Lok'n Store proves resilience after housing and business moves

While commercial landlords grapple with the onset of a second national lockdown, housebuilders attempt to catch-up on completions after the first caused closures of sales and construction sites. By contrast, self-storage has been a rare corner of stability within the real estate sector. For Lok’n Store (LOK), that has translated into a double-digit growth in operating profits for the year to July and a set of figures that prompted house broker FinnCap to upgrade its adjusted cash profit forecast for 2021 by 12 per cent. If current trading momentum continued, there could be scope for further upgrades, the brokerage said.

Progress on earnings meant cash available for distribution - adjusted cash profits minus net finance costs and maintenance expenses - also rose 12 per cent to 21.3p a share. That resulted in management recommending a 1p rise in the annual dividend for the ninth consecutive year. 

Occupancy rose almost 6 per cent across the self-storage specialist’s portfolio, which combined with stable pricing, pushed revenue higher. Household customers account for two-thirds of the group’s business. Their need is often linked to a life event where they will need space temporarily - for example to support a house sale. With that in mind, it is unsurprising that demand has boomed in recent months.

UK house prices rose 5.8 per cent in October, according to the Nationwide House Price Index, the largest annual increase in more than five years as demand has surged ahead of the 31 March stamp duty deadline. That sharp uptick in transactions also resulted in estate agency Purplebricks (PURP) revealing adjusted cash profits for the six months to the end of October would be ahead of management’s expectations. The group said it anticipated reporting an 8 per cent increase in instructions over the first-half, which are up more than a fifth since June. 

The question is what impact a second lockdown will have on the UK’s economic health, with the International Monetary Fund predicting a 10.4 per cent reduction in gross domestic product even before the November lockdown was announced. However, management at Lok point to the chronic lack of supply within the UK self-storage market, with 0.7 square/feet (sq/ft) of self storage space per capita, compared with 1.9 sq/ft in Australia and 9.4 sq/ft in the US. 

What’s more, business customers, who are reworking their office space to comply with social distancing, have also provided a boost to demand, said managing director, Neil Newman-Shepherd. “We’ve had some business from that actually, particularly business customers who are looking to create space in their offices to get some people back into offices,” said Mr Newman-Shepherd. That has been combined with customers that are rethinking how they operate, and how much office space they need, following lockdown, he added. 

Yet despite any uncertainty around the UK economic outlook, management is pressing ahead with its store expansion plans. During the year to July, it opened two managed stores and acquired another “landmark” store in Leicester immediately after the year-end. It has a pipeline of 10 stores under development, of which eight will be freehold by the group and the remainder operating as stores managed on behalf of third-parties. The benefit of the latter is that it allows the group to earn revenue without having to commit capital. A further four stores are progressing with lawyers. Management’s plan is to shift the portfolio increasingly towards freehold and managed stores, which generate margins of an average 62 per cent and 100 per cent, respectively, compared with a portfolio average of 56 per cent. 

Expansion plans are supported by a sturdy balance sheet. The loan-to-value ratio stood at just 19 per cent, while cash balances combined with undrawn debt facilities stood just under £37m. After extending its £75m by a year, it does not have to make any repayments before April 2025. “If we see a change in that we can quickly respond,” said executive chairman Andrew Jacobs. 

Lok’s resilient performance bodes well for larger peer Big Yellow (BYG), which will report interim figures later this month. Unsurprisingly, all three London-listed self storage groups have regained much of the ground lost following March’s market crash, bucking the trend set by other commercial property groups. Shares in Aim-listed Lok trade in line with consensus forecast NAV at the end of July 2021, a sizeable discount to Safestore (SAFE) and Big Yellow. That is only partially justified by its smaller scale - buy.