.9m of cash. The average purchase cost was 152 pence. We welcome these new Shareholders to the Company.The sale of the shares from treasury will have no impact on earnings or taxable profits but has reduced debt, the loan to value ratio (LTV) and interest payable while increasing cash and current assets, so providing strong support for the Company’s growth strategy. The growth of sales, profit and asset values has allowed us to achieve a substantial reduction in the LTV ratio down to 14.0% (2016: 20.8%) and net debt down to £17.4m (2016: £23.5m) while we also invested £6.6m in store development in this period. Pipeline of new StoresAgainst this background of ever improving finances we have now secured a rapid increase in our new store pipeline to 11 stores by the reporting date, which will take the total to 37 stores. These will all be purpose-built landmark stores in highly prominent locations and will, over the coming years, add substantially to the Group’s capacity for revenue, profit and asset growth. Performance and OutlookThe table below sets our achievements for the last year against our objectives as set out in our 2016 report:THE STRATEGIC REPORT COVERS THE FOLLOWING AREAS OF LOK’NSTORE’S BUSINESS: ■Summary of Strategy, Performance and Outlook ■Lok’nStore’s Business Model ■Operating and Marketing Review ■Property Review ■Financial Review ■Corporate Social Responsibility Report ■Principal Risks and Uncertainties in operating our Business8Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 20178Lok'n Store-AR2017.indd 811/1/2017 5:47:55 PMObjective Achievements in Financial Year 2017 1. Continue to increase EBITDA over the coming years  Like for like (LFL) Adjusted EBITDA up 5.4% in 2017. 2. Fill existing stores and improve pricing 3. Acquire more sites to build new landmark stores  Gillingham and Wellingborough sites are on target to open in late 2017 and in spring 2018 respectively. Both are in prominent retail locations with little established competition.  LFL Self-storage unit occupancy up 6.5% and LFL self-storage pricing up 0.8% in 2017. 4. Increase the number of stores we manage for third parties Immediately after the year-end we acquired a further site in a highly prominent location in Bedford, Bedfordshire. The store will open in 2018.  During 2017 we completed and opened the Broadstairs store and the Hemel Hempstead store is scheduled to open at the end of 2017. In July 2017 we announced the signing of management contracts to develop and operate two new landmark stores in highly prominent locations in Exeter, Devon and Ipswich, Suffolk. Immediately after the year-end we signed a further site in Dover, Kent. The Dover store will bring the total number of managed stores to 11 out of a total of 33 stores. S T R A T E G I C R E P O R T 5. Grow our document storage business  In the financial year 2017 the turnover of our document storage business grew 7.1% with number of boxes up 10.1% and number of tapes stored up 17.5%. Following this year of solid successes we have created a strong platform for an exciting period of growth for Lok’nStore. Achievement of these objectives has increased the cash available for distribution (CAD) enabling a predictable growth of the dividend from a strong asset base and conservatively geared balance sheet. Our focus continues to be on four key areas: 1. Fill stores and improve pricing to continue increasing cash flow from the existing stores 2. Acquire more sites to build new landmark stores 3. Increase the number of stores we manage for third parties 4. Grow our document storage business The UK self-storage market and Lok’nStore’s position within it Lok’nStore Group Plc is one of the leading companies in the fast growing UK self- storage market. We opened our first self-storage centre in 1995 and have grown consistently over the last 20 years, currently operating 26 self-storage centres and two serviced document stores in Southern England. We have been listed on the AlM Market since June 2000 and the Board accounts for 29% of the Total Voting Rights (TVR) in the ordinary shares of the Company. We offer self-storage and serviced document storage from our own stores, and management services to third party storage owners. Self-storage and other storage services are available to both household and business customers at our highly branded Lok’nStore centres. Each centre is prominently located, mainly in the affluent South-East of England in large towns and cities. We develop and operate self-storage centres in prominent locations. Our eye- catching buildings with their distinctive orange livery create highly visible landmarks which continue to be a big contributor of new business for Lok’nStore. Demand for self-storage by both business and domestic customers is driven by a combination of specific need based on changing circumstances but also linked to economic activity and consumer and business confidence. Households, businesses and other organisations are more space constrained in the relatively expensive areas of the South East. Barriers to entry in the form of competition for suitable sites and the difficulties in securing appropriate planning consents are also correspondingly higher. Lok’nStore aims to build more landmark self-storage centres primarily across South- East England, to steadily increase the cash available for distribution (CAD) enabling a predictable growth of the dividend from a strong asset base and conservatively geared balance sheet. We believe there is the opportunity for significant further growth underpinned by our rapidly expanding pipeline of new stores. There remains significant opportunity in the UK self-storage market where there are an estimated 1,430 self-storage facilities providing approximately 4.2 million square feet of storage space. With a population of 65.2 million people in the UK this equates to only 0.64 square feet per person compared to 7.8 square feet per person in the USA (Self-Storage Association 2017 UK Annual Survey). The sector remains in good health. The 2017 Report for the Self-Storage Association says that: “total annual turnover for the UK self-storage industry in 2016 was around £540 million . . . from approximately 693 different operators. When compared to Europe the UK has around 47% of the total European self-storage market.” In their valuation report JLL describe a rising number of transactions in the UK self-storage market demonstrating the increasing liquidity of the market. Since early 2015 there have been 17 transactions worth £420m for 81 stores, including four major transactions in 2017. These transactions were a UK trade buyer, a US trade buyer, a South African trade buyer and a UK financial buyer. This is the first time a UK financial investor has invested directly in the self- storage sector which is a significant step forward for the market. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 9 9 Lok'n Store-AR2017.indd 9 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:55 PM 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 Attractive market dynamics Our competitive strengths by taking advantage of: ■ Growing sector ■ UK self-storage use remains relatively low ■ Limited new supply coming onto the market ■ Resilient through economic downturns ■ Recognised brand with landmark stores ■ Excellent customer service ■ Strong balance sheet ■ Experienced Board with clear strategy Stable and rising income streams and low credit risk ■ Over 9,650 customers (2016: 9,200) ■ Mix of business and domestic customers ■ Stores set mainly in the affluent South of England ■ Low bad debt expense and strong credit risk model Strong growth opportunities ■ Demand increasing ■ Undersupplied market ■ Strong Internet marketing ■ Powerful economics of ‘Managed Stores’ Translation of the business model into high quality earnings ■ Low technology & product obsolescence ■ Track record of growing cash generation ■ Flexible approach to portfolio management ■ Progressive dividend policy 10 10 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 10 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:55 PM Operating and Marketing Review “ Visibility of our stores remains very important to our marketing efforts. We continue to invest in new signage and lighting at our existing stores as well as creating striking designs for our new landmark stores.” S T R A T E G I C R E P O R T Positive self-storage business performance ■ Self-storage revenue £13.91m up 3.4% (2016: £13.44m) – LFL up 5.7% ■ Adjusted Store EBITDA £7.70m up 2.8% (2016: £7.49m) – LFL up 4.6% ■ Unit Pricing up 0.8% LFL ■ Unit occupancy up 6.5% LFL With costs firmly under control, revenue growth translates into healthy profit growth. Total adjusted store EBITDA in the self- storage business, a key performance indicator of profitability and cash flow of the business, increased 2.8% to £7.7m (2016: £7.49m). Like for like growth in store EBITDA was 4.6% The overall adjusted EBITDA margin across all stores was very slightly down at 55.1% (2016: 55.3%) with the adjusted Store EBITDA margins of the freehold stores at 63.4% (2016: 64.6%) and the leasehold stores at 41.5% (2016: 41.7%). Over the course of the year unit occupancy rose by a healthy 6.5% LFL and unit pricing growth was subdued at 0.8% LFL. Normalised occupancy which strips out stores which have opened or moved in the last 3 years was 69.8%. Out of 26 stores open 15 were trading at above 70% occupancy. At the end of July 2017, 33.5% of Lok’nStore’s self-storage revenue was from business customers (2016: 34%) and 66.5% was from household customers (2016: 66%). By number of customers 18.1% of our customers were business customers (2016: 18.5%) and 81.9% household customers (2016: 81.5%). By the year-end we had 7 stores under management following the opening of the Broadstairs store in May 2017. Portfolio Analysis and Performance Breakdown As at 31 July 2017 Number of stores % of Valuation % of Adjusted Store EBITDA Adjusted Store EBITDA margin (%) When fully developed % lettable space Lok owned Number of stores Total % lettable space Freehold and Long Leasehold 12 82.5 71.5 63.3 63.9 14 49.8 Operating Leaseholds1 Pipeline (freehold) Managed Stores (trading) Managed Stores (under development) 7 2 7 4 13.4 28.5 41.5 36.1 4.1 – – – – – – – – – – – Total 321 100 100 55.1 100 7 – 11 – 32 24.2 – 26.0 – 100 1 On 3 August 2017, contracts were exchanged on the purchase of a site in Bedford. Legal completion and building work will follow completion of relevant planning matters. Following completion, Lok’nStore will operate 33 stores. Lok’nStore will develop this site as a purpose-built landmark store. The average unexpired term of the Group’s operating leaseholds is approximately 10 years and 8 months as at 31 July 2017 (11 years and 8 months: 31 July 2016). The leaseholds produced 28.5% of the total store EBITDA in the year (2016: 30.5%). www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 11 11 Lok'n Store-AR2017.indd 11 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:55 PM 25416.04 – 1 November 2017 5:47 PM – Proof 7Ancillary SalesAncillary sales which consist of boxes and packaging materials, insurance and other sales increased 2.6% over the year accounting for 11.2% of self-storage revenues (2016: 11.2%). We continue to promote our insurance to new customers with the result that 91% (2016: 91%) of our new customers purchased our insurance over the year and this has resulted in 80% of all of our customers being insured through Lok’nStore (2016: 80%). Serviced document storage revenue and profits up ■Revenue £2.33m up 7.1% (2016: £2.17m) ■Adjusted EBITDA £0.54m, up 3.8% (2016: £0.52m) (after adjustment for Lok’nStore Management charges) ■Number of boxes stored up 10.1% ■Number of tapes stored up 17.5% Revenue and adjusted EBITDA have increased in our document storage business as operating metrics improve in response to the Company’s more customer facing marketing stance. This approach has resulted in excellent customer feedback and puts us in a good position to win new business, with boxes stored increasing 10.1% and tapes stored up 17.5%. Last year we consolidated the capacity of our serviced document warehouse, closing one of the three storage sites and fitting new racking in our main site. This has significantly increased the number of boxes that can be stored within our existing premises. As part of this continuing strategy of optimising the utilisation of trading space our two sites in Leatherhead have been consolidated into one trading unit which will reduce costs in the coming year.Security The safety and security of our customers and their goods remains our highest priority. We invest in CCTV, intruder and fire alarm systems and the remote monitoring of our stores out of hours. Importantly, all of our stores are manned during opening hours. MarketingDuring the year our marketing efforts have continued to focus on the presentation of our buildings to attract passing traffic and Internet marketing. Visibility of our stores remains very important to our marketing efforts. With their prominent positions, distinctive design and bright orange elevations, our stores raise the profile of the Lok’nStore brand and generate an increasing 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. 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 large marketing budgets compared with those of the smaller self-storage operators.Operating and Marketing Reviewcontinued12Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 201712Lok'n Store-AR2017.indd 1211/1/2017 5:48:00 PMThe Year in Figures Consistent growth of profits 7 6 5 4 3 2 1 ) m £ ( A D T B E I Revenue and EBITDA profits have moved ahead steadily. With costs firmly under control, revenue growth translates into healthy profit growth. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Progressive dividend from increasing cash available for distribution S T R A T E G I C R E P O R T 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 e c n e P The dividend payment has increased by 11.1% and the cash available for distribution (CAD) by 9.9% in line with our stated objective to increase CAD to enable a predictable growth of the dividend from a strong asset base and conservatively geared balance sheet. 6,000.000 5,000.000 4,000.000 3,000.000 £ 2,000.000 1,000.000 0 JULY 12 JULY 13 JULY 14 JULY 15 JULY 16 JULY 17 Dividend Cash available for distribution per share Total cash available for distribution Number of and fees from managed stores 8 7 6 5 4 2015 2016 2017 No. Mgt Fees New management contracts were signed in July 2017 to develop and operate three new stores in Exeter, Ipswich and Dover. When developed, these Managed Stores will add around 125,000 sq. ft. to the trading portfolio and bring the total number of Managed Stores to 11 out of a total of 33 stores. 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 www.loknstore.com www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK Stock Code: LOK 13 13 Lok'n Store-AR2017.indd 13 25416.04 – 1 November 2017 5:47 PM – Proof 2 24921.04 – 1 November 2017 5:47 PM – proof 2 11/1/2017 5:48:00 PM Property Review Store and portfolio strategy Lok’nStore has 26 freehold, leasehold and managed stores trading. Of these, 19 stores are owned with 12 freehold (or long leasehold) and 7 leaseholds. All of our leasehold stores are 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 10 years and 8 months as at 31 July 2017. 7 stores are trading under management contracts. We have a pipeline of 7 new stores representing a combination of owned Stores and managed Stores. These 7 stores will add 338,800 sq. ft. of new capacity adding 26.1% to the existing trading space of 1.29 million sq. ft. Following completion, Lok’nStore will operate 33 stores. Lok’nStore’s strong operating cash flow, solid asset base, and tactical approach to its store property portfolio provide the Group with opportunities to improve the terms of its property usage in all stages of the economic cycle. Our focus on the trading business gives us many opportunities and our property decisions are always driven by the requirements of the trading business. 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 asset value. This includes strengthening our distinctive brand, increasing the size and number of our stores and replacing stores or sites where it will increase shareholder value. We prefer to own freeholds if possible, and where opportunities arise we will seek to acquire the freehold of our leasehold stores. However, we are happy to take leases on appropriate terms and benefit from the advantages of a lower entry cost, with further options to create value later in the site’s development. Our most important consideration is always the trading potential of the store rather than the property tenure. Growth from new stores and more new stores to come ■ Broadstairs store opened – early trading strong Stores in advance stages of development ■ Wellingborough – scheduled to open this financial year ■ Hemel Hempstead – scheduled to open this financial year ■ Gillingham – scheduled to open this financial year Acquisition of site for a new landmark store (Immediately post balance sheet – August 2017) ■ Bedford – scheduled to open next financial year We will develop this site as a purpose-built landmark store. Our eye-catching buildings with their distinctive orange Lok’nStore branded livery and prominent Lok’nStore signage create highly visible landmarks which continue to be a big contributor of new business. Building work will follow completion of all relevant planning matters. Three new stores to be developed under management contracts ■ Exeter – scheduled to open next financial year ■ Ipswich – scheduled to open next financial year ■ Dover – scheduled to open next financial year Management contracts were signed in July 2017 to develop and operate three new stores. The new sites are in prominent retail locations in Exeter, Ipswich and Dover. Opening for these stores is scheduled for end of 2018. When developed, these will add around 125,000 sq. ft. to the trading portfolio and bring the total number of managed stores to 11 out of a total of 33 stores. Vacated Southampton building In 2016 we opened a new self-storage facility in Southampton, close to our old store but in a much more prominent position. This left the old store vacant. Market evidence suggested that there is a substantial market in Southampton for car parking for cruise liner passengers and that this property was appropriate to this use. The building has now been converted and started trading as “ParknCruise” in May 2017. Early bookings are encouraging. Managed Store Service Over recent years we have been developing our management store services to third party storage owners. We have eight stores under management with seven of these open and trading and one under development, and scheduled to open in 2017. 3 further managed stores will open in 2018. In the case of managed stores Lok’nStore receives a standard monthly fee, a performance fee based on certain objectives and a fee on successful exit. In some cases we charge acquisition, planning and branding fees. This allows us to earn revenue from our expertise and knowledge of the storage industry without having to commit our capital, to amortise various fixed central costs over a wider operating base, and to drive more visits to our website moving it up the rankings and benefiting all the stores we both own and manage. In this year we earned £0.42m (2016: £0.44m) in management fees. We expect this to increase steadily over the coming years. The comparative 2016 figure was enhanced by accrued fees prior to the period which could not be booked until year ended 2016. Excluding these prior period accrued fees, Management fees from Managed Stores was up 3.8%. Underlying management fee growth after adjusting for single one-off payments is 6.7%. Group Year ended 31 July 2017 £ Group Year ended 31 July 2016 £ 420,117 404,864 – 34,390 420,117 439,254 Management fees Management Fees Prior period accrued fees Total management fees 14 14 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 14 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:01 PM Closure of Staines store Our leasehold store in Staines was on a short lease outside of the Landlord and Tenant Act (1954) and has now been closed. There were no dilapidations payments made to the landlord. Because the Staines store was outside of LTA (1954) and on a short lease it has never been valued as an asset in our accounts. The carrying book value in the financial statements was therefore de minimis. The headline revenue and occupancy figures for December 2016 onwards were negatively impacted to some degree by the influence of the closure, but for the sake of transparency and simplicity we have chosen to show like- for-like figures stripping out this effect only where it makes a qualitative difference. Store property assets and Net Asset Value ■ Adjusted total assets now circa £153.5m (2016: £135.1m), up 13.6% on last year ■ Adjusted net asset value of £4.16 per share, up 7.9% on last year Adding our stores under development at cost and land and buildings held at director valuation, our total property valuation is £127.8m (2016: £116.2m). This translates into an adjusted net asset value of £4.16 per share up, 7.9% on last year (2016: £3.86 per share). The increase in the property values of properties which were also valued last year was 6.14%. Lok’nStore’s freehold and operating leasehold stores have been independently valued by Jones Lang LaSalle (JLL) at £119.6m (cost £45.3m) as at 31 July 2017 (2016: £112.7m: cost £46.9m). 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. S T R A T E G I C R E P O R T Lok'n Store-AR2017.indd 15 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:02 PM 1515 25416.04 – 1 November 2017 5:47 PM – Proof 7Record financial results ■Group Revenue £16.65m, up 3.7% (2016: £16.06m) – like for like (LFL) up 5.6% ■Group Adjusted EBITDA £6.49m, up 3.1% (2016: £6.30m) – LFL up 5.4% ■Profit before taxation (adjusting for exceptional items9) £4.08m, up 11.0% (2016: £3.67m) ■Profit after taxation (adjusting for exceptional items9) £3.17m, up 28.8% (2016: £2.46m)In the year there were a number of small one-off items including some management fees booked after the year-end, some additional costs in the ParknCruise set-up as well as some exceptional expenses incurred in order to assist in saving future costs. While these individual items are of themselves immaterial, their combined effect was to moderate the out turn of profit before tax growth to 11.1% (adjusted for the exceptional receipt in the previous year).TaxationThe Group will pay tax on its earnings at an effective tax rate of 20% and has made a tax provision of £0.8m. (2016: £0.6m). The deferred tax provision which 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 amounts to £16.4 million (2016: £15.4 million) (see note 18).Earnings per shareBasic earnings per share (EPS) were 11.0 pence (2016: 16.60 pence per share). Diluted EPS were 10.64 pence (2016: 16.24 pence per share). If 2016 figures are adjusted to eliminate the 2016 exceptional property sale gain of £1.94m, the 2016 EPS is adjusted to 9.08 pence per share and the 2016 diluted EPS to 8.88 pence per share.Earnings per share (EPS)Year ended 31 July2017£’000Year ended 31 July2016£’000Profit for the year3,0614,282Exceptional Gain on sale of Reading site–(1,940)Adjusted earnings3,0612,342 No. of shares No. of sharesWeighted average number of sharesFor basic earnings per share27,780,67625,791,821Dilutive effect of share options999,657577,882For diluted earnings per share28,780,33326,369,643Basic EPS (pence)11.02p9.08pDiluted EPS (pence)10.64p8.88pTreasury sharesSale of treasury shares: In November 2016 Lok’nStore sold 1,975,000 ordinary shares of 1 pence each held in treasury. The shares were sold to a range of institutional investors at a price of 400 pence per share. (The Company acquired the shares at an average price of 150.3 pence.) On 26 April 2017 Lok’nStore sold the remaining 491,869 ordinary shares in treasury to a range of institutional investors at a price of 425 pence per Ordinary Share. Both treasury sales were undertaken to satisfy demand for the Company’s shares, and to improve liquidity. The sale of these shares will have no impact on earnings or taxable profits but has reduced debt, LTV and interest payable while increasing cash and current assets. This provides strong support for the Company’s growth strategy. Purchase of treasury shares: The Group did not purchase any Treasury shares during the year. We are proposing to renew our ongoing authority to buy back shares at this year’s AGM to ensure the Group continues to have flexibility to make purchases should it be considered to be in the best interests of Shareholders to do so.Operating costs ■Cost ratio flat at 59% (2016: 59%)We have a strong record of reducing our Group operating costs each year; however, we cautioned at our 2016 year-end results that although we maintain a disciplined approach to costs, continuing to reduce them is increasingly challenging while delivering both strong revenue growth and an acceleration of our store opening programme. Group operating costs amounted to £9.84m for the period, a 4.2% increase year on year (2016: £9.44m) which derived from higher rates bills as we opened landmark stores, extra staffing in document storage and higher Internet marketing costs. Property costs which mainly constitute rent and rates have risen by 6.8% as we felt the effects of higher rates bills as we opened our new landmark stores at Southampton and Bristol and have incurred rates on our development site at Wellingborough. Rents payable remained static and utility costs rose modestly. Excluding rates, other property costs fell by 2.6%. Overhead costs are running 2.7% lower for the full year 2017.Staff costs increased by 3.7% as we increased staffing at our serviced document storage unit to cope with increased volumes of incoming items. Across the rest of the Group there was no increase in staff costs despite additional national insurance costs arising on the exercise of employee share options.Financial Review16Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 201716Lok'n Store-AR2017.indd 1611/1/2017 5:48:08 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Overall the cost increases are mainly driven by the expansion of the business and we are seeing little other cost pressures. Looking beyond 2017, property costs within the Saracen business will be further driven down as part of a continuing strategy within the Saracen document storage business of optimising the utilisation of trading space. Immediately after the year-end and as reported in note 31(b) (Events after the Reporting date) the two warehouse units in Leatherhead have now been consolidated into one trading unit. This will remove approximately £0.1 million of property costs annually going forward.Overall operating costs as a percentage of revenue have remained flat and represent 59% as a cost ratio. (2016: 59%). GroupIncrease/(Decrease) in costs %2017£’0002016£’000Property costs 6.84,1793,913Staff costs 3.74,3894,232Overheads (2.7)1,0981,128Distribution costs 0.4171170Total 4.2%9,8379,443Strong balance sheet, efficient use of capital, low debt ■Two year extension to £40m Bank facility on same terms ■Net debt down to £17.4m (2016: £23.5m) ■Loan to value ratio (LTV) down to 14% (2016: 20.8%) ■Gearing down ■Cost of debt averaged 1.66% in the year on £28.8m drawn.Extension of existing £40m Banking Facility to six years Following the agreement of new facilities with Royal Bank of Scotland on improved terms last year, the Group has agreed a two year extension on its existing banking facility. The £40m facility will now run until January 2023 and 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 extension of term. The facility also provides for the possibility of an additional accordion of up to £10m which if taken up during the term of the facility will increase facilities available to £50m. Management of interest rate riskOf the £28.8m of gross debt currently drawn against the £40m revolving credit facility, £20m was at a fixed interest rate with £10m fixed rate swap at a fixed 1 month sterling LIBOR rate of 1.2% and £10m swap at a fixed 1 month sterling LIBOR rate of 1.15%. Both swaps expired 20 October 2016 and the Group’s all-in floating rate dropped to 1.65% on its entire gross debt.