REG - CLS Holdings PLC - Annual Financial Report
08/03/2023 07:15
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RNS Number : 2713S CLS Holdings PLC 08 March 2023
CLS HOLDINGS PLC
("CLS", the "Company" or the "Group")
ANNOUNCES ITS UNAUDITED ANNUAL RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2022
The best offices in our locations
CLS is a leading FTSE250 office space specialist and a supportive, progressive
and sustainably focused commercial landlord, with a c.£2.35 billion portfolio
in the UK, Germany and France, offering geographical diversification with
local presence and knowledge. For the year ended 31 December 2022, the Group
has delivered the following results:
UNAUDITED 31 December Change (%)
2022 2021
EPRA Net Tangible Assets ("NTA") per share (pence) ¹ 329.6 350.5 (6.0)
Statutory NAV per share (pence)¹ 307.3 326.6 (5.9)
Contracted rents (£'million) 110.2 107.6 2.4
(Loss)/profit before tax (£'million) (82.0) 91.5 NM (2)
EPRA Earnings per share ("EPS") (pence) ¹ 11.6 11.3 2.7
Statutory EPS from continuing operations (pence) ¹ (20.2) 29.3 NM (2)
Dividend per share (pence) 7.95 7.70 3.2
Notes: ¹ A reconciliation of statutory to alternative performance measures is
set out in Note 6 to the financial statements (2) Not Meaningful
Fredrik Widlund, Chief Executive Officer of CLS, commented:
"Against the backdrop of a challenging economy and uncertain property market,
CLS has delivered solid and resilient results ahead of market expectations
with lower relative valuation and NTA declines, reflecting the quality and
locations of our properties and higher EPRA earnings.
"Over the last year, we have continued to invest in our properties to make
them sustainable and attractive to tenants and ensure that we have the best
offices in our locations. With the economic outlook and monetary policy
conditions across our markets remaining uncertain, our focus in 2023 is to
optimise our planned refinancings and leverage our in-house asset management
capabilities to reduce vacancy rates, which will position the company well for
the future."
FINANCIAL HIGHLIGHTS
· EPRA NTA down 6.0% primarily as a result of property valuation
declines of 2.6% in Group currency (5.3% in local currencies), partially
offset by increased EPRA earnings
· Portfolio valuation down 5.3%% in local currencies, better than
the declines in the market reflecting the quality of our portfolio and
indexed-linked leases. Yield expansion resulted in valuation decreases of 6.7%
in the UK, 3.5% in Germany and 5.3% in France
· Loss before tax of £82.0 million (2021: £91.5 million profit)
principally due to valuation declines on investment properties of £136.5
million (2021: £28.5 million gain)
· EPRA EPS up 2.7% to 11.6 pence per share from higher profits from
our hotel and student operations and tax savings following conversion to a
REIT in the UK, partly offset by lower net rental income from our offices
given higher vacancy. Statutory EPS of (20.2) pence per share reflecting the
valuation declines
· A proposed final dividend maintained at 5.35 pence per share to
be paid on 2 May 2023, resulting in a total 2022 dividend of 7.95 pence per
share, an increase of 3.2% (2021: 7.70 pence per share)
· Total accounting return for the year of -3.7% (2021: 3.7%)
· We anticipate increased financing costs in 2023 given higher
interest rates but are focussed on reducing vacancy from our refurbished
schemes and other vacant space
OPERATIONAL HIGHLIGHTS
· Net rental income stable at £107.8 million (2021: £108.0
million) due to disposals, redevelopment and leasing expiries resulting in
higher vacancy offset by contributions from net acquisitions, higher student
and hotel income, and the benefits of indexation
· Properties with contractual rental indexation increased to 55.5%
(2021: 50.1%) of the Group portfolio
· Acquired two properties in Germany 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%
· Disposed of six properties for £57.9 million (5.4% net initial
yield) at 2.5% above 2021 book values
· Completed 106 lease events securing £8.2 million of annual rent
at 4.8% above 31 December 2021 estimated rental values
· Vacancy rate increased to 7.4% (2021: 5.8%) with most of this
increase due to the completion of developments currently being marketed to
prospective tenants as well as some net lease expiries
· Rent collection has continued to remain strong with 99% collected
(2021: 99%)
Financing
· Weighted average cost of debt at 31 December 2022 up 47 basis
points to 2.69% (2021: 2.22%) resulting from the impact of central bank
interest rate increases
· Loan-to-value at 42.2% (2021: 37.1%) reflecting valuation
declines and net acquisitions during the year. Gross debt of £1,105.9
million (2021: £1,031.6 million) with cash of £113.9 million (2021: £167.4
million) and £50 million (2021: £50 million) of undrawn facilities
· Weighted average debt maturity of 3.8 years (2021: 4.4 years)
· Financed or refinanced £229.9 million of debt in 2022 at an
average of 3.24%, including £58.4 million fixed at 3.17%, and repaid £166.6
million of debt
· The loan portfolio as at 31 December 2022 had 72% at fixed rates
and 4% subject to interest rate caps (31 December 2021: 85% fixed and 5% caps)
· Well advanced with 2023 and 2024 refinancing activity with £237
million out of £505 million executed or with credit approval secured, leaving
£94 million to refinance in 2023 which we are confident will be completed
successfully
ENVIRONMENTAL, SOCIAL AND Governance
· GRESB score remained good at 85 (2021: 85) and 4 green stars,
with 86% (2021: 83%) of the managed portfolio achieving at least a 'Good'
BREEAM In-Use rating
· 99.9% (2021: 92%) of Group electricity is now carbon-free, our
rooftop solar PV energy output increased by 51% by installing a further 347kWp
of new solar arrays in the UK and 43 electric vehicle charging points
installed at 12 of our buildings in the UK
· Progress continues with implementing our ambitious, but
achievable, long-term sustainability targets including our 2030 Net Zero
Carbon Pathway at a total cost of £65 million. We completed 57 carbon
reduction projects this year with spend on track with the plan which will
save an estimated 612 tonnes CO2e per annum and we were in-line with our Scope
1 & 2 target for 2022
· We are fully compliant with 2023 minimum EPC regulations in the
UK and reduced our EPC D rated buildings by nearly 20% through a combination
of refurbishments and disposals
· Continued action on social challenges including 562 employee
volunteering hours given to community and charitable organisations, new
diversity, equity & inclusion plan created and committed to Living Wage
Foundation accreditation in the UK
Dividend Timetable
Further to this announcement, in which the Board recommended a final dividend
of 5.35 pence per ordinary share, the Company confirmed its dividend timetable
as follows:
Announcement date 8 March 2023
Ex-Dividend date 23 March 2023
Record date 24 March 2023
Payment date 2 May 2023
- 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 8 March 2023 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 9L
· Webcast: The live webcast will be available here:
https://secure.emincote.com/client/cls/cls006
(https://secure.emincote.com/client/cls/cls006)
· 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/cls006/vip_connect
(https://secure.emincote.com/client/cls/cls006/vip_connect)
For further information, please contact:
CLS Holdings plc
(LEI: 213800A357TKB2TD9U78)
www.clsholdings.com (http://www.clsholdings.com/)
Fredrik Widlund, Chief Executive Officer
Andrew Kirkman, Chief Financial Officer
+44 (0)20 7582 7766
Liberum Capital
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.
Chairman's statement
"One of CLS' big attractions and differentiators is its open, positive
culture, reflected in our Pan-European presence, which ensures the continued
success of the Company"
Dear Shareholder
In 2022 the evolution of offices continued with the bifurcation of the market
becoming more pronounced between high quality, attractive properties and those
of a more secondary nature. Responding to these trends, CLS is continuing to
invest significant amounts to ensure that we supply the best offices in our
locations to meet the changing demands of tenants. There is much more on this
theme throughout this report.
Performance and our property portfolio
In 2022, CLS delivered a resilient and solid performance with relative
valuation outperformance compared to the market and higher earnings from
a solid letting performance, improved operations from our one student and
hotel operation and the benefits from the UK REIT conversion. Our balance
sheet remains well capitalised and our diversified but focused approach
continues to deliver.
EPRA NTA per share decreased by 6.0% to 329.6 pence per share (2021: 350.5
pence per share) and total accounting return, including the dividends paid in
the year, was -3.7% (2021: 3.7%). The value of our property portfolio rose by
0.9% to £2.4 billion (2021: £2.3 billion) with the property portfolio now
split 46% in the UK, 42% in Germany and 12% in France. The movement in the
property portfolio was as a result of: £58.3 million capital expenditure;
£26.9 million of net acquisitions (£83.4 million acquisitions less £56.5
million disposals); and an increase of £63.4 million as a result of
the weakening of sterling by 5.0%, offset by £127.0 million from net
valuation decreases of 5.3% in local currencies.
"Since CLS was established 30 years ago in 1992, the Company has successfully
weathered several difficult periods. This current period is no different and
our resilient strategy, quality offices and dedicated team are continuing to
deliver, which leaves CLS well placed for future growth."
Environmental, Social and Governance
In a year that has again seen extreme events linked to climate change, it is
even more important for companies like ours to lead the transition to a
carbon-free future. As highlighted in this report, I am pleased that we are
seeing positive results from implementing our Net Zero Carbon Pathway
underlining our aim to reduce carbon emissions and energy intensity, whilst
providing modern, sustainable office space that meets the needs of our tenants
including reducing the overall cost of office occupation. Our commitment to
the communities in which we invest remains a central part of our culture
and this will be strengthened with the implementation of our Social Value
Framework. This work is underpinned by our strong governance oversight;
establishing our new Sustainability Committee further demonstrates our vision
of being a leading sustainably-focused commercial landlord.
Strategic outlook
CLS has pursued a highly successful, focused strategy over the last 30 years
with a commitment to delivering shareholder value through our long-term
approach, which has been demonstrated in our track record. Our strategy and
business model remain unchanged through the investment in, and active asset
management of, well located, high quality offices in Europe's three largest
economies. However, during this uncertain economic period, we will: be more
cautious in considering acquisitions and only make disposals at the right
values; execute our planned refinancings; and deliver lettings of our quality
refurbishments, to drive growth.
Against the rising interest rate backdrop, CLS' treasury team continues to
seek to match our borrowing with our properties' characteristics as set out in
the later case study. In addition, CLS also has considerable rental upside
within the existing portfolio which would more than offset the expected
financing cost increase.
Dividends
Reflecting the more difficult economy currently, the Board has decided to
propose a flat final 2022 dividend which, together with the 10.6% increase in
the interim dividend, results in an increase of 3.2% in the full year
dividend, which is 1.47x covered by EPRA earnings. The full-year dividend is
in-line with our revised policy of having the dividend covered by EPRA
earnings 1.2x-1.6x and in-line with the guidance given in May 2022 that 2022's
dividend would be in the middle of the range.
Our staff and our culture
I was pleased to attend, and speak at, our first staff conference for three
years and to experience first-hand the enthusiasm, positivity and resilience
of our staff. As commented upon before, CLS' open, inclusive and supportive
culture is a key differentiator and it is great to see that it continues to
flourish with our dedicated team well-prepared and motivated to deal with all
the ongoing challenges and opportunities.
Finally, I would like to thank our shareholders for their ongoing support
as the Board continues to deliver long-term value for all stakeholders.
Lennart Sten
Non-Executive Chairman
8 March 2023
Maintaining the right culture
Maintaining a healthy culture
We continue to promote an open, collaborative culture within our workforce,
with an efficient decision making structure which facilitates ownership and
enables a hands-on operating process.
CLS' culture and the role of the Board
The Board recognises the need to establish the correct culture, values
and ethics to ensure good standards of behaviour are maintained
throughout the Group.
We engage with our employees in a number of ways, such as through the
Workforce Advisory Panel, staff surveys, Board visits and property tours, and
informal meetings, to ensure the voice of the workforce is prominent in our
decision-making process.
The Board also receives information on human resourcing matters such as
employee turnover and diversity statistics at each meeting. These feedback
mechanisms allow the Board to understand how the culture of the Group evolves
and, through the Chief Executive Officer, facilitates changes to ensure the
Group maintains its Purpose, Vision and Values which underpin our culture.
How the Board assesses and monitors culture
The Board is able to assess and monitor Group culture through a range of key
sources. The Board understands that these key sources of data are crucial in
maintaining good communication with the employees who are integral in ensuring
the success of the Company.
Five culture priorities are used to embed culture within our business
activities and Board oversight:
· Promoting integrity and openness
· Valuing diversity
· Being responsive to the views of stakeholders
· Culture aligned to purpose and values
· Culture aligned to strategy
Chief Executive's review
"CLS continues to stay close to tenants and respond to their changing office
demands. We are investing in our existing properties to improve their quality
through well-being, amenity, flexibility, sustainability and digital
enhancements to deliver the best offices in our locations."
Delivering on our strategy
Delivering on our strategy
2022 was very much a year of two halves, somewhat apt in a World Cup year,
with the first half seeing a fairly stable market before the second half saw
significant market deterioration in response to rising interest rates and a
worsening economic outlook. Against this backdrop, CLS has, and is, very much
focused on operational performance. To that end, we have included two larger
case studies on investment into our properties to meet the greater quality
demands and on our financing activity to ensure that we maintain sufficient
liquidity and flexibility to allow us to deal with challenges and
opportunities.
We have also included a longer piece on the office of the future in which we
highlight that whilst hybrid working is likely to lead to lower demand for
some offices, sustainability requirements are expected to reduce supply which
will act as an offset. However, I think it is also worth reiterating why
offices work for employees and employers, and why the attractions and
necessities are being increasingly recognised again.
It is easy to confuse flexibility with working from home which are two very
different things. Flexibility, alongside empowering employees, promotes a good
work-life balance and helps employees achieve both personal and professional
goals. As has become increasingly clear, working from home, more than a day or
two, has been shown to simply not work very well for many roles and teams.
Fundamentally human beings are social creatures and the work benefits of this
sociability such as collaboration, spontaneity, creativity, learning and
mentoring are only effective when people meet. To encourage and help employees
meet their objectives, the offices of the future must be flexible, inclusive
and attractive. They must also provide both individual workspace as well as
meeting rooms, video conferencing, chill-out areas, cafés and canteens
amongst other amenities whilst being well-located to transport and urban
facilities.
Ultimately, this might seem to be an unsurprising message from an owner of
offices but we believe that deep down most people and organisations know this
to be true. This belief is fundamental to our conviction of remaining a
long-term office investor. To that end, we were a net acquirer in 2022, making
two acquisitions for £76.9 million and six disposals for £57.9 million,
resulting in net additions of £19.0 million. Given greater uncertainty in the
market and focus, we expect to be a net disposer in 2023 although we do expect
that there will be attractive acquisition opportunities emerging towards the
end of the year.
In 2022, we completed on two properties in Dortmund and Dusseldorf for £76.9
million, which had 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 actively asset managing the properties to secure market
rents and lease the small amount of vacant space. More detail on these
buildings is given in the country sections.
We continue to recycle capital on a selective basis, making disposals when:
the business plan has been completed and there are limited opportunities to
add value/drive returns; a more economic alternative use exists; or we are
offered a compelling price. Additionally, we are seeking to increase the
average size of our properties by disposing of smaller properties which
usually consume a disproportionate amount of management time and are less
economic to equip with the best amenities. To that end we sold six smaller
properties (five in the UK and one in France), most for alternative uses, at a
net initial yield of 5.4% for consideration of £57.9 million which was 2.5%
above 31 December 2021 valuations.
In order to deliver the higher quality offices demanded by tenants, as
discussed above and in the investing in our portfolio case study, we are
investing greater amounts in our portfolio. We spent capital expenditure of
£58.3 million in 2022 and would expect to spend similar amounts in 2023 as
we are refurbishing more offices, from single floors to whole buildings, than
at any time in our history. A description of our four largest developments
and refurbishments across all three countries is set out in the case study
about investing in our properties, which also highlights the considerable
rental upside to be delivered. We are forecasting capital expenditure to fall
for 2024 onwards from the heightened levels of 2022 and 2023 to a more
normalised level of £20 to £30 million per annum including our 2030 Net Zero
Carbon pathway spend.
Asset and property management
For CLS, active management is one of the five parts of our business model and
"our tenants, our focus" is one of our four values. In a period of higher
interest rates, the importance of being adept at asset management as a means
of driving long-term value from a property portfolio has greatly increased and
plays to CLS' strengths. Pre-pandemic, during the pandemic and now we are
hopefully post-pandemic, CLS' rent collection has remained in excess of 99% as
a result of building strong tenant relationships. On the whole, our properties
are multi-let with over 700 tenants, of which 26% are government agencies, 39%
are large corporations (with Group turnover over £36 million) and 13% are
medium-sized corporations (with Group turnover between £10 and £36 million).
Last year was very much a tale of two markets with the investment market being
sluggish at best whereas the letting market remained mostly favourable,
particularly for higher-quality, sustainable offices. In 2022, the overall
Group EPRA vacancy rate increased to 7.4% (2021: 5.8%) which is above our
long-term target of 5% due to the impact of refurbishments and expiries. We
are expecting the vacancy rate to remain elevated in the medium-term until we
let our pipeline of refurbishments.
The vacancy position was mixed across the Group with considerable differences
between countries. In France, the vacancy rate has fallen to 2.6% (2021: 3.0%)
as a result of higher demand for smaller units (below 1,000 sqm) which fits
with CLS' France space offering and we would expect vacancy to remain low in
2023. In Germany, the vacancy rate fell from 7.4% in 2021 to 6.1% in 2022 as
we made further progress with letting the vacancy that was deliberately
acquired for its asset management upside in 2021, and we are confident to see
further reductions in German vacancy in 2023. In the UK, there is a much more
difficult letting market and hence we are putting in considerable investment
to upgrade the quality of our portfolio. The UK vacancy rate increased to
10.0% (2021: 5.4%) as a result of refurbished space being completed and lease
expiries in excess of lettings. The vacancy rate may well increase in 2023 for
the same reasons if lettings continue to take longer.
At 31 December 2022, the value of the portfolio was marginally up (by 0.9%) as
a result of our investment in the portfolio, foreign exchange gains and net
acquisitions largely offset by revaluation declines of 5.3% in local
currencies. There were decreases in all countries with Germany down 3.5%,
France down 5.3% and the UK down 6.7% in local currencies. Across all
countries, the increase in interest rates and the risk-off nature of investors
impacted valuations but there were also some regional and property specific
differences.
In the UK, our government, Central London offices, developments, student and
hotel performed well whilst other London and Southeast offices were in-line
with the market, with equivalent yields increasing by 25 basis points to 5.61%
(2021: 5.36%), ERVs decreasing by 0.3% and vacancy increasing.
In Germany, values in most of the cities where we have our properties fell by
about 3% to 4% with equivalent yields expanding by 36 basis points to 4.75%
(2021: 4.39%) with partial offset from ERVs increasing by 1.4% as well as
benefits from reducing vacancy and significant indexation.
In France, values in Paris dropped 7.4% whilst valuations in Lyon and Lille
were down 2.1% as overall equivalent yields increased by 9 basis points to
5.13% (2021: 5.04%) with some offset from ERVs increasing by 4.9% as well as
benefits from reducing vacancy and all leases being indexed.
In aggregate, fair value declines reduced property values by £127.0 million
including £7.8 million lease incentive debtor adjustments.
Financial results
We delivered resilient and solid results in 2022 against a challenging
economic backdrop. Property valuations were down but outperformed relative to
the market and EPRA earnings were ahead of last year as our student and hotel
operations delivered record results and we saved tax by converting our UK
business to a REIT at the start of 2022.
Loss from recurring operations was £81.9 million (2021: profit £77.3
million). Partly mirroring but outperforming the more challenging market, CLS
suffered revaluation losses (with marginal gains on the sale of investment
properties) in 2022 of £136.5 million (2021: £28.5 million gain) with a
foreign exchange loss of £0.3 million (2021: £2.3 million). Earnings per
share were a loss of 20.2p (2021: 29.3p gain) reflecting the revaluation loss.
As highlighted, EPRA earnings per share rose 2.7% from 11.3p in 2021 to 11.6p
in 2022 as a result of improved hotel and student performance, the benefits of
REIT conversion in the UK and lower foreign exchange losses partly offset by
higher vacancy and related property costs.
EPRA NTA decreased by 6.0% (2021: 1.5% increase) to 329.6 pence per share,
reflecting revaluation reductions of 5.3% in local currency and the payment of
an increased dividend partly offset by EPRA earnings, a £33.6 million foreign
exchange gain from the 5.0% weakening of sterling against the euro (2021:
£39.5 million loss) and a 2.6 pence per share or 0.7% uplift from the
September 2022 tender share buyback. The £25.5 million share buyback (1 for
40 at 250 pence per share) demonstrated our belief in the value of our
portfolio.
At the year end, we had liquid resources of £113.9 million (2021: £167.4
million), reflecting net acquisitions and ongoing investment, as well as
£50.0 million of undrawn credit facilities (£2021: £50.0 million). We are
well progressed with our 2023 and 2024 financing, more of which in the
'financing at CLS' section.
In 2022, we generated £43.0 million net cash from operating activities (2021:
£44.2 million) compared with EPRA earnings of £47.0 million (2021: £45.9
million) showing the continued strong cash generation of our business model.
Of this cash, £32.4 million (2021: £30.8 million) was paid as a dividend to
shareholders. Overall, we balance the use of the cash generated between
dividends and reinvestment in the business to drive the total accounting
return to shareholders, which was -3.7% in 2022 (2021: 3.7%) due to negative
property revaluations.
Purpose, people and planet
Retaining the carbon value of existing real estate is being increasingly
recognised as an important component of a low carbon future and this
reinforces the long-term viability of our purpose and portfolio.
We recognise the importance of future proofing our assets in the face of ever
tightening regulations across the UK and Europe. To this end, I am
exceptionally proud of our progress against our sustainability strategy. We
continue to improve the energy efficiency of our buildings as we refurbish
them and, in line with our Net Zero Carbon pathway, this has resulted in the
completion of 57 projects saving an estimated 612 tonnes of CO2e, equivalent
to taking over 130 cars off our roads
(https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-typical-passenger-vehicle).
We have yet again increased the amount of electricity we generate from on-site
photovoltaic arrays, which is used for the benefit of our tenants and
ultimately reduces their cost of office occupation, and totalled 706,787 kWh,
enough to power 244 homes (https://www.ofgem.gov.uk/).
For the first time we are now reporting against our social value framework,
measuring all aspects of our contributions to the societies and communities in
which we invest. We have undertaken 41% more volunteering hours during 2022
than in 2021 and, along with all other areas measured, our Social Value is
equivalent to £191,916, and I commend our teams for their efforts. We have
committed to further enhancing the measurement of our social value
contribution in the coming years.
We know we have an important part to play across our three strategic pillars
and we are well placed to achieve our aims.
In 2022 we also recognised the impact of cost of living pressures on our
employees. We introduced differentiated pay increases, rewarding our lower
paid employees more given the greater impact of higher inflation upon them.
Our employees are one of CLS' best assets and we remain committed to helping
them thrive.
2.7%
Increase in EPRA earnings
99%
Rental collection
Looking to the future
We included our rent progression waterfall chart in last year's annual report
and an updated version is included this year as securing these increases is
critical to drive rental growth over and above rising financing costs. Set out
below is an updated chart which shows:
· contracted rent at the end of 2022 of £110.2 million;
· the current potential Estimated Rental Value ("ERV") of the portfolio of
£121.4 million if all vacant space (£9.0 million increase) and net
reversionary potential (£2.2 million increase) were captured. We do though
benefit from some vacancy/churn within the portfolio to capture reversion more
quickly and/or to allow the refurbishment of older properties. It
is therefore recognised that not all of this vacancy upside should or will
be captured;
· the potential increase to ERV over 2023 and 2024 to £136 million from
refurbishments and committed developments (£14.5 million); and
· the potential increase to ERV between 2024 and 2026 to £139 million from
uncommitted development opportunities in the portfolio (£3.0 million
increase)
In addition to these increases up to 2026, there is further potential from
indexation, with over half the portfolio having contractual increases, and
market movements as well as executing transactions, both acquisitions and
disposals, to focus the portfolio on faster growing properties. Post 2026, we
have significant development, redevelopment or rental increase opportunities
at Spring Gardens and New Printing House Square, both of which are in Zone 1
in London.
We expect 2023 to be in many ways the reverse of 2022 with the first six
months being challenging whilst inflation and interest rates are forecast to
peak before the economy and property market improve in the second half. Our
strategy and our focus on the three largest countries in Europe remains
unchanged but as usual with slightly different priorities as we expect to be a
net seller in 2023 and thus will place even greater emphasis on operational
improvements. Ultimately, we are confident that CLS will remain successful by
responding to tenant and market needs by having the best properties in our
locations.
Fredrik Widlund
Chief Executive Officer
8 March 2023
Chief Financial Officer's review
"in 2022 CLS delivered solid results with lower valuation falls relative to
the market and we have made significant progress with the planned refinancing
activity for 2023 and 2024."
