REG - CLS Holdings PLC - Annual Financial Report
06/03/2024 07:00
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RNS Number : 7840F CLS Holdings PLC 06 March 2024
THIS ANNOUNCEMENT RELATES TO THE DISCLOSURE OF INFORMATION THAT QUALIFIED OR
MAY HAVE QUALIFIED AS INSIDE INFORMATION WITHIN THE MEANING OF ARTICLE 7(1) OF
THE MARKET ABUSE REGULATION (EU) 596/2014
CLS HOLDINGS PLC
("CLS", the "Company" or the "Group")
ANNOUNCES ITS UNAUDITED ANNUAL RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2023
The return to the office
CLS is a leading office space specialist and a supportive, progressive and
sustainably focused commercial landlord, with a c.£2.1 billion portfolio in
the UK, Germany and France, offering geographical diversification with local
presence and knowledge. For the year ended 31 December 2023, the Group has
delivered the following results:
31 December Change
2023 2022
EPRA Net Tangible Assets ("NTA") per share (pence) ¹ 253.0 329.6 (23.2)%
Statutory NAV per share (pence)¹ 233.8 307.3 (23.9)%
Contracted rents (£'million) 112.6 110.2 2.2%
Loss before tax (£'million) (263.4) (82.0) (181.4)
EPRA Earnings per share ("EPS") (pence) ¹ 10.3 11.6 (11.2)%
Statutory EPS from continuing operations (pence) ¹ (62.9) (20.2) (42.7)
Dividend per share (pence) 7.95 7.95 -
(1)A reconciliation of statutory to alternative performance measures is set
out in Note 5 to the financial statements
Fredrik Widlund, Chief Executive Officer of CLS, commented:
"CLS performed well during the period and made progress on its strategic
objectives. Our high-quality estate underpinned strong leasing momentum and
pricing with new leases nearly 7% above ERV. As a result, we held our
underlying vacancy rates steady, and delivered net rental income growth of
close to 5%.
"As expected, valuations reduced in the period. However, our outperformance
relative to the markets we operate in and the embedded rental growth potential
in our portfolio give us confidence in our ability to deliver long-term
growth. We remain focused on optimising our portfolio and reducing LTV through
the course of 2024, with nearly three-quarters of the loans expiring in 2024
already refinanced, and over £270m of assets targeted for disposal.
"We firmly believe the outlook for high-quality offices is bright and we are
seeing a clear trend of companies thinking strategically about the return to
the office as a value driver for their businesses. The investments we have
made and continue to make across our portfolio mean we are well placed to
thrive."
OPERATIONAL HIGHLIGHTS
· Net rental income increased by 4.8% to £113.0 million (2022:
£107.8 million) as a result of indexation (55.2% of contracted rent is
index-linked), excellent performance of our hotel and student operations and a
full-year of income from prior year acquisitions
· Strong leasing momentum with 130 new lettings and renewals (2022:
106) generating annual rent of £15.5 million (2022: £8.2 million). Signed
89% more leases by value than in 2022 and these leases were 6.9% above 31
December 2022 estimated rental values
· Underlying vacancy rate steady at 7.6% but overall vacancy rate
increased to 11.0% (2022: 7.4%) due to the completion of developments in the
year which are currently being marketed to prospective tenants
· Rent collection has continued to be strong with 99% collected
(2022: 99%)
· Sold five smaller properties (four completed and one
unconditionally exchanged) for a total of £25.4 million, 10.0% above the
latest valuations of the properties
· The buyer for Westminster Tower, Albert Embankment, which
exchanged unconditionally in June 2023, failed to complete in 2023 and thus
the deposit was called in 2024. The property is now being re-marketed for sale
· Since year-end we have received strong expressions of interest on
two sales for over £70 million at a small discount to valuations.
· Progressing additional planned sales including our successful
student accommodation operation at Spring Mews which we have now owned for ten
years
FINANCIAL HIGHLIGHTS
· Portfolio valuation down 12.5% in local currency (UK -16.7%,
Germany -9.1% and France -9.1%), in line with expectations, with estimated
rental value growth of 1.6% more than offset by yield expansion of 62 basis
points on a like-for-like basis
· EPRA NTA per share down 23.3% primarily as a result of property
valuation falls. Total accounting return for the year of -20.8% (2022: -3.7%)
· EPRA EPS down 11.2% to 10.3 pence per share due to higher
financing costs, partly offset by higher net rental income from indexation and
the excellent performance of our hotel and student operations
· Loss before tax of £263.4 million (2022: £82.0 million loss)
from valuation declines on investment properties of £302.7 million (2022:
£136.5 million loss). Statutory EPS was a loss of 62.9p
· A proposed final dividend of 5.35 pence per share, reflecting the
Board's confidence in our business and assets, resulting in an unchanged
full-year dividend of 7.95 pence per share (2022: 7.95 pence per share).
Dividend cover of 1.30 times, within the Group's stated policy
FINANCING HIGHLIGHTS
· Balance sheet remains strong with total liquidity of £120.6
million comprising cash of £70.6 million and two undrawn revolving credit
facilities totalling £50 million. Post year-end a new £10.0 million
overdraft was agreed
· Loan-to-value at 48.5% (2022: 42.2%) reflecting valuation
declines with net debt of £1,000.0 million broadly unchanged (2022: £992.0
million). Weighted average debt maturity of 3.5 years (2022: 3.8 years) with
76% at fixed rates and 4% subject to interest rate caps (31 December 2022: 72%
fixed and 4% caps)
· Weighted average cost of debt at 31 December 2023 up 92 basis
points to 3.61% (2022: 2.69%) resulting from central bank interest rate
increases and new refinancings at these higher rates
· Refinanced or extended £330.6 million of debt in 2023 at an
average of 5.27%, including £196.7 million fixed at 4.76%
· Well advanced with 2024 refinancing activity with £251.7 million
out of £350 million executed, leaving £98.3 million across 6 loans in
Germany and France with an LTV of 45%, which we are confident will be
refinanced successfully
ENVIRONMENTAL, SOCIAL AND Governance
· Our sustainability progress was recognised with an increase to a
Gold award in the EPRA Sustainability Best Practices Recommendations, up from
Silver in 2022. We have also maintained our GRESB award of 4 green stars
· We maintained over 99% Group electricity being carbon-free, and
completed our UK rooftop solar PV energy and electric vehicle charging rollout
by installing a further 111kWp of new solar arrays and 20 EV charging points
at five 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. In 2023, we spent a further £4.8 million towards our
estimated total programme cost of £65 million such that we have now invested
over £15 million since launching our Net Zero Carbon Pathway
· We are fully compliant with 2024 minimum EPC regulations in the
UK and have reduced our EPC D rated buildings by nearly 20% through a
combination of refurbishments and disposals
Dividend Timetable
The Board has recommended a final dividend of 5.35 pence per ordinary share
with the following dividend timetable:
Announcement date 6 March 2024
Ex-Dividend date 21 March 2024
Record date 22 March 2024
Payment date 2 May 2024
- ends -
Results presentation
A presentation for analysts and investors will be held in-person at the London
Stock Exchange, by webcast and by conference call on Wednesday 6 March 2024 at
8:30am followed by Q&A. Questions can be submitted either online via the
webcast or to the operator on the conference call.
· The London Stock Exchange: 10 Paternoster Square, London EC4M 7LS
· Webcast: The live webcast will be available to access here:
https://protect-eu.mimecast.com/s/t9fjCNOYMUKqYWFmA8Aw?domain=lsegissuerservices.com
(https://url.uk.m.mimecastprotect.com/s/xnshC99DkuyBj9C1LgHC?domain=lsegissuerservices.com)
· Conference call: In order to dial in to the presentation via
phone, please register at the following link and the event access details will
be sent to your email: https://registrations.events/direct/LON502550
(https://url.uk.m.mimecastprotect.com/s/qe40C46z1iN1x3HO2Uhr?domain=registrations.events)
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
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
Hastings Tarrant
+44 (0)20 3047 2546
Forward-looking statements
This document may contain certain 'forward-looking statements'. By their
nature, forward-looking statements involve risk and uncertainty because they
relate to future events and circumstances. Actual outcomes and results may
differ materially from those expressed or implied by such forward-looking
statements. Any forward-looking statements made by or on behalf of CLS speak
only as of the date they are made and no representation or warranty is given
in relation to them, including as to their completeness or accuracy or the
basis on which they were prepared. Except as required by its legal or
statutory obligations, the Company does not undertake to update
forward-looking statements to reflect any changes in its expectations with
regard thereto or any changes in events, conditions or circumstances on which
any such statement is based. Information contained in this document relating
to the Company or its share price, or the yield on its shares, should not be
relied upon as an indicator of future performance.
Chairman's review
Dear Shareholder,
As a result of recent events and trends, quality has become the greatest
differentiator for the office sector. Well-located space with great amenities
drive rental growth and ultimately value, particularly when supply is low.
With greater calls for employees to return to the office, CLS is ensuring that
we supply the best offices in our locations to attract tenants and "earn the
commute".
Performance and our property portfolio
CLS again delivered a robust performance. Strong rental growth was achieved
through indexation, record student and hotel results and the full-year impact
of previous acquisitions, although this was offset by higher interest expense
from rate increases leading to overall lower earnings.
The value of our property portfolio fell by 12.3% to £2.06 billion (2022:
£2.35 billion) with the portfolio now split 45% in the UK, 43% in Germany and
12% in France. The movement in the property portfolio was as a result of
£299.5 million from a net valuation decrease of 12.5% in local currencies,
£26.3 million from the strengthening of Sterling by 2.1%, £14.0 million of
disposals, and depreciation of £0.2 million, partly offset by £50.1 million
of capital expenditure.
The property valuation decreases resulted in EPRA NTA per share declining by
23.2% to 253.0 pence per share (2022: 329.6 pence per share) and the Total
Accounting Return, including the dividends paid in the year, was -20.8% (2022:
-3.7%).
Strategic outlook
Whilst the economies of our three markets remain challenging, our priorities
have remained steadfast. We will deliver lettings of our quality
refurbishments to drive growth, make disposals at the right values to reduce
LTV and be highly selective in considering acquisitions or developments, as
well as execute our planned refinancings. These are alongside our vision to be
a sustainably focused landlord which will be accomplished through executing
our 2030 Net Zero Carbon Pathway and supporting our local communities combined
with delivering social value.
CLS has pursued a highly successful, focused strategy over the last 30 years
concentrated on high-quality offices in Europe's three largest economies
whilst delivering shareholder value through our long-term approach. Our core
strategy and business model remain unchanged but we will continue to evolve to
meet market opportunities.
Dividends
Given the economic conditions, the Board has decided to propose a flat final
2023 dividend which results in a flat full year dividend. The dividend, which
is 1.30x covered by EPRA earnings, is in-line with our policy of having the
dividend covered 1.2x-1.6x by EPRA earnings.
Our staff and our culture
Since 2020 it has been a volatile period for the office sector and for CLS,
with the pandemic followed by higher interest rates and a challenging economy.
Gratifyingly our staff have coped magnificently with all that has been thrown
at them and, on behalf of the Board, I want to thank them for their dedication
and hard work. CLS' positive culture has been maintained throughout all the
challenges and as interest rates fall and the cycle turns, I am confident that
CLS will thrive and deliver for shareholders for many years to come.
Lennart Sten
Non-Executive Chairman
6 March 2024
Chief Executive's review
The return to the office
Since 2020, due to the disruption caused by the pandemic, working patterns
have significantly changed and continue to evolve. The initial response was a
wholesale shift to home working followed by many different hybrid working
arrangements once the pandemic subsided.
Since the adoption of hybrid working, the last two years have seen office
occupancy levels increasing in the UK and Europe, albeit it has been a slow
recovery and attendance is much more concentrated around the middle of the
week. However, ongoing company policy changes and surveys show that the return
to the office trend is only likely to increase.
Recent surveys* showed that levels of flexible or home working look to have
peaked and some are predicting a full return to in-office working by 2026.
Whilst this may prove ambitious, the driver is that there is a growing
recognition that the office is a marketplace of knowledge and so much more
than an overhead cost: it has a decisive influence on productivity, employee
retention, corporate culture, innovation, and thus long-term business results.
Our view is that hybrid working will continue for at least the short-to
medium-term but that the actual reduction in space will be less than
predicted. This is because tenants need to cope with peak worker occupancy,
which determines the minimum amount of office space an occupier needs, and
that sustainability requirements across all countries are reducing supply.
This explains why the occupancy market continues to do well and we see a
growing number of companies planning to lease more space.
All of this means that to bring employees back to the office, appropriate
incentives must be created. Demand continues to intensify for well-connected,
good-quality office space in mixed-use locations, and amid construction delays
and shortage of good stock, occupiers will have to compete for the best space,
supporting rental growth.
Delivering on our strategy
In response to these trends, CLS has focused on improving the quality of its
properties and driving operational performance. With an uncertain market in
2023, CLS did not make any acquisitions and instead focussed on investing in
our properties. In 2023, we finished the enhanced capital expenditure
programme that we commenced in 2022 to deliver the higher quality offices
demanded by tenants with capital expenditure of £50.1 million (2022: £58.3
million). The three largest schemes in this programme: Artesian, Prescot St,
London; The Coade, Vauxhall, London; and Park Avenue, Lyon, were completed in
2023 or early 2024 and accounted for c40% of the capex spent this year. These
buildings now offer a total of over 200,000 sq. ft of the highest quality
space with excellent amenities and market-leading sustainability credentials.
As set out last year, we expected to be a net seller and in 2023 we disposed
of five smaller properties (four completed and one unconditionally exchanged)
across our three geographies at a net initial yield of 6.0% for £25.4 million
at 10.0% above the properties' latest valuations. We sold smaller properties
in 2023 because there was a more liquid market for properties at this lot
size. In addition, we are seeking to increase the average size of our
properties as smaller properties usually consume a disproportionate amount of
asset and property management time and are less economic to equip with the
best amenities. Our LTV increased in 2023 as a result of valuation reductions,
with net debt little changed year-on-year, and thus in 2024 we will again
target to be a net seller to reduce LTV to below 45% in the short-term and 40%
in the medium-term.
The other major focus in 2023 was ensuring that we delivered on our financing
activity to ensure that we maintain sufficient liquidity and flexibility. This
target was successfully executed with all 2023 refinancings completed and, as
at the end of February 2024, we have already completed over 70% of 2024
refinancings. More details on our progress in 2023 with capital expenditure,
disposals, and refinancings, as well as lettings are set out in the strategy
in action section.
Asset and property management
Active asset management is a key part of CLS' culture and business model with
"our tenants, our focus" being one of our four values. Therefore, whilst the
market remains challenging it is critical to drive asset management to create
long-term value from our property portfolio. In 2023, the investment market
remained subdued but the letting market was more buoyant and CLS signed 89%
more leases by rent in 2023 (130 leases for £15.5 million) than in 2022 (106
leases for £8.2 million). The new leases were signed on average at 6.9% above
ERV.
As a result of this leasing activity and also expiries, like-for-like vacancy
was relatively flat at 7.6%, however the overall Group EPRA vacancy rate
increased to 11.0% (2022: 7.4%) due to the impact of our three large
refurbishments at Artesian, The Coade and Park Avenue. This vacancy rate is
above our long-term target of 5% and we are expecting vacancy to remain
elevated in the short-term until we let this newly refurbished, high-quality
space.
Reflecting these refurbishments, the vacancy position was mixed across the
Group with considerable differences between countries. In France, the vacancy
rate has risen to 5.6% (2022: 2.6%) as a result of refurbished space at Park
Avenue being available to let. Demand remains good for smaller units (below
1,000 sqm) which fits with CLS France's space offering, and we would expect
vacancy to remain at this level in 2024. In Germany, the vacancy rate
increased to 6.8% (2022: 6.1%) as the rate of lettings was slightly behind the
rate of expiries. We have one big upcoming vacancy in Dortmund in 2024 which
we are working
* KPMG global CEO and Deloitte UK CFO 2023 surveys
hard to fill and, subject to this, we would expect vacancy to fall in 2024.
With the completion of Artesian in Q4 2023 and Q1 2024, and little time to let
the space, vacancy in the UK understandably rose significantly to 15.8% from
10.0% in 2022. The letting market improved during the year, with far more
lettings completed since September, and we are cautiously optimistic that UK
vacancy will reduce, and rental income increase, in 2024.
Overall, our properties are multi-let with over 700 tenants, of which 21% are
government agencies, 40% are large corporations and 16% are medium-sized
companies. Reflecting the strength of our tenant base, CLS' rent collection
has remained in excess of 99% before, during and after the pandemic.
