PRESS RELEASE

 

Release date:                11 August 2021

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 2021

 

Well placed to grow through delivering operational improvements

 

CLS is a leading FTSE 250 office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a £2.3 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the half year ended 30 June 2021, the Group has delivered the following results:

 

	30 June 2021	31 December 2020	Change (%)
EPRA NTA per share (pence)1	337.2	345.2	(2.3)
EPRA NAV per share (pence)1	343.4	350.1	(1.9)
Statutory NAV per share (pence)1	303.0	311.9	(2.9)
Contracted rents (£'million)	109.9	107.9	1.9

 

	30 June 2021	30 June 2020	Change (%)
Profit before tax (£'million)	24.7	31.5	(21.6)
EPRA Earnings per share ('EPS') (pence)1	5.4	7.0	(22.9)
Statutory EPS from continuing operations (pence)1	2.2	5.3	(58.5)
Dividend per share (pence)	2.35	2.35	-

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

 

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"Over the course of 2019 and 2020, we undertook a significant reshaping of the portfolio, disposing of non-core assets while making acquisitions in strategic growth markets, particularly Germany, with the opportunity for active asset management. Equally significant, today we announce our new sustainability strategy which includes an ambitious set of long-term targets, including becoming net zero carbon by 2030. This fully costed plan is a critical aspect of how we will deliver space which meets our tenants' requirements including the increasing emphasis placed on environmental sustainability.

 

"Our first half 2021 performance has naturally been shaped by the pandemic with higher vacancy and stable property valuations. This was compounded by a strengthening of sterling which has resulted in lower NTA and earnings. We are hopeful we will see some improvements in the second half of the year as people continue to return to the office and our recent increased level of enquiries translates into letting deals. Our focus remains on delivering our value enhancement opportunities to ensure continued growth over the long-term."

 

 

FINANCIAL HIGHLIGHTS

·      EPRA NTA down 2.3% and EPRA NAV down 1.9% primarily as a result of foreign exchange reductions from strengthening sterling with the portfolio valuation flat in local currency

·      Like-for-like portfolio valuation up 0.2% in local currency with an increase in Germany of 1.5%, offset by declines in France of 0.1% and the UK of 0.5%

·      Profit before tax down 21.6% to £24.7 million (30 June 2020: £31.5 million) from investment property valuation decline of £2.8 million (30 June 2020: £2.7 million uplift) and FX reductions of £1.9 million (30 June 2020: £3.1 million gain) partly offset by cost savings

·      EPRA EPS down 22.9% from foreign exchange reductions, lower income from our hotel and student operations and lower dilapidations income. Statutory EPS down 58.5% due to increased deferred tax liabilities following the enactment of the change in future UK corporation tax rate from 19% to 25%

·      Interim dividend maintained at 2.35 pence per share (30 June 2020: 2.35 pence per share) to be paid on 24 September 2021.

·      Total accounting return of (0.8)% (30 June 2020: 4.6%)

 

OPERATIONAL HIGHLIGHTS

·      Rent collection remained high with 99% of first half rent collected and 97% of third quarter contracted rent due collected to date.  Continued high rent collection has led to a slight reduction in bad debt provisions

·      Net rental income decreased by 7.4% to £52.3 million (30 June 2020: £56.5 million) as a result of foreign exchange reductions, lower income from our hotel and student operations and lower dilapidations income

·      Acquired six properties for £164.8 million, three of which had exchanged in 2020.  The five properties in Germany and one in the UK were bought for their asset management opportunities at a combined net initial yield of 3.9% and a reversionary yield of 6.1%

·      Completed the disposal of four properties for £15.5 million, two of which had exchanged in 2020.  Exchanged on a further two disposals for £10.9 million which have both completed following the period end

·      Completed 53 lease events (30 June 2020: 52) securing £5.2 million (30 June 2020: £7.8 million) of annual rent. Excluding the Veolia lease in France, the lettings were at 1.2% above 31 December 2020 Estimated Rental Value

·      Vacancy rate increased to 7.7% (31 December 2020: 5.1%). Most of this increase was due to the vacancy acquired with the recent German acquisitions with some increase from expiries running ahead of lettings

 

FINANCING

·      Weighted average cost of debt at 30 June 2021 down six basis points to 2.22% (31 December 2020: 2.28%)

·      Loan-to-value at 38.1% (31 December 2020: 33.7%) reflecting net acquisitions in the period.  Gross debt of £1,058.7 million (31 December 2020: £977.0 million) with cash of £168.7 million (31 December 2020: £235.7 million) and £50.0 million (31 December 2020: £50.0 million) of undrawn facilities

