REG - CLS Holdings PLC - Annual Financial Report
16/03/2022 07:00
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RNS Number : 9469E CLS Holdings PLC 16 March 2022
CLS HOLDINGS PLC
("CLS", the "Company" or the "Group")
ANNOUNCES ITS ANNUAL RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2021
Location Quality Flexibility
CLS is a leading FTSE250 office space specialist and a supportive, progressive
and sustainably focused commercial landlord, with a c.£2.3 billion portfolio
in the UK, Germany and France, offering geographical diversification with
local presence and knowledge. For the year ended 31 December 2021, the Group
has delivered the following results:
31 December Change (%)
2021 2020
EPRA Net Tangible Assets (NTA) per share (pence) ¹ 350.5 345.2 1.5
Statutory NAV per share (pence)¹ 326.6 311.9 4.7
Contracted rents (£million) 107.6 107.9 (0.3)
Profit before tax (£million) 91.5 96.5 (5.2)
EPRA Earnings per share (EPS) (pence) ¹ 11.3 12.2 (7.4)
Statutory EPS from continuing operations (pence) ¹ 29.3 19.0 54.2
Dividend per share (pence) 7.70 7.55 2.0
¹A 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 has delivered a healthy and robust set of results for 2021 with net
assets up from earnings and valuation gains in all of our three countries.
We faced headwinds from the strengthening of sterling and the impact of
pandemic restrictions which temporarily reduced occupancy but our operational
performance, especially in the second half of the year, was excellent with
collection and leasing activities at pre-pandemic levels.
"These results show that our well-located, high quality and flexible offices
with great amenities in modern, sustainable buildings are meeting the needs of
our customers. We have seen significant positive momentum in lettings in
recent months and have more than 30 ongoing refurbishment and developments
that will drive strong growth going forwards"
FINANCIAL HIGHLIGHTS
á EPRA NTA up 1.5% primarily due to EPRA earnings and portfolio
valuation gains, which were offset by foreign exchange losses due to the
strengthening of sterling
á Portfolio valuation up 1.6% in local currency with increases in
all regions (3.1% in Germany, 0.7% in the UK and 0.3% in France) as a result
of strong letting activity and slight yield tightening
á Profit before tax down 5.2% to £91.5 million (2020: £96.5
million) due to lower gains from disposals but statutory EPS up 54.2% because
of the derecognition of deferred tax liabilities on UK property revaluation
gains following CLS' conversion of its UK operations to a Real Estate
Investment Trust ("REIT")
á EPRA EPS was down 7.4% due to the strengthening of sterling which
resulted in unfavourable foreign exchange movements, offset by cost
rationalisations which have lowered our cost base
á A proposed final dividend of 5.35 pence per share to be paid on
29 April 2022, resulting in a total 2021 dividend of 7.70 pence per share, an
increase of 2.0% (2020: 7.55 pence per share) and total accounting return for
the year of 3.7% (2020: 8.1%)
OPERATIONAL HIGHLIGHTS
á Rent collection remained strong in 2021 with 99% collected (2020:
99%) and 97% of first quarter 2022 contracted rent due now collected (2020:
98%)
á Net rental income stable at £108.0 million (2020: £109.8
million) due to redevelopment and leasing expiries, foreign exchange
reductions and lower dilapidations income offset by contributions from net
acquisitions
á Acquired six properties for £164.8 million, three of which had
exchanged in 2020. The five properties in Germany and one in the UK were
bought for their asset management opportunities at a combined net initial
yield of 3.9% and a reversionary yield of 6.1%. Post period end, a further two
properties have exchanged in Germany for £75.7 million, with a combined net
initial yield of 5.1% and a reversionary yield of 5.6%. Both completions are
due in April 2022
á Disposed of eight properties for £37.4 million (4.8% net initial
yield) at 3.2% above 2020 book values. Post period end, two further
properties exchanged for sale in the UK at £10.1 million (6.0% net initial
yield) at book value. Completions are expected in Q1 2022
á Completed 125 lease events securing £12.9 million of annual rent
at 0.4% above 31 December 2020 estimated rental values
á Vacancy rate increased to 5.8% (2020: 5.1%) due to the
deliberately acquired vacancy in our 2021 German purchases. Whilst vacancy was
reduced from 7.7% at the end of June due to considerable letting activity at
the end of 2021, there are further opportunities to capture market rents
Financing
á Weighted average cost of debt at 31 December 2021 down 6 basis
point to 2.22% (2020: 2.28%)