In 2023, the value of the portfolio was down by 12.3% over the year as a
result of our revaluation declines of 12.5% in local currencies with the
investment in the portfolio almost exactly offset by foreign exchange losses
and property disposals. There were decreases in all countries with the UK down
16.7%, Germany down 9.1% and France down 9.1% in local currencies. It is worth
noting that the shortening lease at Spring Gardens, the largest asset in the
Group, leased by the National Crime Agency contributed c.16% of the UK
reduction as the site is valued as a standing office investment and not as a
development site. Across all countries, the increase in interest rates and the
risk-off nature of investors impacted valuations. As ERVs were up in all three
countries, the valuation declines were mainly a result of interest rate driven
yield shifts, although, as always, there were also some regional and property
specific differences.
Financial results
With the economic backdrop remaining challenging in 2023, CLS again delivered
on its strategic objectives. Property valuations were down, but outperformed
relative to the market, and whilst net rental income grew by 4.8% finance
costs rose more quickly such that EPRA earnings were lower.
EPRA earnings per share fell 11.2% from 11.6p in 2022 to 10.3p in 2023 (IFRS
loss per share 2023: (62.9)p, 2022: (20.2)p) as improved rental income from
indexation, record hotel and student performance and the full-year impact of
previous acquisitions, was more than offset by increased finance costs as CLS'
cost of debt rose from 2.69% to 3.61% due to the impact of higher central bank
rates on floating rate loans and refinanced debt. Operating loss for the year
was £223.4 million (2022: loss £63.9 million).
EPRA NTA decreased by 23.2% (2022: 6.0% decrease) to 253.0 pence per share
(IFRS net assets 2023: £929.2 million, 2022: £1,220.8 million), reflecting
revaluation reductions of 12.5% in local currency, foreign exchange losses of
£26.3m from the 2.1% strengthening of sterling against the euro (2022: £33.6
million gain) and the payment of the dividend, which was partly offset by EPRA
earnings.
At the year end, we had cash and cash equivalents of £70.6 million (2022:
£113.9 million), as a result of the completion of the heightened investment
in the portfolio, as well as £50.0 million of new, longer-term, committed
credit facilities (2022: £50.0 million). To give more liquidity and
flexibility, we have also secured an additional £10 million overdraft in
January 2024 and are actively considering options for our 2025 refinancings.
In 2023, we generated £45.9 million net cash from operating activities (2022:
£43.0 million) compared with EPRA earnings of £40.9 million (2022: £47.0
million) showing the continued strong cash generation of our business model.
Of this cash, £31.6 million (2022: £32.4 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 -20.8% in 2023 (2022: -3.7%) due to the
negative property revaluations.
Sustainability
We continue to make progress against our Sustainability Strategy and improve
our assets in line with our Net Zero Carbon Pathway. We completed 73 energy
efficiency and PV projects (28% more than last year) saving an estimated 741
tonnes of CO(2)e (2022: 612 CO(2)e), equivalent to taking over 165 cars off
our roads for one year
(https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator) and we
have exceeded our energy usage target of 4% year-on-year reduction with an 8%
reduction in 2023.
CLS reports under various national regulations as well as regional and
international frameworks. Our EPRA sBPR Gold award demonstrates our commitment
to transparency and maintaining our GRESB 4 star rating reflects our
achievements across the whole business. At an asset level, we are compliant
with MEES in the UK, Décret Tertiaire in France and maintained our ratings in
BREEAM In-use, despite the tightening of the rules.
2024 and beyond
As in the previous two years, we have again included our rent progression
waterfall chart which has been updated to show the changes and progress made
in the year. In summary, it shows the more than 20% rental upside that exists
within the portfolio, with a large proportion of it able to be captured
quickly following the completion of major refurbishments/developments in 2023.
Securing these rental increases is critical to drive rental growth in excess
of rising financing costs and thus achieve higher profits.
In addition to these increases up to 2026, there is further potential from
indexation, with over half the portfolio having contractual increases, and
ongoing investment to focus the portfolio on faster growing properties. Post
2026, we have significant opportunities, in Zone 1 in London at New Printing
House Square and Spring Gardens.
Despite the challenging market, CLS' long-term strategy and our focus on the
three largest countries in Europe, with the cities with the highest growth
prospects such as London, Paris, Berlin and Munich, remains unchanged. And, in
the medium term, we will again pursue acquisitive growth. Operationally the
key objective for 2024 is to reduce vacancy to capture the substantial rental
upside within the portfolio. Regarding capital and the balance sheet, the
focus is on executing upcoming refinancings and reducing LTV through selective
disposals and one of the actions we are taking is the marketing for sale of
our Spring Mews student property in Vauxhall.
We remain confident that in responding to the demands to return to the office
by having some of the best properties in our locations, alongside an
expectation of more favourable monetary policies and an improving
macro-economic environment, CLS is well placed to capitalise on these trends
and remain successful in the future.
Fredrik Widlund
Chief Executive Officer
6 March 2024
Chief Financial Officer's review
Summary
Given valuation declines, EPRA net tangible assets ('NTA') per share fell
by 23.2% to 253.0 pence (2022: 329.6 pence) and basic net assets per share
by 23.9% to 233.8 pence (2022: 307.3 pence). EPRA earnings per share were
10.3 pence (2022: 11.6 pence) whilst the loss after tax of £249.8 million
(2022: £81.9 million loss) generated basic earnings per share of ‑62.9
pence (2022: -20.2 pence). EPRA EPS provided 1.30x cover of the full year
dividend of 7.95 pence per share.
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 5 and our Supplementary disclosures give a full
description and reconciliation of our APMs.
Income statement
Net rental income in 2023 of £113.0 million, was up 4.8% from 2022 (£107.8
million). The increase arose mainly from three areas: rental indexation
increases of £2.8 million as the majority of our properties
have index-linked rent; another record year for our student and hotel
operations, up £1.2 million; and the full-year impact of two previous
acquisitions in Germany of £2.3 million. Disposals reduced rental income by
£2.0 million and the movement of properties into refurbishments and net
lease expires lowered rental income by £0.5 million and £0.1 million
respectively. Higher vacancy, mainly in the UK, resulted in higher net
service charge expenses of £1.0 million. Dilapidation payments on lease
expiries were £1.1 million higher and other, including FX, increased rents
by £1.4 million.
CLS' tenant relationships remain strong and the quality and diversity of our
tenant base has continued to be reflected in our rent collection, and, as in
previous years, we collected over 99% of rent. Rent collection for the first
quarter of 2024 is over 97% as is customary at this point in time.
Overall administration and property expenses increased by £1.9 million to
£33.8 million (2022: £31.9 million) primarily as a result of higher
personnel and other administrative costs given inflationary increases. The
proportion of index-linked rent remained steady at 55.2% (2022: 55.5%) 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
interest rates.
Due to the higher level of costs, CLS' administration cost ratio increased to
16.0% (2022: 14.4%) whereas our EPRA cost ratio reduced to 25.1% (2022: 25.8%)
as certain vacancy costs are excluded from this measure. 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 £302.7 million (2022: £136.5 million fall) with falls in the
UK of 16.7%, Germany 9.1% and France 9.1% in local currencies.
Four properties were sold in 2023 for an aggregate consideration of £15.6
million. This was 15.2% above the pre-sale book value which, after costs,
resulted in a profit on sale of properties before tax of £1.4 million (2022:
£0.5 million). In addition, a further property unconditionally exchanged for
£9.8 million, 2.8% above the pre-sale book value. Since the year-end, we have
had strong expressions of interest on two sales for over £70.0 million at a
small discount to valuations. Operating loss for the year was £223.4 million
(2022: loss £63.9 million).
Finance income of £1.6 million (2022: £1.3 million excluding unrealised
gains on derivative financial instruments of £8.8 million) increased given
higher interest rates on cash deposits. Derivative financial instruments fell
in value by £4.2 million (2022: £8.8 million gain) as they are now close to
maturity. Finance costs, excluding the movement on derivative financial
instruments, increased to £37.1 million (2022: £26.8 million) as a result
of higher interest costs on floating rate, and recently refinanced, loans
given wider market interest rate increases.
Approximately 51% of the Group's sales are conducted in the reporting currency
of Sterling and 49% in Euros. Whilst the year-end Sterling rate against the
Euro strengthened by 2.1%, the average Sterling rate weakened by 2.0%
resulting in a similar level of foreign exchange losses of £0.3 million in
the income statement compared to last year (2022: £0.3 million).
Exchange rates to the £ EUR
At 31 December 2021 1.1893
2022 average rate 1.1732
At 31 December 2022 1.1295
2023 average rate 1.1500
At 31 December 2023 1.1535
The effective tax rate of 5.2% (2022: 0.0%) 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 at the start of 2022 and thus
minimal tax is now paid in the UK.
Overall, EPRA earnings were lower than last year at £40.9 million (2022:
£47.0 million) and generated EPRA earnings per share of 10.3 pence (2022:
11.6 pence). The decrease of 1.3 pence in EPRA EPS was primarily due to the
increase in net rental income of 1.3p being more than offset by the increase
in finance expense of 2.5p and inflationary cost increases of 0.4p.
EPRA net tangible assets and gearing
At 31 December 2023, EPRA net tangible assets per share were 253.0 pence
(2022: 329.6 pence), a fall of 23.2%, or 76.6 pence per share. The main
reasons for the decrease were: property valuation decreases of 12.5% or 75.6
pence per share; dividends of 7.95 pence per share paid in the year and
foreign exchange declines on our European business of 3.6 pence per share;
partly offset by EPRA earnings per share of 10.3 pence per share and other
movements of 0.3 pence per share.
Balance sheet loan-to-value (net debt to property assets) at 31 December 2023
increased to 48.5% (2022: 42.2%) which was as a result of property valuation
reductions with net debt little changed. The value of properties not secured
against debt decreased to £74.1 million (2022: £105.1 million). In 2024, CLS
is intending to be a net disposer of property to reduce LTV below 45% in the
short-term and 40% in the medium-term.
"In 2023 CLS delivered solid results with lower valuation falls relative to
the market and we have made significant progress with the planned
refinancing activity for 2024."
Cash flow and net debt
As at 31 December 2023, the Group's cash balance was £70.6 million (2022:
£113.9 million). Net cash flow from operating activities, after payment of
£37.3 million for financing costs and tax, generated £45.9 million, an
increase of £2.9 million from 2022. From this net cash flow, £31.6 million
was distributed as dividends with the remainder reinvested in the business to
grow net tangible assets. Capital expenditure of £46.4 million was partly
funded by proceeds after tax from property disposals of £15.2 million. In
addition, there was a net repayment of loans of £24.6 million. The net
result of property and financing transactions, being the investment of £43.3
million in our property portfolio.
Gross debt decreased by £35.3 million to £1,070.6 million (2022: £1,105.9
million) due to: the net repayment of loans of £24.6 million; the decrease
of £12.2 million due to the strengthening of Sterling against the Euro; and
the amortisation of loan issue costs of £1.5 million. In the year, £330.6
million (£329.5 million net of capitalised fees) of new or replacement loans
were taken out, loans of £336.2 million were repaid and £17.9 million of
contractual periodic or partial repayments were made. Year-end net debt rose
slightly to £1,000 million (2022: £992.1 million). At the year end, CLS'
additional facilities remained unchanged comprising two undrawn revolving
credit facilities totalling £50.0 million, both of which are committed. After
the year-end, a new £10 million overdraft was agreed.
The weighted average cost of debt at 31 December 2023 was 3.61%, 92 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 (47 bps increase);
new higher cost debt drawn for various refinancings completed (46 bps
increase); and the weakening of the Euro against the pound (1 bps reduction).
In 2023, interest cover at 2.2 times (2022: 3.0 times) gave comfortable
covenant headroom.
"The focus for 2024 is on sales and refinancing to lower LTV and keep the
balance sheet strong"
Financing strategy and covenants
In 2023, we refinanced the remaining expiring loans which had not already been
refinanced in 2022. We also made significant progress with the refinancing
activity for 2024 such that of the £350.0 million expiring in 2024 at the
start of 2023, £178.2 million was refinanced in 2023. Subsequent to the
year-end, two of those loans for £82.5 million have been extended until
2025. As a consequence, only £98.3 million across six loans in Germany and
France with an LTV of 45% remain to be refinanced in 2024.
The Group's strategic financing priorities remain to keep the cost of debt low
whilst: keeping 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. At a tactical level,
the priorities for this year are to complete the remaining refinancings for
2024 and advance as much of the 2025 refinancing activity as practical.
As noted, CLS' objective remains to keep a high proportion of fixed rate debt.
However, in 2023 just as in 2022 more floating rate loans and extensions than
usual were executed given that: some properties are to be sold and thus
wanting to avoid break costs; the letting profile for some properties needs to
be improved in advance of securing a longer-term fixed rate loan; and a
belief that interest rates were peaking and that lower rates could be secured
in the future once the floating rate loan expired.
In 2023, the Group refinanced or extended 11 loans to a value of £330.6
million for a weighted average duration of 3.0 years and at a weighted average
all-in rate of 5.27%, and of these £196.7 million were fixed at a weighted
average all-in rate of 4.76%. Consequently, at 31 December 2023, 75.9% of the
Group's borrowings were at fixed rates or subject to interest rate swaps, 3.8%
were subject to caps which had been hit and 20.3% of loans were unhedged.
The fixed rate debt had a weighted average maturity of 3.9 years and the
floating rate 2.2 years. The overall weighted average unexpired term of the
Group's debt was 3.5 years (2022: 3.8 years).
The Group's financial derivatives, predominantly interest rate swaps, are
marked to market at each balance sheet date. At 31 December 2023 they
represented a net asset of £4.3 million (2022: £8.5 million asset).
At 31 December 2023, the Group had 43 loans (33 SPVs, eight portfolios and
two facilities) from 24 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 43 loans, CLS has between 13% and 30% 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
The final dividend for 2022 of 5.35 pence per share (£21.3 million) was paid
in April 2023 and in October 2023, CLS paid an interim dividend of 2.60
pence per share (£10.3 million).
Given ongoing uncertainty and challenging economic conditions, the proposed
final dividend for 2023 is maintained at 5.35 pence per share (£21.3
million), the same level as 2022. This would result in a full year
distribution of 7.95 pence per share (£31.6 million), covered 1.30 times by
EPRA earnings per share. The Total Accounting Return, being the reduction in
EPRA NTA plus the dividends paid in the year, was -20.8% (2022: -3.7%).
As a result of the conversion of our UK operations to a REIT in 2022,
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 2023 interim dividend
of 2.60 pence per share, the PID was 1.70 pence per share and for the
proposed final dividend of 5.35 pence per share, the PID will be 1.50 pence
per share giving a full year dividend of 7.95 pence per share of which 3.20
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
6 March 2024
United Kingdom
£919.9m
Value of property portfolio
45%
Percentage of Group's property interests
37
Number of properties
221
Number of tenants
15.8%
EPRA vacancy rate
1.9m sq. ft
Lettable space
72.1%
Government and large companies
3.5
Years weighted average lease length to end
32.7%
Leases subject to indexation
Market overview
The UK economy continued to grow over the course of 2023 albeit at a modest
0.3% due the higher interest rates policies being used to reduce inflation.
Unemployment increased slightly to 4.0% but compared well to other major
European economies. UK inflation fell to 7.4%.
The 2023 UK property investment market had a volume of c.£34bn, which was 39%
down on the previous year reflecting on-going uncertainty as property
investors worried about valuations and re-financing risks.
Office take-up in central London was 16% down compared to 2022 although the
latter part of the year showed encouraging signs of recovery with Q4 growing
over 20% compared to the previous quarter. The wider Greater London and
South-East office market was down 17% for the year but also saw take-up
increase in Q4 compared to the previous quarter. Consequently, year-end
vacancy in the London market was up from 8.7% to 9.1% while the South-East
market was flat at 11.8%.
Portfolio movement and valuation summary
In 2023, the value of the UK portfolio decreased by £150.8 million as a
result of a revaluation decline of £184.5 million or 16.7% in local currency
and disposals of £3.9 million, partly offset by net capital expenditure of
£37.6 million (including depreciation of £0.1 million).
The 16.7% valuation decline was as a result of equivalent yields expanding by
79 basis points on a like-for-like basis and increased vacancy from completed
refurbishments, with some offset from ERVs increasing by 1.1% on a
like-for-like basis and some lease indexation. CLS' valuation decline was
in-line with the UK office market valuation decline but if the valuation of
Spring Gardens, which was significantly impacted by the shortening lease, is
excluded then CLS was ahead with a 14.0% valuation decline.
Asset management
The EPRA vacancy rate increased to 15.8% as at 31 December 23 (2022: 10.0%) as
result of a number of significant refurbishments and developments,
particularly the Coade and Artesian, being completed in 2023 and the start of
2024. However, given greater letting activity in the second half of the year,
like-for like vacancy reduced from 10.0% to 9.8%. Most encouragingly we saw a
growing trend among our UK occupiers to return to the office and in a number
of cases they have taken additional space to create a more attractive and
vibrant environment for their staff.
