PRESS RELEASE

 

The announcement contains inside information for the purposes of UK MAR.

 

Release date:                10 August 2022

Embargoed until:           07:00

 

 

CLS HOLDINGS PLC

("CLS", the "Company" or the "Group")

ANNOUNCES ITS HALF-YEARLY FINANCIAL REPORT

FOR THE 6 MONTHS TO 30 JUNE 2022

 

Sound portfolio, index-linking and majority fixed debt provide protection against economic headwinds

 

CLS is a leading FTSE250 office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a c.£2.4 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the half year ended 30 June 2022, the Group has delivered the following results:

 

	30 June 2022	31 December 2021	Change (%)
EPRA Net Tangible Assets ("NTA") per share (pence)1	352.8	350.5	0.7
Statutory NAV per share (pence)1	329.2	326.6	0.8
Contracted rents (£'million)	107.9	107.6	0.3

 

	30 June 2022	30 June 2021	Change (%)
Profit before tax (£'million)	20.3	24.7	(17.8)
EPRA Earnings per share ("EPS") (pence)1	5.8	5.4	7.4
Statutory EPS from continuing operations (pence)1	4.2	2.2	90.1
Dividend per share (pence)	2.60	2.35	10.6

¹  A reconciliation of statutory to alternative performance measures is set out in Note 4 to the condensed Group financial statements

 

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"CLS delivered a robust set of results in the first half of 2022, with EPRA NTA growing by 0.7%, EPRA EPS up 7.4% and the interim dividend up 10.6%. We remain focused on actively managing our portfolio to drive long-term value and continue to invest where we see opportunities.

 

"We are well placed to navigate the challenging economic and trading conditions with our high-quality portfolio, a significant portion of index-linked leases and strong balance sheet.

 

"We continue to believe the share price discount is unjustified and today are announcing an initial £25.5 million tender offer share buyback to address the issue. If the share price discount persists, we will consider further buybacks in tandem with disposals demonstrating the Board's commitment to delivering shareholder value whilst maintaining the Group's gearing at appropriate levels."

 

FINANCIAL HIGHLIGHTS

·      EPRA NTA up 0.7% primarily as a result of foreign exchange gains from weakening sterling with the portfolio valuation slightly up in local currency before lease incentives

·      Portfolio valuation up 0.1% in local currency with increases in the UK of 0.5% and Germany of 0.3%, partly offset by declines in France of 2.1%

·      Profit before tax down 17.8% to £20.3 million (30 June 2021: £24.7 million) from lower fair value movements on investment properties due to lease incentives (£3.1 million) and a one-off profit on disposal of equity investments in 2021 (£1.4 million)

·      EPRA EPS up 7.4% to 5.8 pence per share from lower foreign exchange losses, lower tax following REIT conversion, and higher income from our hotel and student operations, partly offset by higher expenses as 2021 included the release of pandemic bad debt provisions. Statutory EPS up 90.1% due to lower UK tax charges after the conversion to a UK REIT

·      Interim dividend up 10.6% to 2.60 pence per share (30 June 2021: 2.35 pence per share) to be paid on 3 October 2022. Increased dividend reflects the adoption of our updated dividend policy announced in May

·      Total accounting return of 2.2% (30 June 2021: (0.8%))

 

OPERATIONAL HIGHLIGHTS

·      Net rental income increased by 0.9% to £52.8 million (30 June 2021: £52.3 million) as a result of higher income from our hotel and student operations and higher dilapidations income

·      Acquired two properties for £76.9 million, which completed in April and July respectively.  These properties were bought for their asset management opportunities at a combined net initial yield of 5.1% and a reversionary yield of 5.6%

·      Completed the disposal of two smaller properties for £10.1 million, one of which had exchanged in 2021, at book value.  Post period end, completed on a further three disposals for £39.8 million at an average 3.7% above book value

·      Completed 60 lease events (30 June 2021: 53) securing £4.4 million (30 June 2021: £5.2 million) of annual rent at 4.5% above ERV with like-for-like contracted rent increasing by 0.4%

·      Vacancy rate increased to 6.9% (31 December 2021: 5.8%; 31 March 2022: 7.2%). Most of this increase was due to lease expiries and completion of developments currently being marketed to prospective tenants

·      Rent collection remained at the same, consistently high levels with 99% of first half rent collected and 98% of third quarter contracted rent due collected to date

 

FINANCING

·      Weighted average cost of debt at 30 June 2022 up 4 basis points to 2.26% (31 December 2021: 2.22%) due to increases in SONIA on UK floating rate debt

·      Loan-to-value at 38.9% (31 December 2021: 37.1%) reflecting net investments in the period.  Gross debt of £1,043.2 million (31 December 2021: £1,031.6 million) with cash of £110.4 million (31 December 2021: £167.4 million) and £50 million (31 December 2021: £50 million) of undrawn facilities

·      In the first half of 2022, financed or refinanced £92.3 million of debt at 1.81% for 1.9 years.  Discussions well advanced for the remaining £93.6 million refinancings, excluding amortisation, due in 2022

·      The loan portfolio as at 30 June 2022 had 80% at fixed rates (31 December 2021: 85%) with the reduction as a result of short-term floating rate extensions in advance of longer-term loans once the letting of the buildings has been improved or to give flexibility for potential sales

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

·    Progress continues with implementing our ambitious but achievable long-term sustainability targets including our 2030 Net Zero Carbon Pathway. We have completed 35 carbon reduction projects with another 76 projects in progress totalling £11 million estimated spend by the end of 2022 which will save an estimated 1,300 tonnes CO2e per annum and puts us on track to achieve our targets

·    A 23% net increase in CLS' solar electricity generation and a further 347kWp increase in capacity in progress from the installation of new solar arrays in the UK. We are also installing more electric vehicle charging points in the UK and Germany

·    Taking action on social challenges including supporting refugees from the Ukraine war, donating to local food banks tackling the cost-of-living crisis for the poorest and volunteering to support local community projects

 