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 low level of indebtedness, low Loan to Value and high interest cover, combined with the wider uncertainties within the economy of Brexit likely to produce low rates for longer, it is not the intention of the Group to enter into an interest rate hedging arrangement at this time.Cash flow and financingAt 31 July 2017 the Group had cash balances of £11.4m (2016: £5.3m). Cash inflow from operating activities before investing and financing activities was £5.5m (2016: £3.8m) and the sale of the Treasury shares raising £9.9m further added to our cash position. As well as using cash generated from operations to fund some capital expenditure, the Group has a six year revolving credit facility. This provides sufficient liquidity for the Group’s current needs. Undrawn committed facilities at the year-end amounted to £11.2m (2016: £11.2m). Gearing At year-end there was £28.8m of gross borrowings (2016: £28.8m) representing gearing of 19.6% (2016: 32.9%) on net debt of £17.4m (2016: £23.5m). 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 reported Jones Lang LaSalle (JLL) valuation, gearing drops to 16.9% (2016: 27.6%). If the deferred tax liability carried at year-end of £16.4m (2016: £15.4m) is excluded gearing drops further to 14.6% (2016: 23.4%).Strong cash flow supports 11.1% dividend increase ■Annual dividend 10 pence per share, up 11.1% (2016: 9 pence per share) ■Cash available for Distribution (CAD) from operations £5.17m, up 9.9% (2016: £4.71m) ■Cash available for Distribution (CAD) of 18.1 pence per share (2016: 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. 17www.loknstore.com Stock Code: LOK17STRATEGIC REPORTwww.loknstore.com Stock Code: LOKLok'n Store-AR2017.indd 1711/1/2017 5:48:09 PMFinancial Review continued Analysis of Cash Available for Distribution (CAD) CAD Year ended 31 July 2017 £’000 Year ended 31 July 2016 £’000 6,493 6,295 (297) (90) (138) (792) (1,317) 5,176 9.9% (735) (110) (134) (606) (1,585) 4,710 Group Adjusted EBITDA Less: Net finance costs (per Income Statement) Capitalised maintenance expenses New Works Team Current tax Total deductions Cash Available for Distribution Increase in CAD over last year Closing shares in issue CAD per share (annualised) Number Number 28,679,711 18.1p 26,019,241 18.1p Total CAD has increased by 9.9% as a result of higher EBITDA profit and a much lower finance charge. At a per share level this has been balanced by the sale of treasury shares increasing the number of shares so the CAD per share remained constant at 18.1 pence despite the de-risking of the business. Capital expenditure and capital commitments The Group has grown through a combination of new site acquisition, existing store improvements and relocations, and has concentrated on extracting value from its existing assets and developing through collaborative projects and management contracts. Capital expenditure during the year totalled £6.63m (2016: £6.99m). This was primarily the construction works at our development sites in Gillingham and Wellingborough and the refurbishment of the old Southampton store for cruise parking. The Group has capital expenditure contracted but not provided for in the financial statements of £2.6m (2016: £1.1m). Analysis of Total Property Value Freehold & Long Leasehold valued by JLL1 Short Leasehold valued by JLL2 Freehold land and buildings at Director valuation3 Subtotal Sites in development at cost Total 1 Includes related fixtures and fittings (refer note 10b). Statement of Financial Position Net assets at the year-end were £89.1m (2016: £71.5m). Freehold and long leasehold properties were independently valued at 31 July 2017 at £102.9m (2016: £96.1m). Refer to the table of property values below. Market Valuation of Freehold and Operating Leasehold Land and Buildings It is the Group’s policy to commission an independent external valuation of its properties at each year-end. Our eleven freehold properties and one long leasehold are held in the statement of financial position at fair value and have been valued by JLL. Refer to note 10b) – property, plant and equipment and also to the accounting policies for details of the fair value of trading properties. The valuations of the leasehold stores held as ‘operating leases’ are not taken onto the statement of financial position. However, these have also been valued and these valuations have been used to calculate the adjusted net asset value position of the Group. The value of our operating leases in the valuation totals £16.7m (2016: £16.6m) and we have reported by way of a note the underlying value of these leasehold stores in our revaluations and adjusted our Net Asset Value (NAV) calculation accordingly to include their value. This ensures comparable NAV calculations. A deferred tax liability arises on the revaluation of the properties and on the rolled-over gain arising from the disposal of some trading stores. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief. The proceeds from the sale of the old Reading store have been reinvested into new store development. It is not the intention of the Directors to make any other significant disposals of operational stores, although individual disposals may be considered where it is clear that added value can be created by recycling the capital into other opportunities. The Board will continue to commission independent valuations on its trading stores annually to coincide with its year-end reporting. No. of stores/ sites 12 7 1 20 2 22 31 July 2017 Valuation £ 102,900,000 16,725,000 4,195,479 123,820,479 5,124,567 128,945,046 No. of stores/ sites 12 7 1 20 2 22 31 July 2016 Valuation £ 96,125,000 16,575,000 3,000,000 115,700,000 457,826 116,157,826 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 10 years and 8 months at the date of the 2017 valuation (2016 valuation: 11 years and 8 months). 3 For more details (refer note 10b – Directors’ valuation). Total freeholds and long leasehold account for 87.0% of property values (2016: 85.7%). 1818 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 18 25416.04 – 1 November 2017 5:47 PM – Proof 2 24921.04 – 1 November 2017 5:47 PM – proof 2 11/1/2017 5:48:09 PM Adjusted Net Asset Value per Share ■ Adjusted Net Asset Value per share up 7.9% to £4.16 (2016: £3.86) 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 2017 the adjusted net asset value per share (before deferred tax) increased 7.9% to £4.16 from £3.86 last year. This increase is a result of higher property values 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 by management and staff during the year. The sale of Treasury shares at the average price of £4.05 was largely neutral on this figure. Analysis of Net Asset Value (NAV) Net assets Adjustment to include operating/short leasehold stores at valuation Add: JLL leasehold valuation Deduct: leasehold properties and their fixtures and fittings at NBV Deferred tax arising on revaluation of leasehold properties1 Adjusted net assets Shares in issue Opening shares in issue Shares issued for the exercise of options Closing shares in issue Shares held in treasury Shares held in EBT Closing shares for NAV purposes Adjusted net asset value per share after deferred tax provision Adjusted net asset value per share before deferred tax provision Adjusted net assets Deferred tax liabilities and assets recognised by the Group Deferred tax arising on revaluation of leasehold properties1 Adjusted net assets before deferred tax Closing shares for NAV purposes Adjusted net asset value per share before deferred tax provision S T R A T E G I C R E P O R T Group 31 July 2017 £’000 89,119 16,725 (2,878) 102,966 (2,354) 100,612 Number 29,109 194 29,303 – (623) 28,680 £3.51 100,612 16,363 2,354 119,329 28,680 £4.16 Group 31 July 2016 £’000 71,475 16,575 (3,065) 84,985 (2,432) 82,553 Number 28,447 662 29,109 (2,467) (623) 26,019 £3.17 82,553 15,361 2,432 100,346 26,019 £3.86 1 A deferred tax adjustment in respect of the uplift in the value of the leasehold properties has been included. Although this is a memorandum adjustment as leasehold properties are included in the Group’s financial statements at cost and not at valuation, this deferred tax adjustment is included in the adjusted net asset value calculation in order to maintain a consistency of tax treatment between freehold and leasehold properties. Summary Lok’nStore is a robust business with an excellent credit model, low debt and gearing and which is strongly cash generative from an increasing asset base. 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 Broadstairs, Bristol, Southampton, and Chichester and our strong pipeline of more landmark stores demonstrate the Group’s ability to use those strengths to exploit the opportunities available. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 19 19 Lok'n Store-AR2017.indd 19 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:09 PM Corporate Social Responsibility Report Corporate and social responsibilities Lok’nStore conducts its business in a manner that reflects honesty, integrity and ethical conduct. Our Corporate Social Responsibility Report sets out our environmental policy and how we manage our impact on the environment, our policies and principles in relation to our responsibilities to stakeholders including suppliers, customers and employees. We believe that the long-term success of our business is best served by respecting the interests of all of our stakeholders. Management of social, environmental and ethical issues is of high importance to Lok’nStore. These issues are dealt with on a day-to-day basis by the Group’s managers with principal accountability lying with the Board of Directors. We look for opportunities to address our responsibility to the environment, and we pay close attention to our energy use, carbon dioxide emissions, water use and waste production. A full assessment is set out below in our Environmental Policy. Customers We believe in clarity and transparency. Brochures and literature are written in plain English, explaining clearly our terms of business without hiding anything in the ‘small print’. We are open and honest about our products and services and do not employ pressure selling techniques or attempt to take advantage of any vulnerable groups. If we make a mistake we acknowledge it, deal with the problem quickly, and learn from our error. We listen to our customers as we know that they can help us improve our service to them. In return, a substantial amount of our business comes from previous customers, existing customers taking more space and customer referrals. Suppliers We are committed to conducting our business with suppliers in a fair and honest manner, with openness and integrity, operating in accordance with the terms and conditions agreed upon. We expect our suppliers to operate to these same principles. Employees At 31 July 2017 we had 167 employees (2016: 150). We treat our employees with dignity and respect and are committed to providing a positive attitude in the business and an enjoyable working environment. We have a professional open culture where staff can exchange ideas and offer suggestions for work and business improvement. This encourages our staff to build on their skills, through appropriate training and regular performance review. Regular training courses at our Farnborough Head Office support these objectives. We have a large conference room which can accommodate all our training requirements for the foreseeable future. This reduces outgoings and increases and improves contact between Head Office and the stores by bringing staff into Head Office for their training. This in turn contributes to attracting and retaining the right people which is key to the success of Lok’nStore. The Lok’nStore Academy Academy This will be the second year of running the Lok’nStore Academy which brings strategic and operational benefits, including: ■ Aligning all of our training and development under one “branded” project ■ To build teams for the future through internal succession planning ■ Enhancing the internal and external perception of the business as a great place to work, giving our people a sense of belonging and achievement through our training and development During the year, 6 employees successfully completed National, Vocational Qualifications under the sponsorship of the Academy. The Academy has had a good impact on the sales skills of our customer facing teams, with specific increase seen in the conversion of new enquiries from our website as a direct result of the Academy workshops. We also successfully promoted 3 internal candidates to Centre Managers following the completion of our management development training. The Academy encompasses all “in-house” training, quality audits such as our monthly mystery shop programme and standards audits and performance reviews. Share ownership plans All employees are eligible to participate in our share ownership plans. Lok’nStore operates a Share Incentive Plan with 129 members (2016: 124), a total of 78% of employees participating in the Scheme (2016: 81%). This high level of participation is testament to the loyalty and commitment of our staff. Our personnel are committed and motivated and help maintain the exemplary levels of friendly service that Lok’nStore provides to its customers. The Board would like to thank all of our staff for their commitment to our business and for their hard work and efforts over the year. Policy on payment of suppliers The Group does not follow any formal code or standard on payment practice. The Company’s policy, which is also applied by the Group, is to ensure that, in the absence of dispute, all suppliers are dealt with in accordance with standard payment practice, whereby all outstanding trade accounts are settled within the terms agreed with the supplier at the time of the supply or otherwise 30 days from invoice date. At the year-end the credit taken from suppliers by the Group was 43 days (2016: 50 days). Health and safety The Board recognises the prime importance of maintaining high standards of Health & Safety and healthy working conditions for staff, customers, visitors, contractors and other people who may be affected by our business activities. Lok’nStore has a Property Risk Committee which meets every other month and considers issues relevant to Health and Safety and other risk issues within the Group under the overall supervision of Ray Davies, Finance Director, who carries Board responsibility for risk management. The Health and Safety policy is reviewed by the Committee on an annual basis. It is also amended to include changes to Health and Safety Law as they occur. The Health and Safety policy clearly sets out the duties and responsibilities of the Chief Executive Officer, Managers and all staff within the Group. Employee benefit trust The Employee Benefit Trust owns 623,212 shares (2016: 623,212), the costs of which are shown as a deduction from Shareholders’ funds. Full details are provided in note 26 – Own Shares. Environmental performance Our Environmental Policy is to effectively manage our waste, control our polluting emissions and encourage our suppliers to minimise their impact on the environment. Trucost, the environmental reporting company, has reviewed Lok’nStore Group Plc’s reporting of environmental matters in its Annual Report for the year ended 31 July 2017. 20 20 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 20 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:09 PM 25416.04 – 1 November 2017 5:47 PM – Proof 7Environmental Management and PerformanceIntroductionLok’nStore Group has been measuring its environmental impacts since 2005, monitoring environmental key performance indicators (eKPIs) including greenhouse gas emissions (GHG), water use and waste, and reviewing them against its stated Environmental Policy, which includes the following aims: to manage waste effectively, control polluting emissions and encourage suppliers to minimise their impact on the environment. The UK government requires all quoted companies to report on their GHG emissions as part of their annual directors’ report under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. As in previous years, Lok’nStore engaged Trucost to review its reporting of environmental impacts for the financial year ended 31 July 2017. The following information comes from Trucost’s report.Highlights for the year ended 31 July 2017: ■The Company’s environmental reporting is consistent with “Environmental Key Performance Indicators: Reporting Guidelines for UK Business 2006” ■Lok’nStore’s GHG reporting for 2016–17 aligns with government guidelines ■Trucost found that Lok’nStore assessed and disclosed all material environmental impacts – GHG emissions, water consumption and waste generation for its own facilities ■Operational GHG emissions decreased by 26%. Since 2005, GHG emissions have shrunk by 82% ■GHG emissions from the consumption of purchased electricity decreased to zero due to the Company’s use of electricity derived from renewable sources Operational greenhouse gas emissionsDuring FY2016–17, Lok’nStore’s combined operational GHG emissions – direct and indirect – decreased by 26%, falling to 213.4 tCO2e from 287.8 tCO2e the previous financial year. Normalising these emissions by annual revenue, FY2016–17 also had a 26% lower emissions intensity of 13.7 tCO2e per £m compared to FY2015–16’s 18.4 tCO2e per £m. Since the Company began reporting in 2005, GHG emissions have decreased by 82% from 1,189 tCO2e. When normalised by annual revenue, Lok’nStore emissions intensity has decreased by 91% since 2005. Figure 1 below displays the absolute emissions and intensity values between 2005 and 2017.Figure 1: Combined direct and indirect operational greenhouse gas emissions, FY2005–17202006200520072008200920102011201320122014201520162017Absolute GHG emissions (metric tons CO2e)Source: Trucost analysis (2017) based on Lok’nStore dataGHG Emissions Intensity: metric tons CO2e per million (£m) revenue1,6001,4001,2001,00080060040020001601801401201008060400Metric tons CO2eMetric tons CO2e per £1m revenueDirect GHG EmissionsOne component of GHG emissions from organisational operations are direct emissions derived from natural gas consumption, owned transportation and similar activities. During FY2016–17, Lok’nStore’s direct emissions decreased by 13% to 213.4 tCO2e, from 245.6 tCO2e the previous financial year. Comparing the intensity of GHG emissions normalised by revenue, FY2016–17 emissions declined by 16% to 13.3 tCO2e per £m, from 15.7 tCO2e per £m during FY2015–16. Figure 2 below displays these metrics.Figure 2: Direct operational greenhouse gas emissions, FY2005–173502503002001501005003025201510502006200520072008200920102011201320122014201520162017Absolute GHG emissions (metric tons CO2e)Source: Trucost analysis (2017) based on Lok’nStore dataGHG Emissions Intensity: metric tons CO2e per million (£m) revenueMetric tons CO2eMetric tons CO2e per £1m revenue21www.loknstore.com Stock Code: LOK21STRATEGIC REPORTwww.loknstore.com Stock Code: LOKLok'n Store-AR2017.indd 2111/1/2017 5:48:10 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Environmental Management and Performance continuedIndirect GHG emissionsA second component of GHG emissions related to organisational operations are indirect emissions primarily from the consumption of purchased electricity. Since 100% of Lok’nStore’s electricity is derived from renewable feedstocks through its purchases from vendors and on-site PV electricity generation at company facilities, this electricity generated zero GHG emissions (0 tCO2e). As a result, Lok’nStore’s indirect emissions intensity was also 0 tCO2e per £m of revenue, down from 2.7 tCO2e per £m of revenue the previous year. Figure 3 below conveys these values.Figure 3: Indirect operational greenhouse gas emissions, FY2005-171,2001,00080060040020001401201008060402002006200520072008200920102011201320122014201520162017Absolute GHG emissions (metric tons CO2e)Source: Trucost analysis (2017) based on Lok’nStore dataGHG Emissions Intensity: metric tons CO2e per million (£m) revenueMetric tons CO2eMetric tons CO2e per £1m revenueRenewable energy generationLok’nStore has prioritised installing solar photovoltaic panels at as many facilities as possible. The past year demonstrates the Company’s commitment to this goal, as each success metric increased—total PV electricity generated, PV electricity exported to the grid and the number of Lok’nStore sites with active PV infrastructure. Lok’nStore facilities produced 63% more PV electricity during FY2016–17, rising to 243.9 MWh, up from 149.4 MWh the previous year. This electricity avoided 100.5 tCO2e of GHG emissions, based on the national standard mix of non-renewable – renewable energy. The amount of exported PV electricity increased by 64% to 39.0 MWh, from 23.7 MWh during FY2015-16. On average, each facility produced 30% of the electricity that it needed for the year. Three of the four sites already generating PV electricity saw increases from FY2015–16: Bristol (up 166%), Maidenhead (up 20%) and Reading (up 2%). During FY2016–17, the Southampton facility began generating PV electricity and led the Lok’nStore sites, generating 56.1 MWh or 23% of the total. Figure 4 and Table 1 below show the overall electricity generation from on-site PV systems at each facility, including the proportion of electricity consumed within the facility and the proportion exported to the national grid. Table 2 provides the amount of PV electricity exported from each facility. The Company’s elimination of any GHG footprint from electricity consumption at its facilities and export of clean energy to the national grid demonstrate its success.Figure 4: Electricity from PV systems—consumption on-site and exported, FY2016–170605040302010406(13%)(87%)3511371242 MWhPooleMaidenheadReadingBristol524SouthamptonRenewably-sourced electricity used on-site (MWh)Renewably-sourced electricity exported (MWh)6Source: Trucost analysis (2017) based on Lok’nStore data(24%)(76%)(12%)(88%)(24%)(76%)(8%)(92%)Table 1: Lok’nstore photovoltaic electricity generated, by facility, FY2016-17Lok’nStore FacilityFY2015–16 PV Generated (MWh)FY2016–17 PV Generated (MWh)% changePoole46.046.10%Maidenhead38.045.6+20%Reading47.348.0+2%Bristol18.148.2+166%SouthamptonN/A56.1N/ATotal149.4243.9+63%Avoided GHG emissions (tCO2e), applying national standard mix 61.6100.5+63%Source: Trucost analysis (2017) based on Lok’nStore dataTable 2: Lok’nstore photovoltaic electricity exported, by facility, FY2016-17Lok’nStore FacilityFY2015–16 PV Generated (MWh)FY2016–17 PV Generated (MWh)% changePoole5.86.2+7%Maidenhead7.210.8+50%Reading4.35.9+39%Bristol6.711.6+74%SouthamptonN/A4.5N/ATotal23.739.0+64%Avoided GHG emissions (tCO2e), applying national standard mix 9.816.1+64%Source: Trucost analysis (2017) based on Lok’nStore data22Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 