In 2023, we let or renewed leases on 417,494 sq. ft and lost 430,183 sq. ft of
space from expiries. Excluding rent reviews, 60 lease extensions and new
leases secured £7.4 million of rent at an average of 4.6% above ERV. The most
significant transactions included a new 10-year lease with Hays Recruitment
for 9,673 sq. ft of space at the newly refurbished Apex Tower in New Malden
and the lease renewal with Honda Motor Europe for their European HQ (57,426
sq. ft) at Reflex in Bracknell for 10 years.
In 2023, we agreed the surrender of the head lease with the Secretary of State
for New Printing House Square which is a prominent building of c.200,000 sq.
ft on Grays Inn Road in Central London. The head lease was due to expire in
June 2025 and the building was fully sub-let on co-terminus leases to a
variety of private sector occupiers. As a result, we now benefit from an
additional rent roll of c.£1m above the previous rent received as well as
having a direct relationship with the occupiers which presents opportunities
for retaining them from June 2025 onwards.
Both our student and hotel operations achieved record breaking years,
surpassing the previous records set in 2022. The student accommodation was
fully let for the 2023/24 academic year and sales for 2024/25 are
significantly ahead of expectations. Due to some refurbishment, occupancy at
the hotel averaged 87% for 2023, the same as 2022, however average daily rates
rose by 12% which significantly increased profitability.
In 2023, in conjunction with Savills, we carried out a review of all of our UK
properties in response to nationwide concerns regarding Reinforced Autoclaved
Aerated Concrete ("RAAC") and found no issues.
Developments and refurbishments
Total capital expenditure was £37.7 million with The Coade and Artesian
being our largest schemes. The construction of The Coade, our 27,700 sq. ft
new office development in Vauxhall, completed in Q2 2023. In Q4 2023, we also
completed the first phase (Basement to 3rd floor) of "Artesian", a 96,000 sq.
ft refurbishment at 9 Prescot Street, London with the final phase 4th to 6th
floor being fully competed in Q1 2024. Successful agents' launches for each
building were held shortly after completion of the refurbishments.
At Spring Gardens, which is let to the National Crime Agency until February
2026, we are working up the planning application for a major mixed-use
development of the two and a half-acre plot assuming the NCA were to leave.
Disposals
During 2023, we continued with our strategy of disposing of some of our
smaller assets. This included the sale of St Cloud Gate in Maidenhead,
a 9,700 sq. ft office building as well as The Rose pub in Vauxhall. The total
consideration received for these assets was £4.3 million, which was 16.4%
above the latest valuations.
The sale of Westminster Tower, which has planning consent for conversion to
residential use, exchanged unconditionally in June 2023 with a completion date
of 30 November 2023. However, the buyer failed to complete in 2023 and thus
the deposit was called in 2024, and the property is now being re-marketed for
sale. As a result, this was not recognised as a disposal in the 2023 financial
statements.
Outlook
The consensus forecast for the UK economy is to grow at around 0.4% but with
higher growth in the latter part of the year as the economy improves.
Unemployment is forecast to increase marginally to 4.6%.
The investment market is likely to remain sluggish for the first half of the
year but with improvements in the occupational market and strong rental
growth, the attractiveness of commercial real estate as an asset class should
improve, especially once financing costs begin to fall.
The recent improvements in the occupational market together with increased
office requirements, means that we expect good opportunities to let our recent
developments while our UK vacancy should reduce on the back of our recent
capex upgrade programme alongside more occupiers returning to the office.
"Most encouragingly we saw a growing trend among our UK occupiers to return
to the office and in a number of cases they have taken additional space to
create a more attractive and vibrant environment for their staff."
Dan Howson
Head of UK
Germany
£885.5m
Value of property portfolio
43%
Percentage of Group's property interests
32
Number of properties
368
Number of tenants
6.8%
Epra vacancy rate
3.8m sq. ft
Lettable space
55.6%
Government and large companies
4.9
Years weighted average lease length to end
65.9%
Leases subject to indexation
Market overview
Germany had a tumultuous year in 2023 with Europe's biggest economy
contracting 0.3% because of low business confidence, budgetary pressures and
higher energy prices. Unemployment held up well at 5.7% while higher interest
rates had the desired impact on inflation which shrank to 6.1%.
The German property investment market had a challenging year and investment
volumes were down by 56% to c.€23 billion in 2023 reflecting hesitant buyers
due to the interest rate trajectory and concerns about the development of the
economy.
In the occupational market, leasing transactional volumes were down over 20%
with less space let across the seven largest cities with only Dusseldorf and
Frankfurt showing single-figure reductions. Vacancy increased to 5.7% for the
seven largest cities ranging from 3.3% in Cologne to 9.7% in Dusseldorf. The
majority of CLS properties are located in Hamburg, Munich, Berlin and
Dusseldorf which saw strong rental growth for quality space.
Portfolio movement and valuation summary
In 2023, the value of the German portfolio decreased by £110.5 million as a
result of a revaluation decline of £89.1 million or 9.1% in local currency; a
foreign exchange decrease of £20.4 million; and disposals of £10.2 million,
partly offset by net capital expenditure of £9.2 million (including
depreciation of £0.1 million).
The 9.1% valuation decline resulted from equivalent yields expanding by 36
basis points on a like-for-like basis and marginally increased vacancy, with
some offset from ERVs increasing by 2.4% on a like-for-like basis and the
majority of leases being indexed.
According to the VDP banking association, office property values in Germany
fell by 13.3% which compares to the fall in CLS' property values of 9.1%. This
outperformance of CLS' German properties can be partly explained by our focus
on government agencies and "Mittelstand" companies.
Asset management
The EPRA vacancy rate increased from 6.1% in 2022 to 6.8% at the end of 2023.
This increase was despite some significant letting successes during the year
with expiries in excess of lettings.
In 2023, we let or renewed leases on 17,008 sqm and lost 25,123 sqm of space
from expiries. Excluding those arising from contractual indexation uplifts, 36
lease extensions and new leases secured £5.2 million of rent at an average of
14.8% above ERV (£2.6 million at 6.6% above ERV excluding Essen as described
below). Leases subject to indexation increased by an average of 7.1%.
The largest transaction in 2023 was a 30-year, index-linked lease signed in
June 2023 with the City of Essen for £2.6 million of rent at 24.3% above ERV.
The significant refurbishment will start in mid-2024, following which the
interior department will take occupation in July 2025 at which point the
building will be fully occupied. Further details are in the strategy in action
case study.
Developments and refurbishments
No significant individual property refurbishments or extensions were carried
out in 2023. However, in advance of potential future development, the planning
permissions for the roof top extension at Adlershofer Tor, Berlin and the new
building at Lichthof, Stuttgart were extended for a further three years to
allow for market conditions to improve.
Smaller refurbishments continued with £9.3 million spent across our portfolio
to improve the quality of our properties to meet tenants' needs and enhance
their sustainability credentials.
A good example is at Fleethaus in Hamburg, where we carried out a
refurbishment of the façade to improve its energy efficiency and to maintain
the architectural and cultural heritage of the City of Hamburg. In 2024,
in addition to our investment in Essen, we are also targeting to start a
major refurbishment for half of the building at Bismarkstrasse in Berlin with
the aim of driving rents from the previous passing level of €11 sqm to
€30 sqm.
Disposals
In 2023, we disposed of a small property in Germany in Germering, Munich for
€5.9 million and one piece of land in Sweden for SEK80.0 million in
Hyllinge, which is included in the German segment for ease of disclosure and
as it was our last property in Sweden. On a combined basis, the
two properties sold for 19.5% above the latest valuations. There were no
acquisitions in the year.
Outlook
The consensus forecast is for German GDP to grow 0.2% in 2024 and unemployment
to remain at current levels. Germany has now successfully reduced its
dependence on Russian gas which will help lower inflation and support the
strong export industry that is the backbone of German industrial success.
The investment market is expected to be even more nuanced with small- to
medium-sized buildings below €50 million, with good sustainability
credentials and transportation links, selling whilst other properties,
especially in out-of-town business park areas or large lot sizes, will
continue to struggle.
Office take-up is expected to be patchy with larger corporates still grappling
with the changing economic landscape while demand from small- to medium-sized
companies and public bodies, which plays to CLS' strengths, remains resilient.
We have only one big upcoming vacancy in 2024, which is at Gotic Haus in
Dortmund. Discussions with potential tenants are ongoing, and subject to a
successful outcome, and in combination with a general market reduction in
development activity, we would expect vacancy to fall in our German portfolio
in 2024.
"Office take-up is expected to be patchy with larger corporates still
grappling with the changing economic landscape while demand from small- to
medium-sized companies and public bodies, which plays to CLS' strengths,
remains resilient."
Rolf Mensing
Head of Germany
France
£257.5m
Value of property portfolio
12%
Percentage of Group's property interests
17
Number of properties
155
Number of tenants
5.6%
Epra vacancy rate
0.8m sq. ft
Lettable space
49.0%
Government and large companies
5.2
Years weighted average lease length to end
100.0%
Leases subject to indexation
Market overview
The French economy achieved GDP growth of 0.9% in 2023 with unemployment
steady at around 7.3%. Inflation in France, which started the year lower than
many other European countries, fell to 5.7%. All of this was against a
backdrop of increasing ECB base rates which went from 2.5% at the start of
2023 to 4.5% by the end of the year.
In 2023, transaction volumes in the French property market fell by 53% to c.
€12 billion. This was not only as a result of a decrease in the number of
transactions but also the average value, reflecting our experience that
investors are less willing to commit to larger purchases.
In the occupational market, after a strong year in 2022, office take-up in
Greater Paris in 2023 was down by double digit percentages, although vacancy
was only up slightly at 8.5% from 7.9% but with continuing large variances
between the districts. Vacancy in the Paris CBD was 2.5% but higher in the
outer districts with 15% in La Défence. CLS' properties are located in the
West and South side of Paris, straddling both areas. The Lyon market continued
to perform comparably well but even here market vacancy rose from 4.4% to
4.9%.
Portfolio movement and valuation summary
In 2023, the value of the French portfolio decreased by £28.6 million as a
result of a revaluation decline of £25.8 million or 9.1% (2022: 5.3%) in
local currency, and a foreign exchange decrease of £5.9 million, partly
offset by capital expenditure of £3.1 million. The 9.1% valuation decline was
as a result of equivalent yields expanding by 82 basis points on a
like-for-like basis and increased vacancy, with some offset from ERVs
increasing by 1.3% on a like-for-like basis and all leases being indexed. CLS
outperformed the market and peers whose offices fell in value by over 12%.
Asset management
EPRA vacancy in the French portfolio increased to 5.6% as at 31 December 2023
(2022: 2.6%) with the increase exclusively driven by the completion of Park
Avenue in Lyon for which two and half floors (c.3,100 sqm) were vacant at the
year end.
In 2023, we let or renewed leases on 13,245 sqm and lost 15,130 sqm of space
from expiries. Excluding contractual indexation uplifts, 34 lease extensions
and new leases secured £2.9 million of rent at an average of 0.1% above ERV.
The most significant transactions during this year were Pole Emploi at Les
Reflets in Lille for 2,499 sqm and Exalog at Bellevue in Paris for 1,039 sqm.
On a like-for-like basis, ERVs increased by 1.3%, with index-linked rental
increases at an average of 5.6%.
Developments and refurbishments
In 2023, we completed the elevated level of capital expenditure spend across
the French portfolio, incurring £3.1 million, with the completion of the
major refurbishment of Park Avenue in Lyon. The refurbishment was finished in
the middle of the year with the final €0.9 million spent in 2023 out of a
total project cost of €9.1 million.
The works involved refurbishing common areas such as reception, lifts,
landings, toilets, and a replacement of the façade with stone, new windows
and electric shades. The outside works also included a green roof, new ground
floor landscaping, the painting of the car park and the creation of new common
terraces through the extension of existing landings. These works have not only
improved tenants' amenities but have also resulted in an a significant
improvement in the building's sustainability credentials (increasing from DPE
G to DPE B).
Tenants for five of the ten floors were decanted to a nearby building whilst
the works were carried out. Following a successful building launch at the
start of 2023, a further three floors have been let. There is good interest in
the remaining two and half floors and we are confident of letting these in
2024.
Disposals
In 2023, we unconditionally exchanged on Quatuor, a building located in the
Montrouge area in Paris. The 2,500 sqm office building was originally acquired
for €4.6m in 2002 and is located in front of the future Grand Paris metro
station. The building is therefore strategic for the City of Montrouge, which
agreed to buy the property for €11.3 million, 2.8% ahead of the June 2023
valuation. In December 2023, we received 10% of the purchase price with the
remaining 90% to be received by June 2024; until then CLS manages and collects
the rent for the property.
Some more details on the Quatuor sale and the Park Avenue refurbishment are
included in the strategy in action case studies.
Outlook
GDP consensus forecast is for France to grow around 0.7% which, although
modest, is above both the UK and German consensus, and for unemployment to
stay at current levels.
With Anglo-Saxon investors notably absent, the investment market has been
driven by domestic and other European investors. Whether this will change in
2024 remains to be seen but we do expect a gradual return to mainland Europe's
second largest economy as markets and the interest rate stabilises.
Office take-up has been volatile in the last two years but smaller floorplates
below 1,000 sqm have consistently performed better which has benefitted CLS'
portfolio due to the size and layout characteristics of our properties.
We expect CLS vacancy to remain around 5% in 2024 with the newly refurbished
space in Park Avenue let being offset by expiries in Front de Parc, located
close to Park Avenue in the Pardieu district of Lyon, which will be available
in the second half of the year following refurbishment.
In the wider market, we expect to see continued varied markets across Paris,
driven by different supply dynamics, and Lyon continuing to perform well due
to a much tighter market and restrictive policies for new developments.
"Office take-up has been volatile in the last two years but smaller
floorplates below 1,000 sqm have consistently performed better which has
benefitted CLS' portfolio due to the size and layout characteristics of our
properties."
Philippe Alexis
Head of France
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 745.4 (190.4) - 5.4% 6.1% 8.1% 7.0% 6.1%
Germany 883.8 (89.1) (20.4) 4.7% 4.8% 6.0% 8.7% 5.2%
France 246.0 (28.2) (5.7) 4.8% 5.2% 8.0% 4.0% 6.0%
Total office portfolio 1,875.2 (307.7) (26.1) 5.0% 5.4% 7.2% 7.4% 5.7%
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 2.5 3.5 4.8 12.3 24.7 9.0 4.6 15.0 23.2 8.7
Germany 4.8 4.9 14.5 4.9 14.3 13.8 14.1 4.7 14.0 13.3
France 2.7 5.2 1.3 0.8 4.2 7.9 1.5 0.8 4.4 8.2
Total office portfolio 3.5 4.3 20.6 18.0 43.2 30.7 20.1 20.4 41.6 30.2
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 %
United Kingdom 46.4 52.4 172,973 50.8 61.0 32.7 15.8%
Germany 43.2 41.5 345,641 47.5 49.5 65.9 6.8%
France 13.2 13.6 72,495 14.3 15.7 100.0 5.6%
Total office portfolio 102.8 107.5 591,109 112.6 126.3 55.2 11.0%
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 (P)
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 2023 was 10.3 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 change 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 2023, the Total Accounting Return was -20.8%.
EPRA 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 2023, the EPRA vacancy rate was 11.0%.
TOTAL SHAREHOLDER RETURN - RELATIVE (%)
Definition
The annual movement in capital in purchasing a share in CLS, assuming
dividends are reinvested in the shares when paid, compared to the TSR of the
23 companies in the FTSE 350 Real Estate Super Sector Index.
Why this is important to CLS
This KPI measures the change in the wealth of a CLS shareholder over the year,
against the change 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 -31.7%, making CLS the 23rd ranked share of the FTSE 350 Real
Estate Super Sector Index of 23 companies.
CLS' share price performed below expectations in 2023 as property,
particularly offices, is out of favour with investors and the lower liquidity
of CLS' shares given one major shareholder.
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 summarised in our
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 2023, the cost of debt of 3.61% was 175 bps
below the net initial yield of 5.36%.
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 2023 we achieved a GRESB rating of 84
and four green stars.
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 for 2023 was 16.0%.
Investment case
1. A clear strategy
Key investment tenets
Diversified approach
This approach is across countries (we invest in major cities in Europe's three
largest economies), tenants (over 700 tenants spread across most sectors), and
financing (loans with 24 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
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% with affordable rents and flexible lease
terms to meet tenant demand and so create opportunities to capture above
market rental growth. On average over 135 lettings executed each year over the
past six years.
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.