Tender Offer Share Buyback and Interim Dividend Timetable

Further to this announcement, in which the Board announced a £25.5 million tender offer share buyback and declared an interim dividend of 2.60 pence per ordinary share, the expected key timetable dates are as follows:

 

	Tender Offer	Dividend Timetable
Announcement Date for the Tender Offer and Dividend	10 August 2022	10 August 2022
Posting of Tender Offer Circular / Tender Offer opens	15 August 2022
Ex-Dividend Date		8 September 2022
Record Date for the Tender Offer and Dividend	9 September 2022	9 September 2022
General Meeting / Tender Offer Closes	9 September 2022
Outcome of Tender Offer announced by	12 September 2022
Cheques despatched / CREST accounts credited	By 16 September 2022
Dividend Payment Date		3 October 2022

 

-ends-

 

Results presentation

 

A presentation for analysts and investors will be held in-person at Liberum Capital, by webcast and by conference call on Wednesday 10 August 2022 at 8:30am followed by Q&A. Questions can be submitted either online via the webcast or to the operator on the conference call.

 

·      Liberum Capital: Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY

·      Webcast: The live webcast will be available here: https://secure.emincote.com/client/cls/cls005

·      Conference call: In order to dial in to the presentation via phone, please register at the following link and you will be provided with dial-in details and a unique access code:

https://secure.emincote.com/client/cls/cls005/vip_connect

 

For further information, please contact:

 

CLS Holdings plc

(LEI: 213800A357TKB2TD9U78)

www.clsholdings.com

Fredrik Widlund, Chief Executive Officer

Andrew Kirkman, Chief Financial Officer

+44 (0)20 7582 7766

 

Liberum Capital Limited

Richard Crawley

Jamie Richards

+44 (0)20 3100 2222

 

Panmure Gordon

Hugh Rich

+44 (0)20 7886 2733

 

Berenberg

Matthew Armitt

Richard Bootle

+44 (0)20 3207 7800

 

Edelman Smithfield (Financial PR)

Alex Simmons +44 7970 174353

Hastings Tarrant +44 7813 407665

 

 

Forward-looking statements

This document may contain certain 'forward-looking statements'. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from those expressed or implied by such forward-looking statements. Any forward-looking statements made by or on behalf of CLS speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Except as required by its legal or statutory obligations, the Company does not undertake to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Information contained in this document relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

Chief Executive's statement

 

Sound portfolio, index-linking and majority fixed debt provide protection against economic headwinds

 

OVERVIEW

 

CLS delivered a robust set of results in the first half with increases in net assets, profits and dividends.  Our focus remains on our diverse and strong set of tenants with continued high rent collection and excellent results from our one hotel and student operation.  CLS remains well-placed with significant financial strength despite the slowdown in market activity that we have seen since the end of the first quarter.

 

We secured 331,668 sq. ft (30,813 sqm) of lettings and renewals but vacancy increased to 6.9% (31 December 2021: 5.8%) due to lease expiries and completion of refurbishments, which are currently being marketed to prospective tenants. We invested £24.5 million of capital expenditure in an increased number of refurbishments and a limited amount of developments so as to improve the quality of our space to meet market needs.

 

Over the six months, EPRA NTA increased by 0.7% to 352.8p per share (31 December 2021: 350.5p) mainly as a result of positive foreign exchange movements due to sterling weakening and a slight overall uptick in property valuations before lease incentives. Total accounting return for the six months was 2.2% (30 June 2021: (0.8%)).

 

Given market uncertainty, we have chosen to reduce our acquisition activity with just two acquisitions made in Germany for £76.9 million. The properties, which exchanged in the first quarter, completed in April and July. Each had a Net Initial Yield ("NIY") of 5.1% but both have good asset management opportunities and a combined reversionary yield of 5.6%. Two disposals were completed in the first half for £10.1 million at book value with a NIY of 6.0%. Since the half-year, three further disposals have completed for £39.8 million at an average of 3.7% above 31 December 2021 book values with a NIY of 4.9%. We are targeting further disposals in the second half, focussing on smaller properties with less growth potential, to release funds to invest in the portfolio whilst maintaining gearing at appropriate levels.

 

We announced in May an intention to initiate a tender buyback if the share price discount to book value remained at unjustified levels. Consequently, today we have announced a £25.5 million tender buyback for 1 in every 40 ordinary shares at £2.50 per share. The tender offer document containing further details will be sent out shortly. If the share price discount persists, we will consider further buybacks in tandem with disposals so as to maintain gearing at appropriate levels.

 

RESULTS AND FINANCING

 

Profit after tax for the six months to 30 June 2022 was £17.3 million (30 June 2021: £8.8 million), equivalent to earnings per share of 4.2p (30 June 2021: 2.2p). The increase was as a result of: higher net rental income of £52.8 million (30 June 2021:  £52.3 million); smaller FX losses of £0.2 million (30 June 2021: £1.9 million loss); lower current tax charge of £1.2 million (30 June 2021: £4.5 million) and lower deferred tax charge of £1.8 million (30 June 2021: £11.4 million) following the conversion of CLS' UK operations to a REIT. EPRA earnings per share were 5.8p (30 June 2021: 5.4p), 7.4% up on last year.

 

Shareholders' funds increased in the six months by 0.8% to £1,341.3 million reflecting the weakening of sterling partly offset by the payment of the final dividend in April.

 

Our balance sheet liquidity remains strong with £110.4 million of cash and £50 million of undrawn facilities. Whilst our loan book remains substantially at fixed rates with 80% secured (31 December 2021: 85%), our weighted average cost of debt increased marginally to 2.26% (31 December 2021 2.22%) reflecting the increase in the UK bank base rate impacting UK floating rate debt. All of the remaining 2022 refinancings of £93.6 million are well advanced. Net debt excluding leasehold liabilities rose to £932.8 million (31 December 2021: £864.2 million) and loan-to-value rose to 38.9% (31 December 2021: 37.1%) reflecting net investment in the period. Interest cover remained high at 3.1 times (30 June 2021: 3.2 times) demonstrating the Group's ongoing ability to generate cash.