Summary
EPRA net tangible assets ('NTA') per share, fell by 6.0% to 329.6 pence (2021:
350.5 pence) and basic net assets per share by 5.9% to 307.3 pence (2021:
326.6 pence). Loss after tax of £81.9 million (2021: £119.5 million profit)
generated basic earnings per share of (20.2) pence (2021: 29.3 pence) but EPRA
earnings per share of 11.6 pence (2021: 11.3 pence). EPRA EPS provided 1.47x
cover of the full year dividend of 7.95 pence per share.
On 1 January 2022, we converted our UK operations to a REIT which has resulted
in a saving of at least £3 million per annum in tax. In May 2022, in response
to becoming a REIT, CLS also updated its dividend policy as described below.
The other notable event was the 1 for 40 share buyback tender offer executed
in September 2022 to demonstrate our belief in the value of our portfolio.
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 6 gives a full description and reconciliation
of our APMs.
Income statement
Net rental income in 2022 of £107.8 million, was little changed from 2021
(£108.0 million). The increases arose from acquisitions (£4.1 million) made
in 2021 and the start of 2022, and indexation gains of £1.5 million as the
majority of our properties have index-linked rent. As a result of a post
pandemic bounce, we recorded record results from our hotel and student
operations with rental increases of £2.2 million and £2.1 million
respectively. Disposals reduced rental income by £3.4 million and the
movement of properties into refurbishments lowered rental income by £1.9
million. Higher vacancy, mainly in the UK, resulted in higher net service
expenses of £2.2 million and net lease expiries of £1.8 million. Other,
including FX, lowered rents by £0.8 million.
The strength of CLS' tenant relationships and the quality and diversity of our
tenant base has continued to be reflected in our rent collection. CLS
collected over 99% of rent before Covid-19, over 99% during the pandemic and
over 99% in 2022. Rent collection for the first quarter of 2023 is over 95% as
is usual at this point in time.
Overall administration and property expenses increased by £2.5 million to
£31.9 million (2021: £29.4 million) primarily as a result of: higher student
and hotel expenses of £1.2 million given higher occupancy; a one-off release
of bad debt provisions in 2021 of £0.3 million with a more normal charge of
£0.6 million in 2022; and an increase in operating costs of £0.4 million
given higher vacancy. The proportion of index-linked rent increased to 55.5%
(2021: 50.1%) of the total contracted rent of the portfolio. This high level
of indexation continues to be a significant benefit in a time of higher
inflation and increasing interest rates.
Due to the higher level of costs, CLS' administration cost ratio increased to
14.5% (2021: 14.1%) and the EPRA cost ratio rose to 25.8% (2021: 22.6%).
Given market weakness from higher interest rates and economic uncertainty, the
valuation of CLS' properties fell, although the reduction was lower than wider
market movements. The reduction in the value of investment properties,
excluding lease incentive movements, was £136.5 million (2021: £28.5 million
gain) with falls in the UK of 6.7%, Germany 3.5% and France 5.3% in local
currencies.
CLS has small shareholdings in two listed non-core Swedish companies. CLS now
directly holds 2.92% of Fragbite Group AB and indirectly 8.9% of Vo2 Cap
Holding AB, both of which are classified as investments given that CLS has no
control over their affairs. The share prices of both companies fell in 2022
resulting in a loss of £3.8 million (2021: £7.5 million profit including a
part disposal).
Six properties were sold in 2022 for an aggregate consideration of £57.9
million. This was 2.5% above book value which, after costs, resulted in a
profit on sale of properties before tax of £0.5 million (2021: £0.1 million
loss).
Finance income of £10.1 million (2021: £5.9 million) included unrealised
gains on derivative financial instruments of £8.8 million (2021: £5.2
million) from higher interest rates.
Excluding the derivative financial instruments, finance income increased by
£0.6 million as interest received increased to £1.3 million (2021: £0.5
million) given higher interest rates on cash deposits and dividends receivable
fell by £0.2 million (2021: £0.2 million).
Finance costs increased to £26.8 million (2021: £25.4 million) due to the
increase in the amount of borrowings and cost, given wider market interest
rate increases.
Approximately 49% of the Group's sales are conducted in the reporting currency
of sterling and 51% in euros. Whilst the average sterling rate against the
Euro strengthened marginally by 0.8%, there were far fewer transactions in
2022 compared to 2021 and consequently FX losses were at a much lower level.
In 2022, foreign exchange losses were £0.3 million in the income statement
(2021: £2.3 million).
Exchange rates to the £ EUR
At 31 December 2020 1.1185
2021 average rate 1.1634
At 31 December 2021 1.1893
2022 average rate 1.1732
At 31 December 2022 1.1295
The effective tax rate of 0.0% (2021: -30.6%) was below the weighted average
rate of the countries in which we operate principally as a result of the
conversion of CLS' UK operations to a REIT and thus minimal tax is now paid in
the UK.
Overall, EPRA earnings were higher than last year at £47.0 million (2021:
£45.9 million) and generated EPRA earnings per share of 11.6 pence (2021:
11.3 pence). The increase of 0.3 pence in EPRA EPS was primarily due to: the
strong performance of the hotel and student operation; tax savings following
the conversion of CLS' UK operations to a REIT; and relative improvement in FX
losses, partly offset by: increased vacancy in the UK leading to lower revenue
and higher costs; and higher interest costs.
EPRA net tangible assets and gearing
At 31 December 2022, EPRA net tangible assets per share were 329.6 pence
(2021: 350.5 pence), a fall of 6.0%, or 20.9 pence per share. The main reasons
for the decrease were: property valuation decreases of 5.3% or 33.9 pence per
share; dividends of 7.95 pence per share paid in the year; and other movements
of 1.5 pence per share, partly offset by: EPRA earnings per share of 11.6
pence per share; foreign exchange gains on our European business of 8.6 pence
per share; and a 2.6 pence per share benefit from the share buyback.
Balance sheet loan-to-value (net debt to property assets) at 31 December 2022
increased to 42.2% (2021: 37.1%) as a result of net acquisitions and capital
expenditure, and property valuation reductions. The loan-to-value of secured
loans by reference to the value of properties secured against them was 49.2%
(2021: 46.3%). The value of properties not secured against debt increased to
£105.1 million (2021: £100.8 million). In 2023, CLS is expected to be a net
disposer of property and thus, in the absence of significant property
valuation falls, LTV is expected to reduce.
Cash flow and net debt
As at 31 December 2022, the Group's cash balance had fallen to £113.9
million (2021: £167.4 million). Net cash flow from operating activities
generated £43.0 million, a reduction of £1.2 million from 2021. £32.4
million was distributed as dividends and £27.5 million paid out for financing
costs and tax, with the remainder reinvested in the business to grow net
tangible assets. Acquisitions of £83.8 million and capital expenditure of
£57.2 million were partly funded by proceeds after tax from property
disposals of £53.0 million and the net drawdown of loans of £51.3 million.
The net result of property and financing transactions, and after the share
buyback cost of £25.8 million and other of £1.6 million, being the
investment of £53.5 million in our property portfolio.
Gross debt increased by £74.3 million to £1,105.9 million (2021: £1,031.6
million) due to: the net drawdown of loans of £43.6 million, amortisation of
loan issue costs of £1.9 million and the increase of £28.8 million due to
the weakening of sterling against the euro. In the year, £144.1 million
(£143.0 million net of capitalised fees) of new or replacement loans were
taken out, loans of £80.9 million were repaid and £18.5m of contractual
periodic or partial repayments were made. Year-end net debt rose to £992.0
million (2021: £864.2 million). At the year end, CLS' additional facilities
remained unchanged comprising undrawn bank facilities of £50.0 million, of
which £30.0 million was committed.
The weighted average cost of debt at 31 December 2022 was 2.69%, 47 basis
points ('bps') higher than 12 months earlier. The movement was as a result of:
an increase in the reference rates on floating rate loans (28 bps increase);
new higher cost debt drawn for acquisitions and various refinancings completed
(29 bps increase), partly offset by: the expiration of legacy interest rate
swaps (6 bps reduction); repayments of higher cost debt on disposals (3 bps
reduction); and the strengthening of the euro against the pound (1 bps
reduction). In 2022, interest cover remained at a healthy level of 3.0 times
(2021: 3.2 times).
Financing strategy and covenants
A larger section on the Group's financing strategy is included in this report
but a few of the key points are worth repeating here. Significant progress has
been made with the refinancing activity for 2023 but also for 2024 when a
greater proportion of the Group's debt falls due. The Group's financing
priorities remain to keep the cost of debt low whilst maintaining an
appropriate LTV, maintaining a high proportion of fixed debt, increasing the
amount of green loans and seeking to match the Group's weighted average debt
maturity against the Group's WAULT.
As noted, CLS' objective remains to keep a high proportion of fixed rate debt.
However, in 2022 more floating rate loans than usual were executed given that:
some properties are to be sold and thus wanting to avoid break costs; some
loans were extended whilst the letting profile was improved in advance of
securing a longer term fixed rate loan; and a belief that interest rates were
temporarily higher given the quickened pace of interest rate increases and
greater market volatility.
In 2022, the Group financed, refinanced or extended 12 loans to a value of
£229.9 million for a weighted average duration of 2.8 years and at a weighted
average all-in rate of 3.24%, and of these £58.4 million were fixed at a
weighted average all-in rate of 3.17%. Consequently, at 31 December 2022,
72.4% of the Group's borrowings were at fixed rates or subject to interest
rate swaps, 3.8% were subject to caps and 23.8% of loans were unhedged. The
fixed rate debt had a weighted average maturity of 4.4 years and the floating
rate 2.2 years. The overall weighted average unexpired term of the Group's
debt was 3.8 years (2021: 4.4 years).
The Group's financial derivatives, predominantly interest rate swaps, are
marked to market at each balance sheet date. At 31 December 2022 they
represented a net asset of £8.5 million (2021: £0.4 million liability).
At 31 December 2022, the Group had 46 loans (36 SPVs, eight portfolios and two
facilities) from 25 lenders. 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 46 loans, CLS has between 25% and 35% 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, substitute property or deposit cash for
the period the loan is in breach, after which the cash can be released.
Distributions to shareholders and total accounting return
In May 2022, following the conversion of CLS' UK business to a REIT, the Group
announced an updated dividend policy for the 2022 financial year onwards. CLS
announced that it would 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)
which equates to a pay out range of 63% to 83% of EPRA earnings. It was also
announced that it was expected that FY 2022 dividend cover would be around the
middle of the new range.
The proposed final dividend for 2021 of 5.35 pence per share (£21.8 million)
was paid in April 2022. In October 2022, following the completion of the share
buyback tender offer, CLS paid an interim dividend of 2.60 pence per share
(£10.6 million), an increase of 10.6% compared to 2021 interim dividend
of 2.35 pence per share.
Given ongoing uncertainty, the proposed final dividend for 2022 is maintained
at 5.35 pence per share (£21.4 million), the same level as 2021. This would
result in a full year distribution of 7.95 pence per share (£32.0 million),
covered 1.47 times by EPRA earnings per share. The 2022 dividend is an
increase of 3.2% over the prior year and the total accounting return, being
the reduction in EPRA NTA plus the dividends paid in the year, was -3.7%
(2021: 3.7%).
As a result of the conversion of our UK operations to a REIT, shareholders
receive dividends comprising two elements. The dividends comprise a Property
Income Distribution ('PID') from the UK REIT operations and a second element
from CLS' remaining operations. For the interim dividend of 2.60 pence per
share, the PID was 1.20 pence per share and for the proposed final dividend of
5.35 pence per share, the PID will be 1.36 pence per share giving a full year
dividend of 7.95 pence per share of which 2.56 pence per share is the PID. The
split between the PID and the dividend from our remaining operations is likely
to fluctuate over time, and will depend on the level of capital allowances and
inter-company interest, amongst other things.
Andrew Kirkman
Chief Financial Officer
8 March 2022
United Kingdom
£1,170.6m
Value of property portfolio
46%
Percentage of Group's property interests
39
Number of properties
204
Number of tenants
10.0%
EPRA vacancy rate
1.8m sq. ft
Lettable space
78%
Government and large companies
3.7 years
Weighted average lease length to end
33.0%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the UK portfolio decreased by £90.3 million as a result of: net
disposals of £12.9 million (capital expenditure of £36.7 million partly
offset by five disposals for £49.6 million); a valuation decline of £77.3
million or 6.7%; and depreciation of £0.1 million. The 6.7% valuation decline
was as a result of equivalent yields increasing by 27 basis points on a
like-for-like basis and ERVs decreasing by 0.3%. However, this does not give
the full picture with some strong segment performance offsetting
area weakness.
CLS' UK portfolio valuation movements most logically split as:
· Government, Central London offices, Artesian and the Coade, student and
hotel operations (56% of the portfolio) delivered relative outperformance
against the market with a 1.4% decrease in valuation with yield expansion of
36 basis points partially offset by ERV growth of 1.1%. The
relative outperformance is due to the attractiveness of government income
with its higher proportion of indexation, stronger covenant and some lease
regears alongside the stronger performance of the hotel and student with some
offset from our major developments until they are let;
· Other London offices (31% of the portfolio) which were more in-line with
wider office market movements being down 10.3% with yield expansion of 25
basis points and ERV reduction of 2.5% on a like-for-like basis; and
· Southeast offices (13% of the portfolio) were reflective of the Southeast
market generally as values fell 18.0% with yield expansion of 59 basis points
and a decrease in ERV of 1.5% on a like-for-like basis.
"The UK is our most challenging occupational market currently - we are
responding by carrying out our largest number of refurbishments and this is
already leading to an increase in enquiries."
Developments and refurbishments
Construction of "The Coade", our 28,400 sq. ft (2,638 sqm) new office
development at Vauxhall Walk, London, is almost complete. We have had several
viewings and are confident to secure our first tenant shortly. "Artesian", our
development at 9 Prescot Street, London, is also progressing well. The 92,500
sq. ft (8,594 sqm) development, is expected to complete in Q2/Q3 2023. More
details are available on both developments in the 'investing in our portfolio'
section.
Other smaller refurbishments were carried out, including a pre-let at Reflex
in Bracknell with a full CAT A refurbishment of the 5,700 sq. ft (530 sqm)
suite as well as undertaking a bespoke tenant fit-out to enhance their space.
Our property at 6 Lloyds Avenue in the City of London is a Grade II listed
building, therefore the refurbishments, which encompass both CAT A and CAT A+
specifications, have required a sensitive approach. The resulting works
created modern and attractive spaces which provide flexibility for tenants
seeking either managed solutions or traditional leases.
Disposals
During the course of 2022 we continued with our strategy of disposing of some
of our smaller assets or those that have a greater value for alternative uses.
In line with our strategy, we sold five assets for £50.0 million, which was
0.9% above the 31 December 2021 valuation. For more details, see the case
study.
Asset management
The vacancy rate increased to 10.0% as at 31 December 2022 (2021: 5.4%) as
result of a number of significant refurbishments, such as at 405 Kennington
Road and Harman House in London, being completed throughout the year. There
were also a few instances where tenants sought to downsize their space in
response to changing working patterns amongst their staff.
In 2022, we let or renewed leases on 105,782 sq. ft (9,827 sqm) and lost
201,170 sq. ft (19,454 sqm) of space from expiries. Excluding rent reviews, 54
lease extensions and new leases secured £2.9 million of rent at an average of
2.8% above 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 new 10-year lease with BioHorizons UK Limited for 5,700 sq. ft (529 sqm)
at Reflex in Bracknell. Not included in our 54 deals was 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 five years past the previous break
date of April 2023. Furthermore, the lease associated with our largest asset
at Spring Gardens is subject to annual indexation and contracted rent
increased by approximately £1 million as a result of the 10.5% RPIx uplift.
Our student and hotel operations continued to perform extremely well
throughout the year, achieving record results. The student accommodation was
fully let for the 2022/23 academic year and the hotel occupancy was at an
average of 87% for 2022 (70% in 2021) with much higher average daily rates.
The hotel has just undergone a limited refurbishment programme to ensure it
continues to provide best in class accommodation for both short and extended
stay customers.
Market overview and outlook
The UK economy has continued its recovery from the effects of the pandemic and
2022 GDP growth of 4.1% exceeded estimates made earlier in the year. This also
reflects recent comments from the Bank of England that any downturn in the UK
economy is due to be shorter and less severe than had been previously
predicted. During 2022, to control the inflation which was close to 10%, the
Bank of England increasingly raised the base rate from 0.25% in January 2022
to 4% by February 2023 and the market is expecting further rate rises
in the first half of the year.
In terms of the UK property investment market, commercial volumes for the year
fell to c. £41 billion, which was down by more than 20% compared with 2021,
and reflects the political and economic uncertainty which occurred during
last year.
Leasing transactions and activity in Central London were positive with 20%
growth while the rest of the South-East office market showed a decline of a
similar order with a 25% drop in leasing volumes. This illustrated the flight
to quality both in terms of the buildings themselves but also location, with
well-located and modern offices performing strongly irrespective of
geographical location. Vacancy in London was relatively stable during the year
at 8.5%.
Early evidence however suggests that activity has picked up at the start of
2023 which it is hoped will lead to a further increase in take-up.
We continually assess whether to hold or sell properties
49%
Year on year increase in UK capital expenditure
UK Disposal Programme
During the course of 2022, CLS successfully completed the disposal of five
assets within the UK for a total consideration of £50.0m which was 0.9% above
the book value of these properties as at 31 December 2021.
The assets were sold as part of the Group's strategy of disposing of assets
which are either too small to have a meaningful impact on the Group's
profitability or have greater value for alternative uses. This is with a view
to re-investing the proceeds in our core portfolio through development and
refurbishment or through acquisitions.
The largest transaction was the sale of Great West House. This is a prominent
office building close to the M4 in West London which had been part of the
Group's portfolio since 1996 and has significant potential for alternative
uses, subject to planning. Other buildings, such as Kings House in Bromley and
Crosspoint House in Wallington were sold with the benefit of prior approval
for conversion to residential.
Sentinel House in Coulsdon was sold to an owner occupier at the end of
a 10-year lease which allowed the Group to realise a capital receipt
having benefited from the rent for the majority of the lease term.
Germany
£996.0m
Value of property portfolio
42%
Percentage of Group's property interests
33
Number of properties
372
Number of tenants
6.1%
EPRA vacancy rate
3.9m sq. ft
Lettable space
56%
Government and large companies
5.2 years
Weighted average lease length to end
64.5%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the German portfolio increased by £108.0 million as a result of:
net additions of £93.3 million (two acquisitions for £83.4 million including
costs and capital expenditure of £9.9 million); and a foreign exchange gain
of £49.0 million, partly offset by a valuation loss of £34.2 million or 3.5%
in local currency and depreciation of £0.1 million. The like-for-like
valuation decrease, which excludes the acquisition costs, was 3.3%. The 3.5%
valuation decline was as a result of equivalent yields expanding by 36 basis
points (30 basis points on a like-for-like basis) with partial offset from
ERVs increasing by 1.4% as well as benefits from reducing vacancy and
significant indexation.
Values in most of the cities where we have our properties fell by about 3% to
4%. The two exceptions were firstly Stuttgart where values were down 11.2%
given both a weaker market and CLS' decision to delay the development of Vor
dem Lauch given this market uncertainty and secondly, in Berlin, where
valuations were down 0.8%, which was mainly driven by the valuation increase
for Adlershofer Tor following the granting of building consent for a rooftop
extension.
"Whilst Germany experienced some economic turmoil in 2022, the market
fundamentals remain strong and we expect vacancy to reduce further in 2023."
Acquisitions and disposals
In 2022 we purchased two properties for £76.9 million with combined initial
yields of 5.1% and a combined reversionary yield of 5.6%. There were no
disposals in the year.
The acquisition of these two properties is discussed in more in the 'investing
in our portfolio' section.
Developments and refurbishments
Various refurbishments continue across our portfolio focusing on improving the
quality of our assets by meeting tenants' needs and enhancing the
sustainability credentials of our properties. At Office Connect in Cologne and
Hansaallee in Düsseldorf, the entrance areas as well as outdoor facilities
have been completely redesigned and the buildings now include co-working
spaces, as well as refurbished receptions.
Flexion in Berlin was purchased in 2021. The 71% acquired vacancy rate has
been reduced through a substantial re-design, allowing us to re-position the
property in the local market and successfully let 30,279 sq. ft (2,813 sqm).
All space not currently under development in this building is now let.
Grafelfing in Munich, was previously occupied by a single tenant for 15
years. We are currently working closely with our new tenant Toptica on their
62,458 sq. ft (5,803 sqm) space, improving it by tailoring to their needs. In
terms of executing our longer term development strategy, planning
has been granted for a rooftop extension at Adlershofer Tor, Berlin which
would increase the lettable area of the building by approximately
46,285 sq. ft (4,300 sqm).
Asset management
EPRA vacancy rates reduced from 7.4% at 31 December 2021 to 6.1% the end of
2022. This reduction was due to a significant number of lettings during the
year, acquisitions with lower weighted average vacancy and ongoing
refurbishment of vacant units. In 2022, we let or renewed leases on 503,473
sq. ft (46,774 sqm) and lost 507,074 sq. ft (47,109 sqm) of space from
expiries. Excluding those arising from contractual indexation uplifts, 32
lease extensions and new leases secured £3.8 million of rent at an average
of 8.2% above ERV. Leases subject to indexation increased by an average of
6.3%. The most significant transactions were a new 10-year letting for 62,458
sq. ft (5,803 sqm) to Toptica at Grafelfing in Munich and a new 5-year letting
for 19,343 sq. ft (1,797 sqm) to All3Media. Both deals were executed at rents
above ERV and helped significantly decrease vacancy in their respective
buildings. At the end of 2022, the portfolio was 2.1% net reversionary. In
light of the continued recovery of the letting markets and despite the market
increased vacancy rates, we believe that there is the potential for further
rental growth.
Market overview and outlook
The German economy has continued to recover and achieved 2022 GDP growth of
1.9% as a result of a strong finish to the year. German industry has proven to
be much more resilient than some anticipated, with dependency from Russian gas
reduced to such a level that the implementation of emergency plans did not
materialise, and the entire winter supply was secured. Inflation was close to
9% in 2022 and the ECB increasingly raised the base rate from 0% in January
2002 to 2.5% by February 2023 with a further 0.50% increase announced for
March.
The commercial property investment market for the year fell to c. €51
billion which was 16% below 2021 reflecting rising interest costs and
continued uncertainty around the geopolitical situation.
Leasing transactions and take-up in the top seven cities were similar to 2021
and in-line with the 10-year average. Berlin and Munich performed strongly
and we are continuing to see rental growth in most cities. Vacancy across
the seven cities increased slightly to an average of 5% with Stuttgart and
Cologne at 3%, Berlin, Hamburg, and Munich at circa 4%, and Frankfurt and
Dusseldorf around 8%.
Many occupiers have started to show a willingness to return to the market and
we expect activity to improve gradually over the year in the larger cities.
We acquire the right properties
£76.9m
Properties acquired in 2022
Acquisitions
Despite a challenging market, 2022 provided selected, attractive
opportunities to grow the portfolio in our locations.
In April we completed on the purchase of Kanzlerstrasse 8, Dusseldorf for
£20.9 million which is situated in a well-connected and growing submarket of
the city. The 98,684 sq. ft (9,168 sqm) property is occupied by three tenants
including the anchor tenant Amevida with a WAULT of c.8 years and net initial
yield of 5.1%.
In July we completed on the purchase of The Yellow, Dortmund for £56.0
million. The 258,140 sq. ft (23,982 sqm) office is located in the central
business district of Dortmund, next to the central shopping district. The
property is occupied by Postbank, a department of the federal state of North
Rhine-Westphalia and two smaller tenants with an overall WAULT of 5.2 years
and net initial yield of 5.1%.
Both properties provide opportunities to take advantage of the net reversion
through improving the ESG credentials of the buildings, under-renting and
letting remaining vacancy. The combined reversionary yield is 5.6%.
France
£286.1m
Value of property portfolio
12%
Percentage of Group's property interests
17
Number of properties
147
Number of tenants
2.6%
EPRA vacancy rate
0.8m sq. ft
Lettable space
56%
Government and large companies
4.9 years
Weighted average lease length to end
100.0%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the French portfolio increased by £3.7 million as a result
of: net acquisitions of £4.8 million (capital expenditure of £11.7 million
offset by disposals of £6.9 million); and a foreign exchange increase of
£14.4 million, partly offset by a revaluation decline of £15.5 million or
5.3% in local currency. The 5.3% valuation decline was as a result of
equivalent yields expanding by 9 basis points (12 basis points on a
like-for-like basis) with some offset from ERVs increasing by 4.9% as well as
benefits from reducing vacancy and all leases being indexed.
Values in Paris dropped 7.4% reflecting our more suburban locations whilst
valuations in Lyon and Lille were down 2.1% given the stronger Lyon investment
market.
"The market in France remains mixed with good demand in central Paris and Lyon
but weaker demand in Parisian suburbs such as those around La Défense. There
is also good demand for smaller space, as offered by CLS, which is keeping
our vacancy low."
Developments and refurbishments
During the year we continued on a programme of refurbishing several of our
French properties. The two most significant are the redevelopment of D'Aubigny
and Park Avenue, both in Lyon.