201722Lok'n Store-AR2017.indd 2211/1/2017 5:48:10 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Water consumptionThe only negative change during FY2016–17 was the increase in water use among Lok’nStore sites—up 27% to 3,659 cubic metres (m3), from 2,885 m3 during FY2015–16. Water use intensity, normalized by revenue, rose 23% to 227.8 m3 per £m, from 184.8 m3 per £m the previous year. However, since 2005, both absolute water consumption and water use intensity have decreased—by 29% and 66%, respectively. Figure 5 features the values for water use. Figure 5: Water use, FY2005–17Absolute Water Consumption (m3)Water consumption (m3)6,0003,0004,5001,50007005004003006002001000Water Intensity: cubic metres per million (£m) revenueCubic metres per £1m of revenue 2006200520072008200920102011201320122014201520162017Source: Trucost analysis (2017) based on Lok’nStore dataWater use for FY2016–17 originally appeared much higher based on utility tracking and reporting. However, the increase in water consumption was due partially to a water leak identified through usage tracking during the year. This leak was rectified and the consumption figures have returned to normal levels since March 2017.Waste generation and recyclingDuring FY2016–17, total waste generation increased by 4% to 398.9 metric tons, from 382.8 metric tons during FY2015–16. In addition, normalized waste intensity increased slightly to 24.8 metric tons per £m, from 24.5 metric tons per £m. Landfilled waste increased by 4% to 170.8 metric tons during FY2016–17, from 164.3 metric tons the previous year, and represented a minor 1% increase when normalized for revenue. Incinerated waste increased by 5% to 0.023 metric tons, from 0.022 metric tons, and represented a minimal 2% increase when normalized for revenue. Figure 6 on the following page displays the landfilled waste for the period FY2016–17.Figure 6: Landfilled waste, FY2005-17Absolute Waste to Landﬁll (metric tons)Landﬁll Waste Intensity: metric tons per million (£m) revenueWaste to landﬁll (metric tons)Metric tons per £1m revenue1,00080060040020001201008060402002006200520072008200920102011201320122014201520162017Source: Trucost analysis (2017) based on Lok’nStore dataAs a positive impact, Lok’nStore increased the amount of material that it recycled to 228.2 metric tons during FY2016–17, an increase of 4% over the 218.4 metric tons that it recycled during FY2015–16. Normalising these values by annual revenue, Lok’nStore’s recycling increased by 2% to 14.2 metric tons per £m of revenue, from 14.0 metric tons per £m of revenue. Recycled materials included cardboard, office paper, used computer media and equipment, shrink wrap, and employee uniforms.ConclusionTable 3 overleaf summarises the environmental impact from operations, FY2016–2017.Lok’nStore Group Plc continues to monitor and report its environmental impact in line with all government guidelines. Over the coming years, the Company intends to: ■Continue including photovoltaic production units at its new stores and sourcing its other electricity requirements from renewable sources. ■Investigate the rise in water use to understand and rectify the cause. ■Continue to monitor and where possible reduce its waste generation and/or increase the amount sent for recycling.23www.loknstore.com Stock Code: LOK23STRATEGIC REPORTwww.loknstore.com Stock Code: LOKLok'n Store-AR2017.indd 2311/1/2017 5:48:11 PMEnvironmental Management and Performance continued Table 3: Summary of environmental impacts from operations, FY2016–17 Absolute Quantity Normalized* Quantity Per £m Revenue Impact Metric Definition Data Source and Calculation Methods FY 2015–16 FY 2016-17 FY 2015–16 FY 2016-17 % change in normalized quantity Greenhouse gas emissions—Direct operational (tCO2e) Natural gas Emissions from utility boilers Van fuel Diesel and petrol used in vans on company business Automobile fuel Diesel and petrol used in vans on company business Total direct GHGs Includes carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) Yearly consumption in kWh collected from fuel bills, converted according to DEFRA Guidelines Fuel invoices, recorded mileage or satellite tracking converted according to DEFRA Guidelines Fuel invoices, recorded mileage or satellite tracking converted according to DEFRA Guidelines Calculated according to DEFRA Guidelines 33.3 32.4 2.1 2.0 -5% 155.5 14.8 10.0 0.9 -91% 56.8 166.2 3.6 10.3 +184% 245.6 213.4 15.7 13.3 -16% Greenhouse gas emissions—Indirect operational (tCO2e) Purchased electricity Directly purchased electricity, which generates GHGs based on the fuel source Yearly consumption of purchased electricity in kWh, converted according to DEFRA Guidelines 42.2 zero 2.7 zero -100% Greenhouse gas emissions—Total operational (tCO2e) Operational GHG emissions Combined direct (scope 1) and indirect (scope 2) GHG emissions from operations Added values for direct operational emissions and indirect operational emissions above 287.8 213.4 18.4 13.7 -26% 24 24 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 24 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:11 PM Absolute Quantity Normalized* Quantity Per £m Revenue Impact Metric Definition Data Source and Calculation Methods FY 2015–16 FY 2016-17 FY 2015–16 FY 2016-17 % change in normalized quantity Water consumption (m3) Water use Consumption of piped water Yearly consumption of purchased water 2,885 3,659 184.8 227.8 +23% Waste generation (metric tons) Landfilled waste Office waste sent to landfills, including paper, cardboard and plastic Incinerated waste Sanitary waste that was incinerated Recycled waste Office waste recycled, including cardboard, computer media and fluorescent lights Total waste Includes waste that was landfilled, incinerated or recycled Volume of landfilled waste, based on the number of bins and skips removed; converted to metric tons according to DEFRA Guidelines Volume of incinerated sanitary waste, based on the number of bins removed Volume of recycled waste, based on the number of bins and skips removed, which was converted to metric tons according to DEFRA Guidelines Measured by tracking waste volumes throughout the year * Normalised based on annual revenue for the respective year. Trucost has rounded all values. Source: Trucost analysis (2017) based on Lok’nStore data 164.3 170.8 10.5 10.6 +1% 0.022 0.023 0.00142 0.00144 +2% 218.4 228.2 14.0 14.2 -2% 382.8 398.9 24.5 24.8 +1% S T R A T E G I C R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 25 25 Lok'n Store-AR2017.indd 25 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:11 PM Principal Risks and Uncertainties in operating our Business Finance Lok’nStore finances its current needs through a combination of strong operational cash flows and debt. Cash deposits are placed with Royal Bank of Scotland plc on a no-notice treasury deposit account which tracks base rate and yields a rate equivalent to RBS bank base rate on all deposited balances. The Group’s cash position is reviewed daily and cash is transferred daily between these accounts and the Group’s operational current accounts as required. The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The policies for managing these risks are regularly reviewed and agreed by the Board. Full details are set out in the Financial Review. Further information on our treasury arrangements is set out in note 16. The financial risk management objectives and policies of the Group, along with details of exposure to liquidity and cash flow risk, are set out below and in note 16 (Financial Instruments) to the financial statements. Risk management Risk management has been a fundamental part of the development of Lok’nStore. We maintain a risk register which identifies and categorises our risks and provides an assessment of risk based on a combination of ‘likelihood’ and ‘consequences and impact’ on the business. This is reviewed regularly by management and the Board and underpins our structured approach to identifying, assessing and controlling risks that emerge during the course of operating the business. Its purpose is to support better decision-making through understanding the risks inherent in both the day-to-day operations and the strategic direction of the Group and their likely impact. This is a continuing and evolving process as we review and monitor the underlying risk elements relevant to the business. Market risk Self-storage is a developing market with further opportunities for significant growth. Awareness of self-storage and how it can be used by customers is well understood in the United States, but historically has been relatively low throughout the UK. Survey and anecdotal evidence suggests this awareness is now rising in the UK. The rate of growth in branded self-storage operations in good trading locations continues to be limited by the challenge of acquiring sites at appropriate prices and obtaining planning permission. Lok’nStore invests in prime locations where its criteria for site selection are met and which will enable it to develop high quality stores which are prominent with high visibility and strong branding. We believe this will place us in a strong trading position and may discourage competitors from entering that local market. However, it is possible that, Lok’nStore may be unable to execute this strategy which will inhibit its growth. Further, it is possible that an increasing number of competitors in the industry may negatively impact Lok’nStore’s existing operations. We have a large customer base spread across the stores including those customers who have used Lok’nStore regularly over the years. Many of these periodically return as their circumstances and their storage needs change. Across all of the stores we operate, self-storage customers are a broad mix of both domestic and business. Property risk The acquisition of new sites for development into self-storage centres is a key strategic objective of the business. We will continue to face significant competition for site locations from other uses such as hotels, car showrooms and offices as well as from the other self-storage operators. The process of gaining planning permissions remains challenging. Lok’nStore may take on the risk of obtaining planning permission when acquiring sites in the face of competitive bids. In these cases we are obliged to undertake the planning, environmental and other property due diligence under tight timescales which creates greater risk in the process. Nevertheless, Lok’nStore’s management has gained significant experience in operating in this property environment, acquiring sites on main roads in prominent locations and obtaining appropriate planning permissions. We manage the construction of our properties carefully. The building of each store is handled through a design and build contract with established contractors. We employ an external team of professionals to monitor the progress of each development. The fitting of mezzanine floors and steel units is generally managed in-house using an established external professional team of sub-contractors who understand Lok’nStore’s particular specifications. Credit risk Lok’nStore’s self-storage credit model is strong with customers paying four-weekly in advance in addition to an initial four weeks rental deposit. We retain a legal lien over customers’ goods which can be sold to cover their unpaid bills. Credit control remains tight with only £33,900 (2016: £33,210) of bad debts recognised during the year representing around 0.20% of Group revenue (2016: 0.21%). There was £6,159 of additional costs associated with recovery (2016: £8,116). Given the tight credit conditions in the wider economy our own credit control indicators are resilient, showing no appreciable signs of weakening during the year. Tax risk We regularly monitor proposed and actual changes in legislation in the tax regime particularly in corporation tax, capital gains tax, VAT and Stamp Duty Land Tax (SDLT). We work with our professional advisers and through trade bodies to understand and mitigate or benefit from their effects. Corporate social responsibility and employee risk The Corporate Social Responsibility and Employee Risk within the business are discussed within the Corporate Responsibility Report. Reputational risk Lok’nStore’s business reputation is very important to the Group. Our management and staff work hard to protect and develop it. We always try to communicate clearly with our customers, suppliers, local authorities and communities, employees and Shareholders and to listen and take account of their views. The Lok’nStore Group websites (www.loknstore.co.uk, www.loknstore.com and www.saracendatastore.co.uk) are important avenues of communication and a source of information for employees, customers and investors. Employee communication is augmented by quarterly staff newsletters. Approved by the Board of Directors and authorised for issue on 27 October 2017 and signed on its behalf by Andrew Jacobs Chief Executive Officer Ray Davies Finance Director 26 26 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 26 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:11 PM Corporate Governance Introduction The governance of the Group continues to be of great importance to the Board which seeks to operate the highest governance standards appropriate to the size and nature of the Company. The Group and Board fully support the principles of openness, integrity and accountability which underpin the UK Corporate Governance Code. This year the Group joined the Quoted Companies Alliance and has reviewed its corporate governance and annual reporting against their guidelines for Smaller Quoted Companies. In this section we hope to demonstrate how we have met these guidelines and where we have been unable to do so, explain the reasons why. Our governance structure The Board Remuneration Committee Meets Once a Year Chaired by Edward Luker Audit Committee Meets Once a Year Chaired by Charles Peal See page 30 for more information See page 30 for more information Executive Board Committee Meets Monthly Considers: Strategy, Management accounts, Store operations, Customer Issues and Human Resources Capex Committee Meets Monthly Considers: Proposed capital expenditure, actual spend against budgets Property Committee Meets Weekly Considers: Sites under Development New Acquisitions Property Risk Committee Meets Quarterly Considers: Risks associated with properties including HS&E G O V E R N A N C E R E P O R T Operational Management Day-to-day Business Delivery Internal control The Board is responsible for ensuring that the Group has in place a system of internal control. In this context, internal control is defined as those policies and processes established to ensure that business objectives are achieved cost-effectively, assets and shareholder value are safeguarded, and laws, regulations and policies are complied with. Controls can provide reasonable but not absolute assurance that risks are identified and adequately managed to achieve business objectives and to minimise material errors, losses and fraud or breaches of laws and regulations. The Group operates a strict system of internal financial control, which is designed to ensure that the possibility of misstatement or loss is kept to a minimum. There is a comprehensive system in place for financial reporting and the Board receives a number of reports to enable it to carry out these functions in the most efficient manner. These procedures include the preparation of management accounts, forecast variance analysis and other ad hoc reports. There are clearly defined authority limits throughout the Group. The Group continues to develop the internal audit function utilising operational management to make unannounced store visits as part of a process supported by audit control checklists and other procedures. This undertaking has contributed to sales by promoting efficient store management, but also addresses risk and credit control, cash and store banking, and space and customer management. The internal audit checks are designed to ensure any fraud or mismanagement is quickly identified. The Group has a whistle-blowing procedure within its staff handbook, which is issued to all staff. All employees may raise concerns about malpractice or improper or potentially illegal behaviour in confidence without concern of victimisation or disciplinary action. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 27 27 Lok'n Store-AR2017.indd 27 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:11 PM Corporate Governance continued Meets: 6 times a year with teleconferences when required The Board 3 Executive Directors • 4 Non-Executive Directors Considers: Receives: ■ Financial strategy ■ Company performance ■ Major investments ■ Capital resources ■ Risk Management ■ Reporting to Shareholders ■ Detailed management accounts against budgets ■ A current trading appraisal ■ Minutes of all subcommittees ■ The Risk Register ■ The Conflicts Register The Directors The Board consists of three Executive Directors and four Non-Executive Directors. The expertise of the Directors covers Company Law, Corporate Finance, Economics, Finance and Accounting, Corporate Reporting, Risk Management, Tax and Compliance, Marketing, Operations, Property Law and Strategy. The UK Corporate Governance Code recommends that a smaller company should have at least 2 Non-Executive Directors that are deemed independent. Due to the tenure of our Board Members, we do not currently comply with this requirement. Further explanation on this can be found on page 29. Activities The Non-Executive Directors provide considerable support to the Chief Executive Officer and while much of this is via informal meetings, telephone calls and email correspondence, the Non-Executive Directors also lend their expertise and experience to other members of the management team. Board performance and evaluation Board Attendance Board Audit Committee Remuneration Committee Annual General Meeting % Attendance Total Number of Meetings in 2016/2017 Executive Directors Andrew Jacobs Ray Davies Neil Newman-Shepherd Non-Executive Directors Simon Thomas Edward Luker Charles Peal Richard Holmes 4 (2 Telecon) 4 (2) 4 (2) 4 (2) 4 (2) 4 (2) 4 (2) 3 (2) 1 n/a n/a n/a n/a 1 1 n/a 1 n/a n/a n/a n/a 1 n/a 1 1 1 1 1 1 1 1 1 100% 100% 100% 100% 100% 100% 87.5% Conflicts of interest The Directors have a responsibility to act in the best interests of the Group and its Shareholders and in keeping with this responsibility it is imperative that Directors are aware of and properly manage potential conflicts of interest. The table below shows the directorships that the current Group Directors hold in other Companies both inside and outside the Group: Andrew Jacobs Andrew Jacobs (UK) Limited Lok’nStore Limited* Saracen DataStore Limited* Ray Davies Ash Road SS Limited Davies Elise Consulting Ltd Lok’nStore Limited* Lok’nStore Trustee Limited* ParknCruise Limited* Saracen DataStore Limited* Semco Engineering Limited* Semco Machine Tools Limited* Southern Engineering and Machinery Co. Limited* Neil Newman-Shepherd Lok’nStore Limited* * Lok’nStore Group Companies † Guernsey registered company Simon Thomas Lok’nStore Limited* Simon Thomas (UK) Limited Edward Luker Edward Luker Consultancy Limited St George’s School Ascot Trust Ltd Richard Holmes Incorporated Society of British Advertisers Limited Lok’nStore Limited* Lok’nStore Trustee Limited* Specsavers Optical Group Limited† Charles Peal Warnborough Asset Management Ltd 28 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 28 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:11 PM Conflicts of interest arise where an individual’s personal interests or those interests related to legitimate outside roles may conflict with the interests of the Group. This could, for example, inhibit open discussions or lead to a perception that the individual is acting outside of the Group’s interests. Under the Companies Act 2006, Non-Executive Directors who have served over 9 years must offer themselves for re-election at every Annual General Meeting and accordingly Simon Thomas, Edward Luker, Charles Peal and Richard Holmes now offer themselves for re-election at every AGM. Directors’ remuneration The Remuneration Committee consists of Edward Luker (Chairman of the Committee) and Richard Holmes. The Committee meets and considers, within existing terms of reference, the remuneration policy and makes recommendations to the Board for each Executive Director. The Committee’s remuneration policy aims to design a package that will align the interests of Executive Directors and those of Shareholders. The Executive Directors’ remuneration consists of a package of basic salary, bonuses and share options, which are linked to corporate achievements and these levels are determined by the Remuneration Committee. Although performance related bonuses are calculated in accordance with strict and measurable performance criteria, there are currently no specific performance conditions relating to the grant of share options. The Remuneration Committee has this currently under review in order to determine the most appropriate performance criteria to apply for the grant of share options as part of future long-term performance awards in order to meet the objectives of the business and accord with accepted corporate governance. The details of each Director’s remuneration are set out in note 6 to the financial statements. The Committee meets once a year and considers proposals from the Chairman and Chief Executive Officer. Shareholder relations We aim to provide balanced, clear and transparent communications which allow our Shareholders to understand our performance, strategy and prospects. Further aiding transparency is the fact that the Group has a straightforward capital structure; one class of shares, one bank and no other financial instruments. The Directors also meet and discuss the performance of the Group with Shareholders throughout the year with specific schedules to visit institutional investors, analysts and the media being held after the announcement of the half year and full year results. At the AGM the Board give a presentation of events and progress during the year. Attendee Shareholders are encouraged to mix and engage with the Directors after the formal business of the AGM has concluded. Regular RNS announcements are made throughout the year keeping all Shareholders informed about acquisitions, trading conditions, director dealings, etc. Queries raised by a shareholder, either verbally or in writing, are promptly answered by whoever is best placed on the Board to do so. G O V E R N A N C E R E P O R T It is recognised that conflicts of interest will inevitably occur from time to time and that Directors legitimately undertake roles outside of the Group. The Board therefore believes it is important to be transparent in terms of such interests and to ensure they are properly recorded and, where necessary, Directors will withdraw from decision making if there is a danger of perceived conflict. A register of interests is maintained by the Assistant Company Secretary and is circulated to the Directors in advance of each Board meeting. Conflicts of Interest are considered and authorised by the Board as they arise. We report in note 29 (Related party transactions) regarding related party transactions. Additionally, within note 29, in the interests of transparency we include items which while not strictly falling within the definition of a related party transaction are still considered matters of interest. Important note on independent Directors The UK Corporate Governance Code requires that a smaller company should have at least 2 Non-Executive Directors that are deemed independent. The Code‘s definition of independence provides that no director who has served for more than 9 years can be deemed independent. The quoted Companies Alliance guidelines also state this requirement in its code. As of last year all of Lok’nStore’s Non-Executive Directors have served for longer than 9 years. In July 2017 Simon Thomas stepped down as Executive Chairman to Non-Executive Chairman and is now considered within this category. Our Non-Executive Directors meet five of the six other criteria for independence. Were it not for the fact that Edward Luker retains his modest award of options awarded in return for waiving his remuneration in 2008/9 and Simon Thomas holds 25,217 options, the Non-Executives would meet all criteria for independence other than length of service. The Board has considered the Company’s non-compliance in this area in great detail this year and is satisfied that the current composition of the Board, which consists of three Executive Directors and four Non-Executives, provides for a constructive and challenging dialogue. The broad range of skills, expertise and attitude amongst the Executive and Non-Executive Directors include all the matters that the Company deals with – strategy, property, finance, human resources, marketing, and organisation. Further, the long experience of Board members is considered an asset and all express challenges robustly. The current composition of the Board is considered to be in the best interest of Shareholders and the Company as a whole. The Board also considers appointing another Director may well prove unwieldy, which is something the Code specifically guards against. Creating positions for cosmetic purposes also flies in the face of the Company’s rigorous attention to cost control. Board members are major Shareholders in the Company, substantially mitigating the tension which might exist between the interests of Directors and Shareholders. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 29 29 Lok'n Store-AR2017.indd 29 25416.04 – 1 November 2017 5:47 PM – Proof 1 11/1/2017 5:48:11 PM Corporate Governance continued Accounting dates and reporting calendar 2017 January February March April May June July August September October November December ■ H1 Period-end ■ Pre-close Trading Statement (H1) ■ Interim Results announced ■ Institutional Investor visits ■ Institutional Investor & Media Site visits ■ Financial Year-end ■ Pre-close Trading Statement ■ Preliminary Statement ■ Institutional Investor visits ■ AGM Accountability and audit The Board believes that the Annual Report and Accounts play an important part in presenting all Shareholders with an assessment of the Group’s position and prospects. The Strategic Report contains a detailed consideration of the Group’s position and prospects. Board Committees Under the UK Corporate Governance Code, Boards are tasked with ensuring that there is a framework in place to manage the appointment of Directors, to set Directors’ remuneration, to check the reliability of assurances on governance, risk management, and the integrity of financial statements and the annual report. The Code suggests companies have three committees to take on these responsibilities: a Nomination Committee, a Remuneration Committee and an Audit Committee. The following section introduces the Group’s committees, members and the terms of reference. Nomination Committee A Nomination Committee would oversee the appointment of a new Director. Due to the relatively small size of the Company, the Board does not believe that a Nomination Committee is necessary. In the event of a proposal to appoint a new Director, this is discussed at a full Board meeting with each member being given the opportunity to meet the individual concerned prior to any formal decision being taken. Each member of the Board is subject to the re-election provisions of the Articles of Association, which require them to offer themselves for re-election at least once every three years. Remuneration Committee The Remuneration Committee consists of Edward Luker (Chairman of the Committee) and Richard Holmes. The Committee meets once a year and considers, within existing terms of reference, the remuneration policy and makes recommendations to the Board for each Executive Director. Further, the Committee considers proposals from the Chief Executive Officer on the remuneration of the operational management team especially in relation to bonus share option awards under the long-term performance related pay schemes. The Committee’s remuneration policy aims to design a package that will align the interests of Executive Directors and those of Shareholders. The Executive Directors’ remuneration consists of a package of basic salary, bonuses and long-term performance related pay including share options, which are linked to corporate achievements and these levels are determined by the Remuneration Committee. The details of each Director’s remuneration are set out in note 6 to the financial statements. Audit Committee The Company has an Audit Committee, to whom the external auditor, RSM UK Audit LLP, reports. The Committee consists of Charles Peal (Chairman of the Committee) and Edward Luker. Charles Peal is the Committee’s Nominated Financial Expert (for details of Charles’s experience please see his biography on page 32). The Committee is responsible for the relationship with the Group’s external auditor and the review of the Group’s financial reporting and internal controls. The Committee meets prior to the announcement of annual results to consider the Auditors’ Findings Report and consider any corresponding recommendations, and would convene at other times should it be necessary. The Audit Committee also undertakes a formal assessment of the auditor’s independence each year, which includes: ■ a review of non-audit services provided to the Group and related fees; ■ discussion with the auditor of a written report detailing all relationships with the Company and any other parties that could affect independence or the perception of independence; ■ a review of the auditor’s own procedures for ensuring the independence of the audit firm and partners and staff involved in the audit, including the regular rotation of the audit partner every five years; and ■ obtaining written confirmation from the auditor that, in their professional judgement, they are independent. An analysis of the fees payable to the external audit firm in respect of both audit and non-audit services during the year is set out in note 5 to the financial statements. The Committee is satisfied that the external auditor remains independent in the discharge of their audit responsibilities. The Board will continue to review the Company’s corporate governance and annual reporting against best Practice QCA guidelines and to implement appropriate systems in order to support the Directors in executing their responsibilities to all of the Company’s Stakeholders. On behalf of the Board. Simon G. Thomas Chairman 27 October 2017 30 30 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 30 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:12 PM 25416.04 – 1 November 2017 5:47 PM – Proof 7Board of Directors and AdvisersExecutive DirectorsAndrew established Lok’nStore over 20 years ago after 8 years working in the Japanese equity market. Andrew is responsible for strategy, corporate finance and property. He has an MPhil in Economics from Cambridge University and a BSc in Economics from LSE.Key areas of Expertise:Strategy, corporate finance, economics and propertyRay is a chartered accountant. Prior to joining Lok’nStore in 2004, Ray held several senior finance positions in listed companies in the construction, health and fitness sectors.Key areas of Expertise:Finance and accounting, corporate reporting, risk management, legal, tax and complianceNeil joined the Lok’nStore Group in October 2006 becoming Sales Director in November 2015. Prior to joining Lok’nStore, Neil gained retail experience at Wickes and Woolworths plc. Neil is responsible for sales, marketing and our staff.Key areas of Expertise:Sales, Marketing and Human Resource ManagementDirectors and AdvisersAndrew Jacobs (58) Chief Executive OfficerRay Davies (60)Finance DirectorNeil Newman-Shepherd (40)DirectorBoard of Directors and Advisers31S.G. ThomasNon-Executive ChairmanA. JacobsChief Executive OfficerR.A. DaviesFinance DirectorN. Newman-ShepherdDirector E.T.D. LukerSenior Non-Executive DirectorR.J. HolmesNon-Executive DirectorC.P. PealNon-Executive Director In addition the Board is advised by: Secretary and Registered OfficeDentons Secretaries Limited One Fleet PlaceLondonEC4M 7WSNominated Adviser and BrokerfinnCap Ltd 60 New Broad Street London EC2M 1JJAuditorRSM UK Audit LLP 25 Farringdon Street London EC4A 4AB SolicitorsDentons UKMEA LLP(formerly Maclay Murray Spens LLP)One London WallLondon EC2Y 5ABGoodman Derrick LLP10 St Bride StreetLondonEC4A 4ADGlovers LLP 6 York Street London W1U 6QDRegistrarsCapita RegistrarsCapita Group plcThe Registry, 34 Beckenham RoadBeckenhamKent BR3 4TUBankersRoyal Bank of ScotlandAbbey Gardens4 Abbey StreetReadingRG1 3BADirectorsThe Board of Directors is supported by an Assistant Company Secretary who assists the Chairman with the setting of meeting agendas and provides the information to the Board members prior to the meetings. A procedure to enable Directors to take independent professional advice if required has been agreed by the Board and formally confirmed by all Directors.www.loknstore.com Stock Code: LOKGOVERNANCE REPORTwww.loknstore.com Stock Code: LOK31Lok'n Store-AR2017.indd 3111/1/2017 5:48:13 PM25416.04 – 1 November 2017 5:47 PM – Proof 7Non-Executive DirectorsSimon joined Lok’nStore in 1997 following successful careers in publishing and finance. Simon is responsible for the composition and performance of the Board.Key area of Expertise:Corporate FinanceJoined Lok’nStore in 2007. Edward is a well-known figure in the UK property industry, having worked for CB Richard Ellis for 33 years, where he has been a Director and Partner for 20 years. Edward is a Fellow of the Royal Institution of Chartered Surveyors.Key area of Expertise:Commercial PropertyCommittees:Audit Committee and Chair of the Remuneration CommitteeSimon Thomas (57)Non-Executive ChairmanEdward Luker (68)Senior Non-Executive DirectorJoined Lok’nStore in 2000. Richard is currently Group Marketing Director of Specsavers. Previously, Richard held a number of senior positions within the Boots organisation and was also Head of Strategy Development for Unilever’s worldwide dental business.Key Area of Expertise:Marketing including digital marketingCommittees:Remuneration CommitteeRichard Holmes (57)Non-Executive DirectorJoined Lok’nStore in 2007. Charles started his career in 1977 at 3i Group, the leading UK quoted Venture Capital Company. He was the Chief Executive of Legal and General Ventures from 1988 to 2000 He is currently a Director of Warnborough Asset Management.Key Area of Expertise:Capital Markets and Fund ManagementCommittees:Chair of the Audit Committee (and Nominated Financial Expert)Charles Peal (62)Non-Executive DirectorBoard of Directors and Advisers continued32Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 201732Lok'n Store-AR2017.indd 3211/1/2017 5:48:16 PMDirectors’ Report The Directors submit their report and the audited financial statements of the Company and of the Group for the year ended 31 July 2017. Principal Activity The principal activity of the Group during the year was that of providing self-storage and related services. Review of the Business and Future Developments A detailed account of the Group’s progress during the year and its future prospects are set out in the Chairman’s Review and the Strategic Report. The Key Performance Indicators are set out in the Highlights and defined on page 75. They are discussed in more detail in the Financial Review and the Strategic Report. Going Concern A review of the Group’s business activities, together with the matters likely to influence its future development, performance and its position in the wider market, are set out in the Strategic Report. The financial position of the Group, its cash flows and borrowing facilities are shown in the Statement of Financial Position, Cash Flow Statement and corresponding notes and policies contained within the financial statements. Further information concerning the Group’s objectives, policies, its financial risk management objectives as well as details of financial instruments and credit and liquidity risk are also found in the Strategic Report and in the notes to the financial statements. 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 of £11.4m, (2016: £5.3m) undrawn committed facilities at 31 July 2017 of £11.2m (2016: £11.2m) and future cash generated from operations (2017 £5.5m 2016: £3.8m). Following the agreement of a two-year extension to its facilities with Royal Bank of Scotland on equivalent terms, the Group will now operate its £40m revolving credit facility with RBS plc for a further 6 years. The facility has been in place since 15 January 2016 and will now 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. Dividend In respect of the current year, the Directors propose that a final dividend of 7 pence per share (2016: 6.33 pence) will be paid on 10 January 2018 to Shareholders on the register on 1 December 2017. The total estimated dividend to be paid is £2m based on the number of shares in issue on 13 October 2017 as adjusted for shares held in the Employee Benefits Trust. This dividend is subject to approval by Shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Events after the Reporting Date Reportable events after the reporting date are set out in note 31 to the financial statements. G O V E R N A N C E R E P O R T Directors The following Directors held office during the year and subsequently: S.G. Thomas A. Jacobs R.A. Davies C.M. Jacobs (retired 4 July 2017) E.T.D. Luker R.J. Holmes C.P. Peal N. Newman-Shepherd Details of the interests of the Directors in the shares of the Company are set out below and details of their remuneration are disclosed in note 6 to the financial statements. Biographical details of the Directors are set out on pages 31 and 32. Reappointment of Directors In accordance with the Company’s Articles of Association, Andrew Jacobs and Simon Thomas retire by rotation and each being eligible offer themselves for re-election at the next Annual General Meeting (AGM). Richard Holmes, Edward Luker and Charles Peal who have over 13, 10 and 10 years tenure respectively as Non-Executives are required under the Companies Act 2006 to offer themselves for re-election at every AGM and accordingly offer themselves for re-election at the next AGM. Directors’ and Officers’ Liability Insurance The Company has liability insurance covering the Directors and Officers of the Company and its subsidiaries. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 33 33 Lok'n Store-AR2017.indd 33 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Directors’ Report continued Substantial Shareholdings The Directors have been notified or are aware that the following are interested in 3% or more of the issued Ordinary Share capital of the Company as at 13 October 2017: Andrew Jacobs Miton Asset Management Simon Thomas Hargreave Hale Investment Managers Cavendish Asset Management Slater Investments Current rank 1 2 3 4 5 6 % at 13 Oct 2017 17.75 10.46 6.14 5.59 5.14 4.19 Number of shares 5,205,600 3,067,171 1,800,000 1,640,000 1,507,750 1,228,750 Total shares in issue (excluding treasury shares) Total shares in issue (excluding treasury shares) % at 3 Oct 2016 19.51 12.92 6.74 – 6.48 4.60 Number of shares 5,206,600 3,447,476 1,800,000 – 1,729,700 1,228,750 29,323,9232 26,688,4531 1 Represents total shares in issue (excluding treasury shares) 2 At the start of the financial year Lok’nStore Limited held a total of 2,466,869 of Lok’nStore Group Plc ordinary shares of 1p each for treasury. In November 2016, Lok’nStore sold 1,975,000 ordinary shares of these treasury shares and on 26 April 2017 it sold the remaining 491,869 ordinary treasury shares. Market Valuation of Freehold Land and Buildings The changes in property, plant and equipment during the year and details of property valuations at 31 July 2017 are shown in note 10b to the Financial Statements. Further commentary on the property portfolio is contained in the Property Review and in the Financial Review. Share Buy-back Authority Authority will be sought at the Company’s AGM on 7 December 2017 from Shareholders to approve a share buy-back authority. The buy-back authority will only be exercised in circumstances where the Directors regard such purchases to be in the best interests of Shareholders as a whole. Statement of Disclosure of Information to the Auditor The Directors who were in office at the date of approval of these financial statements have confirmed that, as far as they are aware, there is no relevant audit information of which the auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Annual General Meeting The Company’s Annual General Meeting will be held on 7 December 2017 at 5.30 pm at the offices of Goodman Derrick LLP, 10 St Bride Street, London, EC4A 4AD. Auditor A resolution to reappoint RSM UK Audit LLP as auditor will be put to the members at the Annual General Meeting. A formal notice together with explanatory circular and Form of Proxy will be sent to Shareholders. On behalf of the Board Ray Davies Director 27 October 2017 34 34 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 34 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Directors’ Responsibilities in the Preparation of Financial Statements The Directors are responsible for preparing the Strategic Report and Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company Financial Statements for each financial year. The Directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and have elected under company law to prepare the Company financial statements in accordance with IFRS as adopted by the EU. The financial statements are required by law and IFRS adopted by the EU to present fairly the financial position of the Group and the Company and the financial performance of the Group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing the Group and Company financial statements the Directors are required to: a. select suitable accounting policies and then apply them consistently; b. make judgements and accounting estimates that are reasonable and prudent; c. state whether they have been prepared in accordance with IFRSs adopted by the EU; and d. prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information on the Lok’nStore Group plc websites. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. G O V E R N A N C E R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 35 35 Lok'n Store-AR2017.indd 35 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Independent Auditor’s Report to the Members of Lok’nStore Group plc We have audited the financial statements of Lok’nStore Group Plc (the ‘parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 July 2017 which comprises the consolidated statement of comprehensive income, the consolidated and Company statement of changes in equity, the consolidated and Company statement of financial position, the consolidated statement of cash flows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: ■ the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 July 2017 and of the Group’s profit for the year then ended; ■ the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; ■ the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and ■ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to SME listed entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: ■ the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or ■ the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matter identified is the valuation of the properties as set out below: Property valuation Risk Fair values are calculated using actual and forecast inputs such as: occupancy, capitalisation rates, maximum lettable area, operating expenses and net rent per square foot by property as at 31 July 2017. In addition, the external valuer applies professional judgement concerning market conditions and factors impacting individual properties. We consider property valuation to be a significant and key risk of material misstatement as the valuation process is subjective and inherently judgemental in nature. The market for prime self-storage, in particular, has been subject to market uncertainty in recent years due to the relatively low volume of transactions; however, there was significantly more activity in the year under review. This has provided an additional reference point for the valuations performed. Refer to note 10 to the financial statements for the disclosures relating to the property valuations. Approach Our approach to auditing the valuations involved the following: ■ We tested the integrity of the information provided to the external valuer by management by agreeing key inputs such as actual occupancy and profitability to underlying records and source evidence; ■ We evaluated the competence, capabilities and objectivity of external valuation experts; ■ We assessed the scope of the work which the external valuer was requested to perform by management, quality control procedures in place internally and the valuation methodology applied; ■ We discussed the valuations with the external valuer and challenged them on the key assumptions applied and focused on properties we identified as having significant or unusual valuation movements (compared to underlying performance or previous periods); and ■ We challenged management to justify the assumptions used in the model (particularly in respect of trading forecasts) and comparison of those forecasts to actual results. 36 36 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 36 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Our application of materiality When establishing our overall audit strategy, we set certain thresholds which help us to determine the nature, timing and extent of our audit procedures and to evaluate the effects of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined a magnitude of uncorrected misstatements that we judge would be material for the financial statements as a whole at £523,500. We agreed with the Audit Committee that we would report to them all unadjusted differences in excess of £20,000, as well as differences below those thresholds that, in our view, warranted reporting on qualitative grounds. An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Group and its control environment, including Group-wide controls, and assessing the risks of material misstatement. As in previous years, the audit team performed full scope audits using Group materiality. The scope of our audit covered 100% of both consolidated profit before tax and consolidated net assets. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: ■ the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ■ the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: ■ adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or ■ the parent Company financial statements are not in agreement with the accounting records and returns; or ■ certain disclosures of Directors’ remuneration specified by law are not made; or ■ we have not received all the information and explanations we require for our audit. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement set out on page 35, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body for our audit work, for this report, or for the opinions we have formed. David Clark (Senior Statutory Auditor) For and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants 25 Farringdon Street EC4A 4AB 27 October 2017 G O V E R N A N C E R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 37 37 Lok'n Store-AR2017.indd 37 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Consolidated Statement of Comprehensive Income For the year ended 31 July 2017 Revenue Total property, staff, distribution and general costs Adjusted EBITDA1 Amortisation of intangible assets Depreciation and loss on sale Equity settled share based payments Property disposal costs Store relocation costs Net settlement proceeds Director retirement costs Operating profit1 Finance income Finance cost Profit before taxation Income tax expense Profit for the year Profit attributable to: Owners of the parent Other Comprehensive Income Items that will not be reclassified to profit and loss Increase in property valuation Deferred tax relating to change in property valuation Items that may be subsequently reclassified to profit and loss Increase in fair value of cash flow hedges Deferred tax relating to cash flow hedges Other comprehensive income Total comprehensive income for the year Attributable to owners of the parent Earnings per share Basic Diluted Group Year ended 31 July 2017 £’000 Group Year ended 31 July 2016 £’000 16,654 (10,161) 6,493 (165) (1,856) (97) (15) (29) – (69) (2,231) 4,262 309 (606) 3,965 (904) 3,061 16,056 (9,761) 6,295 (165) (1,537) (182) (123) – 1,940 – (67) 6,228 313 (1,048) 5,493 (1,211) 4,282 Notes 1a 2a 10a 10b 24a 2c 2c 2c 2c 3 4 5 7 25 3,061 4,282 7,772 (932) 6,840 37 – 37 6,877 9,938 9,938 9 9 11.02p 10.64p 17,651 (2,387) 15,264 83 (21) 62 15,326 19,608 19,608 16.60p 16.24p 1 Adjusted EBITDA and operating profit are defined in the accounting policies section of the notes to the financial statements. 