á Loan-to-value at 37.1% (2020: 33.7%) reflecting net acquisitions
during the year. Gross debt of £1,031.6 million (2020: £970.7 million)
with cash of £167.4 million (2020: £235.7 million) and £50 million (2020:
£50 million) of undrawn facilities
á Second long-term, 'green' loan secured for £61.7 million with
Scottish Widows at 2.65% fixed interest rate for 12 years, such that over 20%
of CLS' loan portfolio is now 'green'. This transaction contributed to
maintaining high weighted average debt maturity of 4.4 years (2020: 4.6 years)
á Financed or refinanced £196.7 million of debt in 2021 at an
average of 1.62%, including £172.8 million fixed at 1.70%, and repaid £88.2
million of debt
á The loan portfolio as at 31 December 2021 had 85% at fixed rates
(31 December 2020: 84%)
ENVIRONMENTAL, SOCIAL AND Governance
á GRESB score increased to 85 (2020: 72) and all managed buildings
have been independently certified by BREEAM to assess their sustainability
rating and highlight areas for improvement
á Launched our Sustainability Strategy to 2030, incorporating our
fully funded Net Zero Carbon Pathway, and increased our solar PV capacity by
112% to 933kWp
á 92% of Group electricity is now carbon-free and 83% of managed
portfolio is achieving at least a Good BREEAM In-Use rating
Dividend Timetable
Further to this announcement, in which the Board recommended a final dividend
of 5.35 pence per ordinary share, the Company confirmed its dividend timetable
as follows:
Announcement date 16 March 2022
Ex-Dividend date 24 March 2022
Record date 25 March 2022
Payment date 29 April 2022
~ ends ~
Results presentation
A presentation for analysts and investors will be held in-person at Liberum
Capital, by webcast and by conference call on Wednesday 16 March 2022 at
8:30am followed by Q&A. Questions can be submitted either online via the
webcast or to the operator on the conference call.
á Liberum Capital: Ropemaker Place, 25 Ropemaker Street, London
EC2Y 9L
á Webcast: The live webcast will be available here:
https://secure.emincote.com/client/cls/cls004
(https://secure.emincote.com/client/cls/cls004)
á Conference call: In order to dial in to the presentation via
phone, please register at the following link and you will be provided with
dial-in details and a unique access code:
https://secure.emincote.com/client/cls/cls004/vip_connect
(https://protect-eu.mimecast.com/s/8lCWCz67Wi7l5OFXWu2A?domain=secure.emincote.com)
For further information, please contact:
CLS Holdings plc
(LEI: 213800A357TKB2TD9U78)
www.clsholdings.com (http://www.clsholdings.com/)
Fredrik Widlund, Chief Executive Officer
Andrew Kirkman, Chief Financial Officer
+44 (0)20 7582 7766
Liberum Capital
Richard Crawley
Jamie Richards
+44 (0)20 3100 2222
Panmure Gordon
Hugh Rich
+44 (0)20 7886 2733
Berenberg
Matthew Armitt
Richard Bootle
+44 (0) 203 207 7800
Edelman Smithfield (Financial PR)
Alex Simmons +44 7970 174353
Rob Yates +44 7715 375443
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 letter
Dear Shareholder,
The pandemic and the impact on working practices and habits remains one of the
most significant influences on CLS' operations. In response, we have
maintained our focus on the key drivers of the business as well as adapting
to developing patterns such as hybrid working. Whilst there is still some
uncertainty about the future of the office, greater clarity is emerging. The
market is becoming bifurcated such that offices which are less sustainable
with poorer amenities will struggle, whilst well-located, high quality and
flexible buildings with strong sustainability credentials such as those
provided by CLS will thrive.
Performance and our property portfolio
It is yet again pleasing that the benefits of our diversified business model
and clear strategy continue to persist as demonstrated by our results. In
2021, we delivered a robust financial performance despite our results being
impacted by the strengthening of sterling and the negative impacts of the
pandemic restrictions on our Vauxhall student and hotel operations.
EPRA NTA per share increased by 1.5% to 350.5 pence per share (2020: 345.2
pence per share) and total accounting return, including the dividends paid in
the year, was 3.7% (2020: 8.1%). The value of our property portfolio rose
to £2.3 billion (2020: £2.2 billion) as a result of: £142.4 million of
acquisitions net of disposals; £36.0 million capital expenditure; £36.7
million from net valuation increases of 1.6% in local currencies with uplifts
in all countries; offset by depreciation of £0.5m and a reduction of £66.3
million as a result of the strengthening of sterling by 6.3%. Our property
portfolio is split 50% in the UK, 38% in Germany and 12% in France.