The works at Park Avenue are close to completion with the building launch
taking place in January 2023. Several agents attended and were given a tour of
the €11.2 million refurbishment which included replacement of the existing
façade and creation of new common terraces through the extension of existing
landings. The sustainability credentials of the building were improved through
the installation of new windows, electric shades and a green roof. During the
works, the tenants have been relocated to temporary office space to ensure the
project was delivered as quickly as possible. They will resume occupation in
Q1 2023. There has been good interest in the refurbished vacant areas with two
deals already executed with the tenants moving in on completion of the works
towards the end of Q1 2023.
The works completed at D'Aubigny included the replacement of the existing
façade and new windows. This project completed on time in October 2022 and at
the budgeted cost of €3.2 million. The improvements will be BREEAM certified
and are expected to achieve "Excellent".
Disposals
During the course of 2022 we disposed of Rue Nationale and a small piece of
land for £7.8 million. The disposals were completed at 13.6% above 31
December 2021 valuation. In February we exchanged on the sale of a property in
Paris which offers higher value as a development opportunity. The sale price
of €11.1 million was 0.5% above the 31 December 2022 year end valuation and
is expected to complete in April 2023.
Asset management
EPRA vacancy in France reduced to 2.6% as at 31 December 2022 (2021: 3.0%)
with the reduction largely driven by active asset management. Despite several
tenants leaving during the period, new tenants were secured to the fill the
vacancies, with new lettings exceeding expiries.
In 2022, we let or renewed leases on 67,130 sq. ft (6,237 sqm) and lost 65,261
sq. ft (6,063 sqm) of space from expiries or vacancies. Excluding contractual
indexation uplifts, 20 lease extensions and new leases secured £1.5 million
of rent at an average of 0.3% above ERV. The most significant transactions
during the year were: a lease renewal at Rhône Alpes for 11,345 sq. ft (1,054
sqm) with Aesio Mutuelle via a 1/3/6/9 year lease; and a pre-letting at Park
Avenue for 9,289 sq. ft (863 sqm) with Hopscotch Group. On a like-for-like
basis, ERVs increased by 4.9%, with index-linked rental increases at an
average of 3.3%.
Market overview and outlook
The French economy achieved GDP growth of 2.5% in 2022, also on the back of a
strong fourth quarter, and again proved its resilience with the benefits of
a diversified and large domestic market. French inflation was lower than
other European countries at 6% driven by state interventions in the energy
markets and other stimuli. In common with Germany, the ECB increasingly raised
the base rate from 0% to 2.5% by February 2023 with a further 0.50% increase
announced for March.
The French property investment market had a strong year with an increase of 6%
to c. €25 billion. The strongest growth was recorded in the larger regional
cities like Lyon and Lille, while Greater Paris was marginally up but with a
mixed picture between the different districts.
In the letting market, after two relatively flat years, we saw a return to a
more dynamic market with 10% growth in take-up in Greater Paris. The Lyon
market continued to perform strongly with 16% growth over the year. Vacancy in
Greater Paris was up marginally to 7.8% but with large variances between the
districts; Paris CBD has 3.5% vacancy while La Défense is close to 16%.
Vacancy in Lyon fell from 5.2% to 4.4% on the back of the strong demand
mentioned above.
We expect to see a similar picture for this year with a strong Lyon market and
a fragmented Greater Paris market with pockets of growth and other areas
proving more challenging.
We deliver value through active management
2.6%
2022 year end vacancy rate
Letting success in the French portfolio
At the end of 2022, CLS' French portfolio had a 2.6% vacancy rate. This is an
excellent outcome in the context of average vacancy rates in Greater Paris in
the region of 7.8% and 4.4% in Lyon. There were no stand-out lettings and thus
it is worth highlighting some of the factors behind our successful active
asset management.
Whilst having offices that are highly competitive in terms of location,
building quality and services with efficient operating costs is critical,
successful lettings are ultimately about satisfying our current and future
tenants. There are a number of actions that our team take to achieve this:
· Maintain a close relationship with tenants to meet their needs and
deliver excellent service;
· React as quickly as possible when a tenant intends to change their space
requirements - offering the best options in our portfolio;
· Adapt the premises to the market rapidly in terms of specifications,
size of space, etc.;
· Renovate any areas immediately upon becoming vacant to current market
quality;
· Ensure all internal and external team members deliver actions
in progress; and
· Always meet prospective clients in person.
Rental data(1)
Rental income for the year Net rental income for the year Lettable space Contracted rent at year end ERV at year end Contracted rent subject to indexation EPRA vacancy rate at year end
£m £m sqm £m £m £m
United Kingdom 48.5 48.5 166,234 48.1 54.2 15.9 10.0%
Germany 38.0 35.4 357,865 47.4 51.5 30.6 6.1%
France 12.9 12.7 71,015 14.7 15.7 14.7 2.6%
Total portfolio 99.4 96.6 595,144 110.2 121.4 61.2 7.4%
Valuation data(1)
Market value of property Valuation movement in the year EPRA net initial yield EPRA 'topped-up' net initial yield Reversion Over-rented Equivalent yield
£m
Underlying Foreign exchange
£m £m
United Kingdom 946.8 (74.7) - 4.9% 5.2% 6.2% 4.9% 5.6%
Germany 994.1 (34.6) 49.0 3.9% 4.3% 9.1% 7.0% 4.7%
France 284.2 (15.4) 14.3 4.1% 4.8% 8.1% 4.3% 5.1%
Total portfolio 2,225.1 (124.7) 63.3 4.3% 4.7% 7.7% 5.7% 5.2%
Lease data(1)
Average lease length Contracted rent of leases expiring in: ERV of leases expiring in:
To break To expiry Year 1 Year 2 3 to 5 years After 5 years Year 1 Year 2 3 to 5 years After 5 years
years years £m £m £m £m £m £m £m £m
United Kingdom 2.9 3.7 3.6 6.0 26.6 11.9 3.7 5.8 27.4 11.8
Germany 5.1 5.2 7.7 9.0 16.4 14.3 8.6 9.0 16.9 13.9
France 2.1 4.9 2.2 1.0 3.1 8.4 2.0 0.9 3.1 9.2
Total portfolio 3.7 4.5 13.5 16.0 46.1 34.6 14.3 15.7 47.4 34.9
1 The above tables comprise data for our offices in investment
properties and held for sale (see note 12). They exclude owner occupied, land,
student accommodation and hotel.
Key performance indicators
Measuring the performance of our strategy
EPRA earnings per share
Definition
EPRA earnings is a measure of operational performance and represents the net
income generated from the Group's underlying operational activities.
Why this is important to CLS
This KPI gives relevant information to investors on the income generation of
the Group's underlying property investment business and an indication of the
extent to which current dividend payments are supported by earnings.
Our target
We will seek to grow the earnings of the business alongside net asset value.
Progress
EPRA earnings per share for 2022 was 11.6 pence.
Total accounting return
Definition
Total accounting return is the aggregate of the change in EPRA NTA plus the
dividends paid, as a percentage of the opening EPRA NTA.
Why this is important to CLS
This KPI measures the increase in EPRA NTA per share of the Company before the
payment of dividends and so represents the value added to the Company in
the year.
Our target
Our target total accounting return is between 3% and 9%.
Progress
In 2022, the total accounting return was -3.7%.
More detail is provided in the Chief Financial Officer's review and in note 6.
Vacancy rate
Definition
Estimated rental value (ERV) of immediately available space divided by the
ERV of the lettable portfolio.
Why this is important to CLS
This KPI measures the potential rental income of unlet space and, therefore,
the cash flow which the Company would seek to capture.
Our target
We target a vacancy rate of between 3% and 5%; if the rate exceeds 5%, other
than through recent acquisitions, we may be setting our rental aspirations too
high in the current market; if it is below 3% we may be letting space too
cheaply.
Progress
At 31 December 2022, the EPRA vacancy rate was 7.4%.
More detail is provided in the Country business reviews and in note 6.
Total shareholder return - Relative
Definition
The annual growth in capital in purchasing a share in CLS, assuming dividends
are reinvested in the shares when paid, compared to the TSR of the 24
companies in the FTSE 350 Real Estate Super Sector Index.
Why this is important to CLS
This KPI measures the increase in the wealth of a CLS shareholder over the
year, against the increase in the wealth of the shareholders of a peer group
of companies.
Our target
Our target total shareholder return (relative) is between the median
and upper quartile.
Progress
The TSR was -24.3%, making CLS the 11th ranked share of the FTSE 350 Real
Estate Super Sector Index of 24 companies.
Other performance indicators
In addition to these key performance indicators, the Group also has a number
of other performance indicators by which it measures its progress. These are
regularly reviewed. Three are shown here but others are in note 6 and are
discussed throughout this strategic report. Our environmental and social
indicators (including health and safety) are discussed in the ESG section of
the Annual Report.
Net initial yield vs cost of debt
We seek to maintain a cost of debt at least 200 bps below the Group's net
initial yield. At 31 December 2022, the cost of debt of 2.69% was 202 bps
below the net initial yield of 4.71%.
More detail is provided in the Chief Financial Officer's review and in note
6.
Administration cost ratios
These measure the administration cost of running the core property business
by reference to the net rental income that it generates, and provides a
direct comparative to most of our peer group. We aim to maintain the CLS ratio
between 15% and 17%. The administration cost ratio was for 2022 14.4%.
GRESB (ESG) score/100
Our main sustainability indicator is the Group's GRESB rating as this is an
industry standard measure and also due to the difficulty in drawing
conclusions from carbon-related measures due to the variability in occupancy
of our buildings during the pandemic. In 2022 we maintained our GRESB rating
of 85 and four green stars.
More detail is provided in the ESG section of the Annual Report.
Our investment proposition
1. A clear strategy
Key investment tenets
Diversified approach
This approach is across: Countries (we invest in Europe's three largest
economies); Tenants (over 700 tenants spread across most sectors); and
Financing (25 different lenders).
Sole focus on multi-let offices
Long-term investment in high yielding, multi-let offices in London and the
South East of the UK and the larger cities in Germany and France.
Selected development schemes
Occasional opportunities arise in the portfolio to carry out development
projects to capture rental and capital growth; the amount of development is
kept below 10% of the portfolio value at any one time. Opportunities to secure
alternative uses are pursued usually until planning permission is secured and
then the property is sold to a developer.
2. Active management
Key investment tenets
Experienced in-house capabilities
In-house asset, property and facilities management teams result in better cost
control, closer asset knowledge and synergies across the property portfolio.
Secure rents and high occupancy
Targeted occupancy levels above 95%, whilst providing affordable rents and
flexible lease terms to meet tenant demand and so create opportunities to
capture above market rental growth.
Interest rate management
Financing facilities, which are arranged in-house, seek to balance
flexibility, diversity and maturity of funding whilst ensuring a low cost of
debt which is targeted to be at least 200 basis points below the Group's net
initial yield.
95%
Targeted occupancy rate
3. Leading track record
Key investment tenets
Disciplined approach to investment
Acquisitions are assessed against strict return and strategic fit criteria but
are pursued on an opportunistic basis with no set capital allocation across
countries. Low yielding assets with limited potential or where the risk/reward
ratio is unfavourable are sold.
Cash-backed progressive dividend
CLS is a total return share using cash flow generated to pay a progressive
dividend and also to reinvest in the business to generate further net asset
growth. We aim to grow the dividend in line with the growth of the business,
targeting the dividend to be covered 1.2 to 1.6 times by EPRA earnings.
Financing headroom
Our aim is to keep at least £100 million of liquid resources including
financing headroom. This approach gives the ability to move quickly to
complete acquisition opportunities as well as the flexibility to secure the
optimal financing solution.
£100m
Targeted liquid resources including financing headroom
4. A focus on sustainability
Key investment tenets
Responsible profit
Across our business model, in everything we do, we seek to generate
responsible profit through employing sustainable long-term decisions with the
environment in mind.
Strong ESG performance
We believe in full transparency and therefore continually submit our progress
to global ESG benchmark schemes in our industry, such as GRESB. This also
allows us to monitor our progress and gives our stakeholders confidence in our
delivery against our commitments.
Climate risk mitigation
Our in-house sustainability programme is focused on mitigating our impact on
environmental climate risks and energy security whilst maximising the benefits
we deliver to the communities in which we are involved.
99%
of rated portfolio achieving at least BREEAM In-Use "Good" or better
Investing in our portfolio
As an active asset manager who stays close to our tenants, CLS has always
invested in our properties to ensure that our offices provide attractive work
environments. Before the Covid pandemic, CLS was investing around £20 to
£25 million per annum in refurbishments and routine upkeep across
around 10-20 buildings.
in 2022, CLS invested £58.3 million in our properties reflecting changing
tenant demands and increased opportunities in the portfolio with
refurbishments taking place in over 30 properties. The works have focussed on
the five areas CLS has identified to enhance value being improved amenity,
flexibility, sustainability, health & wellbeing and digital - more of
which is highlighted in the descriptions of the individual projects.
In 2023, CLS expects capital expenditure to remain at a higher level of c.£40
to £60 million as ongoing and other identified refurbishments are completed.
Going forward, we expect capital expenditure to be around £20 to £30 million
reflecting overall greater investment, including more sustainability spend.
Clearly as and when more opportunities emerge, spending may be higher again.
CLS' approach
CLS' underlying philosophy when carrying out a refurbishment or new
development is to transform the space to create distinctive, unique offices,
that are on-trend and provide best-in-class facilities, appropriate to their
location. Our buildings are set apart from the competition by ensuring
flexibility to meet the changing market and our commitment to the idea that
good design is about people. We carefully consider the tenants who use and
enjoy the spaces to determine the optimum way to modernise the building,
thereby creating the best environment for businesses and their staff to
thrive.
Our approach is to make key improvements that will make the building more
attractive to potential occupiers by providing services and space, such as
better air quality, digital services and meeting rooms, that help them work
more productively. In addition, this involves introducing or improving
amenities that contribute to their health and wellbeing, such as roof
terraces, biodiversity and end-of-trip facilities. Wherever possible, we also
seek to add value by repositioning/rebranding or increasing the lettable
space on the site.
Sustainability has always been a fundamental part of CLS' DNA and our approach
to refurbishments and developments. However, this was elevated further by the
publication of our enhanced 2021 Sustainability Strategy including our Net
Zero Carbon Pathway with a forecast spend of £58 million (now £65 million)
to achieve the goal of being New Zero Carbon by 2030. Practically, this has
meant the introduction of photovoltaics across most of our schemes but also a
focus to: improve energy efficiency when refurbishing buildings; reduce carbon
emissions; as well as looking to support our local communities so they share
in the benefit of the investment we are making.
In 2022, CLS successfully undertook a new development and three significant
refurbishments (in addition to many smaller schemes) which show this approach
in action.
The Coade, Vauxhall Walk
New Build
28,400 sq. ft NIA
£18.5 million total investment
ERV on letting £1.5 million
This highly sustainable, ground plus 9 storey office, represents a
substantial increase in lettable office space on the site from 4,500 sq. ft to
28,400sq. ft.
Digital
Our Digital Building Strategy places technology at the service of people to
create more comfortable, safe and productive office environments.
The development of The Coade is an example of CLS' digital building strategy
in action. For example, 2 fibre lines have been installed to provide a main
internet connection and a backup line, thereby reducing the risk of internet
outages to the tenant's business. Cat 6A cables have been distributed
throughout the building and placed in risers across all the floors allowing
tenants to establish swift internet access, without the delay usually
experienced by requiring wayleave agreements. Wi-Fi points have been installed
throughout all landlord/communal areas, including the terraces but also on
the office floors as part of the internet package.
Community
CLS is committed to sharing the value of the investment it makes in buildings
with the surrounding community.
At The Coade, this has involved developing Employment and Skills Construction
and Occupation Plans to target various work opportunities for people normally
resident within Lambeth and payments toward training and employability
programmes. An Affordable Workspace of 72sqm will also be provided on a 15
year lease and fitted-out to support a local charity or not-for-profit
organisation.
Health & Wellbeing
One of the key drivers for improved staff productivity within an office
setting is the air quality. At The Coade, CLS ensured that occupiers could
benefit from having openable windows and also increased the amount of fresh
air to the BCO COVID recommendation of 14 litres per second.
Artesian, Prescot Street
92,500 sq. ft NIA
£31 million total investment
ERV on letting £4.8 million
Digital
Artesian is the first CLS building designed to achieve Wiredscore Platinum
certification. Key features include the diverse points of entry on different
sides of the building for incoming internet providers, free WiFi in common
areas including the roof terrace to enable tenants and their guests to remain
connected throughout the building and provision of pre-defined space on the
roof top for tenants who have additional communication equipment or want
their own backup generator space.
Sustainability
CLS takes the view that green modes of transport, such as cycling and walking,
should be encouraged through provision of end-of-trip facilities to reduce
the impact of travel on the environment. At Artesian, an area of the lower
ground floor, unsuitable for letting, was identified to provide 163 cycle
parks, 15 showers (plus a Disability Discrimination Act shower at ground
floor) and 183 lockers. Drying rooms are also provided on floors 1-6. This new
amenity area is designed to achieve Cyclescore Platinum certification and
meets the Greater London Authorities cycle requirements for a new building.
Originally, only 36 cycle spaces were provided on two separate floors of the
building along with 3 showers.
Health & Wellbeing
Many years ago, approximately half the eastern windows at Lower Ground, Ground
and 1st Floor had been blocked or utilised as vents for a kitchen, which
severely reduced the amount of natural light available to occupiers. As part
of the planning application, CLS argued for opening up these windows but also,
identified areas on the western and southern elevation for new windows on the
upper floors. The purpose of this is to maximise the amount of natural
daylight available to people working in the building.
Flexion, Berlin
48,400 sq. ft refurbishment
€1.4 million total investment
ERV on letting €0.7 million
Vacancy of approximately 65,000 sq. ft provided the opportunity to refurbish
the ground floor entrance and four tired, single office floor layouts into a
more modern, flexible space. Following the refurbishment, which includes
co-working space, the building was rebranded Flexion.
Flexibility
Refurbishment work involved the stripping out of the ground and 4 office
floors of the building back to shell and the addition of new fire protection.
This allows for the flexibility to split the floors down to 2,700 sq. ft areas
and therefore suitable for traditional individual and open-plan offices, as
well as think tanks, creative spaces and meeting spaces.
Improved amenity
Refurbishment work has created a welcoming entrance and reception area which
provides collaboration space. Occupiers and their guests now have the
opportunity to hold informal meetings, exchange ideas and relax over a coffee.
Sustainability
As part of the CLS commitment to decarbonise its buildings, a review was
undertaken of the technical equipment at the building. The existing
inefficient system has been replaced with natural ventilation via the windows
and cooling at the lowest possible energy level. In future, a change will be
made to the use of heat pumps for heating and cooling at the lowest possible
energy level.
Park Avenue, Lyon
75,700 sq. ft refurbishment and addition of 2,300 sq. ft
€11.2 million total investment
ERV on letting €1.7 million
CLS' strategy to acquire all the floors previously in other ownerships secured
the ability to transform the internal and external parts of the building into
a truly sustainable modern office. An additional 2,300 sq. ft of rentable area
was created on the 2nd, 8th and 9th floors.
Sustainability
Works included the complete façade replacement and new windows, which
is expected to achieve BREEAM 'Excellent' certification and reduce
the carbon emissions of the building by approximately 50%. New solar
shading has also been provided which helps reduce overheating and
the amount of air conditioning required.
Health & Wellbeing
Through the design process, a 1,991 sq. ft communal roof terrace and a 2,088
sq. ft private roof terrace space were added by extending over landings. This
will provide outdoor space for tenants to relax and unwind, with stunning
views towards the green space of Parc de la Tête d'Or.
Improved amenity
Arriving at the building, occupiers are now greeted by a landscaped pedestrian
square and new reception which gives easier access. WC's in the building have
been refurbished and converted to provide DDA facilities. Bicycle facilities
have been enlarged to provide parking for 40 cycles and 6 electric vehicle
chargers have been installed in the underground carpark.
Financing at CLS
One of the key parts of CLS' business model is "Securing the right finance"
with the clear objectives of achieving a low cost of debt, utilising
diversified sources of funding and maintaining a high level of liquid
resources. This approach has served CLS well over its history but CLS retains
a dynamic approach which is continually assessed as market conditions
change.
CLS ensures that its flexible approach to the Group financing strategy fits
into a framework where the company's appetite for financial risk and approach
to controlling it are defined. The treasury policy considers both individual
transactions as well as their cumulative impact and the policy is presented
to the Board for review and approval annually. Overall, CLS has an active
approach to its treasury management with the key aspects highlighted below.
Our Approach
Secured vs unsecured, Special Purpose Vehicle ("SPV") and portfolio financings, and other facilities
The preferred financing model for CLS has been, and continues to be,
non-recourse financing arranged for individual properties and secured by
these properties (mortgage-type loans in SPVs). As a result, the parameters
and characteristics of the properties being financed are decisive for the
financing terms and conditions agreed.
Portfolio loans secured by multiple properties are also used when
circumstances require it or to obtain better terms. CLS has more portfolio
financings in the UK as this has allowed longer term loans (i.e. longer than
5-years) to be secured whereas in Europe, 7 or even 10-year loans can be
secured on individual properties.
From time to time, CLS has evaluated unsecured loans but has concluded against
a switch as the rates obtained on our European secured loans are very
competitive and that across the portfolio, but particularly in the UK, very
high break costs would be incurred. Also in the current market, secured
financing is cheaper than the unsecured market and thus remains our
preference.
CLS had 46 loans at the end of 2022 with 25 different lenders and places great
importance on the value, and diversity, of these relationships. In addition,
CLS had unsecured and undrawn facilities of £50 million, being an overdraft
of £20 million and a £30 million Revolving Credit Facility ("RCF"). We
continue to explore whether to increased the size of the RCF, recognising the
increased size of the Group, to provide greater flexibility.
Loan To Value ("LTV")
For the CLS Group, a LTV in the range 35% to 45% is targeted, albeit it could
be higher or lower for a short period of time. As it is a net debt measure,
it should be noted that Group LTV is not impacted by the original LTV of loan
transactions but instead by valuations, acquisitions, capex and disposals.
Given the more uncertain economic backdrop currently, a loan to value below
40% is being targeted in the short-to-medium-term which is expected to result
in CLS being a net seller of property in 2023.
For individual financing transactions, CLS will try to secure as high a loan
amount as available from the lenders approached, whilst remaining
conservative and ensuring that the cost of debt is not adversely affected. The
general aim is to secure LTVs at prevailing levels, based on market knowledge
and understanding of lenders' appetite, with an individual maximum LTV of 80%.
If the LTV of a loan transaction falls below 35% (through amortisation or an
increase in valuation), the aim is to refinance the loan to release some
equity on expiry or earlier if significant break costs are not incurred.
Debt maturity
For individual loan transactions, the general aim is to secure as long a
maturity as available from the lenders approached, assuming the property
financed is a long-term investment. The maturity though will be adapted to
the specifics of the property. For instance, it may be best to execute a
short-term extension to a loan when a property's letting situation is expected
to improve and then refinance longer-term when that letting situation has
improved.
The overall intention is to align the maturity of the debt portfolio with that
of the WAULT of the property portfolio. However, if market lease terms
continue to shorten, a longer relative debt maturity may be preferred. The
intention is to avoid large refinancing risks over short time periods where
possible. The general rule is that a maximum of 30% of the Group's debt is in
one currency or 20% of consolidated Group debt should mature in any 12-month
period, although, pre the recently agreed refinancings, 2024 was an outlier.
However, this is somewhat dependent on the availability of longer-term debt
at different periods of time.
Fixed/floating debt mix and hedging strategy
Fixed rate debt is targeted to be in the range 60% to 90% of total group debt.
Fixed rate debt is defined as fixed rate loans and floating rate loans swapped
to fixed rate via interest rate swaps. The advantage of fixed rate debt is
that it gives certainty of cash flow but on the downside can result in high
break costs when repaid early due to make whole clauses with the vice versa
true for floating rate debt. Fixed rate debt will not usually be chosen if
there is much doubt about keeping the property for the life of the loan.
On the whole, lenders require floating rate loans to be hedged. When
negotiating loans, CLS will aim for a flexible interest rate hedging approach
if possible (e.g. only hedge part of the loan, or only if underlying index
rate resets above a defined level). A minimum 50% of floating rate debt is to
be hedged.
Whilst fixed rate debt is the default position, CLS always evaluates each
property on its merits. Floating rate debt is sometimes preferred as a
short-term solution whilst the letting situation is improved or as a sale of
the building is expected in the near term. In the current market, more
floating rate loans have been executed partly in the expectation that interest
rate volatility and swap levels will reduce in the short to medium term.
CLS uses natural FX hedging by borrowing in the currency of the country in
which the property is located and does not seek to hedge the equity portion of
a property's financing. Interest rate hedging is limited to simple vanilla
instruments such as interest rate swaps, and interest rate caps or collars.
There are no speculative transactions over-hedging, speculative transactions
nor hedging at a group level.
Sustainable finance
Sustainability is a fundamental part of CLS' DNA with it being one of: our key
performance indicators; our quality differentiators for refurbishments; and
our investment tenets. In 2020 and 2021, CLS executed our first two "green"
loans with Aviva and Scottish Widows, each of which had a 10-basis point
incentive for meeting certain sustainability targets which align with our Net
Zero Carbon Pathway for these properties. All KPIs have been met.