38 38 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 38 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:16 PM Consolidated Statement of Changes in Equity For the year ended 31 July 2017 1 August 2015 Profit for the year Other comprehensive income: Increase in property valuation net of deferred tax Decrease in fair value of cash flow hedges net of deferred tax Total comprehensive income for the year Transactions with owners: Dividend paid Share based payments Transfers in relation to share based payments Deferred tax credit relating to share options Exercise of share options Total transactions with owners Transfer realised gains on asset disposal Transfer additional depreciation on revaluation net of deferred tax 31 July 2016 Profit for the year Other comprehensive income: Increase in property valuation net of deferred tax Decrease in fair value of cash flow hedges net of deferred tax Total comprehensive income for the year Transactions with owners: Dividend paid Share based payments Transfers in relation to share based payments Deferred tax credit relating to share options Sale of shares from treasury (net of costs) Exercise of share options Total transactions with owners Transfer additional depreciation on revaluation net of deferred tax 31 July 2017 www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK Attributable to owners of the Parent Share capital £’000 285 – Share premium £’000 2,614 – Other reserves £’000 8,685 – Revaluation reserve £’000 32,239 – Retained earnings £’000 9,146 4,282 Total equity £’000 52,969 4,282 – – – – – – – 6 6 – – 291 – – – – – – – – – 2 2 – 293 – – – – – – – 953 953 – – 3,567 – – – – – – – – 6,150 311 6,461 – 10,028 – 62 62 – 182 (401) (96) – (315) – – 8,432 – – 37 37 – 97 (139) 42 – – – 15,264 – 15,264 – – – – – – (1,639) (262) 45,602 – 6,840 – 6,840 – – – – – – – – 8,469 (277) 52,165 – 15,264 – 4,282 (2,147) – 401 – – (1,746) 1,639 262 13,583 3,061 – – 3,061 (2,637) – 139 – 3,741 – 1,243 277 18,164 62 19,608 (2,147) 182 – (96) 959 (1,102) – – 71,475 3,061 6,840 37 9,938 (2,637) 97 – 42 9,891 313 7,706 – 89,119 39 39 F I N A N C I A L R E P O R T Lok'n Store-AR2017.indd 39 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:17 PM Company Statement of Changes in Equity For the year ended 31 July 2017 1 August 2015 Loss for the year Equity settled share based payments Transfer in relation to share based payments Exercise of share options 31 July 2016 Profit for the year Equity settled share based payments Transfer in relation to share based payments Sale of shares from treasury (net of costs) Exercise of share options Dividends paid 31 July 2017 Share capital £’000 Share premium £’000 Retained reserves (deficit) £’000 Other reserves £’000 285 – – – 6 291 – – – – 2 – 293 2,614 – – – 953 3,567 – – – 6,150 311 – 10,028 (8) (276) – 401 – 117 5,547 – 139 – – (2,637) 3,166 2,180 – 182 (401) – 1,961 – 97 (139) – – – 1,919 Total equity £’000 5,071 (276) 182 – 959 5,936 5,547 97 – 6,150 313 (2,637) 15,406 40 40 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 40 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:17 PM Statements of Financial Position 31 July 2017 Company Registration No. 04007169 Assets Non-current assets Intangible assets Property, plant and equipment Investments Development loan capital Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Derivative financial instruments Non-current liabilities Borrowings Deferred tax Total liabilities Net assets Equity attributable to owners of the parent Called up share capital Share premium Other reserves Retained earnings Revaluation reserve Total equity attributable to owners of the parent Notes Group 2017 £’000 Group 2016 £’000 Company 2017 £’000 Company 2016 £’000 10a 10b 11 12 13 14 16 15 17b 17a 18 19 24a 25 3,428 116,901 – 3,463 123,792 203 4,266 11,386 15,855 139,647 (5,032) (463) – (5,495) (28,670) (16,363) (45,033) (50,528) 89,119 293 10,028 8,469 18,164 52,165 89,119 3,593 104,363 – 3,159 111,115 165 4,952 5,335 10,452 121,567 (5,794) (173) (37) (6,004) (28,727) (15,361) (44,088) (50,092) 71,475 291 3,567 8,432 13,583 45,602 71,475 – – 2,385 – 2,385 – 13,021 – 13,021 15,406 – – – – – – – – 15,406 293 10,028 1,919 3,166 – 15,406 – – 2,288 – 2,288 – 3,648 – 3,648 5,936 – – – – – – – – 5,936 291 3,567 1,961 117 – 5,936 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 for the year ended 31 July 2017 was £5.55m (2016: loss £276,288). Approved by the Board of Directors and authorised for issue on 27 October 2017 and signed on its behalf by Andrew Jacobs Chief Executive Officer Ray Davies Finance Director F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 41 41 Lok'n Store-AR2017.indd 41 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:17 PM Consolidated Statement of Cash Flows For the year ended 31 July 2017 Operating activities Cash generated from operations Income tax paid Net cash generated from operations Investing activities Development loan capital Purchase of property, plant and equipment Net proceeds from disposal of property, plant and equipment Bank interest received Net cash generated from investing activities Financing activities Proceeds from new borrowings Repayment of borrowings Loans repaid from projects under management contracts Finance costs paid Equity dividends paid Proceeds from issue of ordinary shares (net) Proceeds from sale of shares from treasury (net of expenses) Net cash used in financing activities Net increase in cash and cash equivalents in the year Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year No statement of cash flows is presented for the Company as it had no cash flows in either year. Notes 27a Group 2017 £’000 5,523 (502) 5,021 (304) (6,628) – 25 (6,907) – – 944 (574) (2,637) 313 9,891 7,937 6,051 5,335 11,386 Group 2016 £’000 3,774 (961) 2,813 (380) (6,988) 8,399 14 1,045 28,816 (27,701) – (885) (2,147) 959 – (958) 2,900 2,435 5,335 42 42 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 42 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:17 PM 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 1 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. Basis of accounting The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) Interpretations as adopted by the European Union and comply with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board and International Financial Reporting Interpretation Committee relevant to its operations and effective for accounting periods beginning on or after 1 August 2016. The financial statements have been prepared on the historic cost basis except that certain trading properties and derivative financial instruments are stated at fair value. Standards in issue but not yet effective At the date of approval of these financial statements, the following principal standards and interpretations which were in issue but not yet effective: Standards, interpretations and amendments Not Yet Endorsed IFRS 9 IFRS15 IFRS 2 IFRS 16 IFRIC 23 Financial Instruments Revenue from contracts with customers Amendments, classification and measurement of share based payment transactions Leases Uncertainty over income tax treatments Effective date: Periods commencing on or after 1 Jan 2018 1 Jan 2018 1 Jan 2018 1 Jan 2019 1 Jan 2019 Subject to the adoption in due course of IFRS 16, the Directors do not anticipate that the adoption of these Standards will have a significant impact on the financial statements of the Group. With regard to IFRS 16, the Directors are currently assessing the impact on the financial statements. There were no other Standards or Interpretations, which were in issue but not yet effective at the date of authorisation of these financial statements, that the Directors anticipate will have a material impact on the financial statements of the Group. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 July each year. Control is achieved where the Company has power over the investee, exposure or rights to variable returns from the investee and the ability to use its power to vary those returns. Intra-group transactions, balances, and unrealised gains and losses on transactions between Group companies are eliminated on consolidation, except to the extent that intra-group losses indicate an impairment. Goodwill Goodwill arising on consolidation represents the excess of the consideration transferred, the amount of any non-controlling interest and the fair value of any previous interest in the acquired entity over the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is recognised as a non-current asset. Any deficiency of the consideration transferred, the amount of any non-controlling interest and the fair value of any previous interest in the acquired entity below the fair value of identifiable assets and liabilities of a subsidiary (i.e. discount on acquisition) is recognised directly in profit or loss. Goodwill is reviewed for impairment at least annually. For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash generating units, and goodwill is allocated to these units. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Impairment losses in relation to goodwill are recognised immediately in profit or loss and are not reversed in subsequent periods. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset for which the estimate of future cash flows have not been adjusted. When determining whether goodwill is impaired the carrying value of the cash generating unit is adjusted to include the goodwill attributable to the non-controlling interest when the non-controlling interest has been measured as a proportionate share of the net identifiable assets of the subsidiary. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 43 43 F I N A N C I A L R E P O R T Lok'n Store-AR2017.indd 43 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Accounting Policies continued 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 £11.4m (2016: £5.3m), undrawn committed bank facilities at 31 July 2017 of £11.2m (2016: £11.2m), and future cash generated from operations (2017: £5.5m; 2016: £3.8m). Following the agreement of a two-year extension to its facilities with Royal Bank of Scotland on equivalent terms, the Group will now operate its £40m revolving credit facility with RBS plc for a further 6 years. The facility has been in place since 15 January 2016 and will now 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. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for goods and services provided in the ordinary course of the Group’s activities, net of discount, VAT and after eliminating sales within the Group. The Group recognises revenue when the amount of the revenue can be reliably measured and when goods are sold and title has passed. Revenue from services provided is recognised evenly over the period in which the services are provided. (a) Self-storage revenue Self-storage services are provided on a time basis. The price at which customers store their goods is dependent on size of unit and store location. Customers are invoiced on a four-weekly cycle in advance and revenue is recognised based on time stored to date within the cycle. When customers vacate they are rebated the unexpired portion of their four-weekly advance payment (subject to a seven day notice requirement). (b) Retail sales The Group operates a packaging shop within each of its storage centres for selling storage related goods such as boxes, tape and bubble- wrap. Sales include sales to the public at large as well as self-storage customers. Sales of goods are recognised at point of sale when the product is sold to a customer. (c) Insurance Customers may choose to insure their goods in storage. The weekly rate of insurance charged to customers is calculated based on the tariff per week for each £1,000 worth of goods stored by the customer. This charge is retained by Lok’nStore and covers the cost of the block policy and other costs. Customers are invoiced on a four-weekly basis for the insurance cover they use and revenue is recognised based on time stored to date within the cycle. (d) Management fee income Management fees earned for managing stores not owned by the Group are recognised over the period for which the services are provided. (e) Serviced archive and records management Customers are invoiced typically monthly in advance for the archive storage of their boxes, tapes and files and revenue is recognised based on time stored to date within the monthly cycle. In respect of the provision of additional services, such as document box or tape collection and retrieval from archive, customers are invoiced typically monthly in arrears and revenue is recognised in line with the provision of these services. 44 44 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 44 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Segmental information In accordance with the requirements of IFRS8 Operating Segments, the Group has reviewed its identifiable business segments and the information used and provided internally to the Board, which is considered to be the Chief Operating Decision Maker, in order to make decisions about resource allocation and performance management. Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced archive and records management activity. All activities arise in the United Kingdom. Adjusted EBITDA Earnings before interest, tax, depreciation and amortisation (EBITDA), is defined as profits from operations before all depreciation and amortisation charges, share-based payments and other non-recurring costs, finance income, finance costs and taxation. Store adjusted EBITDA Store adjusted EBITDA is defined as adjusted EBITDA (see above) but before central and head office costs. Operating profit Operating profit is defined as profit after all costs except finance income, finance costs and taxation. Taxation Income tax expense represents the sum of the current tax payable and deferred tax. Current tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because some items of income or expense are taxable or deductible in different years or may not be taxable or deductible. The Group’s liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the reporting date. Deferred tax is the tax expected to be payable or recoverable in the future arising from the temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. It is accounted for using the ‘balance sheet liability method’. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the reporting date. Tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the tax is also recognised directly in other comprehensive income. Retirement benefits The amount charged to profit or loss in respect of pension costs is the contributions payable to money purchase schemes in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position. There are no defined benefits schemes. Equity share based payments The cost of providing share based payments to employees is charged to profit or loss over the vesting period of the related share options. The cost is based on the fair value of the options determined using the Black–Scholes pricing model, which is appropriate given the vesting and other conditions attaching to the options. The value of the charge may be adjusted to reflect expected and actual levels of vesting. Property lease premiums Costs relating to the acquisition of long leases are classified as a non-current asset in the statement of financial position. Costs may include lease premiums paid on entering such a lease and other related costs. Following the opening of a store during the year amounts held under lease premiums are transferred to property, plant and equipment. F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 45 45 Lok'n Store-AR2017.indd 45 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Accounting Policies continued Property, plant and equipment Freehold properties and long leasehold properties (classified as finance leases) are measured at fair value which represents the Group’s assessment of the highest and best use of the asset. A comprehensive external valuation is performed at each reporting date. Once a store is opened lease premiums are transferred to property, plant and equipment and carried at their transferred cost less any accumulated depreciation. Short leasehold improvements, fixtures, fittings and equipment, and motor vehicles are carried at cost less accumulated depreciation. Assets in the course of construction and land held for development of new stores (‘development property assets’) are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use. Depreciation is provided on all property, plant and equipment other than freehold land and development property assets at rates calculated to write each asset down to its estimated residual value evenly over its expected useful life as follows: Freehold property Long leasehold property and lease premium Short leasehold improvements Fixtures, fittings and equipment Computer equipment Motor vehicles over 50 years straight-line over unexpired lease period or renewal term over unexpired lease period or renewal term 5% to 15% reducing balance over two years straight-line 25% reducing balance The assets’ residual values, useful lives and methods of depreciation are reviewed and adjusted if appropriate on an annual basis. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. The additional depreciation arising from the revaluation of freehold and long leasehold properties is separately presented on the face of the statement of comprehensive income and transferred from the revaluation reserve to retained earnings each year. Intangible assets (other than goodwill) Customer relationships acquired in a business combination are measured initially at fair value and are subsequently amortised on a straight- line basis over their estimated useful lives (20 years). Impairment of property, plant and equipment and intangible assets (other than goodwill) At each reporting date the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss. Where an impairment loss is subsequently reversed, the carrying amount of the assets or cash generating unit is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or cash generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. Leased assets and obligations Where assets are financed by leasing agreements that give rights approximating to ownership (‘finance leases’), the assets are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable during the lease term. The corresponding leasing commitments are shown as obligations to the lessor. Lease payments are treated as consisting of capital and interest elements, and the interest is charged to profit or loss in proportion to the remaining balance outstanding. All other leases are ‘operating leases’ and the annual rentals are charged to profit or loss on a straight-line basis over the lease term. Payments made on entering into or acquiring a leasehold that is accounted for as an operating lease are amortised over the lease term once the property is brought into use. Investments Shares in subsidiary undertakings are considered long-term investments and are classified as non-current assets in the Parent Company’s statement of financial position. All investments are stated at cost. Provision is made for any impairment in the value of non-current asset investments. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis. Net realisable value is based upon estimated selling prices less any costs of disposal. Provision is made for obsolete and slow-moving items. Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provision of the instrument. 46 46 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 46 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Bank borrowings and finance costs Interest-bearing bank loans are recorded at the proceeds received net of direct issue costs. Issue costs are amortised against the carrying value amount of the loan over the period of the loan with the cost recognised in profit and loss as part of finance costs. Borrowing costs are recognised in profit or loss in the year in which they are incurred, unless the costs are incurred as part of the development of a qualifying asset, when they will be capitalised. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use. Commencement of capitalisation is the date when the Group incurs expenditure for the qualifying asset, incurs borrowing costs and undertakes activities that are necessary to prepare the assets for their intended use. In the case of suspension of activities during extended periods, the Group suspends capitalisation. The Group ceases capitalisation of borrowing costs when substantially all of the activities necessary to prepare the asset for use are complete. All of the Group’s current qualifying assets predate the date of adoption and accordingly, under the transitional adoption arrangements, no borrowing costs have been capitalised in the current year or in prior years. Derivative financial instruments and hedge accounting The Group’s activities expose it to interest rate risk. The Group uses interest rate swap contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative or for any other purposes. The use of financial derivatives is governed by the Group’s policies as approved by the Board of Directors. The Group documents its risk management objectives and strategy for undertaking hedging transactions within the Group’s Risk Register. The Group also documents its assessment both at hedge inception and on an on going basis to assess whether the derivatives that are used are effective in offsetting changes in fair value or cash flows of the hedged items. Derivative financial instruments are measured at fair value and the fair values of the hedged derivative instruments are disclosed in note 17b. Movements on the hedging reserve in other comprehensive income are shown in note 24a. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item has more than 12 months to run, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Instruments quoted in an active market are measured at their current bid price. For instruments that are not quoted in an active market, the fair value is estimated using a valuation technique. Techniques that are used by the Group include comparisons to recent market transactions or reference to other instruments which are substantially the same, discounted cash flow analysis and option pricing models. Inputs to such techniques rely on market inputs where such information is readily available. Where such information is not available entity- specific inputs are used. Cash flow hedges Hedges of exposures to variable cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss are accounted for as cash flow hedges when the hedging criteria have been achieved. The Group designates certain derivative instruments as hedges of the variable rate borrowings. The effective portion of changes in the fair value is recognised in other comprehensive income whilst the gain or loss on the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in other comprehensive income are recycled to profit or loss in the periods when the hedged item affects profit or loss. However, when a forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred into other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the asset. Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are initially recognised at fair value less transaction costs and subsequently measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Liabilities and equity Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities and includes no obligation to deliver cash or other financial assets. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Interest bearing loans and overdrafts are initially measured at fair value net of direct transaction costs and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds net of transaction costs and the settlement or redemption of borrowings is recognised over the term of the borrowing. Trade payables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprises cash and short-term deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash. The carrying amounts of these assets approximate to their fair value and the risk of changes in value is not significant. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 47 47 F I N A N C I A L R E P O R T Lok'n Store-AR2017.indd 47 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Accounting Policies continued Impairment of financial assets Financial assets are assessed for indications of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows from the asset have been reduced. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Net debt Net debt comprises the borrowings of the Group less cash and liquid resources. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated. Employee Benefit Trust The Group operates an employment benefit trust and has de facto control of the shares held by the trust and bears their benefits and risks. The Group records certain assets and liabilities of the trust as its own. Finance costs and administrative expenses are charged as they accrue. Own shares The cost of own shares held by the employee benefit trust (‘ESOP shares’) and treasury shares is shown as a deduction from retained earnings. Earnings per share are calculated on the net shares in issue. Critical accounting estimates and judgements The preparation of consolidated financial statements under EU-IFRS requires management to make estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual outcomes may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. a) Estimate of fair value of trading properties The Group values its self-storage stores using a discounted cash flow methodology which is based on current and projected net operating income. Principal assumptions underlying management’s estimation of the fair value are those relating to stabilised occupancy levels; expected future growth in storage rents and operating costs, maintenance requirements, capitalisation rates and discount rates. A more detailed explanation of the background and methodology adopted in the valuation of the Group’s trading properties is set out in note 10b. The carrying value of land and buildings held at valuation at the reporting date was £87.5m (2016: £81m) as shown in the table in note 10b. b) Assets in the course of construction and land held for pipeline store development (‘Development property assets’) The Group’s development property assets are held in the statement of financial position at historic cost and are not valued externally. In acquiring sites for redevelopment into self-storage facilities, the Group estimates and makes judgements on the potential net lettable storage space that it can achieve in its planning negotiations, together with the time it will take to achieve maturity occupancy level. In addition, assumptions are made on the storage rent that can be achieved at the store by comparison with other stores within the portfolio and within the local area. These judgements, taken together with estimates of operating costs and the projected construction cost, allow the Group to calculate the potential net operating income at maturity, projected returns on capital invested and hence to support the purchase price of the site at acquisition. Following the acquisition, regular reviews are carried out taking into account the status of the planning negotiations, and revised construction costs or capacity of the new facility, for example, to make an assessment of the recoverable amount of the development property. The Group reviews all development property assets for impairment at each reporting date in the light of the results of these reviews. Once a store is opened, it is valued as a trading store. The carrying value of development property assets at the reporting date was £5.1m (2016: £0.5m). Please see note 10b for more details. c) Estimate of fair value of intangible assets acquired in business combination The relative size of the Group’s intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives important to the Group’s financial position and performance. At 31 July 2017 intangible assets, excluding goodwill, amounted to £2.32m (2016: £2.48m). The valuation method used and key assumptions are described in note 10a. The useful life used to amortise intangible assets relates to the expected future performance of the assets acquired and management’s judgement of the period over which economic benefit will be derived from the asset. The estimated useful life of customer relationships principally reflects management’s view of the average economic life of the customer base and is assessed by reference to customer churn rates. Typically, the customer base for a serviced archive business is relatively inert. Corporate customers do not tend to switch service providers and indeed they incur box withdrawal charges should they do so. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge. 48 48 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 48 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Notes to the Financial Statements For the year ended 31 July 2016 1a Revenue Analysis of the Group’s revenue is shown below: Self-storage Self-storage revenue Other storage related revenue Ancillary store rental revenue Total self-storage revenue Management fees Sub-total Serviced archive and records management revenue Total revenue per statement of comprehensive income Group 2017 £’000 12,343 1,550 14 13,907 420 14,327 2,327 16,654 Group 2016 £’000 11,931 1,510 3 13,444 439 13,883 2,173 16,056 1b Segmental information IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board to allocate resources to the segments and to assess their performance. All of the Group’s activities occur in the United Kingdom. Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced document storage activity. Segment revenue comprises 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 2017 is as follows: 2017 Revenue from external customers Adjusted EBITDA Management charges Segment Adjusted EBITDA Depreciation Amortisation of intangible assets Equity settled share based payments Store relocation costs Property disposal costs Director retirement costs Segment operating profit per the income statement Central costs not allocated to segments: Finance income Finance costs Profit before taxation Income tax expense Consolidated profit for the financial year www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK Serviced archive and records management 2017 £’000 Self-storage 2017 £’000 14,327 5,933 25 5,958 (1,760) – (97) (29) – (69) 4,003 2,327 560 (25) 535 (96) (165) – – (15) – 259 F I N A N C I A L R E P O R T Total 2017 £’000 16,654 6,493 – 6,493 (1,856) (165) (97) (29) (15) (69) 4,262 309 (606) 3,965 (904) 3,061 49 49 Lok'n Store-AR2017.indd 49 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM Notes to the Financial Statements continued For the year ended 31 July 2017 1b Segmental information (continued) The segment information for the year ended 31 July 2016 is as follows: 2016 Revenue from external customers Adjusted EBITDA Management charges Segment Adjusted EBITDA Depreciation Amortisation of intangible assets Equity settled share based payments Net settlement proceeds – Reading site Disposal costs – Swindon store(s) Segment operating profit per the income statement Central costs not allocated to segments: Finance income Finance costs Profit before taxation Income tax expense Consolidated profit for the financial year Serviced archive and records management 2016 £’000 Self-storage 2016 £’000 13,883 5,708 72 5,780 (1,436) – (182) 1,940 (123) 5,979 2,173 587 (72) 515 (101) (165) – – – 249 Total 2016 £’000 16,056 6,295 – 6,295 (1,537) (165) (182) 1,940 (123) 6,228 313 (1,048) 5,493 (1,211) 4,282 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 490 customers has a greater customer concentration with its ten largest corporate customers accounting for 34.4% (2016: 34.6%) of revenue, its top 50 customers accounting for 61.1% (2016: 61.7%) and its top 100 customers accounting for 76.2% (2016: 77.0%) of revenue. The self-storage segment with over 9,670 (2016: 9,200) customers has no individual self-storage customer accounting for more than 1% of total revenue and no group of entities under common control (e.g. Government) accounts for more than 10% of total revenues. 2017 Segment assets Segment liabilities Borrowings Total liabilities Capital expenditure (note 10b) 2016 Segment assets Segment liabilities Borrowings Derivative financial instruments not allocated to segments Total liabilities Capital expenditure (note 10b) Serviced archive and records management 2017 £’000 6,190 (669) Self-storage 2017 £’000 133,457 (21,189) 6,459 169 Serviced archive and records management 2016 £’000 6,314 (601) Self-storage 2016 £’000 115,253 (20,727) 6,629 359 Total 2017 £’000 139,647 (21,858) (28,670) (50,528) 6,628 Total 2016 £’000 121,567 (21,328) (28,727) (37) (50,092) 6,988 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. 50 50 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 50 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:18 PM 2a Property, staff, distribution and general costs Property and premises costs Staff costs General overheads Distribution costs Retail products cost of sales (see note 2b) Group 2017 £’000 4,179 4,389 1,098 171 324 10,161 2b Cost of sales of retail products Cost of sales represents the direct costs associated with the sale of retail products (boxes, packaging etc), and the ancillary sales of insurance cover for customer goods, all of which fall within the Group’s ordinary activities. Retail Insurance Other Serviced archive consumables and direct costs 2c Other income and costs Property disposal costs1 Net settlement proceeds2 Property disposal costs3 Director retirement costs4 Store relocation costs5 Group 2017 £’000 128 37 2 167 157 324 Group 2017 £’000 – – 15 69 29 113 Group 2016 £’000 3,913 4,232 1,128 170 318 9,761 Group 2016 £’000 118 51 2 171 147 318 Group 2016 £’000 123 (1,940) – – – (1,817) 1 Property disposal costs relate to the sale and manage-back of the Swindon store. 2 Net settlement proceeds relate to an additional £2m received for the sale of the old Reading store net of costs. 3 Property disposal costs relate to the closure and surrender of the lease on the Unit 4 Leatherhead site and the consolidation of its warehouse capacity into Unit 6 Leatherhead. 4 Director retirement costs relate to the retirement of C.M. Jacobs on 4 July 2017. 5 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. 3 Finance income Bank interest Other interest Interest receivable arises on cash and cash equivalents (see note 16) and on development loan capital deployed. 4 Finance costs Bank interest Non-utilisation fees and amortisation of bank loan arrangement fees www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK F I N A N C I A L R E P O R T Group 2017 £’000 25 284 309 Group 2017 £’000 520 86 606 Group 2016 £’000 14 299 313 Group 2016 £’000 797 251 1,048 51 51 Lok'n Store-AR2017.indd 51 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:19 PM Notes to the Financial Statements continued For the year ended 31 July 2017 5 Profit before taxation Profit before taxation is stated after charging: Depreciation and amounts written off as property, plant and equipment: Owned assets Amortisation of intangible assets Operating lease rentals – land and buildings Amounts payable to RSM UK Audit LLP and their associates for audit and non-audit services: Audit services – UK statutory audit of the Company and consolidated accounts Other services – the auditing of accounts of associates of the Company pursuant to legislation Other services supplied pursuant to such legislation – interim review Tax services – compliance services – advisory services Comprising: Audit services Non-audit services 6 Employees The average monthly number of persons (including Directors) employed by the Group during the year was: Store management Administration Costs for the above persons: Wages and salaries Social security costs Pension costs Share based remuneration (options) Group 2017 £’000 1,856 165 1,488 50 14 10 28 18 120 64 56 120 Group 2017 No. 131 31 162 Group 2017 £’000 3,724 453 96 4,273 97 4,370 Group 2016 £’000 1,537 165 1,529 48 14 7 26 2 97 62 35 97 Group 2016 No. 121 29 150 Group 2016 £’000 3,425 532 92 4,049 182 4,231 Share based remuneration is separately disclosed in the statement of comprehensive income. Wages and salaries of £138,137 (2016: £133,669) have been capitalised as additions to property, plant and equipment as they are directly attributable to the acquisition of these assets. All other employee costs are included in staff costs in the statement of comprehensive income. In relation to pension contributions, there was £11,949 (2016: £11,705) outstanding at the year-end. There were no employees employed by the Company in the year (2016: nil). 52 52 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 52 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:19 PM 6 Employees (continued) Directors’ remuneration 2017 Executive: A. Jacobs R.A. Davies N. Newman-Shepherd C.M. Jacobs1 Non-Executive: S.G. Thomas R.J. Holmes E.T.D. Luker C.P. Peal Emoluments £ Bonuses £ Benefits £ Sub total £ Gains on share options £ 212,242 123,838 71,592 115,284 53,060 21,224 26,530 21,224 644,994 14,000 12,000 29,704 – – – – – 55,704 3,403 3,551 1,826 2,593 3,228 – – – 14,601 229,645 139,389 103,122 117,877 56,288 21,224 26,530 21,224 715,299 1 Includes Director’s retirement costs of £60,100 relating to the retirement of C.M. Jacobs on 4 July 2017. 2016 Executive: A. Jacobs S.G. Thomas R.A. Davies C.M. Jacobs N. Newman-Shepherd Non-Executive: R.J. Holmes E.T.D. Luker C.P. Peal Emoluments £ Bonuses £ Benefits £ Sub total £ 208,080 52,020 116,750 59,021 42,556 20,808 26,010 20,808 546,053 24,000 – 12,000 14,000 21,154 – – – 71,154 3,460 3,315 3,492 2,711 1,299 – – – 14,277 235,540 55,335 132,242 75,732 65,009 20,808 26,010 20,808 631,484 Total £ 229,645 217,892 130,418 153,127 199,725 21,224 26,530 21,224 999,785 Total £ 644,140 187,481 541,487 119,333 65,009 20,808 26,010 43,708 1,647,976 – 78,503 27,296 35,250 143,437 – – – 284,486 Gains on share options £ 408,600 132,146 409,245 43,601 – – – 22,900 1,016,492 Key management personnel are defined as Directors of the Group. Details of their remuneration are shown above. Pension contributions of £30,977 (2016: £30,775) were paid by the Group on behalf of R.A. Davies and are not included in the Directors’ emoluments table above. The highest paid Director did not accrue any pension rights during the year. The benefits in kind all relate to medical insurance premiums paid on behalf of the Directors. The number of Directors to whom retirement benefits are accruing under money purchase pension schemes in respect of qualifying service is one (2016: one). Retirement of C.M. Jacobs: On 5 July 2017 the Company announced the retirement of Colin Jacobs as an Executive Director of the Company. The amounts settled to Mr Jacobs on his retirement are included within his 2017 emoluments in the table above. F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 53 53 Lok'n Store-AR2017.indd 53 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:19 PM Notes to the Financial Statements continued For the year ended 31 July 2017 7 Taxation Current tax: UK corporation tax at 20% (2016: 20%) Deferred tax: Origination and reversal of temporary differences Adjustments in respect of prior periods Impact of change in tax rate on closing balance Total deferred tax Income tax expense for the year The charge for the year can be reconciled to the profit for the year as follows: Profit before tax Tax on ordinary activities at the effective standard rate of corporation tax in the UK of 20% (2016: 20%) Expenses not deductible for tax purposes Depreciation of non-qualifying assets Share based payment charges in excess of corresponding tax deduction Impact of change in tax rate on closing deferred tax balance Adjustments in respect of prior periods – deferred tax Other Share option scheme Income tax expense for the year Effective tax rate Group 2017 £’000 792 204 173 (265) 112 904 2017 £’000 3,965 793 2 104 19 (264) 173 72 5 904 23% Group 2016 £’000 606 976 75 (446) 605 1,211 2016 £’000 5,493 1,099 3 85 36 (69) 75 4 (22) 1,211 22% In addition to the amount charged to profit or loss for the year, deferred tax relating to the revaluation of the Group’s properties of £932,089 (2016: £2,387,114) and the movement in the fair value of cash flow hedges of £nil (2016: (£20,834)) has been recognised as a debit/credit directly in other comprehensive income (see note 18 on deferred tax). 8 Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 July 2015 (5.67 pence per share) Interim dividend for the six months to 31 January 2016 (2.67 pence per share) Final dividend for the year ended 31 July 2016 (6.33 pence per share) Interim dividend for the six months to 31 January 2017 (3 pence per share) 2017 £’000 – – 1,777 860 2,637 2016 £’000 1,456 691 – – 2,147 In respect of the current year, the Directors propose that a final dividend of 7.0 pence per share will be paid to the Shareholders. The total estimated dividend to be paid is £2m based on the number of shares in issue at 13 October 2017 as adjusted for shares held in the Employee Benefits Trust and for shares held on treasury. This is subject to approval by Shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The ex-dividend date will be 30 November 2017; the record date 1 December 2017; with an intended payment date of 10 January 2018. 54 54 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 54 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:19 PM 9 Earnings per share The calculations of earnings per share are based on the following profits and numbers of shares: Profit for the financial year attributable to owners of the parent Weighted average number of shares For basic earnings per share Dilutive effect of share options1 For diluted earnings per share Group 2017 £’000 3,061 Group 2016 £’000 4,282 2017 No. of shares 2016 No. of shares 27,780,676 999,657 28,780,333 25,791,821 577,822 26,369,643 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 notes 20 to 23. There are 623,212 (2016: 623,212) shares held in the Employee Benefit Trust and nil (2016: 2,466,869) Treasury shares are excluded from the above (see note 26). Earnings per share Basic Diluted 10a Intangible assets Group Cost at 1 August 2015 Amortisation at 1 August 2015 Amortisation charge Amortisation at 31 July 2016 Net book value at 31 July 2016 Cost at 1 August 2016 Amortisation at 1 August 2016 Amortisation charge Amortisation at 31 July 2017 Net book value at 31 July 2017 Group 2017 11.02p 10.64p Group 2016 16.60p 16.24p Contractual customer relationships £’000 Goodwill £’000 1,110 – – – 1,110 1,110 – – – 1,110 3,309 (661) (165) (826) 2,483 3,309 (826) (165) (991) 2,318 Total £’000 4,419 (661) (165) (826) 3,593 4,419 (826) (165) (991) 3,428 All goodwill and customer relationships are allocated to the serviced document storage cash-generating unit (CGU) identified as a separate business segment. The remaining amortisation period of the contractual customer relationships at 31 July 2017 is 13 years and 11 months (2016: 14 years and 11 months). The values for impairment purposes are based on past and current experience of trading, estimated future cash flows and external information where relevant and derived from the following key assumptions: F I N A N C I A L R E P O R T ■ a discount rate of 11% ■ estimated useful lives of customer relationships (20 years) ■ short-term sustainable growth rates of 5% (next 5 years) ■ thereafter long-term sustainable growth rates of 2.0% ■ sensitivity: the Group has conducted a sensitivity analysis on the impairment test of each CGU’s carrying value. A cut in projected sales growth by around 7% would result in the carrying value of goodwill being reduced to its recoverable amount. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 55 55 Lok'n Store-AR2017.indd 55 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:20 PM Notes to the Financial Statements continued For the year ended 31 July 2017 10b Property, plant and equipment Development property assets at cost £’000 Land and buildings at valuation £’000 Long leasehold land and buildings at valuation £’000 Short leasehold improvements at cost £’000 Fixtures, fittings and equipment at cost £’000 Motor vehicles at cost £’000 10,492 3,281 (4,604) (8,711) – 458 1,604 – (1,604) – – – 61,035 152 (3,228) 9,377 13,617 80,953 – 606 – 490 (1,096) – 6,425 1 – – 2,837 9,263 – 100 – – (100) – 2,563 – – – – 2,563 1,690 91 – – – 1,781 20,571 3,554 (701) (666) – 22,758 9,999 736 (389) (490) – 9,856 458 80,953 9,263 782 12,902 458 4,666 – – – 5,124 – – – – – – 80,953 685 – – 5,910 87,548 – 705 – – (705) – 9,263 – – – 1,030 10,293 – 125 – – (125) – 2,563 36 – – – 2,599 1,781 99 – – – 1,880 22,758 1,241 (15) – – 23,984 9,856 926 (11) – – 10,771 5,124 87,548 10,293 719 13,213 30 – (13) – – 17 21 2 (11) – – 12 5 17 – – – – 17 12 1 – – – 13 4 Total £’000 101,116 6,988 (8,546) – 16,454 116,012 13,314 1,535 (2,004) – (1,196) 11,649 104,363 116,012 6,628 (15) – 6,940 129,565 11,649 1,856 (11) – (830) 12,664 116,901 Group Cost or valuation 1 August 2015 Additions Disposals Reclassification Revaluations 31 July 2016 Depreciation 1 August 2015 Depreciation Disposals Reclassification Revaluations 31 July 2016 Net book value at 31 July 2016 Cost or valuation 1 August 2016 Additions Disposals Reclassification Revaluations 31 July 2017 Depreciation 1 August 2016 Depreciation Disposals Reclassification Revaluations 31 July 2017 Net book value at 31 July 2017 If all property, plant and equipment were stated at historic cost the carrying value would be £53.9m (2016: £49.5m). Capital expenditure during the year totalled £6.6m (2016: £7.0m). This was primarily for the construction works at our development sites in Gillingham and Wellingborough as well as completing fitting-out works at our Bristol store. £1.22m was also spent on completing the initial phase of the refurbishment of the old Southampton store for the ParknCruise operations. Property, plant and equipment (non-current assets) with a carrying value of £116.9m (2016: £104.4m) are pledged as security for bank loans. 56 56 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 56 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:20 PM 10b Property, plant and equipment (continued) Market valuation of freehold, long leasehold and operating leasehold land and buildings On 31 July 2017, a professional valuation was prepared by Jones Lang LaSalle Limited (JLL) in respect of eleven freehold, one long leasehold and seven operating leasehold properties. The valuation was prepared in accordance with the RICS Valuation – Global Standards 2017, published by The Royal Institution of Chartered Surveyors (“the RICS Red Book”) and the valuation methodology is explained in more detail below. The valuation was prepared on the basis of Fair Value as a fully equipped operational entity having regard to trading potential. The valuation was provided for accounts purposes and as such, is a Regulated Purpose Valuation as defined in the Red Book. In compliance with the disclosure requirements of the RICS Red Book JLL has confirmed that: ■ This is the second year that JLL has been appointed to value the properties. ■ The valuers who prepared the valuation have the necessary skills and experience, having been significantly involved in the sector. ■ JLL does not provide other significant professional or agency services to the Company. ■ In relation to the preceding financial year of JLL, the proportion of the total fees payable by the Company to the total fee income of the firm is less than 5% and is minimal. The valuation report indicates a total valuation for all properties valued of £119.6m (2016: £112.7m) of which £102.9m (2016: £96.1m) relates to freehold and long leasehold properties, and £16.7m (2016: £16.6m) relates to properties held under operating leases. Freehold and long leasehold land and buildings are carried at valuation in the statement of financial position. Short leasehold improvements at properties held under operating leases are carried at cost rather than valuation in accordance with IFRS. For the trading properties the valuation methodology explained in more detail below is based on fair value as fully equipped operational entities, having regard to trading potential. Of the £102.9m valuation of the freehold and long leasehold properties, £9.3m (2016: £9.0m) relates to the net book value of fixtures, fittings and equipment, and the remaining £93.6m (2016: £87.1m) relates to freehold and long leasehold properties. The 2017 valuation includes and reflects movements in value which have resulted from the operational performance of the stores and movements in the investment environment. Valuation methodology Jones Lang LaSalle Limited (JLL) has adopted the profits method of valuation, and cross checked with the direct comparison method based on recent transactions in the sector, which is the main method of pricing adopted by purchasers of self-storage properties. JLL has valued the assets on an individual basis and has disregarded any portfolio effect. The profits method of valuation considers the cash flow generated by the trading potential of the self-storage facility. Due to the specialised design and use of the buildings, the value is typically based on their ability to generate a net income from operating as self storage facilities. JLL has constructed a discounted cash flow model. This sets out JJL’s explicit assumptions on the underlying cash flow that it believes could be generated by a Reasonably Efficient Operator at each of the properties, both at the valuation date and in the near future as the properties increase their occupancy and rates charged to customers. Judgements are made as to the trading potential and likely long-term sustainable occupancy. Stable occupancy depends upon the nature of demand, size of property and nearby competition, and allows for a reasonable vacancy rate to enable the operator to sell units to new customers. In the valuation, the assumed stabilised occupancy level for the 19 trading stores (both freeholds and leaseholds) averages 81.2% (2016: 80.1%). Expenditure is deducted (such as business rates, staff costs, repair and maintenance, utilities, marketing and bad debts) as well as an operator’s charge which takes account of central costs. JLL also makes an allowance for long-term capex requirements where applicable. ■ The cash flow for freeholds runs for an explicit period of 10 years, after which it is capitalised at an all risks yield which reflects the implicit future growth of the business, or a hypothetical sale. ■ The cash flow for leaseholds continues for the unexpired term of the lease. ■ The discount rate applied has had regard to recent transactions, weighted average costs of capital and target return in other asset types with adjustments made to reflect differences in the risk and liquidity profile. ■ The weighted average annual discount rate adopted (for both freeholds and leaseholds) is 11.09% (2016: 11.32%). The yield arising from the first year of the projected cash flow is 7.19% (2016: 7.43%), rising to 10.49% (2016: 10.86%) in year five. ■ JLL has assumed purchaser’s costs of 6.8% (2016: 6.8%). ■ The average stabilised occupancy is 81.2% (2016: 80.1%). ■ The average exit yield assumed is 7.67% (2016: 7.9%). F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 57 57 Lok'n Store-AR2017.indd 57 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:20 PM Notes to the Financial Statements continued For the year ended 31 July 2017 10b Property, plant and equipment (continued) The comparison method considers recent transactions where self-storage properties have sold, and then adjusts them based on a multiple of current earnings, and a capital value per square foot. They are adjusted to reflect differences in location, physical characteristics, local supply and demand, tenure and trading levels. For leaseholds, the same methodology has been used as for freehold property, except that no sale of the assets in the tenth year is assumed, but the discounted cash flow is extended to the expiry of the lease. The average unexpired term of the Group’s operating leaseholds is approximately 10 years and 8 months as at 31 July 2017 (11 years and 8 months: 31 July 2016). Valuations for stores held under operating leases are not reflected in the statement of financial position and the assets in relation to these stores are carried at cost less accumulated depreciation. In 2011, one of the Group store’s leases was renegotiated and includes a ten-year option to renew the leases from March 2026 to March 2036. The option to extend is only operable in the event that all four of the leases applicable to this store are extended and this option is personal to Lok’nStore or another “major self-storage operator”, to be approved by the landlord (approval not to be unreasonably withheld). The JLL valuation on this store is based on this Special Assumption that the option to extend the lease for 10 years is exercised. This is consistent with the approach taken in previous years. The fair value hierarchy within which the Fair Value measurements are categorised is level 3, in accordance with IFRS13 fair value measurements. Directors’ valuation of land and property The Old Southampton Store: Following the opening of the new Southampton store with the corresponding transfer of all customers from the old Southampton store, the vacant building has been redeveloped for cruise parking. Market evidence suggested that there is a substantial market in Southampton for car parking for cruise liner passengers and that this property was appropriate to this use. The Directors placed their valuation on the undeveloped site at the 2016 year-end at £2.5m. The building has now been converted to this use costing £1.195m and started trading as “ParknCruise” in May 2017. Early bookings are encouraging. Accordingly, the Directors placed their valuation on the current developed site at the 2017 year-end at £3.695m. The New Southampton Store: Following the development and opening of the new Southampton store there remains surplus land to the rear of the building which may be ultimately utilised for an expansion of the store or could be sold or used for alternative use. The Directors have considered the advice given and recommendations of value obtained by local agents and, in weighing this with their own view, are satisfied to continue to place a value at year-end on this land of £0.5m. The total value of land and property carried at Director Valuation at 31 July 2017 is £4.195m (2016: £3m). 