·      Second long-term, 'green' loan secured for £61.7 million with Scottish Widows at 2.65% fixed interest rate for 12 years - c.20% of CLS' loan portfolio is now 'green'.  Weighted average debt maturity of 4.6 years (31 December 2020: 4.6 years)

·      In the first half of 2021, financing of c.£145 million at 1.76% for 6.9 years secured across five German SPV loans and one UK portfolio loan.  Discussions advanced for the remaining £52.4 million financing due in 2021

·      The loan portfolio as at 30 June 2021 had 86% at fixed rates (31 December 2020: 84%)

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

·    Today published a new sustainability strategy and calibrated a set of ambitious but achievable long-term targets following asset level reviews. These carbon reduction targets, which include our Net Zero Carbon Pathway and CLS' commitment to become Net Zero Carbon by 2030, have been verified by the Science Based Targets Initiative

·    Increased CLS' solar electricity generation capacity by 48% through the installation of a new UK solar array.  Completed asset-level climate change risk assessments for all our French assets with the UK and Germany to be completed shortly.  On course to achieve margin reduction targets for Aviva and Scottish Widows' loans

·    Worked in partnership with the Social Value Portal to calibrate a Social Value Framework that CLS will adopt to start measuring the social value we produce as a business beyond shareholder value

 

Interim Dividend Timetable

Further to this announcement, in which the Board declared an interim dividend of 2.35 pence per ordinary share, the Company confirmed its dividend timetable as follows:

 

 

Announcement date	11 August 2021
Ex-Dividend date	19 August 2021
Record date	20 August 2021
Payment date	24 September 2021

 

-ends-

 

Results presentation

 

A presentation for analysts and investors will be held by webcast and conference call on Wednesday 11 August 2021 at 9.00am followed by Q&A. Questions can be submitted either online via the webcast or to the operator on the conference call.

 

Webcast: The live webcast will be available here:

https://secure.emincote.com/client/cls/cls003

 

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/cls003/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

 

Elm Square Advisers Limited

Jonathan Gray

+44 (0)20 7823 3695

 

Smithfield Consultants (Financial PR)
Alex Simmons

Rob Yates

+44 (0)20 3047 2546

 

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

 

Well placed to grow through delivering operational improvements

 

OVERVIEW

 

CLS continues to perform well in a market that remains challenging due to the ongoing impacts of Covid-19.  Investment, and especially letting, markets have yet to return to pre-pandemic levels although we are seeing increasing levels of activity.  Our focus on our tenants remains absolute and that investment in relationships is reaping rewards.

 

As with 2020, rent collection remained high with 99% of first half rent and 97% of third quarter contracted rent due collected as of the date of this report. Of the 785 tenants across our three countries, approximately 23.7% of rents are paid by governments and 26.5% by major corporations with 50.2% of rents subject to indexation. The benefits of a diverse tenant base with strong credit ratings and a limited exposure to those sectors that have been most affected by the pandemic is reflected in the strong rent collection performance.

 

Over the six months, EPRA NTA decreased by 2.3% to 337.2p per share (31 December 2020: 345.2p) mainly as a result of foreign exchange movements due to sterling strengthening whilst property valuations were flat with continued growth in Germany offset by weakness in the UK. Total accounting return for the six months was (0.8)% (2020: 4.6%).

 

The first few months were busy with six acquisitions completed for £164.8 million before costs and four small disposals for £15.5 million.  We delivered 347,355 sq. ft (32,270 sqm) of lettings and renewals and the financing of c.£145 million of bank loans.  This activity together with a greater focus on operational activity leaves CLS well-placed.

 

Our portfolio also remains well-placed in terms of: great locations; the potential to capture the reversionary up-lifts from vacancy, under renting and selected refurbishment and development; and the ability to provide tenants with modern, flexible, high-quality space. Come the autumn as workers return, the attractions of the office will again be proved.

 

RESULTS AND FINANCING

 

Profit after tax for the six months to 30 June 2021 was £8.8 million (2020: £21.6 million), equivalent to earnings per share of 2.2p (2020: 5.3p). The reduction was as a result of a property valuation decline of £2.8 million (30 June 2020: £2.7 million uplift), FX reductions of £1.9 million (30 June 2020: £3.1 million gain) and increased deferred tax of £10.2 million from the enactment of the 2023 UK corporation tax rise from 19% to 25% partly offset by cost savings. EPRA earnings per share were 5.4p (2020: 7.0p), 22.9% down on last year.

 

Shareholders' funds fell in the six months by 2.8% to £1,234.6 million reflecting the strengthening of sterling and the payment of the final dividend in April.