CLS has approximately 20% of its debt portfolio in green loans and is
targeting to have over 50% by 2030. We think this target should be achievable
as the UK financing market is fairly well advanced in terms of sustainable
financing, the markets in Germany and France are now increasingly maturing. We
would therefore anticipate securing more green financing in the next couple
of years.
Going forward
2023 focus and priorities
On the whole, CLS only starts to engage with banks around six months before
the expiry of a loan as at that point there is good clarity around the
property's letting situation and the loan is now within the bank's period of
focus. The same situation holds true in 2023 but CLS is now more focused on
all the financings in 2023 and 2024 given the relatively higher proportion of
the debt portfolio maturing during this period and greater uncertainty in the
market.
Considerable progress has been made in the first two months of 2023 with
extending or refinancing 2023 and 2024 maturities such that 6 financings have
been executed, received credit approval or been agreed. These actions not only
spread out the debt profile but would have resulted in an increase in the
debt maturity from 3.8 to 4.2 years.
Once these financings have been executed, the total debt to be refinanced over
2023 and 2024 would have reduced from £505 million to £301 million. This
would leave 7 refinancings left in 2023 for £94 million, all of which
are in Germany and France, and we are confident that these will be
completed successfully.
Evolution of our cost of debt
Given the increase in the cost of debt for floating rate loans during 2022 and
the start of 2023, and as existing fixed rate loans mature, CLS' cost of debt
will increase. CLS' cost of debt hit an all time low of 2.22% at 31 December
2021 and had risen to 2.69% at 31 December 2022.
Based on the current interest rate yield curve, it is expected that CLS'
overall cost of debt will increase by 50-60 basis points in 2023 (14% of total
debt to be refinanced at c.250 basis points higher than the current group
weighted average and 24% floating and unhedged) cost of debt will rise by a
further by 20-25 basis points in 2024 despite rates having peaked in 2022 due
to the expiration of historic low cost fixed rate debt (a further 13% of total
debt to be refinanced at c.200 basis points higher than the current weighted
group average as well as 38% unhedged or recently refinanced). However, the
increases in the cost of debt will be lower if disposals of properties
financed with higher rate floating debt are made as expected.
It should be noted that 5-year sterling swap rates have already fallen by 120
basis points since their peak rates at the end of the third quarter of 2022
and could well drop further. In addition, as highlighted in the Chief
Executive Office's Review, there are considerable increases in rental income
that can be captured by filling existing vacancy and upcoming vacancy
in refurbishment schemes which would more than offset these increased finance
costs, albeit this rental income may take longer to come through.
From the future of the office to the office of the future
In the 2020 Annual Report, which was published at the height of the Covid-19
pandemic, we wrote about the then current thinking regarding the future
of the office. There was considerable uncertainty and a whole spectrum
of views about the future shape of the market and the use of space. The
future of offices remains a very pertinent topic of debate for many
audiences including workers, urban dwellers, journalists and the more general
population, but moreover it is of paramount importance for office investors.
In the past two years, much more clarity has emerged with: many of the trends
evident before Covid having accelerated; hybrid working becoming much more
established and accepted; and the office market becoming bifurcated with
quality, in its many forms, becoming the determining criteria. Consequently,
tenants are becoming much more certain about their letting needs and
have therefore made letting enquiries or decisions on this basis. What is
also clear is that any concerns of a seismic shift in office demand,
comparable to the retail property market, have been disproved.
It has also become evident that not all countries in our portfolio or even
macro (and some micro) locations are responding in the same ways.
Working from home is more popular in the UK, particularly in London with its
longer commuting times, whereas, often for cultural reasons, the office is
more popular in Germany and France. Given that CLS has more of its properties
in the UK, much of the commentary refers to this market. At its essence, the
future direction and trends of the market come down to the balance between
demand and supply; albeit even this is somewhat nuanced with the increased
demand for quality limiting and reducing the available supply.
Demand
Hybrid working and occupancy
One of the clearest indicators of a shift in office demand has been the
reduction in office occupancy, and the consequent reduction in travel, leisure
and other associated infrastructure, as a result of hybrid working. It does
though need to be remembered that pre-pandemic, occupancy (which was not
hugely then monitored) was thought to be only 60% to 70% as a result of
holidays, illness, working at other sites and existing flexible work policies,
amongst others.
Since the roll-out of vaccines and the lifting of Covid restrictions,
occupancy has been slowly rising to anywhere between 30% and 50% on average,
with far greater attendance on Tuesdays, Wednesdays and Thursdays. However,
this is not an even trend across all types of property or locations and there
are great variations by industry as many jobs are just not feasible at home.
The appeal of working from home appears to be diminishing with LinkedIn
reporting in January 2023 that the number of fully remote jobs advertised in
the UK had fallen for the eight month in a row to 11% - the lowest level since
the site began collecting data. The return to the office is driven by multiple
factors such as an improved office environment and better user experience and
also, maybe counterintuitively, more presenteeism due to a weakening jobs
market and greater employer power. As highlighted by Fredrik in his review,
the benefits of being in an office such as collaboration, communication and
creativity are also being increasingly valued again.
The Flex market has risen in importance but it only suits central locations
and employers who are willing to pay much higher prices for greater
flexibility and top-end amenities.
CLS has a limited flex offering, Base Offices, which we are currently rolling
out in a few, select locations as a business incubator to encourage future
take-up of greater amounts of space in the same building.
Quality
One of the other reasons that working from home is diminishing is the increase
in the quality of offices that are now being offered. Both the challenges and
opportunities in European offices can be summarised as recognising, and
responding to, the experience, behaviour and needs of the end user. To a large
extent it is about enticing workers back to the office but also recognising
what the office does well that cannot be replicated by video conferencing and
using better office design to reinforce these qualities. In the war for
talent, the office acts as the physical embodiment of a company's culture and
plays a vital part in attracting staff to join a company.
Quality is now the key market differentiator and, in this bifurcated market,
higher prices and greater rental growth are being commanded by the
better-quality space. The elements that we are seeing, and acting upon, are
amenity, flexibility, sustainability, health & well-being, and digital.
More about how CLS is implementing these quality factors can be read in our
sections on "Investing in our properties" and Sustainability.
Supply
Sustainability
As with quality, sustainability dynamics are nuanced with both the pull
effects of greater requirements for almost all stakeholders as well as the
push impacts of increased regulation. At its simplest, there is increasing
evidence that more sustainable buildings command higher prices. It is though
somewhat hard to disaggregate the "green" elements of a property's value and
more sustainable buildings tend to be newer. However, it is also clear that
more sustainable buildings lead to a reduction in negative environmental
impacts, lower operational and maintenance costs, and greater appeal to
occupiers concerned with corporate reputation and sustainability targets.
On the regulatory front, Governments are increasing the Energy Performance
Certificate (or equivalent) ratings with which office buildings need to
comply. In a period of heightened energy and thus total occupancy costs, this
also accords well with tenants' considerations. In addition, there is an
increased emphasis on "retrofit first" as favoured by CLS rather than new
build as the embodied carbon within existing buildings is taken into account
in considering a building's carbon footprint lifecycle.
In 2023, in response to the post-pandemic world of work with the new era of
flexible working and to meet zero carbon targets, the British Council
for Offices increased its recommended average density to 10-12m(2) per
person compared with the average in 2018 of 9.6m(2).
With the ability to convert offices to residential under permitted development
rights in the UK being reduced, all of this is leading to an increased risk of
stranded and unlettable assets, for which as yet there is no obvious solution,
and overall less supply. Colliers estimates that some 20m sq. ft of London
office space, or 10% of the total market, will be unlettable from April 2023
when the new minimum EPC E regulations come in.
Construction
The increased demand for quality, sustainable offices is leading to a shortage
of available supply, at least in the short to medium term. England's office
footprint had already declined by 6 per cent between 2014 and 2021. In Q4
2022, Cushman and Wakefield reported that the availability of grade-A office
space in London was at its lowest level since 2010 and assuming demand
remained consistent, further rent increases could be expected. Whilst Knight
Frank estimates that London will have an office shortfall of 11 million sq. ft
between 2023 and 2026.
This situation has been exacerbated by unfavourable economic conditions in
the construction market with DZ HYP commenting on the German market in
October 2022 that, "Since space under construction is usually already let, the
postponement of planned projects due to increased construction and financing
costs could lead to an even scarcer supply of space."
This reduced supply and more pre-lets for new-build offices will also start to
benefit the office refurbishments that CLS is carrying out.
Conclusion
In summary, there is still no definitive answer to all the questions around
the future of the office in a post-pandemic world but there are much clearer
trends which continue to evolve, e.g. we are currently seeing greater employer
demands and employee desires for increased time in the office. It is expected
that the market, as before, will still be heavily subject to overall supply
and demand factors. We believe that as a result of hybrid working there will
be around 10% lower demand but there will also be much lower supply
particularly for the "Future Office Winners" which are high quality,
sustainable, and well-connected to public transport and urban amenities.
Valuation trends are currently dominated by macro-economic factors in terms of
forecast interest rates, GDP and employment. Although rental indexation,
which applies to the majority of CLS' properties, is acting as a significant
offset. Ultimately, the Future Office Winners will start to see higher
valuations coming through from rental growth and lower yields. CLS' business
model, to own the best offices in our locations, fits very well into the new
world.
Our risk management framework
How we manage and govern risk
Top down - the Board and its committees create the boundaries
The Board
The Board has overall responsibility for risk and for maintaining robust risk
management and internal controls. The Board is responsible for establishing
the extent to which it is willing to accept some level of risk to deliver
CLS' strategy i.e. determining a risk appetite. It is also responsible for
undertaking a thorough risk assessment. The strategy and strategic objectives
for any one year are discussed alongside monitoring the longer-term viability
of the Group. The Board sets business wide delegated authority limits. Risk
management processes, which include health and safety, human resources and
sustainability risk management amongst others, are employed within
the business and updates are reported to the Board at each meeting.
The Audit Committee
The Audit Committee is the key oversight and assurance function for risk
management, internal controls and viability. An update on risks and the
control environment is presented at each Audit Committee meeting including
the results of any internal control review procedures undertaken in the
period. Senior managers also attend Audit Committee meetings to discuss
specific risk areas and these discussions are supplemented by external
advisors where relevant. The Audit Committee then reports up to the Board
on the effectiveness of risk management and internal controls.
The Executive Committee
The Executive Committee meets weekly and comprises the CEO and the CFO
together with other senior leaders as required. It has day-to-day operational
oversight of risk management. Major business-wide decisions such as property
acquisitions, disposals and significant strategy changes are discussed at the
Executive Committee meetings including consideration of their impact on risk
assessment and appetite. These are reviewed by the Board before
implementation, subject to authorisation limits.
The Senior Leadership Team
The risks, being both principal and emerging, which the Group faces are
reviewed and monitored in Senior Leadership Team meetings throughout the year
and presented to the Board and Audit Committee at least every six months for
further discussion and oversight. The Senior Leadership Team comprises the
CEO, the CFO, the COO, regional business heads as well as other
senior managers and meets every fortnight.
Bottom up - Management of risks throughout the business
Each business area operates various processes to ensure that key risks are
identified, evaluated, managed and reviewed appropriately. For example:
· a monthly asset management portfolio review for each region is prepared
and circulated to the Board which outlines key business risks, developments
and opportunities; and
· the development team convenes risk and opportunity workshops with the
design team at the feasibility stage of development projects. Regular reviews
are then part of the design development to ensure the continuous
identification and management of risks throughout the development process.
The potential risks associated with loss of life or injury to members of the
public, customers, contractors or employees arising from operational
activities are continually monitored. Competency checks are undertaken for the
consultants and contractors we engage and regular safety tours of our assets
are undertaken by the property management team.
In addition, the wellbeing of our employees is a key focus for the Group and
various activities are supported by the Board including the delivery of annual
mental health workshops and company-funded employee contributions to promote
healthy lifestyle initiatives such as gym, or other sports club, memberships.
In this way some people risks are somewhat mitigated.
The Group invested in an internal controls and risk software at the end of 2021. Work continued throughout 2022 to populate this system so that we can fully embed an effective risk management structure within our operations as well as monitor and report the risks and their associated internal controls more efficiently to the Audit Committee and the Board.
Our priorities for 2022
· Roll-out of risk and internal control software.
· Implement Grant Thornton findings.
· Establish milestone targets for Net Zero Carbon pathway.
· Engage external consultants to assist us with in-depth analysis of
climate-related resilience risk set across different climate scenarios.
· Establish Risk and Sustainability Committee.
· Establish benchmarks and targets for Social Value Framework.
· Make improvements based on tenant surveys.
· Simulate a major business interruption to test the Group's updated
business continuity plan.
· Ensure Cyber Essentials plus ranking retained.
What we did in 2022
· We established our Sustainability Committee to oversee the implementation
our sustainability strategy, incorporating our Net Zero Carbon Pathway and
Social Value framework. The Committee discussed strategy implementation, Net
Zero Carbon Pathway progression and development of our Social Value Framework.
· Software for modelling the impact of physical climate risk on our
property portfolio was launched.
· The Board and Senior Leadership Team had an externally facilitated risk
workshop to discuss the principal risks of the Group, the associated risk
appetite and risk assessment and emerging risks.
· Cyber security protection levels have been raised to a market leading
position as well as ensuring compliance with industry standards such as Cyber
Essential Plus.
Risk assessment and appetite
Risk appetite
Our risk appetite is reviewed at least annually and assessed with reference
to changes both that have occurred, or trends that are beginning to emerge in
the external environment, and changes in the principal risks and their
mitigation. These will guide the actions we take in executing our strategy.
Whilst our appetite for risk will vary over time, in general we maintain a
balanced approach to risk. The Group allocates its risk appetite into five
categories:
Very low: Avoid risk and uncertainty
Low: Keep risk as low as reasonably practical with very limited, if any,
reward
Medium: Consider options and accept a mix of low and medium risk options with
moderate rewards
High: Accept a mix of medium and high risk options with better rewards
Very high: Choose high risk options with potential for high returns
The Board has assessed its risk appetite for each of the Group's principal
risks as follows:
Principal risk 2022 Risk appetite 2021 Risk appetite Change in risk appetite
1. Property High Medium Increased
2. Sustainability Medium Medium No change
3. Business interruption Low Low No change
4. Financing Medium Medium No change
5. Political & economic Medium Medium No change
6. People Medium Medium No change
On reviewing our risk appetite, the Board recognised that there are factors
outside of the Group's control, for example the market that influences their
appetite in any one year. In 2022, the market uncertainty meant that in order
to continue to operate our business model effectively, a model that has been
tried and tested over decades, it was necessary to increase appetite for
property risk. The Board do not consider this an increase in their appetite
per se but rather a reflection that that their appetite for property risk will
align with the market in which the Group does business. In addition to the
macro-economic factors, on reviewing our risk appetite the Board took note of
the prior year divergence between risk appetite and risk assessment.
Risk assessment
The general risk environment in which the Group operates has remained at a
higher level over the course of the year. This is largely due to the uncertain
Global and European economic conditions, particularly higher interest rates
and inflation and the impacts of the continued war in Ukraine.
Throughout the year, the Board monitored the changing situation and considered
its effect on the business, as it will continue to do so going forward. The
impact of the market uncertainty is discussed in the CEO review and the
individual country property reviews. The Board continues to be confident in
the CLS business model and the office market.
In considering our principal risks, set out on the following pages, any
potential impact as a result of the market uncertainties has been taken into
account.
Principal risk Risk assessment Change in risk profile in year Current direction of travel
1. Property High Unchanged No change
2. Sustainability Medium Unchanged Increasing
3. Business interruption Low Reduced No change
4. Financing High Increased No change
5. Political & economic High Unchanged No change
6. People Medium Unchanged Reducing
Risk assessment vs risk appetite
The Board's risk appetite in relation to the Group's principal risks is
broadly aligned. As shown in the table below, there is divergence of risk
appetite and risk status in relation to the financing, and political and
economic principal risks. The Board accepts there are factors in relation to
these principal risks that are outside the Group's control and are likely to
change over time. Mitigating actions have been put in place to ensure
financing risk is adequately managed and monitored to reduce the potential
impact on the Group. The Board recognises that not all risk can be fully
mitigated and that they need to be balanced alongside commercial and political
and economic considerations. If a difference between the Board's risk appetite
and the risk assessment persists for an extended period, this variance is
debated as to whether and how the gap should be closed.
2022 ratings 1. 2. 3. Business interruption 4. 5. Political & economic 6.
Property
Sustainability
Financing
People
Risk assessment High Medium Low High High Medium
Risk appetite High Medium Low Medium Medium Medium
Our principal risks
Our principal risks are discussed over the following pages along with any
change in their risk profile since the last year end and the current
direction of travel as well as our risk mitigation actions and plans. Whilst
we do not consider there has been any material change to the nature of the
Group's principal risks over the last 12 months, several risks remain
elevated as a result of the challenging external environment and significant
ongoing uncertainty.
The following pages are only focused on our principal risks being those that
have the greatest impact on our strategy and/or business model. In addition,
there are many lower level operational and financial risks which are managed
on a day-to-day basis through the effective operation of a comprehensive
system of internal controls.
Principal risk Risk description Risk assessment Change in risk profile in the year Current direction of travel Key risks KPI/OPI Link to Strategy and Business Model:
1. Market fundamentals and/or internal behaviours lead to adverse changes to High Unchanged No change · Cyclical downturn in the property market which may be indicated by EPS We acquire the right properties
Property capital values of the property portfolio or ability to sustain and improve an increase in yields
income generation from these assets.
TSR(R) We secure the right finance
· Changes in supply of space and/or demand (vacancy rate)
TAR We deliver value through active management and cost control
· Poor property/
facilities management VR
· Inadequate due diligence and/or poor commercial assessment of ACR
acquisitions
· Failure of tenants
· Insufficient health and safety risk protection
· Building obsolescence
2. As a result of a failure to plan properly for, and act upon, the potential Medium Unchanged Increasing Transition risks: EPS We acquire the right properties
Sustainability environmental and social impact of our activities, changing societal
attitudes, and/or a breach of any legislation, this could lead to damage to These include regulatory changes, economic shifts, obsolescence and TSR(R) We deliver value through active management and cost control
our reputation and customer relationships, loss of income and/or property the changing availability and price of resources.
value, and erosion of shareholder confidence in the Group.
TAR
Physical risks:
VR
These are climate-related events that affect our supply chain as well as the
buildings' physical form and operation; they include extreme weather events, ACR
pollution and changing weather patterns.
3. Data loss; or disruption to corporate or building management systems; or Low Reduced No change · Cyber threat EPS We acquire the right properties
Business interruption risk catastrophic external attack; or disaster; may limit the ability of the
business to operate resulting in negative reputational, financial and · Large scale terrorist attack TSR(R) We secure the right finance
regulatory implications for long term shareholder value.
Environmental disaster, power shortage or pandemic TAR We deliver value through active management and cost control
VR
ACR
4. The risk of not being able to source funding in cost effective forms High Increased No change · Inability to refinance debt at maturity due to lack of funding sources, EPS We secure the right finance
Financing risk will negatively impact the ability of the Group to meet its business plans market liquidity, etc.
or satisfy its financial obligations.
TSR(R) We continually assess whether to hold or sell properties
· Unavailability of financing at acceptable debt terms
TAR
· Risk of rising interest rates on floating rate debt
Cost of debt
· Risk of breach of loan covenants
· Foreign currency risk
· Financial counterparty risk
· Risk of not having sufficient liquid resources to meet payment
obligations when they fall due
5. Significant events or changes in the Global and/or European political and/or High Unchanged Reducing · Ongoing transition of the UK from the EU EPS We acquire the right properties
Political and economic economic landscape may increase the reluctance of investors and customers to
make timely decisions and thereby impact the ability of the Group to plan · Global geopolitical and trade environments TSR(R) We secure the right finance
and deliver its strategic priorities in accordance with its core business
model. TAR We deliver value through active management and cost control
VR
ACR
6. The failure to attract, develop and retain the right people with the required Medium Unchanged Reducing · Failure to recruit senior management and key executives with the EPS We deliver value through active management and cost control
People skills, and in an environment where employees can thrive, will inhibit the right skills
ability of the Group to deliver its business plans in order to create long
TSR(R)
term sustainable value. · Excessive staff turnover levels
TAR
· Lack of succession planning
VR
· Poor employee engagement levels
ACR
1. Property risk
This risk remained high during 2022 due to an uncertain market in response to
rising interest rates and a worsening economic outlook.
Mitigation in 2022 Mitigation in 2023
· In-house management model allowing close links with our tenants · Continued engagement with tenants to understand their needs and space
requirements
· First hand knowledge of tenants changing requirements
· Targeted capital expenditure often with a focus on ESG credentials
· Asset management committees meet once a month to discuss each property
· Deliver the disposal of low yielding and asset management opportunity
· Investment of £58.3 million in our properties reflecting tenant demands poor properties
· Refurbishments taking place in over 30 properties · Continued monitoring of covenant strength and health of tenants
· Rigorous and established governance approval processes for capital and · Continue high quality provision of property and facilities management
leasing decisions services with an in-house team
· Disposal of six properties with low yield, limited asset management · Maintain focus on operating our buildings safely
potential or risk/reward ratio unfavourably balanced
· Continue to maintain a high quality and diversified tenant base
· Health and safety committee that closely monitors activity and regulation
and reports to every Board meeting
2. Sustainability risk
The overall risk assessment remains at Medium. The trend of global increases
in emissions and the increasing world-wide focus on this area, as well as the
resulting focus on carbon and waste/resource reduction and habitat
preservation and restoration means the risk in this area is increasing.
Mitigation in 2022 Mitigation in 2023
· Sustainability Committee instigated to monitor progress · Continue delivery of NZC pathway
· Detailed sustainability risk registers maintained by our in-house team · Complete planned energy efficiency and PV projects
which were formally reviewed every six months
· Build on physical risk assessment to develop a climate resilience
· Acquisition of climate score platform and TCFD physical risk assessment strategy
· All KPIs for 2022 on green loans met · Implement a Sustainable and Responsible Supplier Code of Conduct
· On track with NZC pathway projects and performance · Complete and commence implementation of biodiversity net gain plan
· Independent assurance received on all environmental EPRA SBPR KPI data · Start update to BREEAM In-use V6
for more detail
· Improve social value calculation to include supply chain
· Scope 3 tracking commenced with full calculation for the first time
· Apply for Living Wage accreditation in the UK
· Baseline social value calculation completed
· Continue implementation of diversity, equity and inclusion plan
3. Business interruption risk
The business interruption risk to long-term shareholder value is deemed to
have reduced in the year due to our robust IT infrastructure. Companies will
continue to see attempted cyber attacks, phishing and fraud but knowledge and
expertise in this area remains strong and so there is no change in the current
direction of travel.
Mitigation in 2022 Mitigation in 2023
· Obtained a Centre of Internet Security 'A' rating · Maintain market leading protection position and Cyber Essentials Plus
certification
· Started the transition from annual penetration testing to a continuous
penetration testing regime through automation · Progress work on digital assets within the Group's properties (e.g.
cyber-attacks on building management systems)
· Employees tested and trained on cyber security
· Continued implementation of shared property and finance system across
· External partners used to compliment internal resource and provide the Group
independent reviews
· Continued use of external partners to deliver holistic approach
· Annual review of each property's specific emergency plan
·
4. Financing risk
The heighted economic uncertainty and interest rate increases throughout the
year has resulted in this risk increasing to High.
Mitigation in 2022 Mitigation in 2023
· Financed, refinanced or extended 12 loans to a value of £229.9 million · Be a net seller of property in 2023 to try to reduce Group LTV below 40%
· Weekly treasury meetings take place with the CEO and CFO including · Obtain bids from multiple counterparties to compete for new lending
discussion of financings, rolling 12 month cash flow forecasts, FX
requirements and hedging, amongst other items · Continue weekly treasury meetings
· Weekly cash flow forecasts prepared and distributed to Senior Leadership · Continue weekly updates to cash flow forecasts
Team
· Maintain level of fixed rate debt between 60 and 90%
· 72% of the Group's borrowings are fixed rate plus a further 4% of
interest rate caps · Monitoring lender exposure to ensure no one lender represents more than
20% of total Group debt
· Regularly monitored loan covenants
· Continue to ensure a minimum 50% of floating rate debt is hedged
· CLS borrows in local markets, and in local currencies via individual SPVs
to provide a 'natural' hedge · Given the significant quantum of debt expiry in 2023 and 2024
conversations with banks to be started earlier than the usual 6 months ahead
· Maintained a wide number of banking relationship with 25 lenders across of refinancing
the Group to diversify funding sources
· Continue implementing well-established Group financing strategy
· Maintained low weighted average cost of debt (2.69%)
· Maintained average debt maturity of 3.8 years
· Significant headroom across three main loan covenants of between 25% and
35%
· All loans have equity cure mechanisms to repair breaches
5. Political and economic risk
The economic and political uncertainty experienced throughout 2022 remain
heightened and the risk is classified as High. However, there are tentative
signs that geopolitical turmoil is calming and it appears that interest rates
and inflation have peaked but as yet there is no change in current direction
of travel.