 

PROPERTY PORTFOLIO

 

At 30 June 2022, the value of the property portfolio, including properties held for sale, was £2,399.7 million, £68.4 million higher than six months earlier. This increase was as a result of: investments in the portfolio through capital expenditure of £24.5 million and acquisitions of £22.5 million (including costs); net valuation increases of £3.4 million; and foreign exchange gains of £28.3 million, offset by depreciation of £0.2 million and disposals of £10.1 million.

 

Given market conditions, we took a cautious approach to acquisitions with just two purchases both of which exchanged in the first quarter of the year. Kanzlerstrasse, Dusseldorf completed at the end of April 2022 for £20.9 million and had a WAULT of c.8 years, an initial yield of 5.1% and a reversionary yield of 5.7%. The Yellow, Dortmund completed at the start of July 2022 for £56.0 million and had a WAULT of 5.2 years, an initial yield of 5.1% and a reversionary yield of 5.6%. We are already actively asset managing the properties to secure market rents and lease the small amount of vacant space.

 

As in prior years, selective disposal activity targeting smaller properties with higher alternative use values and/or less growth potential continued.  Two properties in Bromley and Wallington in the UK, which had exchanged before the start of the year, completed for a total of £10.1 million in the first quarter of 2022.  Since the half-year we have sold two properties in Staines and Brentford in the UK and one property in Lille for a total of £39.8 million on average 3.7% ahead of book value.

 

In the second half of 2022, we do not expect to make any further acquisitions and will continue to explore selected disposals. The intention is to use the disposal proceeds to: reduce CLS' loan-to value ratio and potentially fund a further tender buyback; focus the portfolio on better growth prospects; and continue to invest to improve the quality of the existing portfolio.

 

In the six months to June, the like-for-like valuation of the property portfolio (which excludes acquisitions), as well as the overall portfolio valuation, rose by 0.1% in local currency.  There were like-for-like valuation increases of 0.5% in the UK and 0.3% in Germany with France down by 2.1%.  In Sterling, the valuation increase was 1.3% with increases in all countries. At 30 June 2022, the EPRA 'topped up' net initial yield of the portfolio was 4.5% (31 December 2021: 4.6%), some 225 basis points above the Group's cost of debt, underpinning the Group's continuing ability to generate cash.

 

The EPRA vacancy rate as at 30 June 2022 was 6.9% (31 December 2021: 5.8%) with the increase as a result of two factors.  Firstly, lettings started the year strongly but slowed following the Russian invasion of Ukraine as tenants became more hesitant. Secondly, as a result of our investment in the portfolio, a number of refurbishments were completed towards the end of the period, many of which have yet to be let.

 

DIVIDENDS

 

In October, the Group will pay an interim dividend for 2022 of 2.60 pence per share, an increase of 10.6% compared to the 2021 interim dividend, and in line with the revised dividend policy announced in May 2022 of 1.20x to 1.60x EPRA earnings dividend cover.

 

TENDER OFFER

 

On 11 May 2022 we announced a proposed tender offer of our Ordinary Shares subject to the completion of a number of property sales and the unjustified share price discount to NTA persisting.

 

During the first six months of the current financial year, the Group completed two property disposals, realising an aggregate of £10.1 million at prices that were in line with their valuations as at 31 December 2021.  Furthermore, on 3 August 2022, CLS announced that it had completed on the sale of two UK properties, Great West House, Brentford and 62 London Road, Staines and one French property, 96 Rue Nationale, Lille for a total of £39.8 million.  The three properties sold for an average of 3.7% above the 31 December 2021 valuations.

 

The share price of an Ordinary Share in the Company has continued to trade at a significant discount to the NTA value of an Ordinary Share in the Company (30 June 2022: 352.8 pence). The Board believes the share price discount to its NTA is unjustified and it is in the best interests of all Shareholders to implement the Tender Offer to reduce this discount.

 

In light of the persisting share price discount to NTA and the completion of a number of property sales, we are announcing here that the Company is making a tender offer to return up to approximately £25.5 million or 10,184,894 Ordinary Shares (representing 2.5% of the Company's current issued ordinary share capital excluding treasury shares), through the purchase of 1 in every 40 Ordinary Shares, at 250 pence per Ordinary Share.

 

The Board has determined that a Tender Offer should be made at an appropriate premium to the price per Ordinary Share and that this would be the most suitable way of returning capital to Shareholders in a quick and efficient manner, taking account of the relative costs, complexity and timeframes of the possible methods, as well as the equality of treatment of Shareholders.

 

The size of the Tender Offer has been determined to be appropriate to ensure that the Group's loan-to-value ratio remains within an acceptable level, being below 40% and with cash and liquid resources and available facilities being over £100 million, providing the Group with the flexibility to focus its portfolio on attractive growth prospects and continue to invest to improve the quality of its existing portfolio.

 

A document setting out the full details of the Tender Offer will be sent to Shareholders shortly.

 

ENVIRONMENT, SOCIAL AND GOVERNANCE

 

The focus of this year is continuing the implementation of initiatives and projects in support of the targets announced in our Sustainability Strategy and Net Zero Carbon Pathway last year and improving our ability to report on key sustainability data including those related to material risks identified in relation to TCFD.

 

Our biggest sustainability achievement so far in 2022 has been implementing technical and cost-effective Net Zero Carbon projects across all regions. Since commencing on our Net Zero Carbon Pathway, 35 carbon reduction projects are complete with another 76 projects in progress for 2022. These projects represent an investment of around £11 million across the portfolio saving an estimated 214 Tonnes CO2e per annum, putting us on track to achieve our 2030 targets. This has included projects such as LED lighting upgrades at Columbia, BMS upgrades at Priory Place, smart meter installation at Kings Court and new, high-efficiency heating and air conditioning system at Rossstrasse.

 

We improved our data collection and management to ensure we possess an accurate and comprehensive record of our carbon footprint. We currently estimate a further £53 million will be required up to 2030 to deliver the remainder of the full programme, although this does not currently include the full impact of current high inflation. We have aligned implementation of opportunities with our lease and refurbishment plans and are continuing to refine the optimal time to deliver each project over the coming years.