Environmental, social and governance
As highlighted by the Glasgow Climate Pact made at COP26, climate change
continues to dominate world events reinforcing the need to reduce carbon
dioxide emissions, move away from fossil fuels and align private finance
towards achieving net zero emissions. CLS is proud to have published our
sustainability strategy, incorporating our pathway to net zero carbon by 2030,
which is aimed at addressing each of these key themes. As we are now into the
delivery phase of our strategy, I am energised by the way in which our
employees have embraced our aspirations and the commitment they have shown to
deliver future-ready assets. This energy is an essential part of our
commitment to being a good corporate citizen in our communities and
neighbourhoods whilst at the same time maintaining the highest standards of
corporate governance.
Strategic outlook
We are seeing increasing clarity around the companies and properties which
will be successful in the post-Covid era. As a result, CLS will continue to
pursue our proven strategy and business model of providing well-located, high
quality and flexible offices that have the ability to respond to changing
market dynamics.
Our successful efforts to reduce vacancy, our recent conversion to a REIT in
the UK and our focus on providing offices that meet tenant needs leave us
well-positioned for 2022 onwards.
Dividends
Given the financial position of the business and confidence in the future, the
Board has decided to propose an increase in the final 2021 dividend of 3% to
give a 2% increase in the full year dividend, which will be 7.70 pence per
share. The Board's policy of keeping the dividend 1.5 to 2.0 times covered by
EPRA earnings (i.e. paying out 50% to 66.6%) remains in place but we will
review this policy during the year as the 2022 interim dividend in September
2022 will be the first paid out under the REIT regime.
Our staff and our culture
I and the rest of the Board continue to be impressed by the ongoing hard work
of all our staff and the tremendous way that they have responded to the
challenges thrown up during the last two years, for which we offer our sincere
thanks and gratitude. One of CLSÕ big attractions and differentiators is its
open, inclusive and positive culture. It is very pleasing that this has been
maintained, which will stand CLS in good stead going forward.
Lennart Sten
Non-Executive Chairman
16 March 2022
Chief Executive's review
"Historically, successful investment in properties, including offices, was
largely determined by Location, Location, Location. In recent years, the
market and occupiers have become increasingly sophisticated - a trend which
has been accelerated by the pandemic. Consequently, more characteristics are
demanded with the most successful office owners now offering Location, Quality
and Flexibility."
Delivering on our strategy
Much has been written, and continues to be written, about the future of the
office and whilst a definitive conclusion has yet to be reached, trends are
starting to emerge. Rather than repeat or rehash the debate, I wanted to make
a few observations.
A 2021 Knight Frank (Y)OUR SPACE survey showed 30% of corporates anticipated
growing their total space in the next three years, 35% anticipated it staying
the same, and 35% foresaw a decrease in space occupied. This balanced picture
feels about right, but as work from home and other restrictions have
persisted, the attractions of offices in surveys continues to increase.
Perhaps more important is the supply side of the debate. The importance of
sustainability amongst investors and occupiers is increasing. Many existing
offices will become obsolete, as it is uneconomic to upgrade them to meet
rising environmental standards, or will be converted to other uses. The
pandemic has also reduced the amount of construction of new offices. This
will be exacerbated if other cities follow the lead of the City of London in
favouring refurbishment over redevelopment Ð which clearly supports
CLS' business model. And finally, Google in acquiring its office in Kings
Cross highlighted the importance of Òde-intensifyingÓ space. This reduction
in density, creates more space per worker and will further limit supply,
ultimately creating additional demand.
Overall, what appears to be clear is that hybrid working is here to stay and
offices need to be attractive and sustainable, and offer better amenities. For
CLS and our tenant-focused strategy, this simply reinforces our belief in
ensuring we have the right offices which offer Location, Quality and
Flexibility.
With these characteristics in mind, we made six acquisitions in 2021 for a
headline purchase price of £164.8 million and sold eight smaller properties
for a headline sale price of £37.4 million. This resulted in net additions of
£127.4 million before costs.
Five of the acquisitions were in Germany and one was in the UK. All of the
properties had asset management opportunities to drive further value,
particularly the two properties in Germany which had significant vacancy. As a
consequence, whilst the net initial yield of these acquisitions was 3.9%, we
have the opportunity within the next couple of years or so to capture the
potential of these assets, which is reflected in the reversionary yield of
6.1%. More detail on the individual buildings is given in the country pages.
The three German properties which were bought together are highlighted in a
case study in the annual report.