3. Strong 30 year 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 and property by property basis with no set
capital allocation across countries. Low yielding assets with limited
potential are sold. Our TSR has outperformed the FTSE 350 index over a 30 year
period.
Cash-backed progressive dividend
CLS is a total return business 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 cash and undrawn facilities. This
approach gives the ability to move quickly to complete acquisition
opportunities as well as the flexibility to secure the optimal financing
solution.
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 measure our progress
against 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 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.
Strategy in action
We acquire the right properties
Strategy
We invest in high-yielding properties, predominantly offices, with a focus on
cash returns. We diversify market risk by investing in geographical areas
with differing characteristics and also seek to diversify the tenant base.
Strategy implementation
We target modern, high quality properties with good asset management
opportunities in larger cities in the UK, German and France. In addition to
geographic diversity, we have a wide variety of tenants in many different
sectors and we invest in Sterling and Euros.
Our performance in 2023
· As previously announced, CLS was not targeting acquisitions in 2023
but instead was focussed on reducing LTV through disposals
· We did though continue to invest in our portfolio to improve its
quality and meet tenant needs as well as finishing our three major
refurbishments/development
· In 2023, we spent £50.1 million of capital expenditure which
included £19.6 million on the refurbishments at Prescot St, London and Park
Avenue, Lyon as well as the development at The Coade, London
Priorities for 2024
· We will continue to invest in our property portfolio to improve its
quality which also includes sustainability enhancements as per our Net Zero
Carbon Pathway. Capital expenditure will return to historical levels of around
£30 million in 2024
· As in 2023, CLS will be selective in considering acquisitions or
developments in 2024 and instead focus on reducing LTV through disposals
"The investment CLS has made in improving its portfolio is exemplified by the
outstanding quality of Prescot Street, which has been awarded an EPC A and is
now available to let to tenants."
Providing high-quality offices Prescot Steet, London, United Kingdom
· In 2019, CLS purchased 9 Prescot Street which was an Art Deco
era 96,000 sq. ft office building
· In 2022 and 2023 we carried out a £31 million full building
refurbishment to deliver outstanding quality space
· Key areas of improvement include: amenities (new 4,000 sq. ft roof
terrace); sustainability (Cyclescore Platinum); health & wellbeing
(increased fresh air rates); flexibility (different space configurations); and
digital (Wiredscore Platinum)
· Rents of £50-£60/sq. ft are targeted across the six floors
We secure the right finance
Strategy
Whilst CLS has several financing strategic objectives, the key ones are to:
target a low cost of debt whilst maintaining an appropriate LTV; to maintain
a high proportion of fixed rate debt; to utilise diversified sources of
finance to reduce risk; and to maintain a high level of liquid resources.
Strategy implementation
To meet CLS' strategic objectives, we: aim to keep cost of debt at least 200
basis points below net initial yield albeit this depends on market conditions;
execute fixed rate debt loans or use interest rate caps and hedges; have
strong relationships with over 25 lending institutions which each have less
than 20% of our total loan exposure and own properties in special purpose
vehicles financed individually or in small portfolios by non-recourse debt in
the currency used to purchase the asset; and keep at least £100 million in
cash and undrawn facilities.
As noted in the Going Concern assessment, CLS' business model relies upon the
refinancing of loans annually, as well as disposals, for which we have a
successful track record.
Our performance in 2023
· Financed, refinanced or extended eleven loans for £330.6 million
· These loans were at a weighted average duration of 3.0 years and at a
weighted all-in rate of 5.27%
· These loans encompassed all of 2023 and over 50% of 2024 expiring
financings (now over 70%)
· In addition, we replaced £50 million of expiring RCFs and overdraft
facilities with a 3+1+1 year £30 million RCF and a 2+1 year £20 million RCF
Priorities for 2024
· To complete five or six refinancings across Germany and France for
£68.0 million or £98.3 million depending on sales
· To execute one financing for a recent refurbishment and two capex
facilities for upcoming refurbishments
· To progress 2025 refinancings of £399.2 million
"The strength of CLS' lending relationship allowed CLS to complete all of its
2023 refinancings successfully and make significant progress with 2024
refinancings."
Key 2023 refinancing Adlershofer Tor, Berlin, Germany
· Our 20,000 sqm mixed use building has minimal vacancy with a major
food retailer occupying over 40% of the space and the rest offices
· The existing loan of €25.2 million with PBB was expiring at the end
April 2023
· At the end of March 2023, we secured a 5-year loan for €45.0
million with Berliner Sparkasse
· The 4.61% fixed rate interest-only loan is at 52% LTV and
has no amortisation and no financial covenants
We deliver value through active management and cost control
Strategy
Our overall objective is to maintain a high occupancy for our properties
alongside a diversified customer base which is underpinned by a strong core
income stream. In conjunction with driving letting performance, we maintain
strict cost control.
Strategy implementation
In order to deliver on high occupancy and cost control, we use in-house staff
wherever appropriate. Consequently, we use in-house local asset and property
managers who maintain close links with occupiers to understand their needs.
Our focus is on the quality of service and accommodation for our customers.
On the cost side, we perform as many back-office functions as possible
in-house and monitor our performance against our peer group.
Our performance in 2023
· Completed 130 lease events securing £15.5 million of annual rent at
6.9% above ERV with like-for-like contracted rent increasing by 5.1%
· Underlying vacancy was essentially flat at 7.6% but the overall
vacancy rate increased to 11.0%. The increase was due to completion
of developments currently being marketed to prospective tenants
· The bad debt provision reduced by £0.9 million due to better
recovery of old debts and rent collection remained at the same, consistently
high level of 99%
Priorities for 2024
· Increase letting activity, particularly in the UK and for recently
completed refurbishments
· Reduce vacancy levels below 11.0% and over time bring down to our
historic target level of 5.0%
· Maintain rent collection levels and actively manage bad debts as
well as continue cost control measures
"The long-term lease with the City of Essen allows CLS to invest in
a comprehensive refurbishment programme to offer modern and sustainable
offices of the highest quality."
One of CLS Germany's largest-ever leases The Brix, Essen, Germany
· The Brix in Essen is a 17,400 sqm office which was bought in 2021
with 28% vacancy
· In June 2023, CLS signed a 30-year lease with the City of Essen. The
lease also benefits from being index-linked. Servicing local government
agencies is one of CLS' specialisms and they are our largest tenant segment
· Over the next two years, CLS will spend c.€20 million to
substantially improve the building with a host of energy efficiency,
sustainability and wellbeing initiatives to provide high-quality and flexible
workspace
· It is expected that the works will complete in mid-2025 and be
part-funded from a new capex facility
We continually assess whether to hold or sell properties
Strategy
Our focus is to hold those properties with the potential to add value through
active asset management. We dispose of those properties; which are too small
or too low yielding; for which the risk/reward balance is unfavourable;
or for which the acquisition business plan has been executed and there is
limited active asset management potential.
Strategy implementation
We have an asset management plan for every property which we flex to capture
rental and capital growth via leasing and refurbishment activity. We will also
assess whether greater value can be captured through a change of use. If a
decision to dispose of a property is made, we will seek to optimise the timing
of sales depending on market conditions, the characteristics of the property
and the overall portfolio composition.
Our performance in 2023
· Disposed of five properties (four completions and one unconditional
exchange) across all of our geographies for £25.4 million, 10.0% ahead of
the pre-sale valuations. Deferred consideration of €10.2 million on one
sale is due before June 2024, see case study.
· The sale of Westminster Tower unconditionally exchanged in June 2023
with a completion date of 30 November 2023. However, the buyer failed to
complete and therefore we have called on the deposit.
Priorities for 2024
· We are targeting to sell up to 6 properties with a book value of
£172.7 million, as set out in our assets held for sale. In addition, we are
starting to market for sale our Spring Mews student property.
· We are targeting to reduce LTV to 45% in the short-term and below
40% in the medium term. The disposal of all the properties which are held for
sale plus the student building would reduce proforma LTV to 40.8%
"The unconditional exchange of Quatuor allows CLS to exit a small property at
above book value through identifying the right strategic buyer to maximise the
value of the asset."
Transaction with strategic buyer Quatuor, Paris, France
· Our property is a 2,500 sqm office, with a small amount of vacancy,
located in front of one of the new Grand Paris Metro extension stations
· CLS engaged with the City of Montrouge, which had a pre-emption right
over the property, to determine the best possible price as it was the most
likely buyer
· The sale price of €11.31 million was 2.8% above the 30 June
2023 valuation
· In December 2023, unconditional exchange occurred and 10% of the
purchase price was received. The remaining 90% of the purchase price will be
received before June 2024 when the remainder of the loan will be repaid and
the sale recognised. CLS will receive the rent from the building until that
time
Risk management
Risk management is a critical component of the operation of our business,
allowing us to take advantage of opportunities whilst ensuring that we do not
expose the business to excessive risk thereby generating shareholder value
over the long term in a sustainable and compliant manner.
What we did in 2023
· Enhanced our internal control framework through documentation of key
processes and controls across the Group.
· Performed controls testing as per our plan and in readiness for the UK
Government's corporate governance reforms.
· Closely monitored the Group's cash position and cash flow, on at least a
weekly basis, with particular focus on refinancings, sales and capital
expenditure. The Group has a successful track record of cash management but
its business model remains dependent on refinancings and sales as highlighted
in the Going concern assessment.
· Targeted capital expenditure to ensure properties remain appealing to
tenants in terms of their amenities and sustainability credentials to mitigate
identified property and sustainability risks.
· Undertook a Group wide Staff Engagement and Enablement Survey completed
by 88% of staff providing insight into the business.
· Retained our Cyber Essentials plus ranking.
· Achieved milestone targets on the Net Zero Carbon pathway.
· Engaged external consultants who performed an in-depth analysis of the
climate related resilience.
Our Priorities for 2024
· Finance remaining 2024 maturing debt and advance refinancings of 2025
loans.
· Finalisation of CoreStream risk management system through refinement of
risk registers, reassessment of material risks and enhancement of our internal
controls framework (including ownership and testing).
· Continue to deliver on our roadmap of readiness activities for the UK
Government's proposed corporate reforms.
· Refinement of internal control ownership and responsibilities.
· Implement relevant Grant Thornton findings.
· Make improvements based on feedback from tenant surveys.
· Ensure Cyber Essentials plus ranking retained.
· Enhance our crisis response capabilities to reflect the dynamic nature of
the global risk landscape.
· Digitally enable employees and tenants, and continue to build digital
literacy, awareness and capability.
· Minimise financial risk in relation to securing future gas and
electricity supply for the portfolio though adherence to risk limits with
guidance from our external energy procurement partners.
· Closely monitor and support the business through risks arising from the
changing geopolitical environment.
OUR RISK MANAGEMENT FRAMEWORK
Top down
Oversight, identification, assessment and mitigation of risk at a Group level.
Continuous review of strategy and our environment ensures that we respond in a
timely manner to any changes in our principal and emerging risks.
Bottom up
Identification, assessment and mitigation of risk at business unit and
functional level.
The Board
· Overall responsibility for reviewing and monitoring risk management and
internal controls framework.
· Annual review and determination of risk appetite.
· Annual assessment of principal and emerging risks.
· Receives regular updates from the Audit Committee on risk management,
internal controls and the long-term viability of the Group.
· Sets business wide policies and delegated authority limits
Audit Committee
· Key oversight and assurance function for risk management, internal
controls and viability.
· Receives updates on risks and the control environment including the
results of any internal control review procedures and other assessments
undertaken in the period at each Audit Committee meeting.
· Invites senior managers to attend to discuss specific risk areas. These
discussions are sometimes supplemented by external advisors where relevant.
· Engages with, and reviews findings of, the external auditors.
· Reports to the Board on the effectiveness of risk management and internal
controls.
Policies
· The Group has policies set by the Board that govern key risks across the
business. These are regularly reviewed to ensure they are up to date and
comply with laws and regulations.
Executive Committee
· Comprises the CEO and the CFO together with other senior leaders as
required.
· Responsible for the day-to-day operational oversight of risk management.
· Major business-wide decisions such as property acquisitions, disposals,
significant strategy changes and the wider changing geopolitical landscape are
discussed. These decisions are assessed with reference to risk appetite.
· Proposed decisions are reviewed by the Board before implementation
subject to authorisation limits.
Controls
· CoreStream utilised as the Group's risk management system for recording
key processes, controls, risks and ownership and regularly testing
effectiveness of material controls.
Senior Leadership Team
· Meets fortnightly and is comprised of the CEO, the CFO, the COO, regional
business heads and the Group Financial Controller.
· Reviews and monitors the Group's principal and emerging risks taking into
account the appetite for, and impact of, risk in all areas of the business.
These are presented to the Audit Committee every six months for further
discussion.
· Senior managers regularly attend Audit Committee meetings to provide
further information in relation to specific risk areas, supported by external
advisors if appropriate.
Business Units
· Risk management embedded in day-to-day operations including identifying,
evaluating and reviewing within these units.
· Executes strategic actions in compliance with the Group's objectives and
policies.
· Engages with the Executive Directors and senior management to identify
risks and review risk processes and procedures relevant to these units.
Management of Risk throughout the Group
The Board has overall responsibility for risk management and has carried out a
robust assessment of the principal risks faced by the Group thereby meeting
its responsibilities in connection with risk management and internal control
set out in the UK Corporate Governance Code.
Based on the size of its balance sheet and market capitalisation, CLS is a
large business, but it is relatively small based on the number of people
working directly in the business. Our internal control structures allow the
Group to safeguard its assets, prevent and detect material fraud and errors,
ensure accuracy and completeness of the accounting records used to produce
reliable financial information while still allowing the flexibility to take
advantage of opportunities to further the business strategies of the Group.
In 2021 the Group invested in CoreStream, an internal control and risk
software package. Work continues to populate the system fully and embed an
effective risk management structure within our operations. This will allow us
to monitor and report the risks and their associated internal controls more
effectively to the Audit Committee and the Board.
Risks are identified and assessed, and a risk owner is assigned. The risk
owner is the person considered to be in the best position to prepare and
implement mitigation plans. In addition, a control owner is assigned who can
monitor and assess the effectiveness of the controls to address each principal
risk. As part of our risk management procedures, the Executive Committee and
Audit Committee receive updates regarding risk management activities to ensure
that procedures are consistently applied across the Group and that they remain
sufficiently robust, and to identify any weaknesses or enhancements.
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 several people risks are somewhat mitigated.
Risk appetite
The Board reviews our risk appetite at least annually. The risk appetite of
the Group is 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 uses five
risk categories to allocate its risk appetite:
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
To decide upon risk categorisations, internally set, percentage movements in
the balance sheet and income statement are taken into account. The Board has
assessed its risk appetite for each of the Group's principal risks as follows:
Principal risks 2023 Risk appetite 2022 Risk appetite
Property High High No change
Sustainability Medium Medium No change
Business interruption Low Low No change
Financing Medium Medium No change
Political & economic Medium Medium No change
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.
Risk assessment
As part of annual business planning, the Board undertakes an assessment of the
risks that could threaten the Group's strategic objectives, future
performance, solvency or liquidity. Risks are reviewed in detail with their
respective owners, typically a member of the Senior Leadership Team or key
business leader.
We use a risk scoring matrix to consider the likelihood and impact of each
risk at regular points throughout the year.
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 and instability in
the Middle East.
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 macro-economic factors is discussed in the CEO review and the
individual country property reviews.
Our principal risks are set out on the following pages. In evaluating these
risks, any potential impact as a result of market uncertainties has been
considered.
Principal risks 2023 Risk Assessment 2022 Risk Assessment
Property High High
Sustainability Medium Medium
Business interruption Low Low
Financing High High
Political & economic Medium High
People Medium Medium
Risk assessment vs risk appetite
The Board's risk appetite in relation to the Group's principal risk assessment
is broadly aligned. As shown in the table below, there is divergence of risk
appetite and risk status in relation to the financing risk. The Board accepts
that there are factors in relation to this risk 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, whether and how the gap should be closed is discussed at
Board level.
Principal risks Risk assessment Risk appetite
Property High High
Sustainability Medium Medium
Business interruption Low Low
Financing High Medium
Political & economic Medium Medium
People Medium Medium
Principal risks
Our principal risks are discussed over the following pages along with any
change in their risk profile since the last year end, the current direction of
travel and our risk mitigation actions and plans. Whilst we do not consider
that 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 Key risks Mitigation in 2023 Mitigation in 2024
1 Market fundamentals and/or internal behaviours lead to adverse changes to · Cyclical downturn in the property market which may be indicated by an · Maintained strong relationships with our occupiers, agents and direct · Continue with our current controls and mitigating actions
capital values of the property portfolio or ability to sustain and improve increase in yields investors active in the market and actively monitored trends in our sectors
Property income generation from these assets.