 

Within this expenditure for our Net Zero Carbon model, we include meeting the regulatory criteria relating to energy efficiency and/or carbon reductions for office properties as relevant to the UK, France and Germany by 2030. These include the new EPC-B requirements in the UK, the Decret Tertiaire energy efficiency targets in France, and the new energy efficiency targets and carbon costs recently announced in Germany. By incorporating these details into our model, we now have a comprehensive picture of the costs and compliance risks for each property that we will incorporate into the long-term asset management strategies for each property.

 

As part of being a responsible corporate citizen and long-term investor, we have continued to support local and industry related charities, with our core focus being to support the issues of homelessness, food poverty, youth unemployment and environmental sustainability. Examples include supporting refugees from the Ukraine war, donating to local food banks tackling the cost-of-living crisis for the poorest and volunteering by employees to support local community assets such as parks, community farms and bee-keeping projects. The social value we produce as a business beyond shareholder value is measured using our social value framework

 

OUTLOOK

 

The economic, geopolitical and market situation and outlook have deteriorated markedly since the end of the first quarter with the impact of the Russian invasion of Ukraine contributing to existing inflationary and supply chain pressures. CLS though retains significant protection through its well-placed portfolio with over half of its leases being index-linked and the majority of its financing at fixed rates. 

 

Our focus remains on minimising vacancy in our existing portfolio with the potential to capture significant uplifts from the portfolio's net reversion and the increased rents that will be commanded from our higher quality refurbished space with great tenant amenities and facilities. Furthermore, our hotel enjoyed its best ever month in June and our student accommodation is 98% booked for the 2022/2023 academic year.

 

Today we have announced a tender share buyback to drive shareholder value. If the share price remains at an unjustified level compared to book value, we will consider further buybacks alongside being a net disposer of property so as to maintain the Group's gearing at appropriate levels.

 

We believe that our strategy and business model remain well-placed for the long-term success of the Company with significant benefits from our focus on, and the diversity benefits of exposure to, the three largest economies in Europe.  Our portfolio has significant opportunities to grow rental income over the next couple of years.

 

 

Our investor proposition

 

Strong and consistent long-term shareholder returns

 

Set out below are the key tenets of our investment proposition, which remain unchanged from previous years.  A full description can be found on pages 16 and 17 of CLS' 2021 Annual Report and Accounts:

 

Clear strategy	Active management
·      Diversified approach ·      Sole focus on non-prime offices ·      Selected development schemes	·      Experienced in-house capabilities ·      Secure rents and high occupancy ·      Interest rate management

 

Leading track record	Focus on sustainability
·      Disciplined approach to investment ·      Cash-backed progressive dividend ·      Financing headroom	·      Responsible profit ·      Strong ESG performance ·      Climate risk mitigation

 

DIVIDEND POLICY

 

The Company expects to generate sufficient cash flow to be able to meet the growth requirements of the business, maintain an appropriate level of debt and provide cash returns to shareholders via a dividend.

 

As announced in May 2022, we updated our dividend policy following the conversion of our UK operations to a REIT. The company will maintain a progressive dividend policy, with a dividend cover of 1.2 to 1.6 times EPRA earnings (previously 1.5 to 2.0 times). Approximately one-third of the annual dividend is paid as an interim in September or October, with the balance paid as a final dividend in April.

 

ANALYST COVERAGE

 

We are covered by four brokers which publish regular analyst research: Liberum Capital; Panmure Gordon; Berenberg and Peel Hunt. Contact details can be found on our website www.clsholdings.com.

 

2021 INVESTOR ENGAGEMENT

 

Events which have taken place	Events which are due to take place
March 2022 Annual Results presentation Annual Results investor calls and meetings   April 2022 Annual General Meeting	August 2022 Half-Year Results presentation   August/September 2022 Half-Year Results investor calls and meetings   November 2022 Trading Update

 

 

Business review

 

United Kingdom

 

UK inflation and cost of living impacting overall market sentiment

 

	30 June 2022	31 December 2021
Value of properties	£1,171.1m	£1,160.9m
Percentage of Group's property interests	49%	50%
Number of properties	42	44
Number of tenants	219	227
EPRA vacancy rate	7.6%	5.4%
Lettable space	1.9m sq. ft	2.0m sq. ft
Government and major corporates	67.4%	64.6%
Weighted average lease length to end	4.0 years	4.3 years

 

The value of the UK portfolio increased by £10.2 million as a result of: capex of £14.1 million, partly offset by two disposals for £10.1 million and depreciation of £0.2 million; and valuation increases of £6.3 million or 0.5%.  The valuation increase mainly related to government occupied assets, particularly those subject to indexation.

 

Construction of "The Coade", our 28,500 sq. ft (2,647 sqm) new office development at Vauxhall Walk, London, is progressing well and we recently celebrated the topping out of the 10-storey building. Construction is expected to complete by Q1 2023 and we are targeting a 20% profit on cost, and EPC A and BREEAM Excellent ratings. "The Artesian", our development at 9 Prescot Street, London, has ramped up following the expiration of leases of remaining tenants in April 2022 which gave us vacant possession. The 94,000 sq. ft (8,733 sqm) development, incorporates many tenant amenities including a café/reception, ample bike storage, showers and a large roof terrace, is expected to complete in Q2 2023. 

 

Other ongoing, significant refurbishments to create attractive and contemporary office space with plenty of amenities are at Apex Tower and CI Tower in New Malden, Columbia and Reflex in Bracknell, and Kings Court in Leatherhead. All of these schemes include a number of smaller flexible suites in line with current market trends.

 

Our programme of disposing of assets with small lot sizes has continued with two disposals, one of which exchanged in 2021, completing during the period. These disposals at Kings House, Bromley and Crosspoint House, Wallington completed at book value of £10.1 million and were both for residential conversions. After the period, in July and August respectively, we completed the sales of 62 London Road, Staines and Great West House, Brentford for a combined £32.4 million equating to a 1.6% profit on sale compared with the 2021 year-end valuation.