Risk mitigation in 2022 Mitigation in 2023
· Reviewed sanctions processes · Continue to monitor events and trends closely, making business responses
if needed
· Used third party compliance screening tool for anti-money laundering
checks, and sanction and PEP lists · Continue to monitor tenants for sanction issues
· Monitored changing regulation particularly in respect of decoupling from · Maintain membership of key industry bodies for example the British
EU for any impact on our business model Property Federation, British Council of Offices and Better Buildings
Partnership
· Encouraged employees to join key industry forums
6. People risk
The risk assessment remains medium with the direction of travel somewhat
reducing with the post Covid-19 "great resignation" over however low
unemployment rates across Europe means CLS must remain an attractive employer
as the war for talent continues.
Risk mitigation in 2022 Mitigation in 2023
· CLS Group wide staff conference held in Windsor, UK · Undertake staff survey
· Engaged workforce advisory panel · Continue work with workforce advisory panel
· Quarterly mental health workshops carried out · Monitor market to ensure competitive remuneration packages across the
Group
· Successful recruitment of Head of Germany Asset Management
· Introduce revised employee bonus scheme aligned to Group performance
· Implemented multi-lingual learning platform
Emerging risks
We define emerging risks to be those that may either materialise or impact
over a longer timeframe. They may be a new risk, a changing risk or a
combination of risks for which the broad impacts, likelihoods and costs are
not yet well understood, and which could have a material effect on CLS'
business strategy.
Emerging risks may also be superseded by other risks or cease to be relevant
as the internal and external environment in which we operate evolves. The
Senior Leadership Team, which has representatives from each area of the
business, is tasked with identifying emerging risks for the business and
discussing what impact these risks may have on the business and what steps we
should be taking to mitigate these risks. The Board reviews these assessments
on an annual basis.
In 2022, the Board and the Senior Leadership Team participated in a
facilitated risk workshop to explore the risks and emerging risks for the CLS
Group. No new emerging risks were identified and the mitigations remain the
same.
Time Horizon
Risk Potential Impact Mitigation Short Medium Long
< 2yrs
2-5 yrs
> 5 yrs
Regulation/ compliance Increased capital cost of maintaining our property portfolio. Continued ongoing assessment of all properties against emerging regulatory X X
changes and benchmarking of fit-out and refurbishment projects against
Increased administration costs to ensure resources sufficient to deliver third‑party schemes.
corporate compliance.
Increasing energy and construction costs Increased cost of operating properties will reduce attractiveness of tenancies Ongoing consideration of, and investment in, energy efficient plant and X X X
to existing and potential customers. building-mounted renewable energy systems.
Increased costs of refurbishments and developments leading to reduced Continued monitoring of materials, investment in key skills for staff and
investment returns. viability assessments of buildings.
Changes in technology The attractiveness of our properties may decline if the challenges to adapt Each region updates the Senior Leadership Team on trends, including X X X
office facilities, to changing work practices/environment expectations of technology, throughout the business. The in-house management model also gives
customers and advances in technology and digitisation, are not met. valuable insights into tenants' ongoing needs and potential trend changes that
can be incorporated into the future fit-out of properties.
Changes in office occupation trends Changes in social attitudes to agile and flexible working practices may reduce In-house asset management model provides the means for the property team to: X X X
demand for space compared to historic trends as well as there being changing proactively manage customers; and gain real-time insight and transparency
needs of occupiers. on changes in needs and trends.
Workforce and society Failure to adapt to evolving expectations of an intergenerational working The establishment of the Workforce Advisory Panel and the staff survey X X X
population may reduce attractiveness as an employer in the market. process provide forums for employees to communicate views on the working
environment. The Group also interacts with recruitment agents to keep abreast
In response to conflicts, economic disparity and climate change, there may be of trends in the employment marketplace.
greater social tensions and movements which may cause staffing issues.
Climate change Increased risk of weather-related damage to property portfolio and Our sustainability strategy continues to evolve and has been developed in X X
reputational impact of not evolving sustainability goals in line with global alignment with Global Real Estate Sustainability Benchmarks (GRESB),
benchmarks and/or public expectations. consideration of the UN Sustainable Development Goals (SDGs) and climate risk
modelling.
Inability to obtain sufficient carbon credits at suitable price to offset We are investigating various solutions to achieve sufficient offsets by 2030. X
residual carbon emissions in order to achieve net zero carbon.
Going concern & viability
Going concern
Background
CLS' strategy and business model include regular secured loan refinancings,
and capital deployment and recycling through acquisitions, capital expenditure
and disposals. Over the last thirty years, the Group has successfully
navigated several periods of economic uncertainty, including the recent
economic stress resulting from the Covid-19 pandemic, Russia's invasion of
Ukraine and the cost-of-living crisis. The Group continues to have high rent
collection and low bad debts, and has a long-term track record in financing
and refinancing debt including £229.9 million completed in 2022 and a further
£237.3 million subsequent to year end, of which roughly half has been
executed and half for which credit approval has been obtained by lenders or
terms have been agreed.
Going concern period and basis
The Group's going concern assessment covers the period to 31 July 2024 ("the
going concern period"). The period chosen takes into consideration the
maturity date of loans totalling £474.4 million that expire by July 2024, of
which £226.0 million expire in the last three months of the going concern
period. The going concern assessment uses the forecast cash flows approved by
the Board at its November 2022 meeting as the Base case, updated for the
actual results achieved for 2022, benchmarked against 2023. The assessment
also considers a Severe but plausible case and Reverse stress testing.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case take account of the Group's
principal risks and uncertainties, and reflect the current greater uncertainty
and more challenging economic backdrop. The forecast cash flows have been
updated using assumptions regarding forecast forward interest curves,
inflation and foreign exchange, updated for a worsening of these assumptions
in 2023 and 2024. The Base case includes the impact of revenue growth,
principally from contractual increases in rent, and increasing cost levels in
line with forecast inflation. An assumed property valuation reduction of 5%
over the going concern period has also been included.
The Base case is focussed on the cash and working capital position of the
Group throughout the going concern period. In this regard, the Base case
assumes continued access to lending facilities in the UK, Germany and France,
and specifically that debt facilities of £474.4 million expiring within the
going concern period will be refinanced as expected (£335.0 million) or will
be repaid (£139.4 million, of which £125.4 million is linked to forecast
property disposals, with the balance being planned repayments). The Group
acknowledges that these refinancings are not fully within its control;
however, it is highly confident that refinancings or extensions of these loans
will be executed within the required timeframe, having taken into account:
· existing banking relationships and ongoing discussions with the lenders
in relation to these refinancings;
· CLS' track record of prior refinancings, particularly in 2022 when
£229.9 million was successfully refinanced or extended; and
· recent refinancings subsequent to the year end that have been executed,
credit approved by lenders, or where the terms have been agreed, totalling
£237.3 million.
Both the Base case and the Severe but plausible case also include property
disposals in the going concern period in line with the Group's business model
and the forecast cash flows approved by the Board in November 2022. The Group
acknowledges that property disposals are not fully within its control;
however, it is highly confident these transactions will be completed within
the going concern period, based on its history of achieving disposals,
disposals post year end and the status of transactions. The value of the
properties available for disposal is significantly in excess of the value of
the debt maturing during the going concern period.
The Group's financing arrangements contain Loan to Value ('LTV'), Interest
Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the
Base case, minimal cure payments have been forecast given that the Group
expects to maintain its compliance with the covenant requirements.
The near-term impacts of climate change risks within the going concern period
have been considered in both the Base and the Severe but plausible case and
are expected to be immaterial.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been produced by
flexing key assumptions further including: lower rents; increased service
charges; higher property and administration expenses; falling property values;
and higher interest rates. The flexed assumptions are more severe than CLS
experienced during the 2007-2009 global financial crisis and other downturns
such as that experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of 20% until
July 2024, impacting forecast refinancings, sales and cash cures. This is in
addition to the 5% in the Base case and the reduction experienced in 2022.
In the Severe but plausible case, CLS would need to take some mitigating
actions in terms of depositing cash to equity cure some loans, scaling back
uncommitted capital expenditure (without impacting revenue streams over the
going concern period) and reducing the dividend to the Property Income
Distribution required under the UK REIT rules as well as drawing some of its
existing £50 million of currently unutilised facilities of which £30 million
is committed until 30 June 2023 and £20 million is available subject to
certain criteria being met and until further notice. As with the Base case, it
is assumed that loan facilities are refinanced as they become due. If needed,
further disposals could be considered as there are no sale restrictions on
CLS' £2.4 billion of properties.
Reverse Stress Testing
The use of a Severe but plausible case above allows for the simultaneous
consideration of the impact of a number of the Group's principal risks at the
same time. The Board has also considered Reverse stress testing of the
individual assumptions which were flexed in the Severe but plausible case to
determine at which point the Group runs out of liquidity. These included lower
rents, increased service charges, higher property and administration expenses,
falling property values and higher interest rates. The most sensitive of the
impacts of the Reverse stress tests is on the Group's loan covenants, given
that non-compliance would trigger cure payments that would further reduce
available liquidity. On average across its 46 loans, CLS has comfortable
headroom for the three main covenant ratios of LTV, ICR and DSCR. This
headroom has reduced from the half-year 2022 position given the investment
property valuation reductions.
The Board considers that the Reverse stress testing is a remote scenario,
given the magnitude of the downside assumptions applied, in the context of the
historic and forecast performance of the Group and the current economic
environment. There is also a remote likelihood that all the changes modelled
would occur at the same time, and to this extent, during the going concern
period, due to the severity of the assumptions applied and their magnitude,
and the length of the going concern period. In addition, the assumptions have
been applied equally to all regions and thus there is no benefit given for
CLS' geographic and tenant diversity.
Conclusion
Given our track-record, and the progress made on refinancing and disposals
since 31 December 2022, the Directors are highly confident that the debt
falling due for repayment in the going concern period will be refinanced or
settled in line with their plans for the reasons set out above, rather than
requiring repayment on maturity, or will be extinguished as part of property
disposals in the period. After due consideration, and having taken into
account the key judgements made in relation to the magnitude and timing of
debt maturity and asset disposals during the going concern period, and the
current progress on both these categories of transactions, the Directors can
confirm that they have a reasonable expectation that the Group and the Company
will be able to continue in operation and meet its liabilities as they fall
due, with no material uncertainties that would cast significant doubt on the
ability of the Group and the Company to continue as a going concern for the
period to 31 July 2024. The Directors continue to adopt the going concern
basis in preparing these Group and Company financial statements.
Viability statement
Background, period and basis
The Group's viability assessment follows a similar methodology to the going
concern assessment in terms of analysing the Base case financial forecasts and
a Severe but plausible case but makes the assessment of the viability of the
company to continue in operation and meet its liabilities as they fall due
over a considerably longer period. The same strategy and business model, and
track record, are relevant considerations for the viability assessment.
The viability assessment covers the period to 31 December 2026 ("the viability
period"), a period chosen as it is aligned with the period of the forecast
cash flows approved by the Board at its November 2022 Board meeting. These
forecasts comprise the Base case but they have been updated for the actual
results achieved for 2022 and the first two months of 2023. The period of 4
years was chosen as this is similar to the Group's WAULT and weighted average
debt maturity, and so aligns with the period over which the Group has
sufficient visibility to reliably assess viability.
Forecast cash flows - Base case
As with the Going Concern assessment, the forecast cash flows prepared for the
Base case take account of the Group's principal risks and uncertainties, and
reflect the current greater uncertainty and more challenging economic
backdrop. The forecast cash flows have been updated using assumptions
regarding forecast forward interest curves, inflation and foreign exchange,
updated for a worsening of these assumptions in 2023 and 2024 but with some
improvement in 2025 and 2026. The Base case includes the impact of revenue
growth, principally from contractual increases in rent, and increasing cost
levels in line with forecast inflation. An assumed property valuation
reduction of 5% over the viability period but no subsequent bounce back in
valuations has also been included.
The Base case is focussed on the cash and working capital position of the
Group throughout the viability period. In this regard, the Base case assumes
continued access to lending facilities in the UK, Germany and France but given
the longer time period than the going concern period the amounts are
consequentially greater. Within the viability period, debt facilities of
£674.5 million expiring will be refinanced as expected (£535.1 million) or
will be repaid (£139.4 million, of which £125.4 million is linked to
forecast property disposals, with the balance being planned repayments). The
Group acknowledges that these refinancings are not fully within its control;
however, it is highly confident that refinancings or extensions of these loans
will be executed within the required timeframe, having taken into account:
· existing banking relationships and ongoing discussions with the lenders
in relation to these refinancings;
· CLS' track record of prior refinancings, particularly in 2022 when
£229.9 million was successfully refinanced or extended; and
· recent refinancings subsequent to the year end that have been executed,
credit approved by lenders, or where the terms have been agreed, totalling
£237.3 million.
Both the Base case and the Severe but plausible case also include property
disposals in the viability period in line with the Group's business model and
the forecast cash flows approved by the Board in November 2022. The Group
acknowledges that property disposals are not fully within its control;
however, it is highly confident these transactions will be completed within
the viability period, based on their history of achieving disposals, disposals
post year end and the status of transactions. The value of the properties
available for disposal is significantly in excess of the value of the debt
maturing during the viability period.
The Group's financing arrangements contain Loan to Value ('LTV'), Interest
Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the
Base case, minimal cure payments have been forecast given that the Group
expects to maintain its compliance with the covenant requirements.
The near-term impacts of climate change risks within the viability period have
been considered in both the Base and the Severe but plausible case and are
expected to be insignificant.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been produced by
flexing key assumptions further including: lower rents; increased service
charges; higher property and administration expenses; falling property values;
and higher interest rates. The flexed assumptions are more severe than CLS
experienced during the 2007-2009 global financial crisis and other downturns
such as that experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of 20% until
June 2024, impacting forecast refinancings, sales and cash cures, with no
further falls or recovery of values thereafter. This is in addition to the 5%
in the Base case and the reduction experienced in 2022.
In the Severe but plausible case, CLS would need to take some mitigating
actions in terms of depositing cash to equity cure some loans as envisaged
under the facilities of up to £65 million, scaling back uncommitted capital
expenditure (without impacting revenue streams over the going concern period)
and reducing the dividend to the Property Income Distribution required under
the UK REIT rules as well as drawing some of its existing £50 million of
currently unutilised facilities of which £30 million is committed until 30
June 2023 and £20 million is available subject to certain criteria being met
and until further notice. As with the Base case, it is assumed that loan
facilities are refinanced as they become due. If needed, further disposals
could be considered as there are no sale restrictions on CLS' £2.4 billion of
properties.
Conclusion
Given our track-record, and the progress made on refinancings and disposals
since 31 December 2022, the Directors are highly confident that the debt
falling due for repayment in the viability period will be refinanced or
settled in line with their plans for the reasons set out above, rather than
requiring repayment on maturity, or will be extinguished as part of property
disposals in the period. After due consideration, and having taken into
account the key judgements made in relation to the magnitude and timing of
debt maturity and asset disposals during the viability period, and the current
progress on both these categories of transactions, the Directors can confirm
that they have a reasonable expectation that the Group and the Company will be
able to continue in operation and meet its liabilities as they fall due over
the viability period.
Directors' responsibility statement
Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors are required to prepare the Group
financial statements in accordance with the Companies Act 2006 and United
Kingdom adopted International Accounting Standards and International Financial
Reporting Standards (IFRSs) and have elected to prepare the parent company
financial statements in accordance with FRS101 of United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards and
applicable law). Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and of the profit or loss of the Group for that period.
In preparing the parent company financial statements, the Directors are
required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and prudent;
· state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
· prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard
1 requires that Directors:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the entity's
financial position and financial performance; and
· make an assessment of the Group's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole;
· the strategic report includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
· the annual report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
This statement of responsibilities was approved by the Board on 8 March 2023.
Approved and authorised on behalf of the Board
David Fuller BA FCG
Company Secretary
8 March 2023
Group income statement
for the year ended 31 December 2022
2022 2021
Notes Recurring items Non-recurring items Total Restated Non-recurring items Restated
£m £m £m Recurring items £m Total
£m
Note 11 £m
Note 4
Note 4
Revenue 5 139.7 - 139.7 139.8 - 139.8
Costs (31.9) - (31.9) (31.8) - (31.8)
Net rental income 5 107.8 - 107.8 108.0 - 108.0
Administration expenses (15.7) - (15.7) (15.0) (1.2) (16.2)
Other expenses (16.2) - (16.2) (14.4) - (14.4)
Operating profit before revaluation and disposals 75.9 - 75.9 78.6 (1.2) 77.4
Net revaluation movements on investment property 14 (136.5) - (136.5) 28.5 - 28.5
Net revaluation movements on equity investments (3.8) - (3.8) 6.1 - 6.1
Profit/(loss) on sale of investment property 0.5 - 0.5 (0.1) - (0.1)
Operating (loss)/profit (63.9) - (63.9) 113.1 (1.2) 111.9
Finance income 9 10.1 - 10.1 5.9 - 5.9
Finance costs 10 (26.8) - (26.8) (25.4) - (25.4)
Foreign exchange loss (0.3) - (0.3) (2.3) - (2.3)
Impairment of goodwill (1.1) - (1.1) - - -
Share of profit of associates after tax - - - - 1.4 1.4
(Loss)/profit before tax (82.0) - (82.0) 91.3 0.2 91.5
Taxation 12 0.1 - 0.1 (14.0) 42.0 28.0
(Loss)/profit for the year attributable to equity shareholders (81.9) - (81.9) 77.3 42.2 119.5
Basic and diluted earnings per share 6 (20.2)p 29.3p
Group statement of comprehensive income
for the year ended 31 December 2022
Notes 2022 2021
£m
£m
(Loss)/profit for the year (81.9) 119.5
Other comprehensive income:
Items that may be reclassified to profit or loss
Revaluation of property, plant and equipment 27 1.9 5.5
Foreign exchange differences 27 28.5 (32.8)
Deferred tax on revaluation of property, plant and equipment 20 (0.4) (1.0)
Total items that may be reclassified to profit or loss 30.0 (28.3)
Total other comprehensive income/(expense) 30.0 (28.3)
Total comprehensive (expense)/income for the year attributable to equity (51.9) 91.2
shareholders
Group balance sheet
at 31 December 2022
Notes 2022 Restated
£m
2021
£m
Note 4
Non-current assets
Investment properties 14 2,295.0 2,247.1
Property, plant and equipment 15 39.6 41.3
Goodwill and intangible assets 2.8 3.1
Equity investments 2.7 6.6
Deferred tax 20 2.8 2.6
Derivative financial instruments 22 8.5 0.4
Other receivables 17 - 7.7
2,351.4 2,308.8
Current assets
Trade and other receivables 17 15.8 18.1
Cash and cash equivalents 18 113.9 167.4
129.7 185.5
Assets held for sale 16 20.3 44.2
Total assets 2,501.4 2,538.5
Current liabilities
Trade and other payables 19 (58.6) (57.6)
Current tax (2.0) (4.5)
Borrowings 21 (173.4) (169.1)
Derivative financial instruments 22 - (0.7)
(234.0) (231.9)
Non-current liabilities
Deferred tax 20 (110.5) (109.9)
Borrowings 21 (932.5) (862.5)
Leasehold liabilities (3.6) (3.4)
Derivative financial instruments 22 - (0.1)
(1,046.6) (975.9)
Total liabilities (1,280.6) (1,207.8)
Net assets 1,220.8 1,330.7
Equity
Share capital 25 11.0 11.0
Share premium 83.1 83.1
Other reserves 27 115.4 88.7
Retained earnings 1,011.3 1,147.9
Total equity 1,220.8 1,330.7
The financial statements of CLS Holdings plc (registered number: 02714781)
were approved by the Board of Directors and authorised for issue on 8 March
2023 and were signed on its behalf by:
Mr F
Widlund
Mr A Kirkman
Chief Executive Officer Chief
Financial Officer
Group statement of changes in equity
for the year ended 31 December 2022
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 25 Note 27
Arising in 2022:
Total comprehensive expense for the year - - 30.0 (81.9) (51.9)
Share-based payments - - 0.2 - 0.2
Dividends to shareholders - - - (32.4) (32.4)
Transfer of fair value on property, plant and equipment - - (3.5) 3.5 -
Purchase of own shares - - - (25.8) (25.8)
Total changes arising in 2022 - - 26.7 (136.6) (109.9)
At 1 January 2022 11.0 83.1 88.7 1,147.9 1,330.7
At 31 December 2022 11.0 83.1 115.4 1,011.3 1,220.8
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 25 Note 27
Arising in 2021:
Total comprehensive income for the year - - (28.3) 119.5 91.2
Share-based payments - - (0.3) - (0.3)
Dividends to shareholders - - - (30.8) (30.8)
Total changes arising in 2021 - - (28.6) 88.7 60.1
At 1 January 2021 11.0 83.1 117.3 1,059.2 1,270.6
At 31 December 2021 11.0 83.1 88.7 1,147.9 1,330.7
Group statement of cash flows
for the year ended 31 December 2022
Notes 2022 2021
£m £m
Cash flows from operating activities
Cash generated from operations 28 70.5 73.1
Interest received 1.3 0.5
Interest paid (24.2) (24.3)
Income tax paid on operating activities (4.6) (5.1)
Net cash inflow from operating activities 43.0 44.2
Cash flows from investing activities
Purchase of investment properties (83.4) (164.6)
Capital expenditure on investment properties (57.2) (35.8)
Proceeds from sale of properties 56.2 37.0
Income tax paid on sale of properties (3.2) (1.3)
Purchases of property, plant and equipment (0.4) (0.6)
Purchase of intangibles (0.8) (0.9)
Repayment of vendor loan 7.7 -
Cost on foreign currency transactions (0.2) -
Distributions received from associate and investment undertakings - 0.2
Disposal of associate undertakings - 0.5
Net cash outflow from investing activities (81.3) (165.5)
Cash flows from financing activities
Dividends paid 26 (32.4) (30.8)
Purchase of own shares (25.8) -
New loans 144.1 196.7
Issue costs of new loans (1.1) (1.4)
Repayment of loans (99.4) (107.2)
Net cash (outflow)/inflow from financing activities (14.6) 57.3
Cash flow element of net decrease in cash and cash equivalents (52.9) (64.0)
Foreign exchange loss (0.6) (4.3)
Net decrease in cash and cash equivalents (53.5) (68.3)
Cash and cash equivalents at the beginning of the year 167.4 235.7
Cash and cash equivalents at the end of the year 18 113.9 167.4
Notes to the Group financial statements
for the year ended 31 December 2022
1. General information
CLS Holdings plc (the 'Company' or 'Ultimate Parent') and its subsidiaries
(together 'CLS Holdings' or the 'Group') is an investment property group which
is principally involved in the investment, management and development of
commercial properties. The Group's principal operations are carried out in
the United Kingdom, Germany and France.
The Company is an incorporated public limited company and is registered and
incorporated in the United Kingdom. Its registration number is 02714781, with
its registered address at 16 Tinworth Street, London SE11 5AL. The Company is
listed on the London Stock Exchange and domiciled in the United Kingdom. The
Company did not change its name during the year ended 31 December 2022 or the
year ended 31 December 2021.
2. Annual financial report
This financial information has been prepared in accordance with the Companies
Act 2006 and United Kingdom adopted International Accounting Standards and
International Financial Reporting Standards (IFRSs). The Company prepares its
Parent Company financial statements in accordance with FRS 101.
The financial information set out in this announcement is unaudited and does
not constitute the Group's financial statements for the year ended 31 December
2022 or 31 December 2021 as defined by Section 434 of the Companies Act 2006.
Statutory accounts for 2021 have been delivered to the Registrar of Companies
and those for 2022 will be delivered following the Company's Annual General
Meeting.
The 2021 accounts were audited Deloitte LLP and their report was unqualified,
did not contain an emphasis of matter paragraph and did not contain any
statement under Section 498 (2) or (3) of the Companies Act 2006.
The Group's full financial statements for the year ended 31 December 2022 will
be approved by the Board of Directors and reported on by the auditors, Ernst
& Young LLP, in March 2023. Accordingly, the financial information for
2022 is presented unaudited in this announcement.
The financial statements have been prepared on the historical cost basis,
except for the revaluation properties and financial instruments that are
measured at fair values at the end of each reporting period, as explained in
the accounting policies. The consolidated financial statements, including the
results and financial position, are presented in pounds sterling, which is the
functional and presentational currency of CLS Holdings plc. The amounts
presented in the financial statements are rounded to the nearest £0.1
million.
The annual financial report (produced in accordance with the Disclosure and
Transparency Rules) can be found on the Company's website www.clsholdings.com.
The 2022 Annual Report and Accounts is expected to be posted to shareholders
on 23 March 2023 and will also be available on the Company's website.
3. Going concern
Background
CLS' strategy and business model include regular secured loan refinancings,
and capital deployment and recycling through acquisitions, capital expenditure
and disposals. Over the last thirty years, the Group has successfully
navigated several periods of economic uncertainty, including the recent
economic stress resulting from the Covid-19 pandemic, Russia's invasion of
Ukraine and the cost-of-living crisis. The Group continues to have high rent
collection and low bad debts, and has a long-term track record in financing
and refinancing debt including £229.9 million completed in 2022 and a further
£237.3 million subsequent to year end, of which roughly half has been
executed and half for which credit approval has been obtained by lenders or
terms have been agreed.