 

Our balance sheet liquidity remains strong with £168.7 million (31 December 2020: £235.7 million) of cash and £50.0 million (31 December 2020: £50.0 million) of undrawn facilities. We were pleased to execute our second 'green' loan with Scottish Widows with the remaining financing activity for 2021 well advanced.  Our weighted average cost of debt fell to 2.22% (31 December 2020 2.28%) reflecting the increased proportion of lower cost Euro-dominated debt. Net debt excluding leasehold liabilities rose to £882.1 million (31 December 2020: £735.0 million) and loan-to-value rose to 38.1% (31 December 2020: 33.7%) reflecting net acquisitions in the period. Interest cover remained high at 3.2 times (30 June 2020: 3.5 times) demonstrating the Group's ongoing ability to generate cash.

 

 

PROPERTY PORTFOLIO

 

At 30 June 2021, the value of the property portfolio, including those within property, plant and equipment and properties held for sale, was £2,317.6 million, £134.6 million higher than six months earlier, driven by acquisitions of £177.2 million including costs and capital expenditure of £18.9 million offset by foreign exchange reductions of £45.6 million, disposals of £15.1 million and a small revaluation loss of £0.8 million.

 

As previously highlighted, it was a busy start to the year in terms of acquisition activity, and the associated financing, with the completion of the six acquisitions, five in Germany and one in the UK, which had exchanged at the turn of the year, for c.£165 million.  The acquisitions were bought for their asset management opportunities at a net initial yield of 3.9% and a reversionary yield of 6.1%.  We are already starting to execute new lettings to capture this reversionary potential through rent increases and vacancy reduction.

 

Selective disposal activity is also taking place targeting smaller properties with higher alternative use values and/or less growth potential.  Four properties, two in the UK, one in Germany and one in France, were sold for £15.5 million, two of which had exchanged in 2020. In the first half we also exchanged on a further two disposals for £10.9 million (one in Hounslow, UK and one in Wiesbaden, Germany) which completed following the period end.  In total, the six properties were sold for a net initial yield of 4.4%.

 

In the second-half, we expect to continue with selective disposals of smaller properties to drive higher growth from the portfolio. All of this transactional activity is part of a repositioning of the portfolio to allow us to deliver value through active asset management.

 

In the six months to June, the like-for-like valuation of the property portfolio, which excludes acquisitions, rose by 0.2% in local currency with a continued strong performance in Germany up 1.5% offsetting a decline in the UK of 0.5% and a virtually flat performance in France at (0.1)%. Including acquisition costs, the portfolio valuation was flat. At 30 June 2021, the net initial yield of the portfolio was 4.3% (31 December 2020: 4.6%), 206 basis points above the Group's cost of debt, underpinning the Group's ability to generate cash.

 

The EPRA vacancy rate as at 30 June 2021 was 7.7% (31 December 2020: 5.1%) primarily driven by the vacancy acquired with the German acquisitions and, to a lesser extent, by lease expiries being ahead of lettings as pandemic restrictions limited tenant viewing opportunities.  We expect letting activity to pick up in the second-half, particularly in Germany, as we are seeing increased tenant enquiries following the lifting of lockdown.

 

DIVIDENDS

 

In September, the Group will pay an interim dividend for 2021 of 2.35 pence per share, which is at the same level as the 2020 interim dividend.

 

ENVIRONMENT, SOCIAL AND GOVERNANCE

 

With the importance of sustainability reporting growing and the introduction of TCFD this year, we have decided to replace our annual sustainability report with an enhanced sustainability section within our annual company report and accounts starting with the 2021 report. Today we are publishing our new sustainability strategy and Net Zero Carbon Pathway, which outlines our plan for CLS to navigate a decade that will be defined by the impacts of climate change.

 

Our biggest sustainability achievement so far in 2021 has been the completion of our Net Zero Carbon Pathway, for which we took an evidence-based approach through undertaking a program of asset-level energy audits to obtain the technical and cost data for each property to achieve energy and carbon savings. We also employed a specialist consultant to compile our Scope 3 emissions baseline to ensure we had a full picture of the carbon footprint of our business. Our technical assessments have provided us with an estimated total capital expenditure spend of up to £58 million until 2030 to deliver the full programme. We are currently in the process of refining our model to scrutinise the technical and commercial feasibility of each opportunity, and determine the optimal time to deliver each project over the coming years.  This will confirm the year-on-year capital expenditure investment and estimated carbon performance split between the amounts which will be recoverable through service charges, which are part of our normal annual capital expenditure programmes of c.£20 million and which amounts are additional.