 

Vacancy increased in the period from 5.4% to 7.6% largely due to completing refurbishments that are yet to be occupied. In addition, since 1 January 2022, we let or renewed leases on 69,459 sq. ft (6,453 sqm) and lost 139,693 sq. ft (12,978 sqm) from expiries or new vacancies. 33 lease extensions and new leases were signed adding £2.2 million of rent at an average of 2.1% above 31 December 2021 ERV. The most significant transactions were a new 10-year lease with ATS Euromaster at Aqueous II, Birmingham for 13,114 sq. ft (1,218 sqm) and a 10-year lease extension with Consilient Health for 3,887 sq. ft (361 sqm) at Thameslink House, Richmond. Furthermore, we successfully negotiated the removal of break clauses for leases with the Secretary of State for: Unicorn House, Bromley; Armstrong Road, Acton; and 62 London Road, Staines, which secured a total rent of £2.7 million p.a. for an additional 5 years past the previous break date of April 2023.

 

The UK economy grew marginally in the first six months of the year with the construction and services sector performing strongly and offsetting falls in the retail sector which are likely to have been caused by the increased cost of living. Overall, the OECD predicts that the UK economy will grow by 3.6% in 2022. Inflation in the year to June 2022 was 9.4% due to the continuing rise in energy and labour costs. Unemployment is now 3.8% and for the first time in the UK there are more job vacancies than unemployed people, although it remains an issue that over 20% of adults are deemed to be economically inactive and not counted within the unemployment figures.

 

In terms of the UK property market, commercial investment volumes for H1 2022 were c.£25 billion which is ahead of 2021 for the same period of c.£23 billion. In the South-East there was a significant uplift in activity in Q2 with a total of £1.2 billion of transactions completed which was 21% up on Q2 2021. In the occupational market, take-up in Q2 in Central London was 20% up on the 10-year average and vacancy now stands at 8.1% for London.

Germany

 

Energy and interest rate nervousness has slowed investments but lettings are holding up

 

	30 June 2022	31 December 2021
Value of properties	£938.8m	£888.0m
Percentage of Group's property interests	39%	38%
Number of properties	32	31
Number of tenants	377	367
EPRA vacancy rate	7.5%	7.4%
Lettable space	3.6m sq. ft	3.5m sq. ft
Government and major corporates	39.2%	40.5%
Weighted average lease length to end	4.8 years	5.0 years

 

The value of the German portfolio increased by £50.8 million as a result of: one acquisition for £22.5 million (including costs); capex of £3.6 million; foreign exchange increase of £21.6 million; and a valuation gain of £3.1 million or 0.3% in local currency. The portfolio valuation increased as a result of positive letting activity and achieving planning consent on a rooftop extension.

 

In the first half of the year, we exchanged and completed on the acquisition of Kanzlerstrasse 8 in Dusseldorf and exchanged on The Yellow in Dortmund which completed in July. The purchase price of these acquisitions was £76.9 million. These properties each had a net initial yield of 5.1%, a combined reversionary yield of 5.6% and the WAULT of each property is in excess of 5 years.  They present good asset management opportunities through capturing under-renting and letting of vacancy which is c.10% by ERV.

 

Vacancy increased slightly from 7.4% to 7.5% as lettings fell slightly behind expiries as prospective occupiers have been tentative to commit to long-term leases in the current environment of economic uncertainty. Since 1 January 2022, 218,674 sq. ft (20,316 sqm) was let or renewed but 242,960 sq. ft (22,572 sqm) of space expired or was vacated. 16 lease extensions and new leases were signed adding £1.6 million of rent at an average of 12.1% above 31 December 2021 ERV. The most significant transaction was a new 10-year letting for 62,458 sq. ft (5,803 sqm) to Toptica at Gräfelfing in Munich. The letting pipeline is looking promising particularly at Flexion, Berlin where we are in advanced negotiations for most of the vacant area in this building.

 

Refurbishments continue across our portfolio to improve the quality of our assets focusing on meeting tenants' needs and improving the sustainability credentials of our properties. Planning has been granted for a rooftop extension at Adlershofer Tor, Berlin which will increase the lettable area of the building by approximately 46,285 sq. ft (4,300 sqm).

 

The German economy slowed down in H1 2022 with GDP growth forecast for 2022 now at 2.5%. Inflation rose further in Q2 to 7.6% in June and is expected to stay at 6% during 2022, whilst on the positive side, unemployment decreased further to 5.1%.

 

Nearly all industries are suffering from supply chain problems and prices continue to increase to such an extent that developers are postponing or cancelling projects which have become unprofitable. German industry is also heavily dependent on gas which is putting further pressure on companies with talks of potential gas shortages and emergency plans later in the year.

 

The investment market showed a record result in Q1 2022 with c.£21 billion (€24 billion) of deals, significantly exceeding the same period in 2021, while the second quarter saw a significant drop with only c.£3.5 billion (€4 billion) transacted as investors took a step back and paused given the developing political and economic backdrop.

 

On the letting side, the office leasing markets were little affected by the changed macroeconomic environment in the first half of 2022. In the year to date, a total of more than 1.8m sqm of office space has been taken-up. This represents an increase of 55% compared to the first half of 2021, with just over 1 million sqm in the months of April to June alone. Many companies started to implement their new working strategies in the first half of the year, which often resulted in new leases, or, in some cases, owner-occupier starts.  As employees are returning to their offices there is also a noticeable increase in the willingness of companies to invest in the quality, equipment and location of their office space. The overall vacancy rate in the top seven cities remained at 4.5%.

France

Ongoing capital expenditure to maintain quality of portfolio

 

	30 June 2022	31 December 2021
Value of properties	£289.8m	£282.4m
Percentage of Group's property interests	12%	12%
Number of properties	18	18
Number of tenants	153	158
EPRA vacancy rate	2.3%	3.0%
Lettable space	0.8m sq. ft	0.8m sq. ft
Government and major corporates	47.4%	46.4%
Weighted average lease length to end	4.9 years	5.0 years

 

The value of the French portfolio increased by £7.4 million as a result of: capex of £6.8 million; and a foreign exchange valuation uplift of £6.7 million, offset by a valuation loss of £6.1 million or 2.1% in local currency due to softer leasing deals to maintain higher occupancy.