11 Investments Company investments in subsidiary undertakings 31 July 2013 Capital contributions arising from share based payments 31 July 2014 Capital contributions arising from share based payments 31 July 2015 Capital contributions arising from share based payments 31 July 2016 Capital contributions arising from share based payments 31 July 2017 £’000 1,776 119 1,895 211 2,106 182 2,288 97 2,385 58 58 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 58 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:20 PM 11 Investments (continued) The Company holds more than 20% of the share capital of the following companies, all of which are incorporated in England and Wales: Lok’nStore Limited*# Lok’nStore Trustee Limited1*◆ Southern Engineering and Machinery Company Limited1*# Semco Machine Tools Limited2*# Semco Engineering Limited2*# Saracen Datastore Limited1# ParknCruise Limited1 ◆ Class of shareholding Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary % of shares and voting rights held Directly Indirectly Nature of entity 100 – – – – – – 100 100 100 100 100 100 Self-storage Trustee Land Dormant Dormant Serviced Document Storage Car parking for cruise passengers 1 These companies are subsidiaries of Lok’nStore Limited. 2 These companies are subsidiaries of Southern Engineering and Machinery Company Limited and did not trade during the year. * These companies have taken the exemption from audit under Section 479A of the Companies Act 2006. ♦ The address of these companies is 112, Hawley Lane, Farnborough, Hants GU14 8JE # The address of these companies is 1, Fleet Place, London EC4M 7WS. The fair value of these investments has not been disclosed because it cannot be measured reliably as there is no active market for these equity instruments. The Company currently has no plans to dispose of these investments. 12 Development capital In May 2015, Lok’nStore opened a managed store in Aldershot, Hampshire. The store is managed for third party investors under the Lok’nStore brand. Lok’nStore managed the construction and subsequent operation of the store and generates a 10% annual return on £2.5m of the total development capital committed to the project, and a management fee for the construction, operation and branding of the store. The capital provided is fully secured by a first fixed charge on the property. Development capital Group 2017 £’000 3,463 Group 2016 £’000 3,159 Contingent asset When the Aldershot store is sold by its owners, Lok’nStore is 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 believe that it would not be appropriate to recognise this as an asset at this time. 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 and as this date gets nearer, the Directors will give due consideration as to when the value of the property can be reliably measured, and at which point it will be appropriate to recognise the asset in the financial statements. 13 Inventories Consumables and goods for resale Group 2017 £’000 203 Group 2016 £’000 165 The amount of inventories recognised in cost of sales as an expense during the year was £164,225 (2016: £156,121). F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 59 59 Lok'n Store-AR2017.indd 59 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:21 PM Notes to the Financial Statements continued For the year ended 31 July 2017 14 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income The Directors consider that the carrying amount of trade and other receivables approximates their fair value. The following balances existed between the Company and its subsidiaries at 31 July: Net amount due from Lok’nStore Limited The amount due from Lok’nStore Limited is interest free. The balance is repayable on demand. Group 2017 £’000 1,693 1,822 751 4,266 Group 2016 £’000 2,027 1,910 1,015 4,952 Company 2017 £’000 13,021 Company 2016 £’000 3,648 Trade receivables In respect of its self-storage business, the Group does not typically offer credit terms to its customers and hence the Group is not exposed to significant credit risk. All customers are required to pay in advance of the storage period. Late charges are applied to a customer’s account if they are more than 10 days overdue in their payment. The Group provides for receivables based upon sales levels and estimated recoverability. There is a right of lien over the customers’ goods, so if they have not paid within a certain time frame, the Company has the right to sell the items they store to cover the debt owed by the customer. Trade receivables that are overdue are provided for based on estimated irrecoverable amounts, determined by reference to past default experience. For individual self-storage customers the Group does not perform credit checks. However, this is mitigated by the fact that all customers are required to pay in advance, and also to pay a deposit of four weeks’ storage income. Before accepting a new business customer who wishes to use a number of the Group’s stores, the Group uses an external credit rating to assess the potential customer’s credit quality and defines credit limits by customer. There are no customers who represent more than 5% of the total balance of trade receivables. In respect of its document storage business, customers are invoiced typically monthly in advance for the storage of their boxes, tapes and files. The provision of additional services, such as document boxes or tape collection and retrieval from archive, typically are invoiced monthly in arrears. The serviced archive segment with over 450 customers has a greater customer concentration – refer to note 1(b) segmental analysis. Included in the Group’s trade receivables balance are receivables with a carrying amount of £268,252 (2016: £269,153) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group holds a right of lien over its self-storage customers’ goods if these debts are not paid. The average age of these receivables is 43 days past due (2016: 40 days past due). Ageing of past due but not impaired receivables 0–30 days 30–60 days 60+ days Total Movement in the allowance for bad debts Balance at the beginning of the year Impairment losses recognised Amounts written off as uncollectible Balance at the end of the year Group 2017 £’000 97 121 50 268 Group 2017 £’000 186 34 (32) 188 Group 2016 £’000 147 72 50 269 Group 2016 £’000 174 34 (22) 186 The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further provision required. 60 60 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 60 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:21 PM 14 Trade and other receivables (continued) Ageing of impaired trade receivables 0–30 days 30–60 days 60+ days Total 15 Trade and other payables Trade payables Taxation and social security costs Other payables Accruals and deferred income Group 2017 £’000 – – 188 188 Group 2017 £’000 818 288 1,692 2,234 5,032 Group 2016 £’000 – – 186 186 Group 2016 £’000 887 1,369 1,197 2,341 5,794 The Directors consider that the carrying amount of trade and other payables approximates fair value. 16 Financial instruments The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debts, which include the borrowings disclosed in note 17a, cash and cash equivalents and equity attributable to the owners of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity. The Group’s banking facilities require that management give regular consideration to interest rate hedging strategy. The Group has complied with this during the year. The Group’s Board reviews the capital structure on an ongoing basis. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The Group seeks to have a conservative gearing ratio (the proportion of net debt to equity). The Board considers at each review the appropriateness of the current ratio in light of the above. The Board is currently satisfied with the Group’s gearing ratio. The gearing ratio at the year-end is as follows: Capital management Gross borrowings Cash and cash equivalents Net debt Total equity Net debt to equity ratio Group 2017 £’000 (28,816) 11,386 (17,430) 89,119 19.6% Group 2016 £’000 (28,816) 5,335 (23,481) 71,475 32.8% The decrease in the Group’s gearing ratio arises principally through the combined effect of an increase in the value of its properties, the sale of the Group’s treasury shares and the cash generated from operations. Exposure to credit and interest rate risk arises in the normal course of the Group’s business. A Derivative financial instruments and hedge accounting The Group’s activities expose it primarily to the financial risks of interest rates. The Group currently had two interest rate swaps with Lloyds Bank plc which ran until 20 October 2016. These have now expired and are reported fully in the Financial Review and in note 17b. F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 61 61 Lok'n Store-AR2017.indd 61 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:21 PM Notes to the Financial Statements continued For the year ended 31 July 2017 16 Financial instruments (continued) B Debt management Debt is defined as non-current and current borrowings, as detailed in note 17a. Equity includes all capital and reserves of the Group. The Group is not subject to externally imposed capital requirements. The Group borrows through a senior six-year term revolving credit facility with Royal Bank of Scotland plc secured on its store portfolio and other Group assets, excluding intangibles, with a net book value of £136.2m (2016: £118.0m). Borrowings are arranged to ensure the Group fulfils its strategy of growth and development of its stores and to maintain short-term liquidity. As at the reporting date the Group has a committed revolving credit facility of £40m (2016: £40m). This facility expires on 15 January 2023. Undrawn committed facilities at the year-end amounted to £11.2m (2016: £11.2m). C Interest rate risk management The Group’s policy on interest rate risk management is agreed at Board level and is reviewed on an ongoing basis. All borrowings are denominated in sterling and are detailed in note 17a. The Group has a number of revolving loans within its overall revolving credit facility and as such is exposed to interest rate risks at the time of renewal arising from any upward movement in the LIBOR rate. The Group had two cash flow hedging interest rate swap arrangements and these expired during the year. These instruments and the movement in their fair values are detailed in note 17b. Cash balances held in current accounts attract no interest but surplus cash is transferred daily to a treasury deposit account which earns interest at the prevailing money market rates1. All amounts are denominated in sterling. The balances at 31 July 2017 are as follows: Variable rate treasury deposits1 SIP trustee deposits Cash in operating current accounts Other cash and cash equivalents Total cash and cash equivalents Group 2017 £’000 11,048 5 285 48 11,386 Group 2016 £’000 4,915 34 339 47 5,335 1 Money market rates for the Group’s variable rate treasury deposit track Royal Bank of Scotland plc base rate. The rate attributable to the variable rate deposits at 31 July 2017 was 0.1%. The Group reviews the current and forecast projections of cash flow, borrowing and interest cover as part of its monthly management accounts review. In addition, an analysis of the impact of significant transactions is carried out regularly, as well as a sensitivity analysis of the impact of movements in interest rates on gearing and interest cover. D Interest rate sensitivity analysis In managing interest rate risk the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings, without jeopardising its flexibility. Over the longer term, permanent changes in interest rates may have an impact on consolidated earnings. At 31 July 2017, it is estimated that an increase of one percentage point in interest rates would have reduced the Group’s annual profit before tax by £288,156 (2016: £88,156) and conversely a decrease of one percentage point in interest rates would have increased the Group’s annual profit before tax by £288,156 (2016: £88,156). There would have been no effect on amounts recognised directly in other comprehensive income. The sensitivity has been calculated by increasing by 1% the average variable interest rate of 1.66% applying to the variable rate borrowings of £28.8m in the year (2016: £8.8m / 2.56%). E Cash management and liquidity Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in note B above is a description of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk. Short-term money market deposits are used to manage liquidity whilst maximising the rate of return on cash resources, giving due consideration to risk. 62 62 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 62 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:21 PM 16 Financial instruments (continued) F Foreign currency management The Group operates solely in the United Kingdom and as such all of the Group’s financial assets and liabilities are denominated in sterling and there is no exposure to exchange risk. G Credit risk The credit risk management policies of the Group with respect to trade receivables are discussed in note 14. The credit risk on liquid funds is limited because the counterparty is a bank with high credit ratings assigned by international credit-rating agencies, in line with the Group’s policy which is to borrow from major institutional banks when arranging finance. The Group’s maximum exposure to credit risk at 31 July 2017 was £2.34m (2016: £3.70m) on receivables and £11.39m (2016: £5.33m) on cash and cash equivalents. Additionally, the Group has provided development loan capital in respect of the Aldershot store development, a managed contract. The current balance outstanding at 31 July 2017 was £3.46m (2016: £3.16m). These amounts are secured by way of a fixed priority first charge and a debenture over all of the Aldershot assets. H Maturity analysis of financial liabilities The undiscounted contractual cash flow maturities are as follows: 2017 – Group Over five years From two to five years From one to two years Due after more than one year Due within one year Total contractual undiscounted cash flows 2016 – Group From two to five years From one to two years Due after more than one year Due within one year Total contractual undiscounted cash flows I Fair values of financial instruments Categories of financial assets and financial liabilities Financial assets – loans and receivables Trade and other receivables Cash and cash equivalents Development loan capital Financial liabilities – other financial liabilities at amortised cost Trade and other payables Bank loans Trade and other payables £’000 – – – – 2,934 2,934 Trade and other payables £’000 – – – 2,359 2,359 Borrowings £’000 Interest on borrowings £’000 28,816 – – 28,816 – 28,816 Borrowings £’000 28,816 – 28,816 – 28,816 Group 2017 £’000 3,967 11,386 3,463 219 1,438 479 2,136 479 2,615 Interest on borrowings £’000 1,814 738 2,552 831 3,383 Group 2016 £’000 3,700 5,335 3,159 (2,934) (28,670) (2,359) (28,727) F I N A N C I A L R E P O R T The fair values of the Group’s cash and short-term deposits and those of other financial assets equate to their carrying amounts. The Group’s receivables and cash and cash equivalents are all classified as loans and receivables and carried at amortised cost. The amounts are presented net of provisions for doubtful receivables and allowances for impairment are made where appropriate. Trade and other payables and bank borrowings are all classified as financial liabilities measured at amortised cost. www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 63 63 Lok'n Store-AR2017.indd 63 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:21 PM Notes to the Financial Statements continued For the year ended 31 July 2017 16 Financial instruments (continued) J Company’s financial instruments The Company’s financial assets are amounts owed by subsidiary undertakings amounting to £9.9m (2016: £3.8m) which are classified as trade and other receivables, and the investment in its subsidiary undertaking of £0.1m (excluding capital contributions). These amounts are denominated in sterling, are non-interest bearing, are unsecured and fall due for repayment within one year. No amounts are past due or impaired. The Company has no financial liabilities. 17a Borrowings Non-current Bank loans repayable in more than five years (gross) Bank loans repayable in more than two years but not more than five years (gross) Deferred financing costs Net bank borrowings Non-current borrowings Group 2017 £’000 28,816 – (146) 28,670 28,670 Group 2016 £’000 – 28,816 (89) 28,727 28,727 The Group has agreed a two-year extension on its existing banking facility with Royal Bank of Scotland plc (RBS). The £40m five-year revolving credit facility which was executed last year included an extension option which has now been implemented. The facility, which was due to expire in January 2021, will now run until January 2023, providing funding for more landmark site acquisitions and working capital. The £40m five-year revolving credit facility set the interest rate margin at the London Inter-Bank Offer Rate (LIBOR) plus 1.40%–1.65% based on a loan to value covenant test. This rate is 1.40% currently and the all-in-debt cost on £28.8m drawn averaged 1.66% in the period. Bank covenants and margin are unaffected by this extension of term. The facility also provides for the possibility of an additional accordion of up to £10m which, if taken up during the term of the facility, will increase facilities available to £50m. The Group currently has £28.8m drawn against its existing £40m facility. The margin on the new facility is at the London Inter-Bank Offer Rate (LIBOR) plus 1.40%–1.65% margin based on a loan to value covenant test (1.40% at Lok’nStore’s current LTV level). The £40m revolving credit facility with RBS is secured by legal charges and debentures over the freehold and leasehold properties and other tangible assets of the business with a net book value of £120.4m (2016: £118.0m) together with cross-company guarantees from Group companies. 17b Derivative financial instruments During the year the Group continued to operate two separate £10m interest rate swaps with Lloyds Bank plc, both effective from 31 May 2012, the first at a fixed 1-month sterling LIBOR rate of 1.2% and the second at a fixed one-month sterling LIBOR rate of 1.15%. Both swaps ran up to 20 October 2016, whereupon they lapsed. The £20m fixed rate was treated as an effective cash flow hedge and its fair value on a mark-to-market basis has fluctuated historically. Under current facility arrangements with Royal Bank of Scotland plc, the Group is not committed to enter into hedging instruments going forwards but rather to keep such matters under periodic review. As the fixed interest swaps expired on 20 October 2016, the Group’s entire £28.8m of gross debt reverted to variable rate and results in an overall weighted average rate over the financial period of 2.06% (2016: 2.88%). At the balance sheet date the effective cost of debt is 1.65%. 3032816LS Interest rate swap 3047549LS Interest rate swap Currency GBP GBP Principal £ 10,000,000 10,000,000 20,000,000 Maturity date 20/10/2016 20/10/2016 Fair value 2017 £’000 Fair value 2016 £’000 – – – (19) (18) (37) The movement in fair value of the interest rate swaps of £37,850 (2016: £82,675) has been recognised in other comprehensive income in the year. 64 64 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 64 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:22 PM 18 Deferred tax Deferred tax liability Liability at start of year Credited to income for the year Tax credited directly to other comprehensive income Debit / (credit) to share based payment reserve Liability at end of year Group 2017 £’000 15,361 112 932 (42) 16,363 The following are the major deferred tax liabilities and assets recognised by the Group and the movements during the year: Accelerated capital allowances £’000 1,708 147 – – 1,855 341 – – 2,196 Intangible assets £’000 Other temporary differences £’000 Revaluation of properties £’000 Rolled over gain on disposal £’000 530 (83) – – 447 (53) – – 394 (8) 11 21 – 24 (7) – – 17 8,586 1,787 – 2,375 – 10,961 – 920 – 11,881 524 12 – 2,323 (189) 12 – 2,146 At 1 August 2015 Charge/(credit) to income for the year Charge to other comprehensive income Charge to share based payment reserve At 31 July 2016 Charge/(credit) to income for the year Charge to other comprehensive income Charge to share based payment reserve At 31 July 2017 19 Share capital Authorised: 35,000,000 ordinary shares of 1 pence each (2016: 35,000,000) Allotted, issued and fully paid ordinary shares Balance at 1 August Options exercised 193,601 shares (2016: 662,573 shares) Balance at 31 July Share options £’000 (351) 6 – 96 (249) 20 – (42) (271) 2017 £’000 350 £’000 291 2 293 Group 2016 £’000 12,252 605 2,408 96 15,361 Total £’000 12,252 605 2,408 96 15,361 112 932 (42) 16,363 2016 £’000 350 £’000 285 6 291 Number of shares at 31 July The Company has one class of ordinary shares which carry no right to fixed income. Called up, allotted and fully paid Number Called up, allotted and fully paid Number 29,302,923 29,109,322 F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 65 65 Lok'n Store-AR2017.indd 65 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:22 PM Notes to the Financial Statements continued For the year ended 31 July 2017 20 Equity settled share based payment plans The Group operates two equity settled share based payment plans, an approved and an unapproved share option scheme, the rules of which are similar in all material respects. The Company has the following share options: 2017 Summary Unapproved Share Options Approved CSOP Share Options Total 2016 Summary Unapproved Share Options Approved CSOP Share Options Total As At 31 July 2016 No. of options 1,094,482 166,011 1,260,493 As At 31 July 2015 No. of options 1,722,361 172,462 1,894,823 Granted Exercised 44,031 20,486 64,517 (150,408) (43,193) (193,601) Granted 59,858 23,137 82,995 Exercised (643,894) (18,679) (662,573) Lapsed/ surrendered As at 31 July 2017 No. of options (23,997) (7,926) (31,923) 964,108 135,378 1,099,486 Lapsed/ surrendered (43,841) (10,909) (54,750) As at 31 July 2016 No. of options 1,094,482 166,011 1,260,493 The following table shows options held by Directors under all schemes. 2017 Executive Directors A. Jacobs – Unapproved S.G. Thomas – Unapproved R.A. Davies – Unapproved R.A. Davies – CSOP R..A Davies total N. Newman-Shepherd – Unapproved N. Newman-Shepherd – CSOP N Newman-Shepherd total C. Jacobs – Unapproved C. Jacobs – CSOP C .Jacobs total * Non-Executive Directors E.T.D. Luker – Unapproved All Directors total * C. Jacobs retired on 4 July 2017. Total at 31 July 2016 Options granted Options exercised/ lapsed Unapproved Scheme Approved CSOP share options Total at 31 July 2017 206,087 75,217 281,977 14,493 296,470 187,742 16,195 203,937 123,997 18,926 142,923 15,000 939,634 – – – 7,742 7,742 19,679 966 20,645 – – – – 28,387 – (50,000) (25,000) (14,493) (39,493) (10,000) (3,500) (13,500) (23,997) (18,926) (42,923) – (50,000) (25,000) – (25,000) (10,000) – (10,000) (23,997) – (23,997) – (145,916) – (108,997) – – (14,493) (14,493) – (3,500) (3,500) – (18,926) (18,926) – (36,919) 206,087 25,217 256,977 7,742 264,719 197,421 13,661 211,082 100,000 100,000 15,000 822,105 The grant of options to Executive Directors and senior management is recommended by the Remuneration Committee on the basis of their contribution to the Group’s success. The options vest after two and a half or three years. The exercise price of the options is equal to the closing mid-market price of the shares on the trading day previous to the date of the grant. Exercise of an option is subject to continued employment or in the case of unapproved options at the discretion of the Board. The life of each option granted is six and a half to seven years. There are no cash settlement alternatives. The expected volatility is based on a historical review of share price movements over a period of time, prior to the date of grant, commensurate with the expected term of each award. The expected term is assumed to be six years which is part way between vesting (two and a half to three years after grant) and lapse (ten years after grant). The risk free rate of return is the UK gilt rate at date of grant commensurate with the expected term (i.e. six years). The total charge for the year relating to employer share based payment schemes was £96,985 (2016: £182,124), all of which relates to equity settled share based payment transactions. 