 

Incorporated within our Net Zero Carbon model are 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 during this crisis, with our core focus being to support the issues of homelessness, food poverty, and youth unemployment. In March, a CLS team participated in the SleepOut for LandAid event to raise money for, and awareness of, youth homelessness. In addition, we have supported local food banks in Vauxhall and Hamburg, and sponsored the Levallois Young Readers prize in Paris for the third consecutive year.

 

OUTLOOK

 

The benefits of being active in the three largest economies in Europe, our focused strategy and business model, and our long-term commitment to driving shareholder value continue to be demonstrated. With the easing of the majority of lockdown measures in our three country markets, we expect activity to see a pronounced pick-up in the rest of the year. Our balance sheet remains resilient which supports our transactional activity. These transactions will remain opportunistic with some selective disposals likely in the second-half.

 

Whilst we expect the return to offices will support increased activity, we also recognise that the market has become more discerning in terms of the space that is sought after. CLS is continuing to focus on its tenants by providing modern, quality space with great amenities and facilities and, as announced today, sustainability improvements continue to be made.  We also recognise that space and leases need to remain flexible all while providing well-located buildings at affordable rents.

 

The second half of the year will see a greater emphasis on driving operational improvements through reduced vacancy in our portfolio and increased occupancy at our Spring Mews student and hotel operations. In addition, the delivery of major refurbishments and progress on our developments provides the opportunity to capture additional ERV of £11.5 million in the portfolio over the next two years. In the first half, we made some cost rationalisations to improve the efficiency of the business and also made a number of well deserved, internal promotions thereby allowing us to strengthen our senior leadership team further. We will be holding a Capital Markets Day in November at which these leaders, among others, will be presenting to our investors and analysts. We are looking forward to improved operating performance in the second half of the year and going into 2022.

 

 

Our investor proposition

 

Strong and consistent long-term shareholder returns

 

Set out below are the key tenets of our investment proposition.  A full description can be found on pages 10 and 11 of CLS' 2020 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.

 

It is our policy to pay a progressive dividend, fully covered by EPRA earnings. Approximately one-third of the annual dividend is paid as an interim in September, 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; Peel Hunt; and Berenberg. 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 2021 Annual Results presentation Annual Results investor calls   April 2021 Trading update Annual General Meeting	August 2021 Half-Year Results presentation   August/September 2021 Half-Year Results investor calls   November 2021 Trading Update and Capital Markets Day in London

 

 

 

Business review

 

United Kingdom

 

Confidence and deal activity returning as vaccine roll-out progresses

 

	30 June 2021	31 December 2020
Value of properties	£1,143.1m	£1,125.7m
Percentage of Group's property interests	49%	52%
Number of properties	45	47
Number of tenants	243	256
EPRA vacancy rate	7.3%	5.9%
Lettable space	2.1m sq. ft	2.2m sq. ft
Government and major corporates	63.1%	62.8%
Weighted average lease length to end	4.6 years	4.7 years

 

The value of the UK portfolio increased by £17.4 million as a result of: net additions of £23.8 million (one acquisition for £17.9 million including costs and capital expenditure of £11.8 million partly offset by two disposals for £5.9 million) and a valuation loss of £6.4 million or 0.6% in local currency. The like-for-like valuation decrease, which excludes the acquisition costs, was 0.5%. The valuation decline was as a result of increased vacancy more than offsetting a marginal increase in ERVs and a slight decline in net initial yields.

 

The acquisition of Radius House, Watford, which had exchanged in December 2020, completed in January 2021 for £17.9 million. The building is fully let to four tenants with a WAULT of 8.1 years and a net initial yield of 5.6%. Half of the rent is contracted to a UK Government department until 2030 without break, offering secure long-term income.

 

In July, construction started on the 28,500 sq. ft new office development at Vauxhall Walk. The 10-storey building, which is targeting a minimum 20% profit on cost, is forecast to complete in the first quarter of 2023.  At St. Cloud Gate, Maidenhead, final detailed designs are being worked up alongside gauging occupier interest.  We are also in the midst of a major refurbishment at 9 Prescot Street, Aldgate with clear out completing before commencing the construction and fit-out works for the BREEAM Excellent space we will be creating here. In addition, refurbishments are ongoing to create attractive, contemporary and flexible office space at Apex Tower, Hygeia and Reigate (which completed in July).  Where flexible space is additive to our existing offerings, we are rolling out further Base Office floors on a selective basis.