 

In the absence of identifying acquisition opportunities that meet our investment criteria in the first half of the year, we invested substantially in our existing portfolio. Of particular note, works are ongoing on the significant redevelopment of our Park Avenue property in Lyon.  The project to refurbish the common areas, replace the façade and create new common terraces through extension of existing landings is progressing well.  Installation of new windows, electric shades and a green roof is also designed to improve the sustainability credentials of the building increasing its DPE rating from G to B.  The £9.2 million (€10.7 million) renovation is expected to be delivered on time, ready for occupation in Q1 2023.  Across the rest of portfolio, additional works are taking place to upgrade facilities and amenities, and we expect similar levels of capital expenditure over the second half of the year.

 

Continuing with our strategy of disposing of properties which have little asset management potential to drive growth, we exchanged on Rue Nationale in Lille for £7.4 million (€8.8 million).  The disposal completed in July at a 14.4% profit compared to the 2021 year-end valuation.

 

During the period, 43,525 sq. ft (4,044 sqm) was let or renewed but 54,420 sq. ft (5,056 sqm) of space expired or was vacated. Some of the recently vacated space is currently being refurbished and so the vacancy rate fell to 2.3% by the end of June (31 December 2021: 3.0%).  Our French portfolio maintained its low vacancy rates through a series of renewals and letting recently refurbished space to new tenants. 11 lease extensions and new leases were signed adding £0.6 million of rent at an average of 3.9% below 31 December 2021 ERV. The most significant transactions during the period were: a lease renewal at D'Aubigny for 12,695 sq. ft (1,179 sqm) with Icon plc via a 4/7/10 year lease and a lease extension with Bewink at Mission Marchand for 4,774 sq. ft (444 sqm).

 

The French economy was relatively flat in the first six months of 2022 although exports increased 1.2% and imports 0.5%, making the net trade surplus slightly positive. Like other countries GDP expectations have fallen, with French GDP growth for 2022 now forecast to be 2.3% (compared with 6.8% in 2021) according to the latest Banque de France estimate and headline inflation is expected to reach 5.1% in 2022.  Inflation in France, although historically high, is lower compared to other major European economies, as it is dampened by state subsidies and price caps on essential goods like energy and fuel.

 

In France, the investment volume in commercial real estate for H1 2022 reached c.£9.5 billion (€11 billion), up by over 40% compared to the same period in 2021 and a strong bounce back especially in the second quarter. The majority of investors are French but we have seen increased interest from international investors for the larger cities.

 

At 30 June 2022, immediate supply in Greater Paris represented 4 million sqm, corresponding to an unchanged vacancy rate of 7.3%. The number of transactions recorded represents a slight increase (+3%) compared to the levels normally seen. The marked recovery seen in the small space segmented at the beginning of the year continued with take-up reaching 389,000 sqm over the first half of 2022. This is 11% higher than the long-term average. Oversupplied markets were once again la Défense (12.2%) and the Western Crescent (13.4%) while in the City of Paris the vacancy rate was below 4% in almost all the districts. This is also similar to the vacancy rate in Lyon, which has continued to perform strongly.

Key data

 

Rental Data

 

	Rental Income for the Period (£m)	Net Rental Income for the Period (£m)	Lettable Space (sqm)	Contracted Rent at 30 June 2022 (£m)	ERV at 30 June 2022 (£m)	Contracted Rent Subject to Indexation (£m)	EPRA Vacancy rate at 30 June 2022
UK	25.1	24.9	180,390	51.9	57.7	15.7	7.6%
Germany	17.3	16.4	338,234	42.0	46.4	27.4	7.5%
France	6.4	6.3	71,689	14.0	14.7	14.0	2.3%
Total Portfolio	48.8	47.6	590,313	107.9	118.8	57.1	6.9%

 

Valuation Data

 

		H1 Valuation Movement
	Market Value of Property (£m)	Underlying (£m)	Foreign Exchange (£m)	EPRA Net Initial Yield	EPRA Topped-up Net Initial Yield	Reversion	Over-rented	Equivalent Yield
UK	1,043.0	4.5	-	4.6%	4.8%	6.4%	3.7%	5.4%
Germany	933.4	2.7	21.6	3.8%	4.2%	10.4%	8.2%	4.4%
France	287.9	(6.1)	6.7	3.8%	4.4%	6.6%	3.9%	5.0%
Total Portfolio	2,264.3	1.1	28.3	4.2%	4.5%	8.0%	5.5%	4.9%

 

Lease Data

 

	Average Lease Length		Contracted Rent of Lease Expiring In:				ERV of Lease Expiring In:
	To Break (Years)	To Expiry (Years)	Year 1 (£m)	Year 2 (£m)	Years 3 - 5 (£m)	After 5 Years (£m)	Year 1 (£m)	Year 2 (£m)	Years 3 - 5 (£m)	After 5 Years (£m)
UK	3.2	4.0	3.8	5.6	28.9	13.6	4.0	5.5	30.0	13.7
Germany	4.7	4.8	8.9	6.7	14.6	11.8	10.2	6.8	14.5	11.5
France	2.5	4.9	1.6	1.5	3.1	7.8	1.5	1.4	3.1	8.4
Total Portfolio	3.7	4.4	14.3	13.8	46.6	33.2	15.7	13.7	47.6	33.6

Note: The above tables comprise data for investment property and properties held for sale. They exclude owner-occupied, student accommodation, hotel and land.