· Changes in supply of space and/or demand (vacancy rate) · Asset management committees meet once a month to discuss each property
KPI/OPI
· Poor property/facilities management · Continued investment of £50.1 million in our properties with
TSR(R), TAR,
refurbishments taking place in over 30 properties to meet tenant demands
· Inadequate due diligence and/or poor commercial assessment of
acquisitions · Rigorous and established governance approval processes for capital and
leasing decisions
· Failure of tenants
· Engagement with tenants to understand their needs and space requirements
· Insufficient health and safety risk protection
· Targeted capital expenditure with a focus on sustainability
· Building obsolescence
· Disposal of 4 properties with low yield, limited asset management
potential or risk/reward ratio unfavourably balanced
· Continued monitoring of covenant strength and health of tenants
· High quality provision of property and facilities management services
with our in-house team
· Health and safety committee that closely monitors activity and regulation
and reports to every Board meeting
2 As a result of a failure to plan properly for, and act upon, the potential Transition risks: These include regulatory changes, economic shifts, · Continued monitoring and oversight by the Sustainability Committee over · Implementation of new sustainability data platform
environmental and social impact of our activities, changing societal obsolescence, and the changing availability and price of resources. key ongoing projects
Sustainability attitudes, and/or a breach of any legislation, this could lead to damage to
· Implementation of our climate resilience plan
our reputation and customer relationships, loss of income and/or property Physical risks: These are climate-related events that affect our supply chain · Detailed Sustainability risk registers maintained, reviewed and updated
KPI/OPI value, and erosion of shareholder confidence in the Group. as well as the buildings' physical form and operation; they include extreme
· Ongoing rollout of biodiversity net gain plan
weather events, pollution and changing weather patterns. · Continued implementation and active monitoring of NZC Pathway projects
TSR(R), TAR, VR, ACR
· Continue with our current controls and mitigating actions
· Completion of planned energy efficiency projects including all scheduled
PV installations
· Completion of all scheduled EV installations
· Continued EPC upgrade programme
· Recertification of relevant properties in the UK and France to BREEAM
In-use V6
· Independent assurance on EPRA sBPR KPI data
· Sustainable procurement policy published
· Renewal of Sustainable refurbishment and fit-out guide
· Achieved living wage accreditation
· Continued engagement with occupiers including release of new occupier app
3 Data loss; or disruption to corporate or building management systems; or · Cyber threat · Maintained a Centre of Internet Security 'A' rating · Continue with our current controls and mitigating actions
catastrophic external attack; or disaster; may limit the ability of the
Business interruption business to operate resulting in negative reputational, financial and · Large scale terrorist attack · Maintained Cyber Essentials Plus certification
regulatory implications for long term shareholder value.
KPI/OPI · Environmental disaster, power shortage or pandemic · Conducted penetration testing on the Group's properties (e.g. simulate
cyber-attacks on building management systems)
TSR(R), TAR,
· Continued implementation of shared property and finance system across the
Group
· Continued use of external partners for specialist cyber security
activities and independent reviews
· Transitioned to continuous and automated patching across all managed
systems
· Continued to test and train employees on cyber security
4 The risk of not being able to source funding in cost effective forms will · Inability to refinance debt at maturity due to lack of funding sources, · Financed, refinanced or extended 11 loans to a value of £330.6 million · Continue with our current controls and mitigating actions
negatively impact the ability of the Group to meet its business plans or market liquidity, etc.
Financing risk satisfy its financial obligations.
· Weekly treasury meetings took place with the CEO and CFO including
· Unavailability of financing at acceptable debt terms discussion of financing, rolling 12-month cash flow forecasts, FX requirements
KPI/OPI
and hedging, amongst other items
· Risk of rising interest rates on floating rate debt
COST OF DEBT
· Weekly cash flow forecasts prepared and distributed to Senior Leadership
· Risk of breach of loan covenants Team
· Foreign currency risk · 75.9% of the Group's borrowings are fixed rate plus a further 3.8% of
interest rate caps
· Financial counterparty risk
· Regularly monitored loan covenants
· Risk of not having sufficient liquid resources to meet payment
obligations when they fall due · CLS borrows in local markets and in local currencies via individual SPVs
to provide a 'natural' hedge
· Maintained a wide number of banking relationships with 25 lenders across
the Group to diversify funding sources
· Weighted average cost of debt remains low (3.61%)
· Maintained average debt maturity of 3.5 years
· Significant headroom across three main loan covenants of between 13% and
30%
· All loans have equity cure mechanisms to repair breaches
5 Significant events or changes in the Global and/or European political and/or · Ongoing transition of the UK from the EU · Monitored events and trends closely, making business responses if needed · Continue with our current controls and mitigating actions
economic landscape may increase the reluctance of investors and customers to
Political and economic make timely decisions and thereby impact the ability of the Group to plan and · Global geopolitical and trade environments · Maintained membership of key industry bodies for example the British
deliver its strategic priorities in accordance with its core business model. Property Federation, British Council of Offices and Better Buildings
KPI/OPI Partnership
VR, ACR · Monitored tenants for sanction issues
6 The failure to attract, develop and retain the right people with the required · Failure to recruit senior management and key executives with the right · Undertook a Group wide Staff Engagement and Enablement Survey, completed · Continue with our current controls and mitigating actions
skills, and in an environment where employees can thrive, will inhibit the skills by 88% of staff providing insight into the Group
People ability of the Group to deliver its business plans in order to create
· Assess feedback provided in Staff Engagement and Enablement Survey and
long term sustainable value. · Excessive staff turnover levels · Engagement with workforce advisory panel implement appropriate changes.
KPI/OPI
· Lack of succession planning and development opportunities · Staff wellbeing week
TSR(R), TAR, Dividend cover
· Poor employee engagement levels · Monitored market to ensure competitive remuneration packages across the
Group
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.
Time Horizon
Risk Potential Impact Mitigation Short < 2yrs Medium 2-5 yrs Long > 5 yrs
Adoption of technology Failure to embrace technology could result in the Group falling behind its We thoroughly examine emerging technologies to ensure that we extract the X X X
competitors in efficiency, thereby risking a loss of competitive edge. As utmost value from any new system or service we opt to incorporate into our
buildings evolve to incorporate smart features, tenants may prefer such comprehensive digital and technological framework.
technologically advanced spaces over those lacking similar amenities.
Neglecting occupant preferences for technology could diminish the
attractiveness of the Group's office properties, potentially leading to
vacancies and a decline in rental revenue.
Artificial Intelligence The automation of certain tasks through AI may lead to job displacement for Active monitoring of the changing landscape through attendance at AI industry X X X
those whose roles are automated but will also create jobs. This could have talks and regular discussion/awareness at the executive committee level.
implications on our current tenant base which may impact office space
requirements.
Regulation/ compliance Increased capital cost of maintaining our property portfolio. Continued ongoing assessment of all properties against emerging regulatory X 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 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. proactively manage customers; and gain real-time insight and transparency on
changes in needs and trends allowing us to adapt our properties to meet these.
Climate change, natural resources and biodiversity risks 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 and viability statement
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 very high rent collection and low bad debts, and
has a long-term track record in financing and refinancing debt including
£330.6 million completed in 2023 and a further £103.2 million subsequent to
year end, of which £88.5 million has been executed and £14.7 million for
which credit approval has been obtained by lenders or terms have been agreed.
The Directors note that the interim financial information for the six months
ended 30 June 2023 contained disclosure of a Material Uncertainty related to
going concern due to the timing and amounts of the planned refinancing of debt
and disposals of property being then outside of Management's control. In this
context the Directors set out their considerations and conclusions in respect
of going concern for these financial statements below.
Going concern period and basis
The Group's going concern assessment covers the period to 31 July 2025 ("the
going concern period"). The period chosen takes into consideration the
maturity date of loans totalling £311.3 million that expire by July 2025. The
going concern assessment uses the business plan approved by the Board at its
November 2023 meeting as the Base case. The assessment also considers a Severe
but plausible case.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case reflect the challenging
economic backdrop and include assumptions regarding forecast forward interest
curves, inflation and foreign exchange, and includes revenue growth,
principally from contractual increases in rent, and increasing cost levels in
line with forecast inflation.
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 £311.3 million expiring within the
going concern period will be refinanced as expected (£261.5 million) or will
be repaid (£49.8 million), some of which are linked to forecast property
disposals. The Board acknowledges that these refinancings are not fully within
its control; however, they are 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 the 12 months to
31 December 2023 when £330.6 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
£103.2 million of the £311.3 million noted above.
The Base case also includes 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 2023. The Board acknowledges that property disposals are
not fully within its control; however, they are confident these transactions
will be completed within the going concern period, based on their history of
achieving disposals (with disposals of £73.5m achieved since 2022). 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's
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,
higher interest rates and reduced achievements of refinancings and disposals.
These 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 10% until December 2024, impacting
forecast refinancings, sales and cash cures. This is in addition to the
reduction experienced of 12.5% in 2023 and 17.1% since June 2022.
Assumptions around refinancing and investment property disposals are adjusted
to only include those agreed or considered significantly advanced by
management. In addition, a reduction in property values of 10% results in
additional cure payments of £12.1 million being necessary for the Group to
remain in compliance with its covenant requirements.
Due to the severity of the assumptions used in this scenario, which is severe
but plausible and therefore not remote, the liquidity of the Group is
exhausted even after putting in place controllable mitigating actions as set
out below.
Mitigating actions
In the Severe but plausible case, CLS is assumed to take 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 its existing £50 million of
currently unutilised facilities. If needed, further disposals could be
considered as there are no sale restrictions on CLS' £2.1 billion of
properties, albeit the timing and the amount of these potential disposals are
not in the Group's control.
Additionally, the Directors note that the properties that require refinancing
in the going concern period are on a non-recourse basis to the Group.
Accordingly, in extremis, the lender could enforce their security on an
individual property with no claim on the rest of the Group's assets.
Material uncertainty related to going concern
As described above, the Group is reliant for liquidity purposes upon its
ability to both refinance the debt maturing and to complete a number of
property disposals in the going concern period in more challenging market
conditions.
Whilst the Directors remain confident, due to the reasons highlighted above,
that a combination of sufficient refinancings and property disposals will be
achieved, the timing and value of both the planned refinancing of facilities
falling due within the going concern review period, and planned property
disposals, is outside of management's control and consequently a material
uncertainty exists that may cast significant doubt on the Group's and
Company's ability to continue as a going concern.
Notwithstanding this material uncertainty on the going concern assumption,
given our track-record and reputation, the Directors are 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. In extremis, the loans requiring refinancing are
provided on a non-recourse basis. Therefore, the Directors continue to adopt
the going concern basis in preparing these Group and Company financial
statements.
The financial statements do not contain the adjustments that would result if
the Group and Company were unable to continue as a going concern.
Viability statement
Viability
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 viability assessment covers the period to 31 December 2027 ("the viability
period"), a period chosen as it is coincident with the period of the forecasts
approved by the Board at its November 2023 Board meeting. These forecasts
comprise the Base case but they have been updated for the actual results for
2023 and any changed assumptions. 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 good visibility.
In performing this assessment, the Board notes that the interim financial
information for the six months ended 30 June 2023 contained disclosure of a
Material Uncertainty related to going concern because the timing and amounts
of the planned refinancing of debt and disposals of property at the time were
outside of Management's control. In this context the Directors set out their
considerations and conclusions in respect of their viability statement for
these financial statements below.
Viability assessment
As with the Going Concern assessment, the financial forecast prepared for the
Base case takes account of the Group's principal risks and uncertainties, and
reflects the current challenging economic backdrop. The forecast uses forward
interest rate curves, inflation and foreign exchange. The slower pace in the
reduction in vacancy is forecast to continue.
The Base case is focussed on the cash, liquid resources and working capital
position of the Group including forecast covenant compliance. The forecast
also assumes continued access to lending facilities but given the longer time
period than the going concern period the amounts are consequentially greater.
Within the viability period, debt facilities of £714.7 million expiring will
be refinanced (£519.9 million) as expected or repaid (£194.8 million, which
is linked to forecast property sales) taking into account:
· existing banking relationships;
· CLS' track record of prior refinancings, particularly in 2023 when
£330.6 million was successfully refinanced or extended;
· refinancings subsequent to year end that have been completed, or where
terms have been agreed, or where negotiations are very advanced totalling
£103.2 million of the £714.7 million expiring before 31 December 2027; and
· other ongoing discussions with lenders.
A Severe but plausible case was also produced by flexing key assumptions
including: lower rents, increased service charges, higher property and
administration expenses, falling property values, higher interest rates and
reduced achievements of refinancings and disposals. These flexed assumptions
are derived by considering the negative market and economic impacts
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 further reduction in property values of 10%
until 31 December 2024 which is in addition to the fall in value already
experienced in 2022 and 2023 but no subsequent bounce back in valuation has
been assumed.
Assumptions around refinancing and property disposals are adjusted to only
include those agreed or considered significantly advanced by management. In
addition, a reduction in property values of 10% results in additional cure
payments of £9.8 million being necessary for the Group to remain in
compliance with its covenant requirements.
The impacts of climate change risks within the viability period have been
considered in the Severe but plausible case and are expected to be immaterial.
Due to the severity of the assumptions used in this scenario, which is Severe
but plausible and therefore not remote, the liquidity of the Group is
exhausted even after putting in place controllable mitigating actions as set
out below.
In the Severe but plausible case, CLS would need to take mitigating actions in
terms of depositing cash to equity cure some loans as envisaged under the
facilities, stopping future acquisitions, scaling back uncommitted capital
expenditure 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 October 2026 with the option to extend a further two years and £20
million is committed until November 2025 with an option to extend a further
year.
Additionally, the Board note that the properties that require refinancing in
the going concern period are on a non-recourse basis to the Group.
Accordingly, in extremis, the lender could enforce their security on an
individual property with no claim on the rest of the Group assets.
Material uncertainty
The Directors highlighted in their going concern assessment (see note 3) that
whilst they remain confident in the future prospects for the Group and its
ability to continue as a going concern, the Group is reliant upon its ability
to both refinance the debt maturing and to complete a number of property
disposals in the going concern period in challenging market conditions. The
same material uncertainty may also cast significant doubt over the future
viability of the Group.
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 5 March 2024.
Approved and authorised on behalf of the Board
David Fuller BA FCG
Company Secretary
6 March 2024
Group income statement
for the year ended 31 December 2023
Notes 2023 2022
£m
£m
Revenue 4 148.7 139.7
Costs (35.7) (31.9)
Net rental income 4 113.0 107.8
Administration expenses (18.2) (15.7)
Other property expenses (15.6) (16.2)
Operating profit before revaluation and disposals 79.2 75.9
Net revaluation movements on investment property 12/14 (302.7) (136.5)
Net revaluation movements on equity investments (1.3) (3.8)
Profit on sale of investment property 1.4 0.5
Operating loss (223.4) (63.9)
Finance income 8 1.6 10.1
Finance costs 9 (41.3) (26.8)
Foreign exchange loss (0.3) (0.3)
Impairment of goodwill - (1.1)
Loss before tax (263.4) (82.0)
Taxation 10 13.6 0.1
Loss for the year attributable to equity shareholders (249.8) (81.9)
Baisc and diluted earnings per share 5/24 (62.9)p (20.2)p
The notes are an integral part of these Group financial statements.
Group statement of comprehensive income
for the year ended 31 December 2023
Notes 2023 2022
£m
£m
Loss for the year (249.8) (81.9)
Other comprehensive income:
Items that may be reclassified to profit or loss
Revaluation of property, plant and equipment 26 2.2 1.9
Foreign exchange differences 26 (12.3) 28.5
Deferred tax on revaluation of property, plant and equipment 18 (0.6) (0.4)
Total items that may be reclassified to profit or loss (10.7) 30.0
Total other comprehensive (expense)/income (10.7) 30.0
Total comprehensive expense for the year attributable to equity shareholders (260.5) (51.9)
The notes are an integral part of these Group financial statements.
Group balance sheet
at 31 December 2023
Notes 2023 2022
£m
£m
Non-current assets
Investment properties 12 1,850.5 2,295.0
Property, plant and equipment 13 41.8 39.6
Intangible assets 2.9 2.8
Equity investments 1.4 2.7
Deferred tax 18 - 2.8
Derivative financial instruments 20 3.6 8.5
1,900.2 2,351.4
Current assets
Trade and other receivables 15 16.7 15.8
Derivative financial instruments 20 0.7 -
Cash and cash equivalents 16 70.6 113.9
88.0 129.7
Assets held for sale 14 172.7 20.3
Total assets 2,160.9 2,501.4
Current liabilities
Trade and other payables 17 (68.6) (58.6)
Current tax (0.3) (2.0)
Borrowings 19 (193.9) (173.4)
(262.8) (234.0)
Non-current liabilities
Deferred tax 18 (88.7) (110.5)
Borrowings 19 (876.7) (932.5)
Leasehold liabilities (3.5) (3.6)
(968.9) (1,046.6)
Total liabilities (1,231.7) (1,280.6)
Net assets 929.2 1,220.8
Equity
Share capital 23 11.0 11.0
Share premium 83.1 83.1
Other reserves 26 106.7 115.4
Retained earnings 728.4 1,011.3
Total equity 929.2 1,220.8
The unaudited financial statements of CLS Holdings plc (registered number:
02714781) were approved by the Board of Directors and authorised for issue on
06 March 2024.
The notes are an integral part of these Group financial statements.