 

Two disposals, which had exchanged in 2020, completed in the period for £5.9 million.  The disposals at Atholl House in Aberdeen and Quest House in Hounslow were at book value. In the second half of the year we expect further disposals of properties which have limited growth potential for CLS as they are small and/or have more valuable alternative uses.  In July, we completed the sale of Falcon House, Hounslow for £6.1 million being a 22% profit on sale compared to the 2020 year-end valuation.

 

Vacancy increased within the period from 5.9% to 7.3% largely as a result of weak letting conditions at the start of the year which gradually improved throughout the period.  As a result, 165,784 sq. ft (15,402 sqm) of expired or vacated space was ahead of 62,521 sq. ft (5,808 sqm) of space which was let or renewed at values ahead of year-end ERVs. The most significant transactions were a new 10-year lease with RSM Management at Priory Place, Chelmsford for 5,637 sq. ft (524 sqm) and a 10-year lease extension for 5,693 sq. ft (529 sqm) renewal at Hygeia, Harrow with Coyle Personnel.

 

The UK economy experienced an unprecedented drop in GDP in 2020 of c.9%.  However, the success of the furlough scheme, which limited unemployment, and the vaccine roll-out means that GDP growth is forecast at 7% in 2021 with the economy to return to its pre-pandemic size in early 2022.

 

In 2021, the UK property market started the year sluggishly but activity started to increase with the gradual easing of lockdown and increased vaccinations.  While the commercial investment market at £23 billion was up 15% year on year and the South-East market volume at £1.5 billion was up on the 5 and 10-year averages, both were distorted by some exceptionally large transactions, without which volumes were more in-line with recent levels of activity.  Volumes though are forecast to increase in the second half. The letting market was more subdued and whilst Greater London and the South East office letting volume of c.1.8 million sq. ft in H1 2021 was up 67% year on year, this was still down on the 10-year average.

 

 

Germany

 

Markets supported by favourable supply and demand dynamics

 

	30 June 2021	31 December 2020
Value of properties	£880.2m	£747.7m
Percentage of Group's property interests	38%	34%
Number of properties	33	29
Number of tenants	369	311
EPRA vacancy rate	9.3%	3.6%
Lettable space	3.6m sq. ft	3.0m sq. ft
Government and major corporates	33.4%	32.4%
Weighted average lease length to end	4.9 years	5.2 years

 

The value of the German portfolio increased by £132.5 million as a result of: net additions of £159.3 million (five acquisitions for £159.3 million (including costs) and capital expenditure of £4.1 million partly offset by one disposal for £4.1 million); foreign exchange valuation decline of £32.7 million; and a valuation gain of £5.9 million or 0.7% in local currency. The like-for-like valuation increase was 1.5%, which excludes the acquisition costs but also the valuation uplifts on these acquisitions which increased by 2.8% since purchase. The portfolio valuation increased as a result of a slight decrease in net initial yields with ERVs flat.

 

The first half was a particularly busy period for acquisitions with the completion of five purchases in Berlin, Hamburg, Dusseldorf and Essen for £159.3 million (two of which for £70.2 million had exchanged in December last year).  The net initial yield was 3.8% with a reversionary yield of 5.9%.  This considerable upside is as a result of acquiring vacancy in three of the buildings as well under renting which CLS intends to capture through our active asset management model.

 

We are progressing our development at Vor dem Lauch, Stuttgart (now renamed Lichthof Stuttgart) by seeking a substantial pre-let and negotiating a construction contract conditional on the pre-let.

 

While expanding the portfolio through acquisitions, on a selective basis we are also selling smaller properties. In the first half, we sold Frohbosestrasse in Hamburg for £4.1 million. The sale of Kreuzberger Ring in Wiesbaden exchanged in the first half and completed in July for £4.8 million. Combined, the sales were at a 4.1% net initial yield.

 

Vacancy increased significantly within the period from 4.0% to 9.3% largely as a result of acquired vacancy which added 4.0% on a pro forma basis at the point of acquisition but as a result of letting activity since purchase, this fell to 3.8%. In addition in the period, 220,953 sq. ft (20,527 sqm) of space expired or was vacated and 189,585 sq. ft (17,613 sqm) was let or renewed at values slightly ahead of year-end ERVs. The most significant transactions were a new seven-year letting for 12,766 sq. ft (1,186 sqm) to Landersverband at Connect, Cologne and a three-year lease extension to 2028 for 36,447 sq. ft (3,386 sqm) with Naturstrom at Parsevalstrasse, Dusseldorf. The letting pipeline is looking promising with advanced discussions taking place for around half of the vacancy.