Going concern period and basis
The Group's going concern assessment covers the period to 31 July 2024 ("the
going concern period"). The period chosen takes into consideration the
maturity date of loans totalling £474.4 million that expire by July 2024, of
which £226.0 million expire in the last three months of the going concern
period. The going concern assessment uses the forecast cash flows approved by
the Board at its November 2022 meeting as the Base case, updated for the
actual results achieved for 2022, benchmarked against 2023. The assessment
also considers a Severe but plausible case and Reverse stress testing.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case take account of the Group's
principal risks and uncertainties, and reflect the current greater uncertainty
and more challenging economic backdrop. The forecast cash flows have been
updated using assumptions regarding forecast forward interest curves,
inflation and foreign exchange, updated for a worsening of these assumptions
in 2023 and 2024. The Base case includes the impact of revenue growth,
principally from contractual increases in rent, and increasing cost levels in
line with forecast inflation. An assumed property valuation reduction of 5%
over the going concern period has also been included.
The Base case is focussed on the cash and working capital position of the
Group throughout the going concern period. In this regard, the Base case
assumes continued access to lending facilities in the UK, Germany and France,
and specifically that debt facilities of £474.4 million expiring within the
going concern period will be refinanced as expected (£335.0 million) or will
be repaid (£139.4 million, of which £125.4 million is linked to forecast
property disposals, with the balance being planned repayments). The Group
acknowledges that these refinancings are not fully within its control;
however, it is highly confident that refinancings or extensions of these loans
will be executed within the required timeframe, having taken into account:
· existing banking relationships and ongoing discussions with the lenders
in relation to these refinancings;
· CLS' track record of prior refinancings, particularly in 2022 when
£229.9 million was successfully refinanced or extended; and
· recent refinancings subsequent to the year end that have been executed,
credit approved by lenders, or where the terms have been agreed, totalling
£237.3 million.
Both the Base case and the Severe but plausible case also include property
disposals in the going concern period in line with the Group's business model
and the forecast cash flows approved by the Board in November 2022. The Group
acknowledges that property disposals are not fully within its control;
however, it is highly confident these transactions will be completed within
the going concern period, based on its history of achieving disposals,
disposals post year end and the status of transactions. The value of the
properties available for disposal is significantly in excess of the value of
the debt maturing during the going concern period.
The Group's financing arrangements contain Loan to Value ('LTV'), Interest
Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the
Base case, minimal cure payments have been forecast given that the Group
expects to maintain its compliance with the covenant requirements.
The near-term impacts of climate change risks within the going concern period
have been considered in both the Base and the Severe but plausible case and
are expected to be immaterial.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been produced by
flexing key assumptions further including: lower rents; increased service
charges; higher property and administration expenses; falling property values;
and higher interest rates. The flexed assumptions are more severe than CLS
experienced during the 2007-2009 global financial crisis and other downturns
such as that experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of 20% until
July 2024, impacting forecast refinancings, sales and cash cures. This is in
addition to the 5% in the Base case and the reduction experienced in 2022.
In the Severe but plausible case, CLS would need to take some mitigating
actions in terms of depositing cash to equity cure some loans, scaling back
uncommitted capital expenditure (without impacting revenue streams over the
going concern period) and reducing the dividend to the Property Income
Distribution required under the UK REIT rules as well as drawing some of its
existing £50 million of currently unutilised facilities of which £30 million
is committed until 30 June 2023 and £20 million is available subject to
certain criteria being met and until further notice. As with the Base case, it
is assumed that loan facilities are refinanced as they become due. If needed,
further disposals could be considered as there are no sale restrictions on
CLS' £2.4 billion of properties.
Reverse Stress Testing
The use of a Severe but plausible case above allows for the simultaneous
consideration of the impact of a number of the Group's principal risks at the
same time. The Board has also considered Reverse stress testing of the
individual assumptions which were flexed in the Severe but plausible case to
determine at which point the Group runs out of liquidity. These included lower
rents, increased service charges, higher property and administration expenses,
falling property values and higher interest rates. The most sensitive of the
impacts of the Reverse stress tests is on the Group's loan covenants, given
that non-compliance would trigger cure payments that would further reduce
available liquidity. On average across its 46 loans, CLS has comfortable
headroom for the three main covenant ratios of LTV, ICR and DSCR. This
headroom has reduced from the half-year 2022 position given the investment
property valuation reductions.
The Board considers that the Reverse stress testing is a remote scenario,
given the magnitude of the downside assumptions applied, in the context of the
historic and forecast performance of the Group and the current economic
environment. There is also a remote likelihood that all the changes modelled
would occur at the same time, and to this extent, during the going concern
period, due to the severity of the assumptions applied and their magnitude,
and the length of the going concern period. In addition, the assumptions have
been applied equally to all regions and thus there is no benefit given for
CLS' geographic and tenant diversity.
Conclusion
Given our track-record, and the progress made on refinancing and disposals
since 31 December 2022, the Directors are highly confident that the debt
falling due for repayment in the going concern period will be refinanced or
settled in line with their plans for the reasons set out above, rather than
requiring repayment on maturity, or will be extinguished as part of property
disposals in the period. After due consideration, and having taken into
account the key judgements made in relation to the magnitude and timing of
debt maturity and asset disposals during the going concern period, and the
current progress on both these categories of transactions, the Directors can
confirm that they have a reasonable expectation that the Group and the Company
will be able to continue in operation and meet its liabilities as they fall
due, with no material uncertainties that would cast significant doubt on the
ability of the Group and the Company to continue as a going concern for the
period to 31 July 2024. The Directors continue to adopt the going concern
basis in preparing these Group and Company financial statements.
4. Restatement of prior period
The restatements of the prior period noted below do not change profit,
earnings per share or the net assets of the Group; they are presentational
restatements that reclassify amounts to alternative financial statement lines.
£94.1 million reclassification from property plant and equipment to investment property
The student accommodation at Spring Mews was held as investment property until
31 December 2020 when it was reclassified to property, plant and equipment.
The accounting judgement made at that time was reconsidered and it was
determined that it was more appropriate and market sector comparable to
classify the student accommodation as an investment property and so it has
been reclassified back to investment property. There is no material impact on
the income statement, other comprehensive income or basic and diluted earnings
per share.
£4.9 million reclassification from investment in associate to equity investments
The Group has a 24.2% holding in 24 Media Network AB ("N24"). This holding was
accounted for as an investment in associate (carried interest £4.9 million at
31 December 2021 and £nil at 1 January 2021. It was determined that
significant influence did not exist and therefore this holding should be
reclassified as an unlisted equity investment under IFRS 9. This has been
corrected by restating each of the affected financial statement lines for the
prior period.
In the income statement the £5.1 million presented as 'share of profit of
associates after tax' at 31 December 2021 has therefore been reclassified to
'net revaluation movements on equity investments'.
5. Segment information
The Group has two operating divisions - investment properties and other
investments. Other investments comprise the hotel at Spring Mews and other
small corporate investments. The Group manages the investment properties
division on a geographical basis due to its size and geographical diversity.
Consequently, the Group's principal operating segments are:
Investment properties: United Kingdom
Germany
France
Other investments
2022
Year ended 31 December 2022 Investment properties Other Central administration Non-recurring items Total
£m
investments(1) £m £m
£m
United Germany France
£m
£m
Kingdom(1)
£m
Rental income 48.5 38.0 12.9 - - - 99.4
Other property-related income 8.2 0.2 - 4.9 - - 13.3
Service charge income 11.2 11.3 4.5 - - - 27.0
Revenue 67.9 49.5 17.4 4.9 - - 139.7
Service charges and similar expenses (13.1) (14.1) (4.7) - - - (31.9)
Net rental income 54.8 35.4 12.7 4.9 - - 107.8
Administration expenses (6.4) (2.8) (1.4) (0.2) (4.9) - (15.7)
Other expenses (8.1) (4.2) (0.7) (3.2) - - (16.2)
Revenue less costs 40.3 28.4 10.6 1.5 (4.9) - 75.9
Net revaluation movements on investment property (79.6) (41.5) (15.4) - - - (136.5)
Net revaluation movements on equity investments - - - (3.8) - - (3.8)
(Loss)/profit on sale of investment property (0.3) - 0.8 - - - 0.5
Segment operating loss (39.6) (13.1) (4.0) (2.3) (4.9) - (63.9)
Finance income 5.3 1.4 1.4 2.0 - - 10.1
Finance costs (16.4) (6.8) (2.4) (0.8) (0.4) - (26.8)
Foreign exchange loss - - - - (0.3) - (0.3)
Impairment of goodwill - (0.3) (0.8) - - - (1.1)
Segment loss before tax (50.7) (18.8) (5.8) (1.1) (5.6) - (82.0)
2021
Year ended 31 December 2021 Investment properties Other Central administration Non-recurring items Total
£m
investments(1) £m £m
£m
United Germany France
£m
£m
Kingdom(1)
£m
Rental income 53.3 33.8 14.1 - - - 101.2
Other property-related income 6.0 0.3 0.5 2.7 - - 9.5
Service charge income 12.3 11.2 5.6 - - - 29.1
Revenue 71.6 45.3 20.2 2.7 - - 139.8
Service charges and similar expenses (13.8) (12.0) (6.0) - - - (31.8)
Net rental income 57.8 33.3 14.2 2.7 - - 108.0
Administration expenses (6.9) (2.9) (1.7) 0.2 (3.7) (1.2) (16.2)
Other expenses (8.0) (3.3) (1.1) (2.5) 0.5 - (14.4)
Revenue less costs 42.9 27.1 11.4 0.4 (3.2) (1.2) 77.4
Net revaluation movements on investment property 3.7 24.2 0.6 - - - 28.5
Net revaluation movements on equity investments - - - 6.1 - - 6.1
Profit/(loss) on sale of investment property 0.7 (1.1) 0.3 - - - (0.1)
Segment operating profit/(loss) 47.3 50.2 12.3 1.4 (3.2) (1.2) 111.9
Finance income 3.8 0.2 - 1.9 - - 5.9
Finance costs (15.7) (5.4) (2.7) (1.3) (0.3) - (25.4)
Foreign exchange loss - - - (2.3) - - (2.3)
Share of profit of associate after tax - - - - - 1.4 1.4
Segment profit/(loss) before tax 35.4 45.0 9.6 4.8 (3.5) 0.2 91.5
1 Due to the prior year balance sheet restatement in respect of the
student accommodation (see note 4), the associated income and expenses have
been transferred from the 'Other investments' segment to the United Kingdom
investment property segment.
Other segment information
Assets Liabilities Capital expenditure
2022 2021 2022 2021 2022 2021
£m
£m(1)
£m
£m
£m
£m
Investment properties
United Kingdom 1,083.6 1,159.7 551.7 555.0 36.6 20.6
Germany 1,011.6 900.2 536.4 462.4 9.8 9.4
France 294.3 293.8 185.7 183.8 11.7 6.0
Other investments 111.9 184.8 6.8 6.6 0.4 0.5
2,501.4 2,538.5 1,280.6 1,207.8 58.5 36.5
1 Due to the prior year balance sheet restatement in respect of the
student accommodation (see note 4), the associated assets and liabilities have
been transferred from the 'Other investments' segment to the United Kingdom
investment property segment.
6. Alternative performance measures
Alternative performance measures ('APMs') should be considered in addition to,
and are not intended to be a substitute for, or superior to, IFRS
measurements.
Introduction
The Group has applied the October 2015 European Securities and Markets
Authority ('ESMA') guidelines on APMs and the October 2021 Financial Reporting
Council ('FRC') thematic review of APMs in these results, whilst noting the
International Organization of Securities Commissions (IOSCO) 2016 guidance and
ESMA's December 2019 report on the use of APMs. An APM is a financial measure
of historical or future financial performance, position or cash flows of the
Group which is not a measure defined or specified in IFRS.
Overview of our use of APMs
The Directors believe that APMs assist in providing additional useful
information on the underlying trends, performance and position of the Group.
APMs assist our stakeholder users of the accounts, particularly equity and
debt investors, through the comparability of information across the European
real estate sector. APMs are used by the Directors and management, both
internally and externally, for performance analysis, strategic planning,
reporting and incentive-setting purposes.
APMs are not defined by IFRS and therefore may not be directly comparable with
other companies' APMs, including peers in the real estate industry. There are
two sets of APMs which we utilise, and which are reconciled where possible to
statutory measures on the following pages.
EPRA APMs and similar CLS APMs
CLS monitors the Group's financial performance using APMs which are European
Public Real Estate Association ('EPRA') measures as these are a set of
standard disclosures for the property industry and thus aid comparability for
our stakeholder users. The latest edition of the EPRA guidelines were issued
in February 2022. The October 2019 edition of the guidelines replaced EPRA NAV
and EPRA NNNAV with three other balance sheet reporting measures, which are
defined in the glossary:
· EPRA net tangible assets (NTA);
· EPRA net realisable value (NRV); and
· EPRA net development value (NDV).
CLS considers EPRA NTA to be the most relevant of these new measures as we
believe that this will continue to reflect the long-term nature of our
property investments most accurately. However, all the new measures have been
disclosed. EPRA Earnings remains the same.
Whilst CLS primarily uses the measures referred to above, we have also
disclosed all other EPRA metrics as well as disclosing the measures that CLS
used to prefer for certain of these categories. The notes below highlight
where the measures that we monitor differ and our previous rationale for
using them. From 2021 onwards, following CLS' re-entry into the EPRA indices,
we are using all EPRA measures.
The measures we disclose are:
· EPRA net initial yield;
· EPRA 'topped-up' net initial yield;
· EPRA vacancy;
· EPRA capital expenditure;
· EPRA cost ratio; and
· EPRA LTV.
Other APMs
CLS uses a number of other APMs, many of which are commonly used by industry
peers:
· Total accounting return;
· Net borrowings and gearing;
· Loan-to-value;
· Administration cost ratio;
· Dividend cover; and
· Interest cover.
Apart from the introduction of EPRA LTV, there have been no changes to the
Group's APMs in the year with the same APMs utilised by the business being
defined, calculated and used on a consistent basis. Set out below is a
reconciliation of the APMs used in these results to the statutory measures.
1. EPRA APMs
For use in earnings per share calculations 2022 2021
Number
Number
Weighted average number of ordinary shares in circulation 404,410,051 407,395,760
For use in net asset per share calculations
Number of ordinary shares in circulation at 31 December 397,210,866 407,395,760
i) Earnings - EPRA earnings
Notes 2022 2021
£m £m
(Loss)/profit for the year (81.9) 119.5
Non-recurring items after tax 11 - 1.5
Recurring (loss)/profit for the year (81.9) 121.0
Net revaluation movement on investment property 14 136.5 (28.5)
Deferred tax on revaluations (4.8) (38.6)
Net revaluation movement on equities 3.8 (1.0)
(Profit)/loss on sale of investment property (0.5) 0.1
Current tax thereon 1.6 3.2
Movement in fair value of derivative financial instruments 9 (8.8) (5.2)
Impairment of goodwill 1.1 -
Uplift in value of equity investments - (5.1)
EPRA earnings 47.0 45.9
Basic and diluted earnings per share (20.2)p 29.3p
EPRA earnings per share 11.6p 11.3p
ii) Net asset value measures
2022 2021
2022 IFRS EPRA EPRA EPRA IFRS EPRA EPRA EPRA
NAV NTA NRV NDV NAV NTA NRV NDV
£m
£m
£m
£m
£m £m £m £m
Net assets 1,220.8 1,220.8 1,220.8 1,220.8 1,330.7 1,330.7 1,330.7 1,330.7
Goodwill as a result of deferred tax on acquisitions - - - - - (1.1) (1.1) (1.1)
Other intangibles - (2.8) - - - (2.0) - -
Fair value of fixed interest debt - - - 87.2 - - - (4.2)
Tax thereon - - - (6.4) - - - 0.8
Deferred tax on revaluation surplus - 108.6 108.6 - - 107.8 107.8 -
Adjustment for short-term disposals - (8.6) - - - (7.8) - -
Fair value of financial instruments - (8.5) (8.5) - - 0.4 0.4 -
Purchasers' costs(1) - - 149.3 - - - 149.3 -
1,220.8 1,309.5 1,470.2 1,301.6 1,330.7 1,428.0 1,587.1 1,326.2
Per share 307.3p 329.6p 370.1p 327.7p 326.6p 350.5p 389.6p 325.5p
1 EPRA NTA and EPRA NDV reflect IFRS values which are net of
purchasers' costs. Purchasers' costs are added back when calculating EPRA NRV.
iii) Yield
EPRA net initial yield (NIY)
EPRA NIY is calculated as the annualised rental income based on the cash rents
passing at the balance sheet date less non-recoverable property operating
expenses, divided by the gross market value of the property (excluding those
that are under development, student accommodation, held as PPE or occupied by
CLS).
2022 2021
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Rent passing 46.0 42.6 12.8 101.5 52.8 34.9 11.7 99.4
Adjusted for properties in development (0.9) - - (0.9) (2.6) (0.5) - (3.1)
Forecast non-recoverable service charge (1.5) (2.1) (0.3) (3.9) (2.0) (0.6) (0.3) (2.9)
Annualised net rents (A) 43.6 40.5 12.5 96.7 48.2 33.8 11.4 93.4
Property portfolio(1) 946.8 990.1 284.2 2,221.1 1,034.5 883.0 280.1 2,197.6
Adjusted for properties in development (118.7) (4.9) - (123.6) (103.7) (46.2) - (149.9)
Purchasers' costs at 6.8% 56.3 67.0 19.3 142.6 63.3 56.9 19.0 139.2
Property portfolio valuation including purchasers' costs (B) 884.4 1,052.2 303.5 2,240.1 994.1 893.7 299.1 2,186.9
EPRA NIY (A/B) 4.9% 3.9% 4.1% 4.3% 4.8% 3.8% 3.8% 4.3%
EPRA 'topped-up' NIY
EPRA 'topped-up' NIY is calculated by making an adjustment to EPRA NIY in
respect of the expiration of rent-free periods (or other unexpired lease
incentives such as discounted rent periods and step rents).
2022 2021
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Contracted rent 48.1 47.4 14.7 110.2 55.0 38.8 13.8 107.6
Adjusted for properties in development (0.9) - - (0.9) (2.6) (0.6) - (3.2)
Forecast non-recoverable service charge (1.5) (2.1) (0.3) (3.9) (2.0) (0.6) (0.3) (2.9)
'Topped-up' annualised net rents (A) 45.7 45.3 14.4 105.4 50.4 37.6 13.5 101.5
Property portfolio(1) 946.8 990.1 284.2 2,221.1 1,034.5 883.0 280.1 2,197.6
Adjusted for properties in development (118.7) (4.9) - (123.6) (103.7) (46.2) - (149.9)
Purchasers' costs (6.8%) 56.3 67.0 19.3 142.6 63.3 56.9 19.0 139.2
Property portfolio valuation including purchasers' costs (B) 884.4 1,052.2 303.5 2,240.1 994.1 893.7 299.1 2,186.9
EPRA 'topped-up' NIY (A/B) 5.2% 4.3% 4.8% 4.7% 5.1% 4.2% 4.5% 4.6%
1 The above tables comprise data of the investment properties and
properties held for sale. They exclude owner occupied, land, student
accommodation and hotel.
iv) Vacancy
The EPRA vacancy rate calculates vacancy as a proportion of the ERV of the
total portfolio and, from 2021, is the only measure used by the Group.
EPRA vacancy
2022 2021
£m £m
ERV of vacant space (A) 9.0 7.0
ERV of let space 112.4 113.0
ERV of total portfolio (B) 121.4 120.0
EPRA vacancy rate (A/B) 7.4% 5.8%
v) Capital expenditure
EPRA capital expenditure
This measure shows the total amounts spent on the Group's investment
properties on an accrual and cash basis with a split between expenditure used
for the creation of incremental space and enhancing space ('no incremental
space').
Notes 2022 2021
£m £m
Acquisitions 14 83.4 179.5
Amounts spent on the completed investment property portfolio 14
Creation of incremental space 12.7 8.6
Creation of no incremental space 45.5 27.4
EPRA capital expenditure 141.6 215.5
Conversion from accrual to cash basis (1.0) (15.1)
EPRA capital expenditure on a cash basis CF(1) 140.6 200.4
1 Group statement of cash flows
vi) Cost ratios
EPRA cost ratio
Notes 2022 2021
£m £m
Recurring administration expenses 15.7 15.0
Other expenses 5 16.2 14.4
Less: Other investments segment 5 (5.7) (4.4)
26.2 25.0
Net service charge costs 5 4.9 2.7
Service charge costs recovered through rents but not separately invoiced (0.3) (0.3)
Dilapidations receipts (1.2) (1.2)
EPRA costs (including direct vacancy costs) (A) 29.6 26.2
Direct vacancy costs (4.0) (3.4)
EPRA costs (excluding direct vacancy costs) (B) 25.6 22.8
Gross rental income 5 99.4 101.2
Service charge components of gross rental income (0.3) (0.3)
EPRA gross rental income (C) 99.1 100.9
EPRA cost ratio (including direct vacancy costs) (A/C) 29.9% 26.0%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 25.8% 22.6%
vii) EPRA LTV
Notes 2022 2021
£m £m
Borrowings from financial institutions 21 1,105.9 985.2
Bank loans (secured notes) 21 - 46.4
Foreign currency derivatives 22 - 0.7
Net payables 44.8 44.0
Cash and cash equivalents 18 (113.9) (167.4)
Net debt (A) 1,036.8 908.9
Properties held as property, plant and equipment 15 37.5 39.2
Investment properties 14 2,295.0 2,247.1
Properties held for sale 16 20.3 44.2
Financial assets - equity investments 2.7 1.7
Total property value (B) 2,355.5 2,344.8
EPRA LTV (A/B) 44.0% 38.8%
2. Other APMs
i) Total accounting return per share
Notes 2022 2021
pence pence
EPRA NTA at 31 December 6 329.6 350.5
Distribution - prior year final(1) 26 5.4 5.2
Distribution - current year interim(2) 26 2.6 2.4
Less: EPRA NTA at 1 January (A) 6 (350.5) (345.2)
Return before dividends (B) (12.9) 12.9
Total accounting return (NTA) (B/A) (3.7)% 3.7%
1 The 2022 prior year final dividend was 5.35p but has been rounded to
5.4p for the purpose of this note.
2 The 2021 interim dividend was 2.35p but has been rounded to 2.4p for
the purpose of this note.
ii) Net borrowings and gearing
Notes 2022 2021
£m £m
Borrowings short-term 21 173.4 169.1
Borrowings long-term 21 932.5 862.5
Add back: unamortised issue costs 21 5.3 5.9
Gross debt 21 1,111.2 1,037.5
Cash 18 (113.9) (167.4)
Net borrowings (A) 997.3 870.1
Net assets (B) 1,220.8 1,330.7
Net gearing (A/B) 81.7% 65.4%
iii) Balance sheet loan-to-value
Notes 2022 2021
£m £m
Borrowings short-term 21 173.4 169.1
Borrowings long-term 21 932.5 862.5
Less: cash 18 (113.9) (167.4)
Net debt (A) 992.0 864.2
Investment properties 14 2,295.0 2,247.1
Properties in plant, property and equipment 15 37.5 39.2
Properties and land held for sale 16 20.3 45.0
Total property portfolio (B) 2,352.8 2,331.3
Balance sheet loan-to-value (A/B) 42.2% 37.1%
iv) CLS administration cost ratio
CLS' administration cost ratio represents the cost of running the property
portfolio relative to its net income. CLS uses this measure to monitor the
efficiency of the business as it focuses on the administrative cost of active
asset management across three countries.
Notes 2022 2021
£m £m
Recurring administration expenses 15.7 15.0
Less: Other investment segment 5 (0.2) 0.2
Underlying administration expenses (A) 15.5 15.2
Net rental income (B) 5 107.8 108.0
Administration cost ratio (A/B) 14.4% 14.1%
v) Dividend cover
Notes 2022 2021
£m £m
Interim dividend 26 10.6 9.6
Final dividend 26 21.3 21.8
Total dividend (A) 31.9 31.4
EPRA earnings (B) 6 47.0 45.9
Dividend cover (B/A) 1.47 1.46
vi) Interest cover
Notes 2022 2021
£m £m
Net rental income 5 107.8 108.0
Recurring administration expenses (15.7) (15.0)
Other expenses 5 (16.2) (14.4)
Group revenue less costs (A) 75.9 78.6
Finance income (excluding derivatives and dividend income) 9 1.3 0.5
Finance costs (excluding derivatives) 10 (26.8) (25.4)
Net interest (B) (25.5) (24.9)
Interest cover (-A/B) 2.98 3.16
7. Loss/profit for the year
Loss/profit for the year has been arrived at after charging/(crediting):
Notes 2022 2021
£m £m
Auditor's remuneration: Fees payable to the Company's Auditor for:
Audit of the Parent Company and Group accounts 0.4 0.5
Audit of the Company's subsidiaries pursuant to legislation 0.2 0.1
Depreciation of property, plant and equipment 15 0.6 1.0
Employee benefits expense 8 10.2 11.3
Foreign exchange loss 0.3 2.3
Provision against trade receivables 17 0.6 (0.3)
Other services provided to the Group by the Company's Auditor consisted of the
2022 interim review of £50k (2021: £40k) and the provision of access to a
technical financial reporting database of £1k (2021: £nil).