Group statement of changes in equity
for the year ended 31 December 2023
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 23 Note 26
Arising in 2023:
Total comprehensive expense for the year - - (10.7) (249.8) (260.5)
Share-based payments - - 0.5 - 0.5
Dividends to shareholders - - - (31.6) (31.6)
Transfer of fair value on property, plant and equipment - - 1.5 (1.5) -
Total changes arising in 2023 - - (8.7) (282.9) (291.6)
At 1 January 2023 11.0 83.1 115.4 1,011.3 1,220.8
At 31 December 2023 11.0 83.1 106.7 728.4 929.2
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 23 Note 26
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
The notes are an integral part of these Group financial statements.
Group statement of cash flows
for the year ended 31 December 2023
Notes 2023 2022
£m
£m
Cash flows from operating activities
Cash generated from operations 27 83.2 70.5
Interest received 1.6 1.3
Interest paid (35.1) (24.2)
Income tax paid on operating activities (3.8) (4.6)
Net cash inflow from operating activities 45.9 43.0
Cash flows from investing activities
Purchase of investment properties - (83.4)
Capital expenditure on investment properties (46.4) (57.2)
Proceeds from sale of properties 17.0 56.2
Income tax paid on sale of properties (1.8) (3.2)
Purchases of property, plant and equipment (0.8) (0.4)
Purchase of intangibles (0.3) (0.8)
Repayment of vendor loan - 7.7
Foreign currency loss on forward contracts - (0.2)
Net cash outflow from investing activities (32.3) (81.3)
Cash flows from financing activities
Dividends paid 25 (31.6) (32.4)
Purchase of own shares - (25.8)
New loans 129.1 144.1
Issue costs of new loans (1.1) (1.1)
Repayment of loans (152.6) (99.4)
Net cash outflow from financing activities (56.2) (14.6)
Cash flow element of net decrease in cash and cash equivalents (42.6) (52.9)
Foreign exchange loss (0.7) (0.6)
Net decrease in cash and cash equivalents (43.3) (53.5)
Cash and cash equivalents at the beginning of the year 113.9 167.4
Cash and cash equivalents at the end of the year 16 70.6 113.9
The notes are an integral part of these Group financial statements.
Notes to the Group financial statements
for the year ended 31 December 2023
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 2023 or the
year ended 31 December 2022.
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
2023 or 31 December 2022 as defined by Section 434 of the Companies Act 2006.
Statutory accounts for 2022 have been delivered to the Registrar of Companies
and those for 2023 will be delivered following the Company's Annual General
Meeting.
The Group's full financial statements for the year ended 31 December 2023 are
expected to be approved by the Board of Directors and reported on by the
auditors, Ernst & Young LLP, on 8 March 2024. Accordingly, the financial
information for 2023 is presented unaudited in this announcement. The
independent auditor's report is expected to contain an emphasis of matter
paragraph drawing attention to a Material uncertainty related to going
concern.
The 2022 accounts were audited Ernst & Young 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 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 2023 Annual Report and Accounts is expected to be posted to shareholders
on 18 March 2024 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 very high rent collection and low bad debts, and
has a long-term track record in financing and refinancing debt including
£330.6 million completed in 2023 and a further £103.2 million subsequent to
year end, of which £88.5 million has been executed and £14.7 million for
which credit approval has been obtained by lenders or terms have been agreed.
The Directors note that the interim financial information for the six months
ended 30 June 2023 contained disclosure of a Material Uncertainty related to
going concern due to the timing and amounts of the planned refinancing of debt
and disposals of property being then outside of Management's control. In this
context the Directors set out their considerations and conclusions in respect
of going concern for these financial statements below.
Going concern period and basis
The Group's going concern assessment covers the period to 31 July 2025 ("the
going concern period"). The period chosen takes into consideration the
maturity date of loans totalling £311.3 million that expire by July 2025. The
going concern assessment uses the business plan approved by the Board at its
November 2023 meeting as the Base case. The assessment also considers a Severe
but plausible case.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case reflect the challenging
economic backdrop and include assumptions regarding forecast forward interest
curves, inflation and foreign exchange, and includes revenue growth,
principally from contractual increases in rent, and increasing cost levels in
line with forecast inflation.
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 £311.3 million expiring within the
going concern period will be refinanced as expected (£261.5 million) or will
be repaid (£49.8 million), some of which are linked to forecast property
disposals. The Board acknowledges that these refinancings are not fully within
its control; however, they are 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 the 12 months to
31 December 2023 when £330.6 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
£103.2 million of the £311.3 million noted above.
The Base case also includes 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 2023. The Board acknowledges that property disposals are
not fully within its control; however, they are confident these transactions
will be completed within the going concern period, based on their history of
achieving disposals (with disposals of £73.5m achieved since 2022). 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's
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,
higher interest rates and reduced achievements of refinancings and disposals.
These 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 10% until December 2024, impacting
forecast refinancings, sales and cash cures. This is in addition to the
reduction experienced of 12.5% in 2023 and 17.1% since June 2022.
Assumptions around refinancing and investment property disposals are adjusted
to only include those agreed or considered significantly advanced by
management. In addition, a reduction in property values of 10% results in
additional cure payments of £12.1 million being necessary for the Group to
remain in compliance with its covenant requirements.
Due to the severity of the assumptions used in this scenario, which is severe
but plausible and therefore not remote, the liquidity of the Group is
exhausted even after putting in place controllable mitigating actions as set
out below.
Mitigating actions
In the Severe but plausible case, CLS is assumed to take 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 its existing £50 million of
currently unutilised facilities. If needed, further disposals could be
considered as there are no sale restrictions on CLS' £2.1 billion of
properties, albeit the timing and the amount of these potential disposals are
not in the Group's control.
Additionally, the Directors note that the properties that require refinancing
in the going concern period are on a non-recourse basis to the Group.
Accordingly, in extremis, the lender could enforce their security on an
individual property with no claim on the rest of the Group's assets.
Material Uncertainty related to going concern
As described above, the Group is reliant for liquidity purposes upon its
ability to both refinance the debt maturing and to complete a number of
property disposals in the going concern period in more challenging market
conditions.
Whilst the Directors remain confident, due to the reasons highlighted above,
that a combination of sufficient refinancings and property disposals will be
achieved, the timing and value of both the planned refinancing of facilities
falling due within the going concern review period, and planned property
disposals, is outside of management's control and consequently a material
uncertainty exists that may cast significant doubt on the Group's and
Company's ability to continue as a going concern.
Notwithstanding this material uncertainty on the going concern assumption,
given our track-record and reputation, the Directors are 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. In extremis, the loans requiring refinancing are
provided on a non-recourse basis. Therefore, the Directors continue to adopt
the going concern basis in preparing these Group and Company financial
statements.
The financial statements do not contain the adjustments that would result if
the Group and Company were unable to continue as a going concern.
4. Segment information
Each property represents an operating segment which the Group aggregates into
two reporting segments with similar characteristics - investment properties
and other investments. Other investments comprise the hotel at Spring Mews and
other small corporate investments. Central administration relates to the
operating costs of the Group's headquarters and are not allocated to any
reporting segment. The Group manages the investment properties division on a
geographical basis due to its size and geographical diversity. Consequently,
the Group's principal reporting segments are:
Investment properties: United Kingdom
Germany
France
Other investments
2023
Investment properties
Year ended 31 December 2023 United Kingdom £m Germany France Other investments Central administration Total
£m
£m
£m
£m
£m
Rental income 46.4 43.2 13.2 - - 102.8
Other property-related income 8.9 0.6 0.9 5.5 - 15.9
Service charge income 13.4 11.7 4.9 - - 30.0
Revenue 68.7 55.5 19.0 5.5 - 148.7
Service charges and similar expenses (16.3) (14.0) (5.4) - - (35.7)
Net rental income 52.4 41.5 13.6 5.5 - 113.0
Administration expenses (7.5) (3.2) (1.3) (0.1) (6.1) (18.2)
Other property expenses (8.6) (4.2) (0.4) (2.4) - (15.6)
Revenue less costs 36.3 34.1 11.9 3.0 (6.1) 79.2
Net revaluation movements on investment property (186.6) (90.6) (25.5) - - (302.7)
Net revaluation movements on equity investments - - - (1.3) - (1.3)
Profit/(loss) on sale of investment property 0.4 (1.6) (0.1) 2.7 - 1.4
Segment operating (loss)/profit (149.9) (58.1) (13.7) 4.4 (6.1) (223.4)
Finance income 0.1 - - 1.5 - 1.6
Finance costs (25.2) (11.9) (4.0) - (0.2) (41.3)
Foreign exchange gain/(loss) - - 0.1 (0.4) - (0.3)
Segment (loss)/profit before tax (175.0) (70.0) (17.6) 5.5 (6.3) (263.4)
2022
Investment properties
Year ended 31 December 2022 United Germany France Other investments Central administration Total
Kingdom
£m
£m
£m
£m
£m
£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)
Other segment information
Assets Liabilities Capital expenditure
2023 2022 2023 2022 2023 2022
£m
£m
£m
£m
£m
£m
Investment properties
United Kingdom 930.0 1,083.6 548.2 551.7 37.2 36.6
Germany 908.1 1,011.6 510.8 536.4 9.3 9.8
France 265.0 294.3 164.3 185.7 3.1 11.7
Other investments 57.8 111.9 8.4 6.8 0.8 0.4
2,160.9 2,501.4 1,231.7 1,280.6 50.4 58.5
5. 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 (EPRA APMs and similar CLS APMs) which are
reconciled where possible to statutory measures on the following pages.
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. CLS considers the two measures below to be the most
relevant as we believe that these will continue to reflect the long-term
nature of our property investments most accurately.
· EPRA earnings; and
· EPRA net tangible asset value (NTA).
There has been no change 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, although all other measures are shown within the supplementary
unaudited disclosures to the financial statements there has been no change to
comparative amounts.
1. EPRA APMs
For use in earnings per share calculations 2023 2022
Number
Number
Weighted average number of ordinary shares in circulation 397,330,507 404,410,051
Diluted number of ordinary shares 400,942,040 406,473,292
For use in net asset per share calculations
Number of ordinary shares in circulation at 31 December 397,410,268 397,210,866
i) Earnings - EPRA earnings
Notes 2023 2022
£m £m
Loss for the year (249.8) (81.9)
Net revaluation movement on investment property 12/14 302.7 136.5
Deferred tax on revaluations (16.3) (4.8)
Net revaluation movement on equity investments 1.3 3.8
Profit of investment property (1.4) (0.5)
Current tax thereon - 1.6
Movement in fair value of derivative financial instruments 8/9 4.2 (8.8)
Impairment of goodwill - 1.1
Amortisation of intangible assets 0.2 -
EPRA earnings 40.9 47.0
Basic and diluted earnings per share (62.9)p (20.2)p
EPRA earnings per share 10.3p 11.6p
ii) Net asset value measures
2023 2022
2023 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 929.2 929.2 929.2 929.2 1,220.8 1,220.8 1,220.8 1,220.8
Other intangibles - (2.9) - - - (2.8) - -
Fair value of fixed interest debt - - - 56.7 - - - 87.2
Tax thereon - - - (3.3) - - - (6.4)
Deferred tax on revaluation surplus - 90.0 90.0 - - 108.6 108.6 -
Adjustment for short-term disposals - (6.6) - - - (8.6) - -
Fair value of financial instruments - (4.3) (4.3) - - (8.5) (8.5) -
Purchasers' costs(1) - - 147.7 - - - 149.3 -
929.2 1,005.4 1,162.6 982.6 1,220.8 1,309.5 1,470.2 1,301.6
Per share 233.8p 253.0p 292.5p 247.2p 307.3p 329.6p 370.1p 327.7p
1 EPRA NTA and EPRA NDV reflect IFRS values which are net of
purchasers' costs. Purchasers' costs are added back when calculating EPRA NRV.
6. Loss for the year
Loss for the year has been arrived at after charging/(crediting):
Notes 2023 2022
£m £m
Auditor's remuneration: Fees payable to the Company's Auditor for:
Audit of the Parent Company and Group accounts 0.5 0.4
Audit of the Company's subsidiaries pursuant to legislation 0.2 0.2
Depreciation of property, plant and equipment 13 0.6 0.6
Amortisation of intangible assets 0.2 -
Employee benefits expense 7 12.1 10.2
Foreign exchange loss 0.3 0.3
Provision against trade receivables 15 - 0.6
Other services provided to the Group by the Company's Auditor consisted of the
2023 interim review of £76k (2022: £50k) and the provision of access to a
technical financial reporting database of £1k (2022: £1k).
7. Employee benefits expense
2023 2022
£m
£m
Wages and salaries 7.6 7.3
Social security costs 1.4 0.8
Pension costs - defined contribution plans 0.3 0.3
Performance incentive plan 1.2 0.8
Other employee-related expenses 1.6 1.0
12.1 10.2
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.
The monthly average number of employees of the Group in continuing operations,
including Executive Directors, was as follows:
2023 2022
Property Number Hotel Total Property Number Hotel Total
Number
Number
Number
Number
Male 50 11 61 47 9 56
Female 48 9 57 46 7 53
98 20 118 93 16 109
8. Finance income
2023 2022
£m
£m
Interest income
Financial instruments carried at amortised cost 1.6 1.3
Movement in fair value of derivative financial instruments - 8.8
1.6 10.1
9. Finance costs
2023 2022
£m
£m
Interest expense
Secured bank loans 35.5 23.3
Secured notes - 1.7
Amortisation of loan issue costs 1.6 1.8
Total interest costs 37.1 26.8
Movement in fair value of derivative financial instruments 4.2 -
Total finance costs 41.3 26.8
10. Taxation
2023 2022
£m
£m
Corporation tax
Current year charge 5.6 5.8
Adjustments in respect of prior years (1.9) (0.5)
3.7 5.3
Deferred tax (see note 18)
Origination and reversal of temporary differences (17.3) (5.4)
(17.3) (5.4)
Tax credit for the year (13.6) (0.1)
A deferred tax charge of £0.6 million (2022: charge of £0.4 million) was
recognised directly in equity (note 18). 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:
2023 2022
£m
£m
Loss before tax (263.4) (82.0)
Expected tax credit at applicable tax rate (56.3) (15.1)
Expenses not deductible for tax purposes 0.3 1.0
Non-deductible loss from REIT 42.9 13.4
Deferred tax on losses not recognised 3.7 1.2
Adjustments in respect of prior years (3.8) (0.5)
Other (0.4) (0.1)
Tax credit for the year (13.6) (0.1)
The weighted average applicable tax rate of 21.4% (2022: 18.5%) 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 25% (2022: 19%).
11. Property portfolio
Notes United Kingdom Germany France Total
£m
£m
£m
£m
Investment property 12 836.3 768.2 246.0 1,850.5
Property held as property, plant and equipment 13 36.3 1.7 1.7 39.7
Properties held for sale 14 47.3 115.6 9.8 172.7
Property portfolio at 31 December 2023 919.9 885.5 257.5 2,062.9
Notes United Kingdom Germany France Total
£m
£m
£m
£m
Investment property 12 1,030.0 990.5 274.5 2,295.0
Property held as property, plant and equipment 13 33.6 2.0 1.9 37.5
Properties held for sale 14 7.0 3.6 9.7 20.3
Property portfolio at 31 December 2022 1,070.6 996.1 286.1 2,352.8
12. Investment property
United Kingdom Germany France Total
£m
£m
£m
Investment
properties
£m
At 1 January 2023 1,030.0 990.5 274.5 2,295.0
Acquisitions - - - -
Capital expenditure 37.2 9.3 3.1 49.6
Disposals (3.7) (6.6) - (10.3)
Net revaluation movement (186.1) (90.6) (25.5) (302.2)
Lease incentive adjustments (0.3) 1.6 (0.2) 1.1
Exchange rate variances - (20.3) (5.7) (26.0)
Transfer to properties held for sale (40.8) (115.7) (0.2) (156.7)
At 31 December 2023 836.3 768.2 246.0 1,850.5
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 adjustments 0.9 6.9 - 7.8
Exchange rate variances - 48.9 14.3 63.2
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
Investment properties included leasehold properties with a carrying amount of
£65.1 million (2022: £77.7 million).