 

Most of the pandemic restrictions have been lifted since the end of June and Germany has made accelerating progress on the vaccination campaign with over half of the adult population now having received two jabs. The IFO-business climate is showing greater confidence with German industry now back to pre-Covid levels, and services and retail are picking up as well. GDP growth of c.3.5% is expected for 2021 and unemployment has started to decrease and is expected to drop further in the second half.

 

Investment transactions in commercial properties in the first-half totalled €22 billion, close to the levels seen in record years and showing increased momentum.  However, there was considerable variability between the cities in the second quarter with volumes down 46% in Hamburg but up 97% in Munich. Overall, 2021 investment volumes are expected to be above the 10-year average at c.€55 billion.

 

In the first half of 2021 take-up of office space in the top seven cities was 1.2 million sqm, which was marginally up on last year but below the 10-year average. Larger lettings are still scarce and hesitation remains amongst the larger corporations hence the vacancy rate has increased to 4.2% from 3.8% at the end of 2020. Again, there is a mixed picture across the major cities with considerable variability in activity which is also reflected in vacancy rates which are above 7% in Frankfurt and 6% in Dusseldorf but at or below 4% in the other five major cities. Take-up is likely to revive with forecasters estimating a busy second half of the year.
 

France

 

Engaged in selective capital expenditure works to upgrade our existing portfolio

 

	30 June 2021	31 December 2020
Value of properties	£294.3m	£309.6m
Percentage of Group's property interests	13%	14%
Number of properties	20	21
Number of tenants	173	176
EPRA vacancy rate	4.0%	5.1%
Lettable space	0.8m sq. ft	0.9m sq. ft
Government and major corporates	46.4%	45.1%
Weighted average lease length to end	5.0 years	4.9 years

 

The value of the French portfolio decreased by £15.3 million as a result of: net reductions of £2.1 million (one disposal for £5.1 million offset by capital expenditure of £3.0 million); foreign exchange valuation decline of £12.9 million; and a valuation loss of £0.3 million or 0.1% in local currency. Overall, there was little valuation movement for the French portfolio with a reduction in ERVs mostly offset by a slight decline in net initial yield.

 

There were few attractive acquisition opportunities in the first half and consequently we continued to focus on our ambitious redevelopments and important refurbishments as highlighted in our reporting last year.  The most significant capital expenditure in the first half was at Park Avenue, Lyon, where a renovation of internal accommodation areas followed by the refurbishment of the façade and common areas is taking place over this year and the next.  Across the portfolio, additional works are taking place to upgrade facilities and amenities, and we expect similar or greater levels of capital expenditure in the second half.

 

Continuing with our strategy of disposing of properties which are too small to have a meaningful impact and/or have little asset management potential to drive growth, we sold Gennevilliers in Paris for £6.0 million, of which £5.5 million was received in June and £0.5 million to be received in the second half of the year. The disposal represented a profit on sale of £0.3 million or 6.3% increase compared to the 2020 year-end valuation.  We expect further limited disposals in the second half.

 

Letting activity picked up in the first half from previously subdued levels and while 80,718 sq. ft (7,499 sqm) of space expired or was vacated, 95,250 sq. ft (8,849 sqm) was let or renewed. As a consequence, the vacancy rate fell to 4.0% by the end of June (31 December 2020: 5.1%). The most significant transaction was a lease renewal at Inside, Paris to Veolia for at least 4.5 years. Veolia has taken additional space under the renewal and now occupies over half of the property, which has resulted in the building being fully let.  Excluding this deal, lettings were in line with year-end ERVs. A major new 3/6/9-year letting of 6,988 sq. ft (649 sqm) was also made to Apside-Advance, at Sigma in Paris.

 

In May, most pandemic restrictions were released with around half of the adult population now fully vaccinated.  Since the end of the lockdown, the economy has been recovering quite strongly especially in the industrial sector. GDP growth for 2021 has consequently been revised upwards and should be in the region of 5.8% in 2021 although unemployment is expected to peak this year before falling next.

 

The performance of the property market is varying across France with regions such as Lyon and central Paris performing more strongly whereas the Parisian suburbs are weaker particularly the Western Crescent with significant vacancy. Small to medium size companies are more active but government institutions seem to be waiting for the outcome of elections next year.

 

In the first half of 2021, letting activity in the Greater Paris region reached 0.8 million sqm which was up by 14% year on year but down on its long-term average.  Commercial real estate investment volumes in France reached €8 billion which was a decline of 11% compared to 2020.  Most forecasters consider that the second half of 2021 should be active both in terms of letting and investment.