8. Employee benefits expense
2022 2021
£m
£m
Wages and salaries 7.3 8.6
Social security costs 0.8 1.1
Pension costs - defined contribution plans 0.3 0.4
Performance incentive plan 0.8 1.0
Other employee-related expenses 1.0 0.2
10.2 11.3
The Directors are considered to be the only key management of the Group.
Information on Directors' emoluments, share options and interests in the
Company's shares is given in the Remuneration Committee Report in the Annual
Report .
The monthly average number of employees of the Group in continuing operations,
including Executive Directors, was as follows:
2022 2021
Property Number Hotel Total Property Number Hotel Total
Number
Number
Number
Number
Male 47 9 56 46 9 55
Female 46 7 53 48 9 57
93 16 16 94 18 112
9. Finance income
2022 2021
£m
£m
Interest income
Financial instruments carried at amortised cost 1.3 0.5
Movement in fair value of derivative financial instruments 8.8 5.2
Dividend income - 0.2
10.1 5.9
10. Finance costs
2022 2021
£m
£m
Interest expense
Secured bank loans 23.3 21.4
Secured notes 1.7 2.1
Amortisation of loan issue costs 1.8 1.9
Total interest costs 26.8 25.4
11. Non-recurring items
Notes 2022 2021
£m
£m
Administration costs - UK restructuring costs(1) A - (1.2)
Share of associates - profit on sale of associate(1) B - 1.4
- 0.2
Taxation - tax credit on UK restructuring costs(1) A 12 - 0.2
Taxation - deferred tax liability release due to REIT conversion C 12 - 43.7
Taxation - deferred tax asset release due to REIT conversion(1) C 12 - (1.9)
Non-recurring tax - 42.0
Total non-recurring - 42.2
1 These items are included as non-recurring items in the ERPA earnings
reconciliation presented in note 6.
A - UK restructuring costs
The Group incurred costs of £1.2m associated with redundancies made in the
UK. These costs are tax deductible and so the associated tax credit of £0.2m
has also been treated as non recurring.
B - Profit on sale of associate
This relates to the sale of our 21.8% share in Fragbite AB to Funrock (now
renamed Fragbite Group AB). The consideration for the sale was a combination
of cash and shares in the purchaser. Subsequent to our sale, the purchaser
listed on the Nasdaq Nordic stock exchange and the shares are held as an
'equity investment' on the Group balance sheet and were revalued at the year
end. The revaluation of £1.0m has been treated as a recurring item.
C - Deferred tax arising on conversion to REIT
The UK property business became a REIT on 1 January 2022. As a result, the
majority of the UK deferred tax liabilities and assets were released. The
majority of the deferred tax liability released relates to the revaluation of
the UK properties. The deferred tax assets disclosed as non-recurring relate
to the non property business in the UK and were released as it is no longer
probable that sufficient taxable profits will be generated in the future for
the recognition criteria to be met.
12. Taxation
2022 2021
£m
£m
Corporation tax
Current year charge 5.8 11.7
Non-recurring tax on restructuring costs - (0.2)
Adjustments in respect of prior years (0.5) (0.7)
5.3 10.8
Deferred tax (see note 20)
Origination and reversal of temporary differences (5.4) 3.0
Non-recurring deferred tax liability release due to REIT conversion - (43.7)
Non-recurring deferred tax asset release due to REIT conversion - 1.9
(5.4) (38.8)
Tax credit for the year (0.1) (28.0)
A deferred tax charge of £0.4 million (2021: charge of £1.0 million) was
recognised directly in equity (note 20). The charge for the year differs from
the theoretical amount which would arise using the weighted average tax rate
applicable to profits of Group companies as follows:
2022 2021
£m
£m
(Loss)/profit before tax (82.0) 91.5
Expected tax charge at applicable tax rate (15.1) 17.0
Expenses not deductible for tax purposes 1.0 2.6
Non-taxable income - (3.8)
Non-deductible loss from REIT 13.4
Deferred tax on losses not recognised 1.2 0.7
Adjustments in respect of prior years (0.5) (0.7)
Release of deferred tax on election into UK REIT regime - (43.7)
Other (0.1) (0.1)
Tax credit for the year (0.1) (28.0)
The weighted average applicable tax rate of 18.5% (2021: 18.6%) was derived by
applying to their relevant profits and losses the rates in the jurisdictions
in which the Group operated. The standard UK rate of corporation tax applied
to profits is 19.0% (2021: 19.0%).
13. Property portfolio
Notes United Kingdom Germany France Total
£m
£m
£m
£m
Investment property 14 1,030.0 990.5 274.5 2,295.0
Property held as property, plant and equipment 15 33.6 2.0 1.9 37.5
Properties held for sale 16 7.0 3.6 9.7 20.3
Property portfolio at 31 December 2022 1,070.6 996.1 286.1 2,352.8
Notes United Kingdom Germany France Total
£m(2)
£m
£m
£m
Investment property 14 1,090.5 883.0 273.6 2,247.1
Property held as property, plant and equipment 15 32.3 5.0 1.9 39.2
Properties held for sale(1) 16 38.1 - 6.5 44.6
Land held for sale(1) 16 - - 0.4 0.4
Property portfolio at 31 December 2021 1,160.9 888.0 282.4 2,331.3
1 Total differs from the assets held for sale on the Group balance
sheet due to £0.8m of associated liabilities.
2 Restated for reclassification of student accommodation, see note 4
for detail.
14. Investment property
United Kingdom Germany France Total
£m
£m
£m
investment
properties
£m
At 1 January 2022 1,090.5 883.0 273.6 2,247.1
Acquisitions - 83.4 - 83.4
Capital expenditure 36.6 9.9 11.7 58.2
Disposals (11.5) - - (11.5)
Net revaluation movement (79.5) (41.6) (15.4) (136.5)
Lease incentive debtor adjustments 0.9 6.9 - 7.8
Exchange rate variances - 48.9 14.3 63.2
Transfer from/(to) plant, property and equipment - - - -
Transfer to properties held for sale (7.0) - (9.7) (16.7)
At 31 December 2022 1,030.0 990.5 274.5 2,295.0
United Kingdom(1) Germany France Total
£m
£m
£m
investment
properties
£m
At 1 January 2021 997.9 733.2 301.7 2,032.8
Reclassification from property, plant and equipment 94.1 - - 94.1
At 1 January 2021 (restated) 1,092.0 733.2 301.7 2,126.9
Acquisitions 17.9 161.6 - 179.5
Capital expenditure 20.6 9.4 6.0 36.0
Disposals (5.0) - (10.7) (15.7)
Net revaluation movement 3.7 24.2 0.6 28.5
Lease incentive debtor adjustments (0.6) 3.0 0.3 2.7
Exchange rate variances - (48.0) (17.9) (65.8)
Transfer to properties held for sale (38.1) - (6.5) (44.6)
At 31 December 2021 (restated) 1,090.5 883.0 273.6 2,247.1
1 The prior year balances for investment property have been restated
as described in note 4 along with their respective totals.
Investment properties included leasehold properties with a carrying amount of
£77.7 million (2021: £48.6 million).
Interest capitalised within capital expenditure in the year amounted to £0.5
million (2021: £nil).
The property portfolio which comprises investment properties, properties held
for sale (note 16), and hotel and landholding, detailed in note 15, was
revalued at 31 December 2022 to its fair value. Valuations were based on
current prices in an active market for all properties. The property
valuations were carried out by external independent valuers as follows:
Investment property Other property Property portfolio Investment property Other property Property portfolio
2022 2022 2022 2021 2021 2021
£m
£m
£m
£m(1)
£m(1)
£m
Cushman and Wakefield 1,030.0 33.6 1,063.6 1,364.1 79.2 1,443.3
Jones Lang LaSalle 1,265.0 13.5 1,278.5 883.0 1.8 884.8
Directors' valuation/L Fällström AB - 3.6 3.6 - 3.2 3.2
2,295.0 50.7 2,345.7 2,247.1 84.2 2,331.3
1 The prior year balances for investment property have been restated
as described in note 4
The total fees, including the fees for this assignment, earned by each of the
valuers from the Group is less than 5% of their total revenues in each
jurisdiction.
Valuation process
The Group's property portfolio was valued by external valuers on the basis of
fair value using information provided to them by the Group such as current
rents, terms and conditions of lease agreements, service charges and capital
expenditure. This information is derived from the Group's property management
systems and is subject to the Group's overall control environment. The
valuation reports are based on assumptions and valuation models used by the
external valuers. The assumptions are typically market related, such as yields
and discount rates, and are based on professional judgement and market
evidence of transactions for similar properties on arm's length terms. The
valuations are prepared in accordance with RICS standards.
Each Country Head, who report to the Chief Executive Officer, verifies all
major inputs to the external valuation reports, assesses the individual
property valuation changes from the prior year valuation report and holds
discussions with the external valuers. When the process is complete, the
valuation report is recommended to the Audit Committee and the Board, which
considers it as part of its overall responsibilities.
Valuation techniques
The fair value of the property portfolio (excluding ongoing developments, see
below) has been determined using the following approaches in accordance with
International Valuation Standards:
United Kingdom an income capitalisation approach whereby contracted and market rental values
are capitalised with a market capitalisation rate
Germany a 10 year discounted cash flow model with an assumed exit thereafter
France both the market capitalisation approach and a 10 year discounted cash flow
approach
The resulting valuations are cross-checked against the equivalent yields and
the fair market values per square foot derived from comparable recent market
transactions on arm's length terms. Other factors taken into account in the
valuations include the tenure of the property, tenancy details, and ground and
structural conditions.
Ongoing developments are valued under the 'residual method' of valuation,
which is the same method as the income capitalisation approach to valuation
described above, with a deduction for all costs necessary to complete the
development, including a notional finance cost, together with a further
allowance for remaining risk. As the development approaches completion, the
valuer may consider the income capitalisation approach to be more appropriate.
All valuations have considered the environmental, social and governance
credentials of the properties and the potential cost of improving them to
local regulatory standards along with the broader potential impact of climate
change.
These techniques are consistent with the principles in IFRS 13 Fair Value
Measurement and use significant unobservable inputs such that the fair value
measurement of each property within the portfolio has been classified as Level
3 in the fair value hierarchy.
There were no transfers between any of the Levels in the fair value hierarchy
during either 2022 or 2021. The Group determines whether transfers have
occurred between levels in the fair value hierarchy by re-assessing
categorisation at the end of each reporting period.
Gains and losses recorded in profit or loss for recurring fair value
measurements categorised within Level 3 of the fair value hierarchy amount to
a loss of £136.5 million (2021: a gain of £28.5 million) and are presented
in the income statement in the line item 'Net movements on revaluation of
investment properties'. The revaluation deficit for the property, plant and
equipment of £1.9 million (2021: gain of £5.5 million) was included within
the revaluation reserve via other comprehensive income.
All gains and losses recorded in profit or loss in 2022 and 2021 for recurring
fair value measurements categorised within Level 3 of the fair value hierarchy
are attributable to changes in unrealised gains or losses relating to
investment property held at 31 December 2022 and 31 December 2021,
respectively.
Quantitative information about investment property fair value measurement using unobservable inputs (Level 3)
ERV Equivalent yield
Average Range Average Ra
ng
e
2022 2021 2022 2021 2022 2021 2022 2021
£ per sq. ft £ per sq. ft £ per sq. ft £ per sq. ft % % % %
UK 34.01 37.12 10.00-58.09 10.00-66.19 5.61 5.36 2.94-9.61 2.54-10.30
Germany 14.10 13.21 10.14-25.27 8.88-24.05 4.75 4.39 3.30-5.90 3.00-5.40
France 21.69 19.49 13.26-41.38 11.96-37.36 5.13 5.04 4.05-6.75 4.38-6.00
Sensitivity of measurement to variations in the significant unobservable inputs
All other factors remaining constant, an increase in ERV would increase
valuations, whilst an increase in the equivalent yield would result in a
fall in value, and vice versa. There are inter-relationships between these
inputs as they are partially determined by market conditions. An increase in
the reversionary yield may accompany an increase in ERV and would mitigate its
impact on the fair value measurement.
A decrease in the equivalent yield by 25 basis points would result in an
increase in the fair value of the Group's investment property by £138.5
million (2021: £126.9 million) whilst a 25 basis point increase would reduce
the fair value by £107.0 million (2021: £125.9 million). A decrease in the
ERV by 5% would result in a decrease in the fair value of the Group's
investment property by £86.8 million (2021: £92.2 million) whilst an
increase in the ERV by 5% would result in an increase in the fair value of
the Group's investment property by £106.5 million (2021: £71.3 million).
Where the Group leases out its investment property under operating leases the
duration is typically three years or more. No contingent rents have been
recognised in the current or prior year.
Sustainability, climate change, Net Zero Carbon Pathway and EPC compliance
The Group published its sustainability strategy including a pathway to Net
Zero Carbon ("NZC") in August 2021 and has set 2030 as its date to achieve
this. During 2021 the Group employed technical experts to carry out individual
property energy audits to identify energy and carbon saving opportunities. A
total of 76 properties were visited from January to April 2021 across the UK,
France and Germany, with new developments, properties under refurbishment and
properties earmarked for sale all excluded from the programme. The investment
needed to deliver the audit findings amounts to an estimated £65 million over
9 years for all properties. We have integrated these energy audits into each
Asset Management Plan to enable strategic decisions about the refurbishment,
sale or full redevelopment of assets to be made. The UK portfolio is already
compliant with the 2023 Minimum Energy Efficiency Standard (MEES) requirements
and the 2030 target of EPC B is factored in to the NZC Pathway model.
15. Property, plant and equipment
Hotel Land and buildings Owner- occupied property Fixtures Total
£m
£m
£m
and fittings
£m
£m
Cost or valuation
At 1 January 2021 - restated(1) 25.0 3.1 10.6 6.3 45.0
Additions - - - 0.5 0.5
Disposals - - - (0.9) (0.9)
Reclassification (to)/from investment property(2) - - 0.4 - 0.4
Reclassification to accumulated depreciation (1.2) - - (2.7) (3.9)
Revaluation 1.2 0.4 0.1 - 1.7
Exchange rate variances - (0.3) (0.1) - (0.4)
At 31 December 2021 25.0 3.2 11.0 3.2 42.4
Additions - - 0.1 0.3 0.4
Disposals - - - (0.1) (0.1)
Reclassification from investment property - - - - -
Reclassification to held for sale - (3.6) - - (3.6)
Revaluation 1.7 0.4 (0.4) - 1.7
Exchange rate variances - - 0.1 0.1 0.2
At 31 December 2022 26.7 - 10.8 3.5 41.0
Comprising:
At cost - - - 3.5 3.5
At valuation 26.7 - 10.8 - 37.5
26.7 - 10.8 3.5 41.0
Accumulated depreciation and impairment
At 1 January 2021 (1.2) - - (4.1) (5.3)
Depreciation charge (0.1) - (0.1) (0.5) (0.7)
Reclassification from cost 1.2 - - 2.7 3.9
Disposals - - - 0.8 0.8
Revaluation 0.1 - 0.1 - 0.2
At 31 December 2021 - - - (1.1) (1.1)
Depreciation charge (0.1) - (0.1) (0.4) (0.6)
Disposals - - - 0.1 0.1
Revaluation 0.1 - 0.1 - 0.2
At 31 December 2022 - - - (1.4) (1.4)
Net book value
At 31 December 2022 26.7 - 10.8 2.1 39.6
At 31 December 2021 25.0 3.2 11.0 2.1 41.3
1 The prior year balances for student accommodation have been restated
as described in note 4 along with their respective totals. Student
accommodation has not been presented as it has been reclassified in its
entirety to investment property.
2 During 2021, the CLS Group opened an office in the City of
Dusseldorf within a property classified as investment property. This is the
transfer of the value of the part of this investment property that is now
owner occupied by CLS.
Valuation techniques
The fair value of the hotel has been determined using the following approach
in accordance with International Valuation Standards:
Hotel a 10 year discounted cash flow model with an assumed exit thereafter. The
projected net operating profit in the 11th year is capitalised at a market
yield before being brought back to present day values.
This technique is consistent with the principles in IFRS 13 Fair Value
Measurement and uses significant unobservable inputs such that the fair value
measurement of the hotel within the portfolio has been classified as Level 3
in the fair value hierarchy.
Sensitivity of measurement to variations in the significant unobservable inputs
All other factors remaining constant, an increase in EBITDA would increase the
valuation, whilst an increase in exit capitalised yield would result in a fall
in value, and vice versa. A decrease in the exit capitalisation yield by 25
basis points would result in an increase in the fair value of the hotel by
£1.1 million, whilst a 25 basis point increase would reduce the fair value by
£1.1 million. A decrease in EBITDA by 5% would result in a decrease in the
fair value of the hotel by £1.4 million whilst an increase in the EBITDA by
5% would result in an increase in the fair value of the Hotel by £1.3
million.
16. Assets held for sale
2022 2021
UK Germany France Total UK Germany France Total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 37.3 - 6.9 44.2 5.9 10.2 5.8 21.9
Disposals (37.3) - (6.9) (44.2) (5.9) (10.2) (5.3) (21.4)
Transfer from investment property 7.0 - 9.7 16.7 37.3 - 6.5 43.8
Transfer from property, plant and equipment - 3.6 - 3.6 - - - -
Revaluation - - - - - - (0.1) (0.1)
At 31 December 7.0 3.6 9.7 20.3 37.3 - 6.9 44.2
The balance above comprises 3 properties (2021: 5 properties). The facts and
circumstance of the disposals or expected disposals are commercially sensitive
and therefore are not disclosed. Management expect that properties transferred
to held for sale during the year will be disposed of within 12 months, usually
via an open market process.
17. Trade and other receivables
2022 2021
£m
£m
Current
Trade receivables 5.3 8.8
Other receivables 4.9 3.9
Prepayments 2.7 2.4
Accrued income 2.9 3.0
15.8 18.1
Non-Current
Other receivables(1) - 7.7
15.8 25.8
1 This is the vendor loan granted on completion of the sale of First
Camp Sverige Holdings AB in March 2019. The loan was repaid in full during
2022.
Trade receivables are shown after deducting a provision of £2.8 million
(2021: £2.4 million) which is calculated as an expected credit loss on trade
receivables in accordance with IFRS 9 (see note 2). The movements in this
provision were as follows:
2022 2021
£m
£m
At 1 January 2.4 2.8
Debt write-offs (0.2) (0.1)
Charge/(credit) to the income statement 0.6 (0.3)
At 31 December 2.8 2.4
The group uses a provision matrix to calculate the expected credit loss for
trade receivables. The provision rates are based on the Group's historical
observed aging of debt and the probability of default. At every reporting
date, the provision rates are updated to incorporate the previous 12 months
data and forward-looking information such as actual and potential impacts of
political and economic uncertainty, if applicable. In addition, on a
tenant-by-tenant basis, the Group takes into account any recent payment
behaviours and future expectations of likely default events. Specific
provisions are made in excess of the expected credit loss where information is
available to suggest a higher provision is required, for example individual
customer credit ratings, actual or expected insolvency filings or company
voluntary arrangements, likely deferrals of payments due, agreed rent
concessions and market expectations and trends in the wider macroeconomic
environment in which our customers operate. An additional review of tenant
debtors was undertaken to assess recoverability in light of the political
and economic uncertainty.
The Directors consider that the carrying amount of trade and other receivables
is approximate to their fair value. There is no concentration of credit risk
with respect to trade receivables as the Group has a large number of customers
who are paying their rent in advance. Further details about the Group's
credit risk management practices are disclosed in note 23.
18. Cash and cash equivalents
2022 2021
£m
£m
Cash at bank and in hand 113.9 167.4
At 31 December 2022, cash at bank and in hand included £15.8 million (2021:
£13.2 million) which was restricted by a third-party charge. £10.3 million
of the restricted cash related to tenant deposits (2021: £10.1 million) and
£0.2 million from a recently terminated contract for the provision of
property management services to a related party (2021: £nil) (see note 33).
19. Trade and other payables
2022 2021
£m
£m
Current
Trade payables 4.6 3.0
Social security and other taxes 2.1 1.9
Tenant deposits 10.3 10.1
Other payables 4.2 2.0
Deferred income 13.0 19.8
Accruals 24.4 20.8
58.6 57.6
20. Deferred tax
Liabilities Assets Total deferred
tax
£m
UK capital Fair value Other Total UK capital Fair value Other Total
allowances
adjustments to properties
£m
£m
allowances
adjustments to properties
£m
£m
£m
£m £m £m
At 1 January 2021 12.3 145.3 1.9 159.5 (0.3) (6.0) (1.4) (7.7) 151.8
Charged/(credited)
to income statement (12.0) (32.0) 0.1 (43.9) 0.3 3.6 1.2 5.1 (38.8)
to OCI(1) - 1.0 - 1.0 - - - - 1.0
Exchange rate variances - (6.5) (0.2) (6.7) - - - - (6.7)
At 31 December 2021 0.3 107.8 1.8 109.9 - (2.4) (0.2) (2.6) 107.3
Charged/(credited)
to income statement - (4.9) (0.2) (5.1) - (0.3) - (0.3) (5.4)
to OCI(1) - 0.4 - 0.4 - - - - 0.4
Exchange rate variances - 5.3 - 5.3 - 0.1 - 0.1 5.4
At 31 December 2022 0.3 108.6 1.6 110.5 - (2.6) (0.2) (2.8) 107.7
1 Other Comprehensive Income.
Deferred tax has been calculated based on local rates applicable under local
legislation substantively enacted at the balance sheet date.
Deferred tax assets are recognised in respect of tax losses carried forward to
the extent that the realisation of the related tax benefit through future
taxable profits is probable. At 31 December 2022 the Group offset tax losses
valued at the applicable local tax rate of £9.8 million (2021: £9.6 million)
against the deferred tax liability arising on the fair value adjustments to
properties. At 31 December 2022 the Group did not recognise deferred tax
assets of £8.0 million (2021: £7.5 million) in respect of losses amounting
to £45.6 million (2021: £43.3 million) which may be carried forward and
utilised against future taxable income or gains. There is no expiry period for
the carried forward tax losses.
21. Borrowings
At 31 December 2022 At 31 December 2021
Current Non- Total borrowings £m Current Non- Total borrowings £m
£m
current
£m
current
£m
£m
Secured bank loans 173.4 932.5 1,105.9 122.7 862.5 985.2
Secured notes - - - 46.4 - 46.4
173.4 932.5 1,105.9 169.1 862.5 1,031.6
Issue costs of £5.3 million (2021: £5.9 million) have been offset in
arriving at the balances in the above tables.
Secured bank loans
Interest on bank loans is charged at fixed rates ranging between 0.8% and 4.4%
including margin (2021: 0.8% and 5.5%) and at floating rates of typically
SONIA or EURIBOR plus a margin. Floating rate margins range between 1.1% and
2.2% (2021: 1.1% and 2.3%). The bank loans are secured by legal charges over
£2,247.6 million (2021: £2,194.3 million) of the Group's properties, and in
most cases a floating charge over the remainder of the assets held in the
company which owns the property. In addition, the share capital of some
of the subsidiaries within the Group has been charged.
Secured green loans
The Group's debt portfolio includes two sustainability linked loans;
· £151.9m maturing in 2032
· £60.1m in 2033
These loans have an interest rate margin incentive for meeting annual
sustainability targets which align with our Net Zero Carbon Pathway for the
properties which are securing them. The targets have been independently
verified to be aligned with the Loan Market Association (LMA)
Sustainability-Linked loan principles. The targets set for any given year are
based on actual ESG data/milestones achieved in the prior year. Each of the
2022 targets (tested on 31 December 2021 actual results) have been met
resulting in lower interest rates being applied to these loans. The reduction
in interest rate margin is not considered to be a substantial modification of
the loan terms.
Secured notes
On 3 December 2013, the Group issued £80.0 million secured,
partially-amortising notes. The notes attracted a fixed-rate coupon of
4.17% on the unamortised principal amount, the balance of which was repaid
in November 2022. The notes were secured by legal charges over £137.1 million
of the Group's properties. The prior year fair value was determined by the
higher of the carrying principal amount and the discounted future cash flows
(adjusted by excluding the margin component of the fixed interest rate(1)) at
a discount rate derived from the market interest rate yield curve at the date
of the valuation.
1 The fixed interest rate is made up of a market interest rate
(typically a swap rate) plus a margin.
Capitalised interest
Interest capitalised within investment property capital expenditure during the
year was £0.5 million (2021: £0.1 million) at an average rate of 3.22%
(2021: 3.01%).
The Group has complied with all externally imposed capital requirements to
which it was subject.