 

 

Tenant Industries by Contracted Rent   Government 25.7% Commercial and Professional Services 12.2% Information Technology 11.3% Consumer Discretionary 10.4% Communication Services 7.6% Industrials 7.0% Real Estate 5.9% Health Care 5.8% Other 5.1% Financials 4.8% Consumer staples 4.2%

Property use by rent Offices 88.6% Student 5.3% Hotel 3.9% Food/Retail 2.2%

 

 

 

Financial review

 

RESULTS FOR THE PERIOD

 

HEADLINES

 

Profit after tax of £17.3 million (30 June 2021: £8.8 million) generated basic earnings per share of 4.2 pence (30 June 2021: 2.2 pence) and EPRA earnings per share of 5.8 pence (30 June 2021: 5.4 pence), which was up 7.4% year on year resulting from lower foreign exchange losses, lower tax following REIT conversion, and higher income from our hotel and student operations, partly offset by higher expenses from a more normal level of bad debt charges due to a one off release of bad debt provisions in H1 2021. Gross property assets at 30 June 2022, including those in property, plant and equipment and those held for sale, increased to £2,399.7 million (31 December 2021: £2,331.3 million) through: net additions and capex of £47.0 million; foreign exchange increases of £28.3 million; and a revaluation increase of £3.4 million, partly offset by depreciation of £0.2 million and disposals of £10.1 million. Net assets per share rose by 0.8% to 329.2 pence (31 December 2021: 326.6 pence) and EPRA NTA per share by 0.7% to 352.8 pence (31 December 2021: 350.5 pence). Total accounting return including dividends paid in the period was 2.2% (30 June 2021: (0.8)%).

 

CLS uses a number of Alternative Performance Measures ('APMs') alongside statutory figures. We believe that these assist in providing stakeholders with additional useful information on the underlying trends, performance and position of the Group. Note 4 to these condensed set of Financial Statements gives a full description and reconciliation of our APMs, and sets out the full suite of EPRA measures.

 

STATEMENT OF COMPREHENSIVE INCOME

 

Net rental income for the six months to 30 June 2022 of £52.8 million (30 June 2021: £52.3 million) was higher than last year by 0.9% as a result of higher income from our hotel and student operations and higher dilapidations income.   Rent collection remained at the same, consistently high levels with 99% of first half rent collected and 98% of third quarter contracted rent due collected to date.

 

Operating profit of £27.2 million (30 June 2021: £34.9 million) was down £7.7 million year on year mostly due to three factors: firstly a slight increase in expenses due to a one off release of bad debt provisions in H1 2021 not repeating and higher staff costs partly offset by higher net rental income (£0.9 million); secondly, a slightly higher valuation increase offset by higher lease incentives (£3.2 million); and finally, a reduction in the value of our legacy equity holdings (£3.4 million). Lease incentives are higher almost entirely as we have signed a large number of new leases in Germany for which we do not spend capex in advance of a letting but instead capex spend is de-risked by being tied to the lease.

 

Net interest expense of £6.7 million (30 June 2021: £9.7 million), which was down £3.0 million, is comprised of three elements.  Net finance costs of £12.6 million (30 June 2021: £12.6 million) were unchanged year on year with CLS' lower cost of debt offsetting slightly higher debt amounts.  Finance income was higher with both interest income at £0.6 million (30 June 2021: £0.3 million) and the movement in the fair value of derivatives of £5.3 million (30 June 2021: £2.6 million) higher as a result of the increase in UK base rates.

 

The tax charge of £3.0 million (30 June 2021: £15.9 million) represented an effective rate of 14.7% (30 June 2021: 64.4%).  The comparable amounts and rates are impacted by two things: 1) the conversion of CLS' UK operations to a REIT at the start of 2022 which saved tax of over £1.0 million in the first half of 2022; and 2) the enactment in 2021 of an increase in UK corporation tax from 19% to 25% from 2023 onwards which increased deferred tax by £10.2 million in the first half of 2021.

 

EPRA NET TANGIBLE ASSETS PER SHARE

 

EPRA NTA per share rose from 350.5p to 352.8p in the six months to 30 June 2022, an increase of 2.3p per share or 0.7%. On a per share basis, the increase comprised EPRA earnings of 5.8p less the final dividend of 5.35p together with foreign exchange gains of 4.0p and the increase in property values of 0.8p less lease incentives of 1.7p and other negative movements of 1.2p.

 

 

DIVIDEND POST UK REIT CONVERSION

 

Following conversion to a UK REIT, the dividend will comprise two parts: 1) A Property Income Distribution ("PID") from the UK operations which fall under the REIT regime with the 2022 interim PID being 1.20 pence per share; and 2) A dividend from the remaining business with the 2022 interim being 1.40 pence per share.  It is expected that, as the UK business represents c.50% of CLS' operations and 90% needs to be paid out as a PID, the split between PID and remaining dividend will be approximately 45:55.

 

CASH FLOW, NET DEBT AND FINANCING

 

As at 30 June 2022, the Group had cash of £110.4 million (31 December 2021: £167.4 million) and £50.0 million (31 December 2021: £50.0 million) of undrawn facilities. The cash balance decreased by £57.0 million from 31 December 2021 given net investment in our portfolio. During the period, £32.1 million was paid for property acquisitions (including costs and a deposit) and we invested £25.9 million of capital expenditure in our properties partially offset by net receipts from disposals of £6.0 million. Net proceeds from new financing were £14.5 million and £16.1 million of loans were repaid. Net cash flow from operating activities was £19.3 million (30 June 2021: £21.9 million) which was used to pay the 2021 final dividend of £21.8 million.

 

In the six months to 30 June 2022, borrowings rose by £11.6 million to £1,043.2 million (31 December 2021: £1,031.6 million), principally due to a weaker pound increasing the value of debt denominated in Euros.

 

Net debt excluding leasehold liabilities at the half-year was £932.8 million and the Group's loan-to-value was 38.9% (31 December 2021: 37.1%). The weighted average cost of debt increased to 2.26% (31 December 2021: 2.22%) principally as a result of an increase in the UK base rate impacting UK floating rate debt. Despite bank rates increasing, there are still opportunities to offset these increases on the overall weighted average cost of debt in 2022 somewhat through the portfolio refinancing highlighted below and the expiry of some historical swaps. Weighted average debt maturity was 4.0 years (31 December 2021: 4.4 years).