 

 

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 2021 (£m)	ERV at 30 June 2021 (£m)	Contracted Rent Subject to Indexation (£m)	EPRA Vacancy rate at 30 June 2021
UK	26.8	28.8	196,765	55.8	62.3	14.2	7.3%
Germany	16.4	16.2	336,298	39.7	46.2	26.6	9.3%
France	7.4	7.3	78,632	14.4	15.2	14.4	4.0%
Total Portfolio	50.6	52.3	611,695	109.9	123.7	55.2	7.7%

 

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	1,020.0	(7.6)	-	4.7%	5.0%	6.6%	3.2%	5.7%
Germany	876.0	5.9	(32.5)	3.9%	4.2%	11.7%	6.1%	4.4%
France	292.4	(0.3)	(12.8)	3.8%	4.5%	5.7%	4.4%	5.1%
Total Portfolio	2,188.4	(2.0)	(45.3)	4.3%	4.6%	9.0%	4.4%	5.1%

 

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	3.4	4.6	3.8	5.1	32.4	14.5	4.0	5.3	33.8	14.6
Germany	4.7	4.9	8.3	4.8	14.1	12.5	8.4	6.0	14.5	13.0
France	2.6	5.0	0.5	1.7	4.9	7.3	0.6	1.6	5.1	7.3
Total Portfolio	3.8	4.7	12.6	11.6	51.4	34.3	13.0	12.9	53.4	34.9

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 23.7% Commercial and Professional Services 12.2% Information Technology 11.3% Consumer Discretionary 10.0% Industrials 8.9% Communication Services 8.5% Other 8.2% Health Care 6.1% Real Estate 6.1% Financials 5.0%

Property use by rent Offices 93.0% Student 3.0% Hotel 2.0% Food Retail 2.0%

 

 

 

 

Financial review

 

RESULTS FOR THE PERIOD

 

HEADLINES

 

Profit after tax of £8.8 million (2020: £21.6 million) generated statutory earnings per share of 2.2 pence (2020: 5.3 pence) and EPRA earnings per share of 5.4 pence (2020: 7.0 pence), which was down 22.9% year on year resulting from foreign exchange reductions and lower net rental income partly offset by lower administration and other expenses. Gross property assets at 30 June 2021, including those in property, plant and equipment and those held for sale, increased to £2,317.6 million (31 December 2020: £2,183.0 million) through net additions and capital expenditure of £181.0 million reduced by foreign exchange reductions of £45.6 million and a small revaluation decline of £0.8 million. Net assets per share fell by 2.9% to 303.0 pence (31 December 2020: 311.9 pence) and EPRA NTA per share by 2.3% to 337.2 pence (31 December 2020: 345.2 pence). Total accounting return including dividends paid in the period was (0.8)% (30 June 2020: 4.6%).

 

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 2021 of £52.3 million (2020: £56.5 million) was lower than last year by a net £4.2 million, or 7.4%, as a result of lower hotel and student revenue due to Covid-19 and lower dilapidations income. The table below sets out our rent collection across our countries and the Group in the first half and the third quarter of 2021 as at the date of this report:

 

Business segment	First half 2021	Third quarter 2021
	Headline	Adjusted	Headline
UK	98%	96%	93%
Germany	99%	99%	99%
France	98%	99%	95%
Group	99%	97%	94%

Note: Adjusted Q3 2021 rent includes agreed quarterly to monthly changes which have been agreed for c.7% of our tenant base

 

Operating profit of £36.3 million (2020: £41.9 million) was down year on year due to the shortfall in net rental income described above and the revaluation losses on investment properties of £2.8 million (2020: Gain £2.7 million) offset by reductions in administration and other expenses which was down to £13.5 million (2020: £17.1 million).  Part of this expense reduction was from the release of a proportion of the bad debt provision as a result of continuing high rent collection.

 

The increase in net interest expense to £11.6 million (2020: £10.4 million) contained £1.9 million of negative foreign exchange variances (2020: £3.1 million positive) from translating monetary assets into sterling at the balance sheet date offsetting the positive movement on financial instruments of £2.6 million (2020: £2.3 million negative).

 

The tax charge of £15.9 million (2020: £9.9 million), which represented an effective rate of 79.1% (2020: 31.3%) was distorted in 2021 by the enactment of an increase in UK corporation tax from 19% to 25% from 2023 onwards which increased deferred tax by £10.2 million. Without this, the estimated effective tax rate of the Group in 2021 would have been 28.4%.

 

EPRA NET TANGIBLE ASSETS PER SHARE

 

EPRA NTA per share fell from 345.2p to 337.2p in the six months to 30 June 2021, a decrease of 8.0p per share or 2.3% (EPRA NAV fell by 1.9%). On a per share basis, the decrease comprised EPRA earnings of 5.4p from which a dividend of 5.2p was paid together with foreign exchange reductions of 6.4p, the reduction in property values of 0.4p and other net negative movements of 1.4p.