The maturity profile of the carrying amount of the Group's borrowings was as
follows:
At 31 December 2022 Secured Secured Total
bank loans
notes
£m
£m
£m
Maturing in: 175.1 - 175.1
Within one year or on demand
One to two years 350.1 - 350.1
Two to five years 314.4 - 314.4
More than five years 271.6 - 271.6
1,111.2 - 1,111.2
Unamortised issue costs (5.3) - (5.3)
Borrowings 1,105.9 - 1,105.9
Due within one year (173.4) - (173.4)
Due after one year 932.5 - 932.5
At 31 December 2021 Secured Secured Total
bank loans
notes
£m
£m
£m
Maturing in: 124.3 46.5 170.8
Within one year or on demand
One to two years 111.3 - 111.3
Two to five years 432.7 - 432.7
More than five years 322.7 - 322.7
991.0 46.5 1,037.5
Unamortised issue costs (5.8) (0.1) (5.9)
Borrowings 985.2 46.4 1,031.6
Due within one year (122.7) (46.4) (169.1)
Due after one year 862.5 - 862.5
The carrying amounts of the Group's borrowings are denominated in the
following currencies:
At 31 December 2022 At 31 December 2021
Sterling Euro Total Sterling Euro Total
£m
£m
£m
£m
£m
£m
Fixed rate financial liabilities 241.3 445.8 687.1 290.0 450.8 740.8
Floating rate financial liabilities - hedged 117.4 - 117.4 140.9 - 140.9
Total fixed rate 358.7 445.8 804.5 430.9 450.8 881.7
Floating rate financial liabilities - capped - 42.6 42.6 - 47.3 47.3
Floating rate financial liabilities - unhedged 162.2 101.9 264.1 94.3 14.2 108.5
Total floating rate 162.2 144.5 306.7 94.3 61.5 155.8
520.9 590.3 1,111.2 525.2 512.3 1,037.5
Unamortised issue costs (3.5) (1.8) (5.3) (3.9) (2.0) (5.9)
Borrowings 517.4 588.5 1,105.9 521.3 510.3 1,031.6
Of the Group's total borrowings, 72% (2021: 85%) are considered fixed rate
borrowings.
The interest rate risk profile of the Group's borrowings was as follows:
At 31 December 2022 Weighted average interest rate(1) Weighted average life
Sterling Euro Total Sterling Euro Total
%
%
%
Years
Years
Years
Fixed rate financial liabilities 2.7 1.6 2.0 8.4 3.0 4.9
Floating rate financial liabilities - hedged 3.2 - 3.2 1.4 - 1.4
2.9 1.6 2.2 6.1 3.0 4.4
Floating rate financial liabilities - capped - 2.5 2.5 - 4.8 4.8
Floating rate financial liabilities - unhedged 4.8 3.5 4.3 1.4 2.5 1.8
4.8 3.2 4.1 1.4 3.1 2.2
Gross borrowings 3.5 2.0 2.7 4.6 3.0 3.8
At 31 December 2021 Weighted average interest rate(1) Weighted average life
Sterling Euro Total Sterling Euro Total
%
%
%
Years
Years
Years
Fixed rate financial liabilities 2.9 1.4 2.0 8.0 3.2 5.1
Floating rate financial liabilities - hedged 3.4 - 3.4 2.2 - 2.2
3.1 1.4 2.2 6.1 3.2 4.6
Floating rate financial liabilities - capped - 1.3 1.3 - 5.1 5.1
Floating rate financial liabilities - unhedged 2.9 1.2 2.7 2.5 2.0 2.4
2.9 1.3 2.2 2.5 4.4 3.3
Gross borrowings 3.1 1.4 2.2 5.5 3.3 4.4
1 The weighted average interest rate are based on the nominal value of
the debt facilities.
The carrying amounts and fair values of the Group's borrowings are as follows:
Carrying amounts Fair values
2022 2021 2022 2021
£m
£m
£m
£m
Current borrowings 173.4 169.1 173.4 169.1
Non-current borrowings 932.5 862.5 845.3 866.7
1,105.9 1,031.6 1,018.7 1,035.8
The valuation methods used to measure the fair values of the Group's fixed
rate borrowings were derived from inputs which were either observable as
prices or derived from prices (Level 2).
The fair value of non-current borrowings represents the amount at which a
financial instrument could be exchanged in an arm's length transaction between
informed and willing parties, discounted at the prevailing market rate, and
excludes accrued interest.
The Group had the following undrawn committed facilities available at 31
December:
2022 2021
£m
£m
Floating rate:
- expiring within one year 30.0 -
- expiring after one year - 30.0
30.0 30.0
In addition to the above committed facility, the Group has £20 million of
uncommitted facilities available (2021: £20 million).
Contractual undiscounted cash outflows
The tables below show the contractual undiscounted cash outflows arising from
the Group's gross debt.
At 31 December 2022 Less than 1 to 2 2 to 3 3 to 4 4 to 5 Over Total
1 year
years
years
years
years
5 years
£m
£m
£m
£m
£m
£m £m
Secured bank loans 175.1 350.1 121.6 54.9 137.9 271.6 1,111.2
Secured notes - - - - - - -
Total on maturity 175.1 350.1 121.6 54.9 137.9 271.6 1,111.2
Interest payments on borrowings(1) 35.3 26.5 14.3 11.3 9.4 25.2 122.1
Effect of interest rate swaps (3.9) (2.6) - - - - (6.5)
Gross loan commitments 206.5 374.0 135.9 66.2 147.3 296.8 1,226.7
At 31 December 2021 Less than 1 to 2 2 to 3 3 to 4 4 to 5 Over Total
1 year
years
years
5 years
£m
£m
£m years years
£m £m
£m £m
Secured bank loans 124.3 111.3 265.9 116.2 50.6 322.7 991.0
Secured notes 46.5 - - - - - 46.5
Total on maturity 170.8 111.3 265.9 116.2 50.6 322.7 1,037.5
Interest payments on borrowings(1) 21.1 18.4 14.6 9.7 7.6 30.0 101.4
Effect of interest rate swaps 1.1 - 0.1 - - - 1.2
Gross loan commitments 193.0 129.7 280.6 125.9 58.2 352.7 1,140.1
1 Interest payments on borrowings are calculated without taking into
account future events. Floating rate interest is estimated using a future
interest rate curve as at 31 December.
22. Derivative financial instruments
2022 2022 2021 2021
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Non-current:
Interest rate caps and swaps 8.5 - 0.4 (0.1)
Current:
Forward foreign exchange contracts - - - (0.7)
8.5 - 0.4 (0.8)
The valuation methods used to measure the fair value of all derivative
financial instruments were derived from inputs which were either observable as
prices or derived from prices (Level 2).
There were no derivative financial instruments accounted for as hedging
instruments.
Interest rate caps
The aggregate notional principal of interest rate caps at 31 December 2022 was
£nil (2021: £nil). The average period to maturity of these interest rate
caps was 3.7 years (2021: 4.2 years).
Interest rate swaps
The aggregate notional principal of interest rate swap contracts at 31
December 2022 was £117.4 million (2021: £159.4 million). The average period
to maturity of these interest rate swaps was 1.4 years (2021: 1.9 years).
Forward foreign exchange contracts
The Group uses forward foreign exchange contracts from time to time to add
certainty to, and to minimise the impact of foreign exchange movements on,
committed cash flows. At 31 December 2022 and 31 December 2021 the Group had
no outstanding foreign exchange contracts.
Derivative financial instruments cash flows
The following table provides an analysis of the anticipated contractual cash
flows for the derivative financial instruments using undiscounted cash flows.
These amounts represent the gross cash flows of the derivative financial
instruments and are settled as either a net payment or receipt.
2022 2022 2021 2021
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Maturing in:
Less than 1 year 4.3 - - (1.1)
1 to 2 years 3.5 - - (0.1)
2 to 3 years 0.8 - 0.1 (0.1)
3 to 4 years 0.6 - - -
4 to 5 years 0.1 - - -
Over 5 years - - - -
9.3 - 0.1 (1.3)
23. Financial instruments
Categories of financial instruments
Financial assets of the Group comprise: interest rate caps; foreign currency
forward contracts; financial assets at fair value through other comprehensive
income or fair value through profit and loss; trade and other receivables; and
cash and cash equivalents.
Financial liabilities of the Group comprise: interest rate swaps; forward
foreign currency contracts; bank loans; secured notes; and trade and other
payables.
The fair values of financial assets and liabilities are determined as follows:
(a) Interest rate swaps and caps are measured at the
present value of future cash flows based on applicable yield curves derived
from quoted interest rates;
(b) Foreign currency options and forward contracts are
measured using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts;
(c) The fair values of non-derivative financial assets and
liabilities with standard terms and conditions and traded on active liquid
markets are determined with reference to quoted market prices. Financial
assets in this category include financial assets at fair value through other
comprehensive income or fair value through profit and loss such as equity
investments;
(d) In more illiquid conditions, non-derivative financial
assets are valued using multiple quotes obtained from market makers and from
pricing specialists. Where the spread of prices is tightly clustered the
consensus price is deemed to be fair value. Where prices become more dispersed
or there is a lack of available quoted data, further procedures are undertaken
such as evidence from the last non-forced trade; and
(e) The fair values of other non-derivative financial
assets and financial liabilities are determined in accordance with generally
accepted pricing models based on discounted cash flow analysis, using prices
from observable current market transactions and dealer quotes for similar
instruments.
Except for investments in associates and fixed rate loans, the carrying
amounts of financial assets and liabilities recorded at amortised cost
approximate to their fair value.
Capital risk management
The Group manages its capital to ensure that entities within the Group will be
able to continue as going concerns while maximising the return to stakeholders
through the optimisation of debt and equity balances. The capital structure of
the Group consists of debt, cash and cash equivalents, other investments and
equity attributable to the owners of the parent, comprising issued capital,
reserves and retained earnings. Management perform "stress tests" of the
Group's business model to ensure that the Group's objectives can be met and
these objectives were met during 2022 and 2021.
The Directors review the capital structure on a quarterly basis to ensure that
key strategic goals are being achieved. As part of this review they consider
the cost of capital and the risks associated with each class of capital.
The gearing ratio at the year end was as follows:
Notes 2022 2021
£m
£m
Debt 21 1,111.2 1,037.5
Liquid resources 18 (113.9) (167.4)
Net debt (A) 997.3 870.1
Equity (B) 1,220.8 1,330.7
Net debt to equity ratio (A/B) 81.7% 65.4%
Debt is defined as long-term and short-term borrowings before unamortised
issue costs as detailed in note 21. Liquid resources are cash and short-term
deposits. Equity includes all capital and reserves of the Group attributable
to the owners of the Company.
Externally imposed capital requirement
The Group was subject to externally imposed capital requirements to the extent
that debt covenants may require Group companies to maintain ratios such as
debt to equity (or similar) below certain levels.
Risk management objectives
The Group's activities expose it to a variety of financial risks, which can be
grouped as:
· market risk;
· credit risk; and
· liquidity risk.
The Group's overall risk management approach seeks to minimise potential
adverse effects on the Group's financial performance whilst maintaining
flexibility.
Risk management is carried out by the Group's treasury department in close
co-operation with the Group's operating units and with guidance from the
Board of Directors. The Board regularly assesses and reviews the financial
risks and exposures of the Group.
(a) Market risk
The Group's activities expose it primarily to the financial risks of changes
in interest rates and foreign currency exchange rates, and to a lesser extent
other price risk such as inflation. The Group enters into a variety of
derivative financial instruments to manage its exposure to interest rate and
foreign currency risk and also uses natural hedging strategies such as
matching the duration, interest payments and currency of assets and
liabilities. There has been no change to the Group's exposure to market risks
or the manner in which these risks are managed and measured.
(I) Interest rate risk
The Group's most significant interest rate risk arises from its long-term
variable rate borrowings. Interest rate risk is regularly monitored by the
treasury department and by the Board on both a country and a Group basis. The
Board's policy is to mitigate variable interest rate exposure whilst
maintaining the flexibility to borrow at the best rates and with consideration
to potential penalties on termination of fixed rate loans. To manage its
exposure the Group uses interest rate swaps, interest rate caps and natural
hedging from cash held on deposit.
In assessing risk, a range of scenarios is taken into consideration such as
refinancing, renewal of existing positions and alternative financing and
hedging. Under these scenarios, the Group calculates the impact on the income
statement for a defined movement in the underlying interest rate. The impact
of a reasonably likely movement in interest rates, based on historic trends,
is set out below:
Scenario 2022 2021
Income statement
Income statement
£m
£m
Cash +50 basis points 0.6 0.8
Variable borrowings (including swaps and caps) +50 basis points (0.9) (1.0)
Cash -50 basis points (0.6) (0.8)
Variable borrowings (including swaps and caps) -50 basis points 1.5 0.5
(II) Foreign exchange risk
The Group does not have any regular transactional foreign exchange exposure.
However, it has operations in Europe which transact business denominated in
Euros and, to a minimal extent, in Swedish krona. Consequently, there is
currency exposure caused by translating into sterling the local trading
performance and net assets for each financial period and balance sheet,
respectively.
The policy of the Group is to match the currency of investments with the
related borrowing, which reduces foreign exchange risk on property
investments. A portion of the remaining operations, equating to the net assets
of the foreign property operations, is not hedged except in exceptional
circumstances. Where foreign exchange risk arises from future commercial
transactions, the Group will hedge the future committed commercial transaction
using foreign exchange swaps or forward foreign exchange contracts.
The Group's principal currency exposure is in respect of the Euro. If the
value of sterling were to increase or decrease in strength the Group's net
assets and profit for the year would be affected. The impact of a reasonably
likely movement in exchange rates, is set out below:
Scenario 2022 2022 2021 2021
Net
Profit
Net
Profit
assets
before tax
assets
before tax
£m
£m
£m
£m
1% increase in value of sterling against the Euro (6.0) 0.3 (6.2) (0.4)
1% fall in value of sterling against the Euro 6.1 (0.3) 6.3 0.4
(b) Credit risk
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group. Credit risk
arises from the ability of customers to meet outstanding receivables and
future lease commitments, and from financial institutions with which the Group
places cash and cash equivalents, and enters into derivative financial
instruments. The maximum exposure to credit risk is partly represented by the
carrying amounts of the financial assets which are carried in the balance
sheet, including derivatives with positive fair values.
For credit exposure other than to occupiers, the Directors believe that
counterparty risk is minimised to the fullest extent possible as the Group has
policies which limit the amount of credit exposure to any individual financial
institution.
The Group has policies in place to ensure that rental contracts are made with
customers with an appropriate credit history. Credit risk to customers is
assessed by a process of internal and external credit review, and is reduced
by obtaining bank guarantees from the customer or its parent, and cash rental
deposits. At 31 December 2022, the Group held £10.3 million in rent deposits
(2021: £10.1 million) against £5.3 million of trade receivables (2021: £8.8
million). The overall credit risk in relation to customers is monitored on an
ongoing basis. Moreover, a significant proportion of the Group portfolio is
let to Government occupiers which can be considered financially secure.
Credit risk also arises from cash and cash equivalents and deposits with banks
and financial institutions. For banks and financial institutions, only
independently rated parties with a minimum rating of investment grade are
accepted.
At 31 December 2022 the Group held £8.5 million (2021: £0.4 million) of
financial assets at fair value through profit and loss. Management considers
the credit risk associated with individual transactions and monitors the risk
on a continuing basis. Information is gathered from external credit rating
agencies and other market sources to allow management to react to any
perceived change in the underlying credit risk of the instruments in which the
Group invests. This allows the Group to minimise its credit exposure to such
items and at the same time to maximise returns for shareholders.
(c) Liquidity risk
Liquidity risk management requires maintaining sufficient cash, other liquid
assets and the availability of funding to meet short, medium and long-term
requirements. The Group maintains adequate levels of liquid assets to fund
operations and to allow the Group to react quickly to potential risks and
opportunities. Management monitors rolling forecasts of the Group's liquidity
on the basis of expected cash flows so that future requirements can be managed
effectively.
The majority of the Group's debt is arranged on an asset-specific,
non-recourse basis (mortgage type loans in SPVs). This allows the Group a
higher degree of flexibility in dealing with potential covenant defaults
than if the debt was arranged under a Group-wide borrowing facility. Portfolio
loans secured by multiple properties are also used when circumstances require
it or to obtain better conditions.
Banking covenants vary according to each loan agreement, but typically include
loan-to-value and income related covenants. In addition, the Group has two
"green" loans, each of which have a 10-basis point incentive for contain
certain sustainability targets. The Group targets a loan-to-value in the range
of 35% to 45%. Balance sheet loan-to-value at 31 December 2022 was 42.2%
(2021: 37.1%).
Loan covenant compliance is closely monitored by the treasury department.
Potential covenant breaches can ordinarily be avoided by placing additional
security or a cash deposit with the lender, or by partial repayment to cure an
event of default.
The Group's loan facilities and other borrowings are spread across a range of
25 banks and financial institutions so as to minimise any potential
concentration of risk.
24. Financial assets and liabilities
Fair value through profit and loss Amortised Total
£m
cost
£m carrying
value
£m
Financial assets:
Cash and cash equivalents - 113.9 113.9
Derivative financial assets 8.5 - 8.5
Other assets - non-current(1) - - -
Other assets - current(1) - 13.0 13.0
8.5 126.9 135.4
Financial liabilities:
Secured bank loans - (1,105.9) (1,105.9)
Secured notes - - -
Derivative financial liabilities - - -
Other liabilities - current(2) - (43.3) (43.3)
- (1,149.2) (1,149.2)
At 31 December 2022 8.5 (1,022.3) (1,013.8)
Fair value through profit and loss Amortised Total
£m
cost
£m carrying
value
£m
Financial assets
Cash and cash equivalents - 167.4 167.4
Derivative financial assets 0.4 - 0.4
Other assets - non-current(1) - 7.7 7.7
Other assets - current(1) - 15.7 15.7
0.4 190.8 191.2
Financial liabilities
Secured bank loans - (985.5) (985.5)
Secured notes - (46.4) (46.4)
Derivative financial liabilities (0.8) - (0.8)
Other liabilities - current(2) - (35.9) (35.9)
(0.8) (1,067.8) (1,068.6)
At 31 December 2021 (0.4) (877.0) (877.4)
1 Other assets included all amounts shown as trade and other
receivables in note 17 except prepayments of £2.7 million (2021: £2.4
million). All current amounts are non-interest bearing and receivable within
one year.
2 Other liabilities included all amounts shown as trade and other
payables in note 19 except deferred income and sales and social security taxes
of £15.1 million (2021: £21.7 million). All amounts are non-interest bearing
and are due within one year.
Reconciliation of net financial assets and liabilities to borrowings and derivative financial instruments
2022 2021
£m £m
Net financial assets and liabilities: 1,013.8 877.4
Other assets - non-current - 7.7
Other assets - current 13.0 15.7
Other liabilities - current (43.3) (35.9)
Cash and cash equivalents 113.9 167.4
Borrowings and derivative financial instruments 1,097.4 1,032.3
25. Share capital
Number of shares authorised, issued and fully paid Ordinary shares in circulation Treasury shares Total
£m
£m
ordinary shares
£m
Ordinary Treasury Total
shares in circulation
shares
ordinary
shares
At 1 January 2021, 31 December 2021 and 1 January 2022 407,395,760 31,382,020 438,777,780 10.2 0.8 11.0
Purchase of own shares (market purchase) (10,184,894) 10,184,894 - (0.3) 0.3 -
At 31 December 2022 397,210,866 41,566,914 438,777,780 9.9 1.1 11.0
The Board is authorised, by shareholder resolution, to allot shares or grant
such subscription rights (as are contemplated by sections 551(1) (a) and (b)
respectively of the Companies Act 2006) up to a maximum aggregate nominal
value of £3,310,090 representing one-third of the issued share capital of the
Company excluding treasury shares.
26. Dividend
Payment Dividend 2022 2021
£m
£m
date per share
p
Current year
2022 final dividend(1) 02 May 2023 5.35 - -
2022 interim dividend 03 October 2022 2.60 10.6 -
Distribution of current year profit 10.6 -
Prior year
2021 final dividend 29 April 2022 5.35 21.8 -
2021 interim dividend 24 September 2021 2.35 - 9.6
Distribution of prior year profit 7.70 21.8 9.6
2020 final dividend 29 April 2021 5.20 - 21.2
Dividends as reported in the Group statement of changes in equity 32.4 30.8
1 Subject to shareholder approval at the AGM on 27 April 2023. Total
cost of proposed final dividend is £21.3 million.
27. Other reserves
Notes Capital redemption reserve Cumulative translation reserve Fair value reserve Share-based payment reserve Other Total
£m
£m
£m
£m
reserves
£m
£m
At 1 January 2022 22.7 31.2 5.0 1.7 28.1 88.7
Exchange rate variances - 28.5 - - - 28.5
Property, plant and equipment:
- net fair value gains in the year 15 - - 1.9 - - 1.9
- deferred tax thereon 20 - - (0.4) - - (0.4)
- reclassification of student accommodation (3.5) (3.5)
Share-based payment credit - - - 0.2 - 0.2
At 31 December 2022 22.7 59.7 3.0 1.9 28.1 115.4
Notes Capital redemption reserve Cumulative translation reserve Fair value reserve Share-based payment reserve Other Total
£m
£m
£m
£m
reserves
£m
£m
At 1 January 2021 22.7 64.0 0.5 2.0 28.1 117.3
Exchange rate variances - (32.8) - - - (32.8)
Property, plant and equipment:
- net fair value deficits in the year 15 - - 5.5 - - 5.5
- deferred tax thereon 20 - - (1.0) - - (1.0)
Share-based payment charge - - - (0.3) - (0.3)
At 31 December 2021 22.7 31.2 5.0 1.7 28.1 88.7
The cumulative translation reserve comprises the aggregate effect of
translating net assets of overseas subsidiaries into sterling since
acquisition.
The fair value reserve comprises the aggregate movement in the value of
financial assets classified as fair value through comprehensive income,
owner-occupied property and hotel since acquisition, net of deferred tax.
The amount classified as other reserves was created prior to listing in 1994
on a Group reconstruction and is considered to be non‑distributable.
28. Notes to the cash flow
Cash generated from operations 2022 2021
£m
£m
Operating (loss)/profit (63.9) 111.9
Adjustments for:
Net movements on revaluation of investment properties 136.5 (28.5)
Net movements on revaluation of equity investments 3.8 (6.1)
Depreciation and amortisation 0.6 1.1
(Loss)/profit on sale of investment property (0.5) 0.1
Lease incentive debtor adjustments (7.8) (2.7)
Share-based payment charge 0.2 (0.3)
Changes in working capital:
Decrease/(increase) in receivables 2.3 (3.7)
(Decrease)/increase in payables (0.7) 1.3
Cash generated from operations 70.5 73.1
Non-cash movements
2022
Changes in liabilities arising from financing activities Notes 1 January 2022 Financing cash flows Amortisation of loan Fair value adjustments New leases Foreign exchange 31 December 2022
£m
£m
issue costs
£m
£m
£m
£m £m
Borrowings 21 1,031.6 43.6 1.8 - - 28.9 1,105.9
Interest rate swaps 22 0.4 - - (6.0) - - (5.6)
Interest rate caps 22 - - - (2.8) - (0.1) (2.9)
Lease liabilities 3.4 - - - - 0.2 3.6
1,035.4 43.6 1.8 (8.8) - 29.2 1,101.0
Non-cash movements
2021
Changes in liabilities arising from financing activities Notes 1 January 2021 Financing cash flows Amortisation of loan Fair value adjustments New leases Foreign exchange 31 December 2021
£m
£m
issue costs
£m
£m
£m
£m £m
Borrowings 21 970.7 88.1 2.0 - - (29.2) 1,031.6
Interest rate swaps 22 5.6 - - (5.2) - - 0.4
Interest rate caps 22 - - - - - - -
Lease liabilities - - - - 3.4 - 3.4
976.3 88.1 2.0 (5.2) 3.4 (29.2) 1,035.4
29. Contingencies
At 31 December 2022 and 31 December 2021 CLS Holdings plc had guaranteed
certain liabilities of Group companies. These were primarily in relation to
Group borrowings and covered interest and amortisation payments. Principal
amounts of loans secured from external lenders by two Group companies
totalling £29.9 million at 31 December 2022 are also covered by guarantees
provided by CLS Holdings plc (£30.2 million at 31 December 2021).
30. Commitments
At the balance sheet date the Group had contracted with customers under
non-cancellable operating leases for the following minimum lease payments:
Operating lease commitments - where the Group is lessor 2022 2021
£m
£m
Within one year 100.4 99.9
Between one and two years 85.7 88.7
Between two and three years 71.4 73.3
Between three and four years 50.3 59.2
Between four and five years 38.8 38.9
More than five years 135.0 133.4
481.6 493.4
Operating leases where the Group is the lessor are typically negotiated on a
customer-by-customer basis and include break clauses and indexation
provisions.
Other commitments
At 31 December 2022 the Group had contracted capital expenditure of £16.7
million (2021: £25.1 million). At the balance sheet date, the Group had not
exchanged contracts to acquire any investment properties (2021: £nil). There
were no authorised financial commitments which were yet to be contracted with
third parties (2021: £nil).
31. Post balance sheet events
On 2 February 2023, the Group exchanged on the disposal of a property in
France for £9.8m. Completion is scheduled for 14 April 2023 and the sale will
be paid in 2 instalments, 50% on completion and 50% on 20 December 2023.
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