 

The proportion of fixed debt to floating rate debt was 80%:20% (31 December 2021: 85%:15%). The proportion of floating rate debt has increased in the first half year following the expiry of four fixed rate loans, all in Germany, with an aggregate amount of £57.1 million, which have been extended on a short-term basis at floating rates. Three of these loans, amounting to £29.6 million, have been extended for 12 months with the aim to refinance at more favourable terms once the letting situations of the buildings have improved and one loan at £27.6 million has been extended for 24 months as the property is planned for sale. For the latter, a floating rate loan provides greater repayment timing flexibility due to no breakage costs should a sale progress sooner.

 

A quarter of the 20% floating rate debt, or c.5% of total debt, has interest rate caps in place.  These caps, all for French and German loans, are at a range of 0.5% to 1.5%, being on average 0.84% above 3 month EURIBOR of 0.30%.

 

CLS has 48 different loans secured by individual, or portfolios of, properties. The loans vary in terms of the number of covenants with the three main covenants being ratios relating to loan to value, interest cover and debt service cover. However, some loans only have one or two of these covenants, some have other covenants and some have none. The loans also vary in terms of the level of these covenants and the headroom to these covenants.

 

On average across the 48 loans, CLS has between 30% and 44% headroom for these three main covenants. In the event of an actual or forecast covenant breach, all of the loans have equity cure mechanisms to repair the breach which allow CLS to either repay part of the loan or deposit cash for the period the loan is in breach, after which the cash can be released.

 

CLS is in advanced discussions with lenders to refinance various loans due to mature within the next 12 months. With regard to 2022 and some 2023 refinancings, we have agreed terms to refinance a portfolio of six UK based assets for a new loan amount of circa £60 million, bank credit approval is in progress and the loan is expected to be drawn in Q4 2022. We have also had initial terms proposed and agreed in principle for three new loans to refinance three German assets for an aggregate amount of circa £71.4 million (€83 million), all of which are expected to complete in Q3 2022. Lastly, terms are being sought and lenders have been approached for a further two loans to refinance two French assets for an amount in the region of between £19-22 million (€22-25 million), with some initial terms received. Completion of the French loans is expected in early Q4 2022.

 

PRINCIPAL RISKS AND UNCERTAINTIES

A detailed explanation of the principal risks and uncertainties affecting the Group, and the steps it takes to mitigate these risks, can be found on pages 42 to 52 of the annual report and financial statements for the year ended 31 December 2021, which is available at www.clsholdings.com/investors.

 

The Group's principal risks and uncertainties are grouped into six categories: property; sustainability; business interruption; financing; political and economic; and people. These risks and uncertainties are expected to remain relevant for the remaining six months of the financial year, and these are discussed further below.

 

The Board has reviewed the risk status of each of the six risk categories, particularly with regard to the ongoing economic and geopolitical risks resulting from both Russia's invasion of Ukraine and Covid-19. As a consequence, we have highlighted that the risk for financing is increasing but that the risk for business interruption is reducing.  Nevertheless, the overall risk landscape remains heightened and we continue to be vigilant.  Of particular note is Germany's dependence on Russian gas and the potential impact on European GDP, and thus property demand, of reduced gas supply.

 

Work continues on implementing software to document, and help test, risks and internal controls with further progress expected by the end of the year. In the second half of the year, further external reviews and facilitated sessions are planned to help with assurance over these areas.

 

Principal risk	Status at year end	Change since year end	Commentary
Property	High	No change	Whilst hybrid working now seems to be established as the current pattern, property risk remains heightened given greater economic uncertainty and slower market activity. The risk of reductions in property values in the second half of 2022 (and the resultant impact on covenant headroom) has increased. In response, CLS is staying close to its tenants ensuring that it provides modern, flexible, quality and affordable offices with good amenities to meet occupier needs.
Sustainability	Medium	No change	Providing sustainable buildings remains a key priority for CLS both to meet regulatory demands but moreover to meet tenant and societal needs. CLS is committed to delivering its enhanced Sustainability Strategy including its 2030 Net Zero Carbon Pathway which can be found on the Group's website.
Business interruption	Medium	Reducing	Our IT infrastructure has stood up well to the demands of the last few years, including recent testing of back-up fail-over systems.  The risk is therefore reducing albeit we continue to maintain vigilance, particularly against cyber threats.
Financing	Medium	Increasing	As interest rates in most countries are increasing, often quite sharply, financing risk is also increasing.  As yet, there have been few increases in bank margins and limited lowering of loan to value ratios. As part of our potential mitigations, CLS is maintaining relationships, monitoring covenants and engaging early with upcoming refinancings. CLS has significant protection with 80% of debt fixed and substantial covenant headroom.
Political and economic	High	No change	The risk remains high given Russia's invasion of Ukraine and economic concerns over, and responses to, higher levels of inflation and slowing GDP. CLS has limited supply chain exposure but changes in construction prices will impact refurbishments costs. However, higher construction costs also support the values of existing buildings through higher replacement costs.
People	Medium	No change	Like many companies, we are still experiencing a higher level of staff turnover. We continue to respond by listening to our staff and acting on suggestions as well as holding events to reinforce our culture. Our first in-person staff conference since the pandemic later this year is particularly welcomed.

 

GOING CONCERN

 

The Directors' assessment of going concern uses the same methodology as for the preparation and validation of the year end viability statement (see page 53 of the 2021 Annual Report and Accounts). This assessment uses forecasts that have been adjusted for the impacts of Covid-19 and current economic forecasts. A more detailed description of the approach is set out in note 2 to these condensed Group financial statements.

 

The Directors consider that in their assessment there are no material uncertainties that would cast significant doubt on the ability of the Group to continue as a going concern and therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least 12 months from the date of this interim report.  Accordingly, they continue to adopt the going concern basis in preparing the condensed Group financial statements.

 

 

RESPONSIBILITY STATEMENT

 

We confirm that to the best of our knowledge:

a)   the condensed set of financial statements, which has been prepared in accordance with IAS 34 'Interim Financial Reporting', gives a true and fair view of the assets, liabilities, financial position and profit of the Group, as required by DTR 4.2.4R;

b)   the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the financial year); and

c)   the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

 

On behalf of the Board

 

 

 

Fredrik Widlund                       Andrew Kirkman

Chief Executive Officer              Chief Financial Officer

10 August 2022