 

 

CASH FLOW, NET DEBT AND FINANCING

 

As at 30 June 2021, the Group had cash of £168.7 million (31 December 2020: £235.7 million) and £50.0 million (31 December 2020: £50.0 million) of undrawn facilities. The cash balance decreased by £67.0 million from 31 December 2020 given net investment in our portfolio. During the period, £163.9 million was paid for property acquisitions (including costs) and we invested £19.7 million of capital expenditure in our properties offset by net receipts from disposals of £17.7 million. Net proceeds from new financing were £143.5 million and £44.7 million of loans were repaid. Net cash flow from operating activities was £21.9 million (2020: £21.6 million) which was used to pay the 2020 final dividend of £21.2 million.

 

In the six months to 30 June 2021, borrowings rose by £80.1 million to £1,050.8 million (31 December 2020: £970.7 million), principally due to net loans drawn for new acquisitions. The most notable financing in the first half was CLS' second long-term, 'green' loan secured for £61.7 million with Scottish Widows at 2.65% fixed interest rate for 12 years including a 10 basis point sustainability margin incentive. As a result, approximately 20% of CLS' loan portfolio is now 'green' and we are on target to achieve the first-year margin reduction targets under the Aviva and Scottish Widows' loans.

 

Net debt excluding leasehold liabilities at the half-year was £882.1 million and the Group's loan-to-value was 38.1% (31 December 2020: 33.7%). The weighted average cost of debt decreased to 2.22% (31 December 2020: 2.28%) as a result of the greater proportion of lower cost Euro denominated loans. Weighted average debt maturity was 4.6 years (31 December 2020: 4.6 years) and the proportion of fixed debt to floating rate debt was 86%:14% (31 December 2020: 84%:16%).

 

CLS has 48 different loans either 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 27% and 49% 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 has started to engage with its finance providers regarding the transition away from LIBOR by the end of 2021. At this stage we do not expect any issues or overall change in pricing.

 

 

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 54 to 62 of the annual report and financial statements for the year ended 31 December 2020, 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 direct and indirect effects of Covid-19. Particularly noteworthy is the progress being made with the vaccination programmes in each of our operating countries which, taken together with a general easing of lockdown restrictions, is resulting in a pick-up in economic activity. However, we believe that it is still too early to be sufficiently clear as to some of the long-term impacts as well as ongoing concerns regarding Covid-19 variants and consequently we have left the status of our six risks as unchanged from those at the 2020 year end.

It is hoped that the risk level for some of the risk categories will be reduced by the year end. However, as noted below, the focus on some of the risks (especially property and sustainability) remains heightened and thus increased mitigating actions are being taken. The status of all risks will be reassessed at the 2021 year end when further clarity is expected.

 

Principal risk	Status at year end	Change since year end	Commentary
Property	High	No change	Whilst the hybrid occupation market is now accepted, it is as yet not fully clear what this means in practice. To ensure that we can meet changing needs, CLS continues its focus on tenants by providing modern, flexible, quality and affordable space with good amenities.
Sustainability	Medium	No change	There is continuing increased global focus in this area. CLS remains committed to improving the sustainability of our properties and has today published its enhanced Sustainability Strategy including its Net Zero Carbon Pathway which can be found on the Group's website.
Business interruption	Medium	No change	Our robust IT infrastructure meant that we responded well to the changes necessitated by Covid-19, especially home working. Overall these changes resulted in little impact to the Group's productivity and performance.
Financing	Medium	No change	In our markets, the appetite and support of lenders remains good but continues to depend on the quality of the property, letting history and covenant strength.  Maintaining our strong lending relationships across multiple, diversified finance providers remains a key strength of the Group particularly if markets are more volatile.
Political and economic	High	No change	Strong levels of government spending and monetary measures from central banks together with the roll-out of vaccines have helped mitigate some of the impact of Covid-19, leading to improved GDP forecasts for 2021 and 2022.  However, Covid-19 variants still pose a threat and the level of future fiscal corrective measures needed to return to a post pandemic "normal" is unclear.
People	Medium	No change	There has been little change in our people risk. The positive results from our 2020 employee survey (discussed in the 2020 annual report) have been discussed with staff and the recommendations have been progressed in conjunction with our Workforce Advisory Panel.

 

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 63 of the annual report and financial statements for the year ended 31 December 2020). This assessment uses forecasts that have been adjusted for the impacts of Covid-19. 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

11 August 2021