Interest capitalised within capital expenditure in the year amounted to £1.0
million (2022: £0.5 million).
The property portfolio which comprises investment properties, properties held
for sale (note 14), and hotel and other, detailed in note 13, was revalued at
31 December 2023 to its fair value. Valuations were based on current prices in
an active market for all properties. The property valuations were carried out
by independent external valuers as follows:
Investment property Other property Property portfolio Investment property Other property Property portfolio
2023
2023
2022
2022
2022
2023
£m
£m
£m
£m
£m
£m
Cushman and Wakefield 836.3 83.6 919.9 1,030.0 33.6 1,063.6
Jones Lang LaSalle 1,014.2 128.8 1,143.0 1,265.0 13.5 1,278.5
Directors' valuation - - - - 3.6 3.6
1,850.5 212.4 2,062.9 2,295.0 50.7 2,345.7
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 independent 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 Valuation - Global standards.
Each Country Head, who reports 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
RICS Valuation - Global 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 2023 or 2022. 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 £302.7 million (2022: a loss of £136.5 million) and are presented
in the income statement in the line item 'Net movements on revaluation of
investment properties'. The revaluation gain for the property, plant and
equipment of £2.2 million (2022: gain of £1.9 million) was included within
the revaluation reserve via other comprehensive income.
All gains and losses recorded in profit or loss in 2023 and 2022 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 2023 and 31 December 2022,
respectively.
Quantitative information about investment property fair value measurement using unobservable inputs (Level 3)
ERV Equivalent yield
Average Range Average Ra
ng
e
2023 2022 2023 2022 2023 2022 2023 2022
£ per sq. ft £ per sq. ft £ per sq. ft £ per sq. ft % % % %
UK 34.76 34.01 10.00-56.05 10.00-58.09 6.08 5.61 2.98-13.23 2.94-9.61
Germany 14.40 14.10 9.93-29.70 10.14-25.27 5.24 4.75 4.40-6.20 3.30-5.90
France 21.96 21.69 12.99-43.53 13.26-41.38 6.00 5.13 4.79-7.40 4.05-6.75
Sensitivity of measurement to variations in the significant unobservable inputs
All other factors remaining constant, an increase in estimated rental value
'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 £84.8
million (2022: £138.5 million) whilst a 25 basis point increase would reduce
the fair value by £85.4 million (2022: £107.0 million). A decrease in the
ERV by 5% would result in a decrease in the fair value of the Group's
investment property by £79.0 million (2022: £86.8 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 £70.7 million (2022: £106.5 million).
Where the Group leases out its investment property under operating leases the
duration is typically three years or more. No material variable contingent
rents have been recognised in the current or prior year.
Sustainability, climate change, Net Zero Carbon Pathway and EPC compliance
In August 2021, the Group published its Sustainability Strategy which includes
a pathway to achieve Net Zero Carbon ("NZC") emissions by 2030. Our NZC
Pathway is underpinned by individual property energy audits, undertaken by
technical experts, which identify energy and carbon saving opportunities. At
today's costs, the investment required to upgrade all our assets to meet our
SBTi-aligned NZC target amounts to an estimated £65 million over the 10-year
period between 2021 and 2030, with over £15 million spent since 2021. We have
integrated the energy audits into individual Asset Management Plans to enable
strategic decisions about the refurbishment, sale or full redevelopment of our
assets to be made. Additional audits are undertaken as and when required (e.g.
when a property enters the portfolio) to ensure the robust delivery of the
Pathway across the Group's portfolio. Progress against our NZC Pathway,
including an update on, is detailed in our separate Sustainability Report. The
UK portfolio is already compliant with the 2023 Minimum Energy Efficiency
Standard (MEES) requirements, whilst further upgrades are scheduled to ensure
our properties achieve the expected target of EPC B by 2030. In France, our
Asset Management Plans will ensure we meet the Décret Tertiaire requirements
and although there are currently no minimum targets for existing buildings in
Germany, our NZC Pathway will see our alignment with the Carbon Risk Real
Estate Monitor ("CRREM") energy and carbon intensity pathways, by 2030, across
all three regions.
13. 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 2022 25.0 3.2 11.0 3.2 42.4
Additions - - 0.1 0.3 0.4
Disposals - - - (0.1) (0.1)
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
Additions 0.5 - - 0.3 0.8
Disposals - - - - -
Reclassification to held for sale - - - - -
Reclassification (to)/from fixtures and fittings (0.2) - - 0.2 -
Revaluation 3.2 - (1.2) - 2.0
Exchange rate variances - - (0.1) (0.1) (0.2)
At 31 December 2023 30.2 - 9.5 3.9 43.6
Comprising:
At cost - - - 3.9 3.9
At valuation 30.2 - 9.5 - 39.7
30.2 - 9.5 3.9 43.6
Accumulated depreciation and impairment
At 1 January 2022 - - - (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)
Depreciation charge (0.1) - (0.1) (0.4) (0.6)
Disposals - - - - -
Revaluation 0.1 - 0.1 - 0.2
At 31 December 2023 - - - (1.8) (1.8)
Net book value
At 31 December 2023 30.2 - 9.5 2.1 41.8
At 31 December 2022 26.7 - 10.8 2.1 39.6
Valuation techniques
The fair value of the hotel and owner-occupied property 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 EBITDA in the 11th year is capitalised at a market yield before
being brought back to present day values.
Owner - occupied property an income capitalisation approach whereby contracted and market rental values
are capitalised with a market capitalisation rate
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 100
basis points would result in an increase in the fair value of the hotel by
£5.5 million, whilst a 100 basis point increase would reduce the fair value
by £4.0 million. A decrease in EBITDA by 5% would result in a decrease in
the fair value of the hotel by £1.5 million whilst an increase in the EBITDA
by 5% would result in an increase in the fair value of the hotel by £1.5
million.
14. Assets held for sale
2023 2022
UK Germany France Total UK Germany France Total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 7.0 3.6 9.7 20.3 37.3 - 6.9 44.2
Disposals - (3.6) - (3.6) (37.3) - (6.9) (44.2)
Transfer from investment property 40.8 115.6 0.3 156.7 7.0 - 9.7 16.7
Transfer from property, plant and equipment - - - - - 3.6 - 3.6
Revaluation (0.5) - - (0.5) - - - -
Exchange rate variances - - (0.2) (0.2) - - - -
At 31 December 47.3 115.6 9.8 172.7 7.0 3.6 9.7 20.3
The balance above comprises 6 properties (2022: 3 properties) that at the year
end were being marketed for sale and are expected to be disposed of within 12
months via an open market process. The properties are situated in the UK,
Germany and France. The directors expect that the sale proceeds achieved to be
similar to their carrying amounts.
15. Trade and other receivables
2023 2022
£m
£m
Current
Trade receivables 8.8 5.3
Other receivables 4.4 4.9
Prepayments 1.4 2.7
Accrued income 2.1 2.9
16.7 15.8
Trade receivables are shown after deducting a provision of £1.9 million
(2022: £2.8 million) which is calculated as an expected credit loss. The
movements in this provision were as follows:
2023 2022
£m
£m
At 1 January 2.8 2.4
Debt write-offs (0.9) (0.2)
Charge to the income statement - 0.6
At 31 December 1.9 2.8
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 macro-economic
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 21.
16. Cash and cash equivalents
2023 2022
£m
£m
Cash at bank 70.6 113.9
At 31 December 2023, cash at bank included £26.1 million (2022: £15.8
million) which was restricted by a third-party charge. £10.7 million of the
restricted cash related to tenant deposits (2022: £10.3 million).
17. Trade and other payables
2023 2022
£m
£m
Current
Trade payables 4.1 4.6
Social security and other taxes 2.2 2.1
Tenant deposits 10.7 10.3
Other payables 5.7 4.2
Deferred income 20.5 13.0
Accruals 25.4 24.4
68.6 58.6
18. Deferred tax
Liabilities Assets Total deferred
tax
£m
UK capital Fair value Other Total UK capital Losses Other Total
allowances
adjustments to properties
£m
£m
allowances
£m
£m
£m
£m £m £m
At 1 January 2022 0.3 107.8 1.8 109.9 - (2.4) (0.2) (2.6) 107.3
(Credited)/charged
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
Charged/(credited)
to income statement 0.4 (17.0) (0.1) (16.7) - (0.7) 0.1 (0.6) (17.3)
to OCI(1) - 0.6 - 0.6 - - - - 0.6
Exchange rate variances - (2.3) - (2.3) - - - - (2.3)
At 31 December 2023 0.7 89.9 1.5 92.1 - (3.3) (0.1) (3.4) 88.7
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 2023 the Group offset tax losses
valued at the applicable local tax rate of £12.8 million (2022: £9.8
million) against the deferred tax liability arising on the fair value
adjustments to properties. At 31 December 2023 the Group did not recognise
deferred tax assets of £13.2 million (2022: £8.0 million) in respect of
losses amounting to £76.1 million (2022: £45.6 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.
19. Borrowings
At 31 December 2023 At 31 December 2022
Current Non- Total borrowings £m Current Non- Total borrowings £m
£m
current
£m
current
£m
£m
Secured bank loans 193.9 876.7 1,070.6 173.4 932.5 1,105.9
Issue costs of £5.0 million (2022: £5.3 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 5.1%
including margin (2022: 0.8% and 4.4%) and at floating rates of typically
SONIA or EURIBOR plus a margin. Floating rate margins range between 1.1% and
2.8% (2022: 1.1% and 2.2%). The bank loans are secured by legal charges over
£1,988.8 million (2022: £2,247.6 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;
· £150.7m maturing in 2032
· £59.4m maturing in 2033
These loans have a basis point 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
2023 targets (tested on 31 December 2022 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.
Capitalised interest
Interest capitalised within investment property capital expenditure during the
year was £1.0 million (2022: £0.5 million) at an average rate of 4.26%
(2022: 3.22%).
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 2023 Secured
bank loans
£m
Maturing in:
Within one year or on demand 195.4
One to two years 327.0
Two to five years 331.0
More than five years 222.2
1,075.6
Unamortised issue costs (5.0)
Borrowings 1,070.6
Due within one year (193.9)
Due after one year 876.7
At the year ended 31 December 2022 £175.1 million of borrowings were due for
repayment within one year and £350.1, was due within one to two years
including unamortised issue costs. During 2023, CLS refinanced £330.6 million
of which £129.1 million was classified as new loans.
At 31 December 2022 Secured
bank loans
£m
Maturing in:
Within one year or on demand 175.1
One to two years 350.1
Two to five years 314.4
More than five years 271.6
1,111.2
Unamortised issue costs (5.3)
Borrowings 1,105.9
Due within one year (173.4)
Due after one year 932.5
The carrying amounts of the Group's borrowings are denominated in the
following currencies:
At 31 December 2023 At 31 December 2022
Sterling Euro Total Sterling Euro Total
£m
£m
£m
£m
£m
£m
Fixed rate financial liabilities 238.9 462.4 701.3 241.3 445.8 687.1
Floating rate financial liabilities - swaps 115.3 - 115.3 117.4 - 117.4
Total fixed rate 354.2 462.4 816.6 358.7 445.8 804.5
Floating rate financial liabilities - capped - 40.6 40.6 - 42.6 42.6
Floating rate financial liabilities 159.9 58.5 218.4 162.2 101.9 264.1
Total floating rate 159.9 99.1 259.0 162.2 144.5 306.7
514.1 561.5 1.075.6 520.9 590.3 1,111.2
Unamortised issue costs (3.3) (1.7) (5.0) (3.5) (1.8) (5.3)
Borrowings 510.8 559.8 1,070.6 517.4 588.5 1,105.9
Of the Group's total borrowings, 76% (2022: 72%) are considered fixed rate
borrowings.
At 31 December 2023, the Group had interest rate swap agreements in place with
an aggregate notional amount of £115.3 million (2022: £117.4 million)
whereby the Group pays an average fixed rate of interest of 1.89% and receives
interest at a daily variable rate. The swap is being used to hedge the
exposure to changes in the variable rate of sterling denominated loans.
The interest rate risk profile of the Group's borrowings was as follows:
At 31 December 2023 Weighted average interest rate(1) Weighted average life
Sterling Euro Total Sterling Euro Total
%
%
%
Years
Years
Years
Fixed rate financial liabilities 2.7 2.5 2.5 7.4 2.8 4.4
Floating rate financial liabilities - swaps 4.7 - 4.7 4.7 - 1.0
3.3 2.5 2.8 5.3 2.8 3.9
Floating rate financial liabilities - capped - 2.6 2.6 - 3.8 3.8
Floating rate financial liabilities 7.1 5.2 6.6 1.6 2.9 1.9
7.1 4.2 6.0 1.6 3.3 2.2
Gross borrowings 4.5 2.8 3.6 4.1 2.9 3.5
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 - swaps 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 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
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
2023 2022 2023 2022
£m
£m
£m
£m
Current borrowings 193.9 173.4 193.9 173.4
Non-current borrowings 876.7 932.5 820.0 845.3
1,070.6 1,105.9 1,013.9 1,018.7
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 taken from Bloomberg (Level 2).
The Group had the following undrawn committed facilities available at 31
December:
2023 2022
£m
£m
Floating rate:
- expiring within one year - 30.0
- expiring after one year(1) 50.0 -
50.0 30.0
1 £30 million of this facility is secured on selected UK properties.
In addition to the above committed facility, the Group has £nil of
uncommitted facilities available (2022: £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 2023 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 195.3 327.0 75.5 135.7 119.8 222.2 1,075.5
Interest payments on borrowings(1) 39.4 32.8 14.9 12.3 8.2 17.6 125.2
Effect of interest rate swaps (2.8) (0.6) - - - - (3.4)
Effect of interest rate caps (0.8) (0.4) (0.3) (0.1) - - (1.6)
Gross loan commitments 231.1 358.8 90.1 147.9 128.0 239.8 1,195.8
At 31 December 2022 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 175.1 350.1 121.6 54.9 137.9 271.6 1,111.2
Interest payments on borrowings1 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
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.
20. Derivative financial instruments
2023 2023 2022 2022
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Non-current:
Interest rate caps and swaps 3.6 - 8.5 -
Current:
Forward foreign exchange contracts 0.7 - - -
4.3 - 8.5 -
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 2023 was
£40.8 million (2022: £42.7 million). The average period to maturity of these
interest rate caps was 2.7 years (2022: 3.7 years).
Interest rate swaps
The aggregate notional principal of interest rate swap contracts at 31
December 2023 was £115.3 million (2022: £117.4 million). The average period
to maturity of these interest rate swaps was 0.9 years (2022: 1.4 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 2023 and 31 December 2022 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.
2023 2023 2022 2022
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Maturing in:
Less than 1 year 3.8 - 4.3 -
1 to 2 years 1.0 - 3.5 -
2 to 3 years 0.3 - 0.8 -
3 to 4 years 0.1 - 0.6 -
4 to 5 years - - 0.1 -
Over 5 years - - - -
5.2 - 9.3 -
21. 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 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 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 2023 and 2022.
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 2023 2022
£m
£m
Debt 19 1,075.6 1,111.2
Liquid resources 16 (70.6) (113.9)
Net debt (A) 1,005.0 997.3
Equity (B) 929.2 1,220.8
Net debt to equity ratio (A/B) 108.2% 81.7%
Debt is defined as long-term and short-term borrowings before unamortised
issue costs as detailed in note 19. 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 2023 Income statement & equity £m 2022 Income statement & equity £m
Cash +50 basis points 0.4 0.6
Variable borrowings (including swaps and caps) +50 basis points (2.6) (0.9)
Cash -50 basis points (0.4) (0.6)
Variable borrowings (including swaps and caps) -50 basis points 1.3 1.5
An increase or decrease of 100 basis points on the cash balance would result
in a gain/(loss) of £0.7 million/(£0.7 million) from cash and cash
equivalents. An increase of 100 basis points on variable borrowings would
result in a loss of £1.3 million and a decrease of 100 basis points on
variable borrowings would result in a gain of £2.6 million.
(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 2023 2023 2022 2022
Net
Profit
Net
Profit
assets
before tax
assets
before tax
£m
£m
£m
£m
1% increase in value of Sterling against the Euro (5.1) 0.9 (6.0) 0.3
1% fall in value of Sterling against the Euro 5.2 (0.9) 6.1 (0.3)
A 10% increase in the value of the Sterling against the Euro would result in a
decrease in net assets of £47.1 million and reduction of profit before tax of
£8.1 million. A 10% decrease in the value of the Sterling against the Euro
would result in an increase in net assets of £57.5 million and an increase of
profit before tax of £9.9 million. The sensitivity disclosed related to the
foreign operations, as the sensitivity related to financial instruments is not
considered significant.