66 66 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 66 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:22 PM 21 Enterprise Management Initiative Scheme The Company operated a share option scheme under the Enterprise Management Initiative (EMI), the vesting conditions of which have been met. The Group has for some years no longer met the EMI Scheme qualifying criteria. Accordingly, there were no options issued under this scheme during the year, and no options remained at the year-end. The scheme is now closed. 22 Unapproved share options The Company issues unapproved share options, the vesting conditions of which have been met. Movements in the year are shown below: Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2017 Pence 159.85 387.50 223.37 166.92 167.57 146.63 Options 2016 Number 1,722,359 59,858 (43,841) (643,894) 1,094,482 798,957 Weighted average exercise price 2016 Pence 148.65 325.00 166.51 143.98 159.85 139.49 Options 2017 Number 1,094,482 44,031 (23,997) (150,408) 964,108 758,366 The options outstanding at 31 July 2017 had a weighted average remaining contractual life of 6.3 years (2016: 5.4 years). The exercise prices for shares exercisable at 31 July 2017 ranged from 56.0 pence per share to 269.5 pence per share. The following sets out the movements in the year in respect of unapproved share options held by the Directors of the Company. As at 31 July 2016 206,087 A. Jacobs 75,217 S. Thomas R. Davies 281,977 N. Newman-Shepherd 187,742 123,977 C. Jacobs 15,000 E.T.D. Luker 890,000 Total Granted – – – 19,679 – – 19,679 Exercised/ lapsed – (50,000) (25,000) (10,000) (23,977) – (108,977) As at 31 July 2017 Exercise price (pence) Date from which exercisable Expiry date 206,087 1.085 – 2.855 25,217 2.070 – 2.855 256,977 0.850 – 2.135 197,421 1.070 – 3.875 100,000 1.070 – 2.695 0.565 15,000 800,702 31/7/15 – 6/8/18 31/7/17 – 6/8/18 31/7/10 – 31/7/17 31/7/11 – 31/7/20 24/4/10 – 31/7/16 31/7/12 31/7/22 – 6/8/25 31/1/24 – 6/8/25 31/7/17 – 31/7/27 31/7/18 – 31/7/27 31/12/17 – 31/1/20 31/7/19 F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 67 67 Lok'n Store-AR2017.indd 67 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:22 PM Notes to the Financial Statements continued For the year ended 31 July 2017 23 CSOP approved share options On 2 June 2010, the Group adopted a Company Share Option Plan (CSOP). The CSOP achieved HMRC approval on 28 June 2010. There are no performance conditions attached to share options issued under CSOP. Movements in the year are shown below: Outstanding at 1 August Granted during the year Forfeited/surrendered during the year Exercised during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2017 Pence 206.05 387.50 260.51 143.66 250.22 191.90 Options 2017 Number 166,011 20,488 (7,926) (43,193) 135,380 81,880 Weighted average exercise price 2016 Pence 178.82 325.00 207.00 98.75 206.05 116.49 Options 2016 Number 172,462 23,137 (10,909) (18,679) 166,011 44,727 The options outstanding at 31 July 2017 had a weighted average remaining contractual life of 8.7 years (2016: 7.8 years). The exercise prices for shares exercisable at 31 July 2017 ranged from 107.00 pence per share to 207.00 pence per share. The inputs into the Black-Scholes model used to value the options granted during the year are as follows: Date of grant 31 July 2017 Expected life (years) Share price at date of grant (pence) Exercise price (pence) 6.5 387.5 387.5 Expected volatility (%) 27.63 Expected dividend yield (%) Risk free interest rate (%) Fair value charge per award (pence) 2.41 0.66 77.94 The following CSOP approved share options have been granted to Directors of the Company: R. Davies C. Jacobs N. Newman-Shepherd As at 31 July 2016 14,493 18,926 16,195 30,688 Granted 7,742 – 966 8,708 Exercised /lapsed (14,493) (18,926) (3,500) (17,993) As at 31 July 2017 7,742 – Exercise price (pence) 3.875 Date from which exercisable 31/7/20 Expiry Date 31/7/27 13,661 1.070 – 3.875 21,403 31/7/14 – 31/7/20 31/7/21 – 31/7/27 68 68 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 68 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:22 PM 24a Other reserves Group 1 August 2015 Share based remuneration (options) IFRS2 – transfer to retained earnings Cash flow hedge reserve net of tax Tax charge relating to share options 31 July 2016 Share based remuneration (options) IFRS2 – transfer (to)/from retained earnings Cash flow hedge reserve net of tax Tax charge relating to share options 31 July 2017 Cash flow hedge reserve £’000 Merger reserve £’000 Other reserve £’000 Capital redemption reserve £’000 Share based payment reserve £’000 (99) – – 62 – (37) – – 37 – – 6,295 – – – – 6,295 – – – – 6,295 1,294 – – – – 1,294 – – – – 1,294 34 – – – – 34 – – – – 34 1,161 182 (401) – (96) 846 97 (139) – 42 846 Total £’000 8,685 182 (401) 62 (96) 8,432 97 (139) 37 42 8,469 The merger reserve represents the excess of the nominal value of the shares issued by Lok’nStore Group Plc over the nominal value of the share capital and share premium of Lok’nStore Limited as at 31 July 2001. The other distributable reserve and the capital redemption reserve arose in the year ended 31 July 2004 from the purchase of the Company’s own shares and a cancellation of share premium. Share based payment reserve Under IFRS2 there is the option to make transfers from the share based payment reserve to retained earnings in respect of accumulated share option charges where the options have either been exercised or have lapsed post-vesting. The total amounts calculated and accordingly transferred to retained earnings amounted to £138,755 (2016: £400,957). 24b Other reserves Company 1 August 2015 Share based remuneration (options) IFRS2 – transfer to retained earnings 31 July 2016 Share based remuneration (options) IFRS2 – transfer to/from retained earnings 31 July 2017 Other reserve £’000 1,114 – – 1,114 – – 1,114 Share based payment reserve £’000 1,066 182 (401) 847 97 (139) 805 Total £’000 2,180 182 (401) 1,961 97 (139) 1,1919 F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 69 69 Lok'n Store-AR2017.indd 69 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Notes to the Financial Statements continued For the year ended 31 July 2017 25 Retained earnings Group 1 August 2015 Profit attributable to owners of Parent for the financial year Transfer from revaluation reserve (additional depreciation on revaluation) Transfer from share based payment reserve (note 24a) Transfer realised gain on asset disposal Dividend paid 31 July 2016 Profit attributable to owners of Parent for the financial year Transfer from revaluation reserve (additional depreciation on revaluation) Transfer from share based payment reserve (note 24a) Sale of shares from treasury Dividend paid 31 July 2017 Retained earnings before deduction of own shares £’000 Own shares (note 26) £’000 13,387 (4,241) Retained earnings Total £’000 9,146 4,282 262 401 1,639 (2,147) 17,824 3,061 277 139 – (2,637) 18,664 – 4,282 – – – – (4,241) 262 401 1,639 (2,147) 13,583 – 3,061 – – 3,741 – (500) 277 139 3,741 (2,637) 18,164 The transfer from revaluation reserve represents the additional depreciation charged on revalued assets net of deferred tax. The own shares reserve represents the cost of shares in Lok’nStore Group Plc purchased in the market and held in the Employee Benefit Trust to satisfy awards made under the Group’s share incentive plan and shares purchased separately by Lok’nStore Limited for the Treasury Account. These treasury shares have not been cancelled and have been released back to the market to assist liquidity of the Company’s stock and to provide availability of a reasonable line of stock to satisfy investor demand. 26 Own shares 31 July 2016 and 31 July 2017 EBT shares Number 623,212 EBT shares £ 499,910 Treasury shares Number – Treasury shares £ Own shares Total £ – 499,910 Sale of treasury shares: At the start of the financial year, Lok’nStore Limited held a total of 2,466,869 of Lok’nStore Group Plc ordinary shares of 1p each for treasury with an aggregate nominal value of £24,669 purchased for an aggregate cost of £3,741,036 at an average price of £1.503 per share (excluding broker’s commission and stamp duty costs). These shares represented 8.4% of the Parent Company’s called-up share capital. The maximum number of shares held by Lok’nStore Limited in the year was 2,466,869. In November 2016, Lok’nStore sold 1,975,000 ordinary shares of these treasury shares. The shares were sold to a range of institutional investors at a price of 400 pence per share. On 26 April 2017, it sold the remaining 491,869 ordinary treasury shares to a range of institutional and individual investors at a price of 425 pence per ordinary share. The Directors have considered whether a prior year adjustment should be made to reflect this reclassification in the Parent Company’s comparative balance sheet but are mindful of the fact that this is all intercompany and the situation has been resolved in the current year through the sale of these shares. As a result, the Directors do not believe that this adjustment would cause the reader of the financial statements to form a different view of the statement of financial position of the Parent Company at 31 July 2016 and therefore do not believe it is material in the context of the financial statements as a whole. 70 70 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 70 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM 26 Own shares (continued) Employee Benefit Trust (EBT): The Group operates an Employee Benefit Trust (EBT) under a settlement dated 8 July 1999 between Lok’nStore Limited and Lok’nStore Trustee Limited, constituting an employees’ share scheme. Funds are placed in the trust by way of deduction from employees’ salaries on a monthly basis as they so instruct for purchase of shares in the Company. Shares are allocated to employees at the prevailing market price when the salary deductions are made. As at 31 July 2017, the Trust held 623,212 (2016: 623,212) ordinary shares of 1 pence each with a market value of £2,414,947 (2016: £2,025,439). No shares were transferred out of the scheme during the year (2016: nil). No dividends were waived during the year. No options have been granted under the EBT. 27 Cash flows (a) Reconciliation of profit before tax to cash generated from operations Profit before tax Depreciation Amortisation of intangible assets Equity settled share based payments Net settlement proceeds – Reading site Property disposal costs Store relocation costs Director retirement costs Interest receivable Interest payable Increase in inventories (Increase)/decrease in receivables (Decrease)/increase in payables Cash generated from operations (b) Reconciliation of net cash flow to movement in net debt Net debt is defined as non-current and current borrowings, as detailed in note 17a less cash and cash equivalents. Group 2017 £’000 3,965 1,856 165 97 – 15 29 69 (309) 606 (38) (284) (648) 5,523 Group 2016 £’000 5,493 1,535 165 182 (1,940) 123 – – (313) 1,048 (24) (2,471) (24) 3,774 Increase in cash in the year Change in net debt resulting from cash flows Movement in net debt in year Net debt brought forward Net debt carried forward Group 2017 £’000 6,051 – 6,051 (23,481) (17,430) Group 2016 £’000 2,900 (1,115) 1,785 (25,266) (23,481) F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 71 71 Lok'n Store-AR2017.indd 71 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Notes to the Financial Statements continued For the year ended 31 July 2017 28 Commitments under operating leases At 31 July 2017, the total future minimum lease payments as a lessee under non-cancellable operating leases were as follows: Land and buildings Amounts due: Within one year Between two and five years After five years Group 2017 £’000 1,469 5,868 6,600 13,937 Group 2016 £’000 1,535 5,847 7,468 14,850 Operating lease payments represent rentals payable by the Group for certain of its properties. Typically, leases are negotiated for a term of 20 years and rentals are fixed for an average of five years. 29 Related party transactions The Company provides share options for the employees of Lok’nStore Limited. The capital contributions arising from these share based payments are separately disclosed under investments in note 11. The aggregate remuneration of the Directors, who are the key management personnel of the Group, is set out below. Further information on the remuneration of individual Directors is found in note 6. Short-term employee benefits Post-employment benefits Share based payments Total Group 2017 £’000 1,000 31 97 1,128 Group 2016 £’000 1,648 31 182 1,861 The Group uses Trucost Plc, an environmental research company, to provide information and undertake performance assessment of the environmental effect of its business activities. The total fees payable to Trucost Plc in respect of its environmental assessment and reporting for the year was £6,000 (2016: £6,000). The balance outstanding to Trucost Plc at year-end was £nil (2016: £nil). Group Director shareholdings – dividends received In respect of the total dividends paid during the year of £2,637,353, the Group directors received the amounts set out in the table below: Director's Dividend Income Executive: A. Jacobs R.A. Davies N. Newman-Shepherd C.M. Jacobs Non-Executive: S.G. Thomas R.J. Holmes E.T.D. Luker C.P. Peal Holding 5,205,600 61,780 3,300 7,500 1,800,000 273,674 13,800 513,561 7,879,215 Final 2016 6.33 pence £ Interim 2017 3.00 pence £ 329,514 2,935 – 475 113,940 17,207 874 54,755 519,700 156,168 1,409 – 225 54,000 8,155 414 15,301 235,672 72 72 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 72 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM 29 Related party transactions (continued) Managed Stores – Group Director shareholdings Although the Director holdings in managed stores falls outside of the definition of related party transactions, they are disclosed here for transparency and are set out in the table below: Director Andrew Jacobs Charles Peal Simon Thomas Total shareholding issued share capital % of issued share capital Chichester Broadstairs Exeter No. of shares No. of shares No. of shares 240,000 500,000 160,000 900,000 3,970,000 22.7% 38,160 – – 38,160 189,690 20.1% 36,800 – – 36,800 189,341 19.4% 30a Capital commitments and guarantees The Group has capital expenditure contracted but not provided for in the financial statements of £2.60m (2016: £1.10m) relating to building contracts on its Gillingham and Wellingborough development sites as well as building retentions outstanding on the completed Bristol, Southampton and Reading stores. 30b Bank borrowings The Company has guaranteed the bank borrowings of Lok’nStore Limited, a subsidiary company. As at the year-end, that company had gross bank borrowings of £28.8m (2016: £28.8m). 31 Events after the reporting date (a) Contracts exchanged on the purchase of the Bedford site On 3 August 2017, contracts were exchanged on the purchase of a site in Bedford for £1.1m. Lok’nStore will develop this site as a purpose-built landmark store. (b) Surrender of lease on Unit 4, Leatherhead Industrial Estate and the execution of a new lease on the adjacent Unit 6 On 10 August 2017, the Group completed the execution of a new lease on Unit 6, Leatherhead Industrial Estate, together with the surrender of the lease on Unit 4. This is part of a continuing strategy within the document storage business of optimising the utilisation of trading space which has now been consolidated into two trading units. i) Surrender of Unit 4 The Group has obtained releases from all obligations whether past, present or future and received all of the rent deposits held by the landlord. There were no outstanding dilapidations obligations. ii) New lease on Unit 6 The lease is in substantially the same form as the existing lease but is for 15 years and inside the 1954 Landlord & Tenant Act. The landlord has the right to break at the end of the tenth year on redevelopment grounds on six months’ notice. There is an upward-only rent review at the end of the fifth year of the term. (c) Planning permission obtained on the Dover site On 9 September 2017, planning permission was granted for the construction of a detached storage building with associated vehicular access, parking and landscaping works. F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 73 73 Lok'n Store-AR2017.indd 73 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Glossary Abbreviation Adjusted EBITDA Earnings before all depreciation and amortisation charges, losses or profits on disposal, share based payments, acquisition costs, non-recurring professional costs, finance income, finance costs and taxation AGM APD Bps C&W CAC CAD Capex CGU C2Oe CSOP EBT EMI ESOP EU GHG HMRC IAS IFRIC IFRS JLL Annual General Meeting Auditing Practices Basis points Cushman & Wakefield Contributory asset charges Cash available for distribution Capital expenditure Cash generating units Carbon dioxide emissions Company Share Option Plan Employee Benefit Trust Enterprise Management Incentive Scheme Employee Share Option Plan European Union Greenhouse gas Her Majesty’s Revenue & Customs International Accounting Standard International Financial Reporting Interpretations Committee International Financial Reporting Standards Jones Lang LaSalle LIBOR London Interbank Offered Rate LFL LTV MWh NAV NBV Like for like Loan to value ratio Megawatt hour Net asset value Net book value Operating Profit Earnings before interest and tax (EBIT) PV RICS sq. ft. Store adjusted EBITDA Photovoltaic Royal Institution of Chartered Surveyors Square feet Adjusted EBITDA (see above) but before central and head office costs TVR VAT Total voting rights Value added tax 74 74 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 74 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Notes – What we mean when we say … (and why we use these key performance indicators (KPIs)) KPI 1 2 3 4 5 6 7 8 9 10 11 Description LFL – Like for like – This measure is used to give transparency on improvements in the operating business unrelated to the opening of new stores or closure of old stores, therefore giving visibility of the true trading picture. In January 2017, Lok’nStore closed its store in Staines. Like for like (LFL) growth figures for the period strip out the effect of this closure. Group Adjusted EBITDA – Earnings before interest, tax, depreciation and amortisation – This measure is designed to give clarity on the operating cash flow of the business stripping away non-cash charges, finance charges and tax. Adjusted EBITDA is defined as EBITDA before losses or profits on disposal, share based payments, acquisition costs, and exceptional items. Exceptional items – refers to “one-off” items of a non-operational nature which arose during the year. Adjustment of prior period exceptional sale – In 2016, the Group received an additional amount of sale proceeds (net of costs) of £1.94m on the sale of its old Reading store and incurred £0.12m of property disposal costs. The reported increase in the profit before tax and the profit after tax reported in the financial results for the year strips out the effect of this £1.82m exceptional credit item and correspondingly adjusts for the 2017 exceptional items described in note 9 below to obtain a like for like comparison. CAD – Cash available for distribution – is calculated as Adjusted EBITDA minus total net finance cost, less capitalised maintenance expenses, New Works Team costs and current tax. This measure is designed to give clarity to the capacity of the business to generate net operating cash that can be used to pay dividends to Shareholders. 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. 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 £17.4m (2016: £23.5m) as a percentage of the total properties independently valued by JLL and including development land assets totalling £124.8m (2016: £113.2m) as set out in the Business and Financial Review. Pipeline sites – 11 sites including 7 sites which have been secured and 4 sites which are currently proceeding with lawyers. Adjusted Total Assets – The value of adjusted total assets of £153.5m is calculated by adding the independent valuation of the leasehold properties (£16.7m) less their corresponding net book value (NBV) of £2.9m to the total assets in the balance sheet of £139.7m. Store adjusted EBITDA – is Adjusted EBITDA (see 2 above) before the deduction of central and head office costs. 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. See also the glossary on page 74. F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 75 75 Lok'n Store-AR2017.indd 75 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Our Stores Head Office Lok’nStore plc 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel www.loknstore.co.uk www.loknstore.com 01252 521010 Central Enquiries 0800 587 3322 info@loknstore.co.uk www.loknstore.co.uk Basingstoke, Hampshire Crockford Lane Chineham Basingstoke Hampshire RG24 8NA Tel basingstoke@loknstore.co.uk 01256 474700 Bristol, Gloucestershire Longwell Green Trade Park Aldermoor Way Bristol BS30 7ET Tel Bristol@loknstore.co.uk 0117 967 7055 Crayford, Kent Block B Optima Park Thames Road Crayford Kent DA1 4QX 01322 525292 Tel crayford@loknstore.co.uk Eastbourne, East Sussex Unit 4, Hawthorn Road Eastbourne East Sussex BN23 6QA Tel eastbourne@loknstore.co.uk 01323 749222 Fareham, Hampshire 26 & 27 Standard Way Fareham Industrial Park Fareham Hampshire PO16 8XJ Tel 01329 283300 fareham@loknstore.co.uk Farnborough, Hampshire 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel farnborough@loknstore.co.uk 01252 511112 Harlow, Essex Unit 1, Dukes Park Edinburgh Way Harlow Essex CM20 2GF 01279 454238 Tel harlow@loknstore.co.uk Horsham, West Sussex Blatchford Road Redkiln Estate Horsham West Sussex RH13 5QR Tel horsham@loknstore.co.uk 01403 272001 Luton, Bedfordshire 27 Brunswick Street Luton Bedfordshire LU2 0HG Tel luton@loknstore.co.uk 01582 721177 Maidenhead, Berkshire Stafferton Way Maidenhead Berkshire SL6 1AY Tel maidenhead@loknstore.co.uk 01628 878870 Milton Keynes, Buckinghamshire Etheridge Avenue Brinklow Milton Keynes Buckinghamshire MK10 0BB Tel miltonkeynes@loknstore.co.uk 01908 281900 Northampton Central 16 Quorn Way Grafton Street Industrial Estate Northampton NN1 2PN Tel nncentral@loknstore.co.uk 01604 629928 Northampton Riverside Units 1–4 Carousel Way Northampton Northamptonshire NN3 9HG Tel northampton@loknstore.co.uk 01604 785522 Poole, Dorset 50 Willis Way Fleetsbridge Poole Dorset BH15 3SY Tel poole@loknstore.co.uk 01202 666160 Portsmouth, Hampshire Rudmore Square Portsmouth PO2 8RT Tel portsmouth@loknstore.co.uk 02392 876783 Reading, Berkshire 251 A33 Relief Road Reading RG2 0RR 01189 588999 Tel reading@loknstore.co.uk Southampton, Hampshire Third Avenue Southampton Hampshire SO15 0JX Tel southampton@loknstore.co.uk 02380 783388 Sunbury on Thames, Middlesex Unit C, The Sunbury Centre Hanworth Road Sunbury Middlesex TW16 5DA Tel 01932 761100 sunbury@loknstore.co.uk Tonbridge, Kent Unit 6, Deacon Trading Estate Vale Road Tonbridge Kent TN9 1SW Tel tonbridge@loknstore.co.uk 01732 771007 76 76 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 76 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Crawley, West Sussex Sussex Manor Business Park Gatwick Road Crawley RH10 9NH Tel 01293 738530 crawley@loknstore.co.uk Swindon, Wiltshire Kembrey Street Elgin Industrial Estate Swindon Wiltshire SN2 8UY Tel swindoneast@loknstore.co.uk 01793 421234 Woking, Surrey Marlborough Road Woking GU21 5JG Tel 01483 378323 woking@loknstore.co.uk Under development (managed stores) Hemel Hempstead, Herts Fortius Point 47 Maylands Avenue Hemel Hempstead Hertfordshire HP2 7DE Exeter, Devon The former Auction Centre Matford Park Road Exeter EX2 8FD Ipswich, Suffolk Plot 7A, Crane Boulevard Futura Park Ipswich IP3 9QH Dover, Kent Honeywood Parkway White Cliffs Business Park Whitfield Dover CT16 3FJ Development locations (Owned stores) Wellingborough, Northamptonshire 19/21 Whitworth Way Wellingborough NN8 2EF Gillingham, Kent Courtney Road Gillingham Kent ME8 0RT Bedford, Bedfordshire 69 Cardington Road Bedford MK42 0BQ Managed stores Aldershot, Hampshire 251 Ash Road Aldershot GU12 4DD Tel aldershot@loknstore.co.uk 0845 4856415 Ashford, Kent Wotton Road Ashford Kent TN23 6LL Tel 01233 645500 ashford@loknstore.co.uk Broadstairs, Kent 2 Pyramid Business Park Poorhole Lane Broadstairs CT10 2PT Tel broadstairs@loknstore.co.uk 01843 863253 Chichester, West Sussex 17 Terminus Road Chichester PO19 8TX Tel chichester@loknstore.co.uk 01243 771840 F I N A N C I A L R E P O R T www.loknstore.com www.loknstore.com Stock Code: LOK Stock Code: LOK 77 77 Lok'n Store-AR2017.indd 77 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Shareholder Notes 78 78 Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2017 Lok'n Store-AR2017.indd 78 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:48:23 PM Lok'n Store-AR2017.indd 6 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:43 PM L o k ’ n S t o r e G r o u p P l c A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 J u l y 2 0 1 7 S t o c k C o d e : L O K Head Office Lok’nStore Plc 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel 01252 521010 www.loknstore.co.uk www.loknstore.com Lok'n Store-AR2017.indd 1 25416.04 – 1 November 2017 5:47 PM – Proof 7 11/1/2017 5:47:38 PM

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