(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 2023, the Group held £10.7 million in rent deposits
(2022: £10.3 million) against £8.8 million of trade receivables (2022: £5.3
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 2023 the Group held £4.3 million (2022: £8.5 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 achieving
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 2023 was 48.5%
(2022: 42.2%).
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
24 banks and financial institutions so as to minimise any potential
concentration of risk.
22. Financial assets and liabilities
Fair value through profit and loss Amortised Total
£m
cost
£m carrying
value
£m
Financial assets:
Cash and cash equivalents - 70.6 70.6
Derivative financial assets 4.3 - 4.3
Other assets - current(1) - 15.3 15.3
4.3 85.9 90.2
Financial liabilities:
Secured bank loans - (1,070.6) (1,070.6)
Other liabilities - current(2) - (45.9) (45.9)
- (1,116.5) (1,116.5)
At 31 December 2023 4.3 (1,030.6) (1,026.3)
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 - current(1) - 13.0 13.0
8.5 126.9 135.4
Financial liabilities:
Secured bank loans - (1,105.9) (1,105.9)
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)
1 Other assets included all amounts shown as trade and other
receivables in note 15 except prepayments of £1.4 million (2022: £2.7
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 17 except deferred income and sales and social security taxes
of £22.7 million (2022: £15.1 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
2023 2022
£m £m
Net financial assets and liabilities: 1,026.3 1,013.8
Other assets - current 15.3 13.0
Other liabilities - current (45.9) (43.3)
Cash and cash equivalents 70.6 113.9
Borrowings and derivative financial instruments 1,066.3 1,097.4
23. 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 2023 397,210,866 41,566,914 438,777,780 9.9 1.1 11.0
Issue of shares 199,402 (199,402) - - - -
At 31 December 2023 397,410,268 41,367,512 438,777,780 9.9 1.1 11.0
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 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 £3,311,752 representing one-third of the issued share capital of the
Company excluding treasury shares.
24. Earnings per share
The calculation of earnings per ordinary share is based on earnings after tax
and the weighted average number of ordinary shares in issue during the year.
2023 2022
Number
Number
Weighted average number of ordinary shares in circulation 397,330,507 404,410,051
Number of ordinary shares in circulation 397,410,268 397,210,866
For diluted earnings per share, the weighted average number of ordinary shares
in issues is adjusted to assume conversion of all dilutive potential ordinary
shares. The diluted earnings per share does not assume conversion of potential
ordinary shares that would have an antidilutive effect on earnings per share.
The diluted loss per share for the period to 31 December 2023 was restricted
to a loss of £62.9p per share, as the loss per share cannot be reduced by
dilution in accordance with IAS 33, Earnings Per Share.
The Group has three types of dilutive potential ordinary shares, being:
unvested shares granted under the Long Term Incentive Plan for executive
directors and senior management; unvested shares granted under the Element B
plan for executive directors and senior management; and unvested shares
granted under the Special Share Award plan to key management. The issue of all
these unvested shares in contingent upon satisfying specified conditions such
as length of service and company performance.
Employee share plan 2023 2022
Number
Number
Element B/Special Award 820,246 520,901
LTIP 2,880,054 1,674,113
Total potential dilutive shares 3,700,300 2,195,014
25. Dividend
Payment Dividend 2023 2022
£m
£m
date per share
p
Current year
2023 final dividend1 2 May 2024 5.35 - -
2023 interim dividend 3 October 2023 2.60 10.3 -
Distribution of current year profit 7.95 10.3 -
Prior year
2022 final dividend 2 May 2023 5.35 21.3 -
2022 interim dividend 3 October 2022 2.60 - 10.6
Distribution of prior year profit 7.95 21.3 10.6
2021 final dividend 29 April 2022 5.35 - 21.8
Dividends as reported in the Group statement of changes in equity 31.6 32.4
1 Subject to shareholder approval at the AGM on 25 April 2024. Total
cost of proposed dividend is £21.3m.
26. 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 2023 22.7 59.7 3.0 1.9 28.1 115.4
Exchange rate variances - (12.3) - - - (12.3)
Property, plant and equipment:
- net fair value gains in the year 13 - - 2.2 - - 2.2
- deferred tax thereon 18 - - (0.6) - - (0.6)
- reserve transfer on disposal of PPE - - 1.5 - - 1.5
Share-based payment credit - - - 0.5 - 0.5
At 31 December 2023 22.7 47.4 6.1 2.4 28.1 106.7
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 13 - - 1.9 - - 1.9
- deferred tax thereon 18 - - (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
The capital redemption reserve comprises of the nominal value of the Company's
own shares acquired as a result of share buyback programmes.
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.
Share options exercised in each respective year have been settled using the
treasury shares of the Group. The reduction in the treasury share equity
component is equal to the cost incurred to acquire the shares, on a weighted
average basis. Any excess of the cash received from employees over the
reduction in treasury shares is recorded in share premium. In 2023 there were
199,402 treasury shares transferred to the EBT (2022: 10,184,894) to satisfy
future awards under employee share plans. At 31 December 2023, the Group held
41,367,512 ordinary shares (2022: 41,566,914) with a market value of £1.1
million (2022: £1.1 million) in treasury. The Company's voting rights and
dividends in respect of the treasury shares, including those own shares which
the EBT holds, continue to be waived.
27. Notes to the cash flow
Cash generated from operations 2023 2022
£m
£m
Operating loss (223.4) (63.9)
Adjustments for:
Net movements on revaluation of investment properties 302.7 136.5
Net movements on revaluation of equity investments 1.3 3.8
Depreciation and amortisation 0.8 0.6
Profit on sale of investment property (1.4) (0.5)
Lease incentive debtor adjustments (1.1) (7.8)
Share-based payment charge 0.5 0.2
Changes in working capital:
(Increase)/decrease in receivables (0.9) 2.3
Increase/(decrease) in payables 4.7 (0.7)
Cash generated from operations 83.2 70.5
Non-cash movements
2023
Changes in liabilities arising from financing activities Notes 1 January 2023 Financing cash flows Amortisation of loan Fair value adjustments New leases Foreign exchange 31 December 2023
£m
£m
issue costs
£m
£m
£m
£m £m
Borrowings 19 1,105.9 (24.6) 1.6 - - (12.3) 1,070.6
Interest rate swaps 20 (5.6) - - 3.1 - - (2.5)
Interest rate caps 20 (2.9) - - 1.1 - - (1.8)
Lease liabilities 3.6 - - - - (0.1) 3.5
1,101.0 (24.6) 1.6 4.2 - (12.4) 1,069.8
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 19 1,031.6 43.6 1.8 - - 28.9 1,105.9
Interest rate swaps 20 0.4 - - (6.0) - - (5.6)
Interest rate caps 20 - - - (2.8) - (0.1) (2.9)
Lease liabilities 3.4 - - - - 0.2 3.6
1,035.4 43.6 1.8 (8.8) - 29.0 1,101.0
28. Contingencies
At 31 December 2023 and 31 December 2022 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 £39.5 million at 31 December 2023 are also covered by guarantees
provided by CLS Holdings plc (£29.9 million at 31 December 2022).
In April 2023, CLS Holdings plc dissolved 8 subsidiaries (the 'Companies').
Before the Companies were dissolved, capital reductions and distributions of
the net assets of the subsidiaries, primarily represented by inter-company
receivables of £17.1m, to the Parent should have been executed. However, they
were not. As a consequence of this, as a matter of Law, on dissolution of
these Companies the technical titles to the inter-company receivables were
transferred from the Group to the Crown.
The Directors have taken legal advice and started the process to restore these
Companies. Thereafter, the Directors can execute the capital reductions and
make appropriate distributions to the Parent of these Companies assets.
Also, based on that legal advice, the Directors consider that it is improbable that the Crown will pursue the CLS group for these assets of the Companies prior to the process of the restoration of the Companies being completed and the technical title to the receivables being returned to the Group. Therefore, the Directors consider that it is not probable that an outflow of cash or other economic resources of £17.1m from the Group will occur, and therefore no provision is recognised at year end, but has been disclosed as a contingent liability.
29. 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 2023 2022
£m
£m
Within one year 100.9 100.4
Between one and two years 84.0 85.7
Between two and three years 61.0 71.4
Between three and four years 48.6 50.3
Between four and five years 36.7 38.8
More than five years 153.2 135.0
484.4 481.6
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 2023 the Group had contracted capital expenditure of £6.9
million (2022: £16.7 million). At the balance sheet date, the Group had not
exchanged contracts to acquire any investment properties (2022: £nil). There
were no authorised financial commitments which were yet to be contracted with
third parties (2022: £nil).
30. Post-balance sheet events
In January 2024, CLS secured a £10 million unsecured overdraft facility with
RBS.
Subsequent to the year end the previously exchanged sale of Westminster Tower
failed to complete. The sale was not recognised in 2023 and the property is
now being re-marketed for sale.
Supplementary disclosures (unaudited)
Unaudited unless otherwise stated
Alternative Performance Measures
CLS uses all the EPRA metrics but we have also disclosed 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.
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
· EPRA like-for-like gross rental income growth
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.
1. EPRA APMs
i) 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).
2023 2022
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Rent passing 45.5 46.4 13.2 105.1 46.0 42.6 12.8 101.4
Adjusted for properties in development - - - - (0.9) - - (0.9)
Forecast non-recoverable service charge (3.7) (2.0) (0.5) (6.2) (1.5) (2.1) (0.3) (3.9)
Annualised net rents (A) 41.8 44.4 12.7 98.9 43.6 40.5 12.5 96.7
Property portfolio1 745.4 883.8 246.0 1,875.2 946.8 990.1 284.2 2,221.1
Adjusted for properties in development (15.7) (2.9) - (18.5) (118.7) (4.9) - (123.6)
Purchasers' costs at 6.8% 49.6 59.9 16.7 126.2 56.3 67.0 19.3 142.6
Property portfolio valuation including purchasers' costs (B) 779.3 940.8 262.7 1,982.9 884.4 1,052.2 303.5 2,240.1
EPRA NIY (A/B) 5.4% 4.7% 4.8% 5.0% 4.9% 3.9% 4.1% 4.3%
1 The above table comprise data of the investment properties and
properties held for sale. They exclude owner-occupied, land, student
accommodation and hotel.
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).
2023 2022
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Contracted rent 50.9 47.5 14.2 112.6 48.1 47.4 14.7 110.2
Adjusted for properties in development - - - - (0.9) - - (0.9)
Forecast non-recoverable service charge (3.7) (2.0) (0.5) (6.2) (1.5) (2.1) (0.3) (3.9)
'Topped-up' annualised net rents (A) 47.2 45.5 13.7 106.4 45.7 45.3 14.4 105.4
Property portfolio1 745.4 883.8 246.0 1,875.2 946.8 990.1 284.2 2,221.1
Adjusted for properties in development (15.7) (2.8) - (18.5) (118.7) (4.9) - (123.6)
Purchasers' costs (6.8%) 49.6 59.9 16.7 126.2 56.3 67.0 19.3 142.6
Property portfolio valuation including purchasers' costs (B) 779.3 940.9 262.7 1,982.9 884.4 1,052.2 303.5 2,240.1
EPRA 'topped-up' NIY (A/B) 6.1% 4.8% 5.2% 5.4% 5.2% 4.3% 4.8% 4.7%
1 The above table comprise data of the investment properties and
properties held for sale. They exclude owner-occupied, land, student
accommodation and hotel.
ii) 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
2023 2022
£m
£m
ERV of vacant space (A) 13.9 9.0
ERV of let space 112.4 112.4
ERV of total portfolio (B) 126.3 121.4
EPRA vacancy rate (A/B) 11.0% 7.4%
iii) 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'). The sum of these expenditures is included in Capital expenditure in
Note 12 of the Notes to the Group Financial Statements. The Group is not party
to any joint venture arrangements, therefore this measure is not disclosed.
Notes 2023 2022
£m
£m
Acquisitions 12 - 83.4
Amounts spent on the completed investment property portfolio 12
Creation of incremental space 2.1 12.7
Creation of no incremental space 47.5 45.5
EPRA capital expenditure 49.6 141.6
Conversion from accrual to cash basis (3.2) (1.0)
EPRA capital expenditure on a cash basis CF(1) 46.4 140.6
1 Group statement of cash flows
iv) Cost ratios
EPRA cost ratio
The Group has a policy of capitalising certain staff costs directly
attributable to the management of the development of investment properties as
outlined in Note 2.5 of the Notes to the Group Financial Statements.
Notes 2023 2022
£m
£m
Recurring administration expenses 18.2 15.7
Other expenses 4 15.6 16.2
Less: Other investments segment and student accommodation operating costs (5.2) (5.7)
28.6 26.2
Net service charge costs 4 5.7 4.9
Service charge costs recovered through rents but not separately invoiced (0.1) (0.3)
Dilapidations receipts (2.3) (1.2)
EPRA costs (including direct vacancy costs) (A) 31.9 29.6
Direct vacancy costs (6.1) (4.0)
EPRA costs (excluding direct vacancy costs) (B) 25.8 25.6
Gross rental income 4 102.8 99.4
Service charge components of gross rental income (0.1) (0.3)
EPRA gross rental income (C) 102.7 99.1
EPRA cost ratio (including direct vacancy costs) (A/C) 31.1% 29.9%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 25.1% 25.8%
v) EPRA LTV
Notes 2023 2022
£m
£m
Borrowings from financial institutions 19 1,070.6 1,105.9
Net payables 52.2 44.8
Cash and cash equivalents 16 (70.6) (113.9)
Net debt (A) 1,052.2 1,036.8
Properties held as property, plant and equipment 13 39.7 37.5
Investment properties 12 1,850.5 2,295.0
Properties held for sale 14 172.7 20.3
Financial assets - equity investments 1.4 2.7
Total property value (B) 2,064.3 2,355.5
EPRA LTV (A/B) 51.0% 44.0%
2. Other APMs
i) Total Accounting Return per share
Notes 2023 2022
pence
pence
EPRA NTA at 31 December 5 253.0 329.6
Distribution - prior year final1 25 5.4 5.4
Distribution - current year interim 25 2.6 2.6
Less: EPRA NTA at 1 January (A) 5 (329.6) (350.5)
Return before dividends (B) (68.6) (12.9)
Total Accounting Return (NTA) (B/A) (20.8)% (3.7)%
1 The 2023 and 2022 final dividend was 5.35p but has been rounded to
5.4p for the purpose of this note.
ii) Net borrowings and gearing
Notes 2023 2022
£m
£m
Borrowings short-term 19 193.9 173.4
Borrowings long-term 19 876.7 932.5
Add back: unamortised issue costs 19 5.0 5.3
Gross debt 19 1,075.6 1,111.2
Cash 16 (70.6) (113.9)
Net borrowings (A) 1,005.0 997.3
Net assets (B) 929.2 1,220.8
Net gearing (A/B) 108.2% 81.7%
iii) Balance sheet loan-to-value
Notes 2023 2022
£m
£m
Borrowings short-term 19 193.9 173.4
Borrowings long-term 19 876.7 932.5
Less: cash 16 (70.6) (113.9)
Net debt (A) 1,000.0 992.0
Investment properties 12 1,850.5 2,295.0
Properties in plant, property and equipment 13 39.7 37.5
Properties and land held for sale 14 172.7 20.3
Total property portfolio (B) 2,062.9 2,352.8
Balance sheet loan-to-value (A/B) 48.5% 42.2%
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 2023 2022
£m
£m
Recurring administration expenses 18.2 15.7
Less: Other investment segment 4 (0.1) (0.2)
Underlying administration expenses (A) 18.1 15.5
Net rental income (B) 4 113.0 107.8
Administration cost ratio (A/B) 16.0% 14.4%
v) Dividend cover
Notes 2023 2022
£m
£m
Interim dividend 25 10.3 10.6
Final dividend 25 21.3 21.3
Total dividend (A) 31.6 31.9
EPRA earnings (B) 5 40.9 47.0
Dividend cover (B/A) 1.30 1.47
vi) Interest cover
Notes 2023 2022
£m
£m
Net rental income 4 113.0 107.8
Recurring administration expenses 4 (18.2) (15.7)
Other expenses 4 (15.6) (16.2)
Group revenue less costs (A) 79.2 75.9
Finance income (excluding derivatives and dividend income) 8 1.6 1.3
Finance costs (excluding derivatives) 9 (37.1) (26.8)
Net interest (B) (35.5) (25.5)
Interest cover (-A/B) 2.23 2.98
vii) EPRA like-for-like gross rental income growth
This measure shows the growth in gross rental income on properties owned
throughout the current and previous year under review. This growth rate
excludes properties held for development, acquired or disposed in either year.
2023 2022
%
%
Increase/(decrease) in gross rental income (%) 3.5 (1.8)
2023 2022
£m
£m
Increase/(decrease) in gross rental income (£m) 3.4 (1.8)
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