Since the year end we have exchanged on the acquisition of two properties in
Dusseldorf and Dortmund for £75.7 million, which are due to complete in April
2022 and, after financing and costs, will result in a net cash outflow of
£32.7 million while adding c.£4 million of rent p.a. The combined net
initial yield is 5.1% with the potential to reduce the limited vacancy and
capture rent increases to achieve a reversionary yield of 5.6%. We continue to
look for further acquisition opportunities across all three countries but we
will not compromise acquisition returns and thus will only acquire when our
acquisition criteria are met.
We continue to recycle capital on a selective basis, making disposals where
there are limited opportunities to add value and/or drive returns, or when
offered a compelling price. Additionally, we are seeking to increase the
average size of our properties by disposing of smaller properties which
usually consume a disproportionate amount of management time and are less
economic to equip with the best amenities. To that end, we sold eight smaller
properties (three in the UK, two in Germany and three in France) at a net
initial yield of 4.8% for £37.4 million which was in line with latest
valuations. Since the year end, we have exchanged on the disposal of two
further properties in the UK which will complete in the first half of 2022.
The total consideration is £10.1 million, in line with the latest valuations,
reflecting a net initial yield of 6.0%.
Maintaining and improving the quality of our properties in terms of amenities
and sustainability remains paramount. We are therefore increasing our
investment across refurbishments such as 45 London Road in the UK,
redevelopments such as Park Avenue in France and developments such as LichtHof
in Germany. Capital expenditure in 2021 was £36.0 million and we expect to
spend around £50 to £70 million in each of 2022 and 2023, of which c.£5
million per annum is part of the Net Zero Carbon pathway spend, to improve the
attractiveness of the portfolio.
In November 2021, we held a Capital Markets Day in London at which we
highlighted the considerable opportunities in the short, medium and long-term
to improve rental income and the value of the portfolio. We also showcased a
number of properties across all three regions and were able to conduct
in-person site visits to some of these opportunities. Since then, we have
continued to make good progress with these opportunities.
Demolition, piling and the ground floor slab were completed by December 2021
at our 28,500 sq. ft office development at Vauxhall Walk in London and the
concrete superstructure has now reached the fourth floor of this £17.4
million project. Completion is on target for Q1 2023 and marketing has
started. The redevelopment of 9 Prescot Street in London is also progressing
well. Strip-out works have been completed and the c.£29 million 94,000 sq. ft
project is on target to complete in Q2 2023.
Asset and property management
In last year's annual report, I repeated the wording from my 2019 commentary
about the importance of staying close to our tenants and building long-term
relationships. I am not going to repeat the wording again but will merely
stress that this business ethos, CLS' business ethos, remains critical in
determining long-term success. Testament to this, our rent collection rates in
2021 were over 99% as has been the case throughout the pandemic. On the whole,
our properties are multi-let with over 750 tenants, of which 24% are
government agencies and 29% are major corporations.
In 2021, the overall Group EPRA vacancy rate increased to 5.8% (2020: 5.1%)
which remains above our target of 5%. However, a simple number does not tell
the story of the drivers and the considerable successes of the asset
management team in the year. Simplistically, the vacancy rate increased from
5.1% at the start of the year to 7.7% in June as a result of consciously
acquired vacancy in Germany as discussed above. The vacancy rate then rose to
over 8% in October from a combination of significant lease expiries and
completed refurbishments becoming available to let again. The reduction to
5.8% by the end of December (UK 5.4%, Germany 7.4% and France 3.0%) reflected
substantial letting activity conducted throughout Q4, particularly in Germany,
due to the team's efforts and a rebound in market activity. We are confident
that our active asset management strategy will reduce vacancy levels below 5%
in 2022.
At 31 December 2021, the value of the portfolio increased by 1.6% in local
currencies as a result of revaluation uplifts. There were increases in all
countries with Germany up 3.1%, the UK 0.7% and France up 0.3%. Whilst many of
the property increases were individual in nature, some trends can be
discerned.
In the UK, the attractiveness of government income and longer-term development
potential helped drive a reduction in equivalent yields to 5.5% (2020: 5.7%)
and ERVs increased 1.3% (2020: 1.6%) (net initial yield fell to 4.8% (2020:
5.0%)). In Germany, considerable letting activity drove improvements in ERVs,
which increased 0.6% (2020: 3.1%), with equivalent yields stable at 4.4%
(2020: 4.4%) (net initial yield fell to 3.8% (2020: 4.1%)). In France, the
picture was more mixed with the continued strength of the Lyon market but a
more varied picture for our Parisian assets resulting in equivalent yields
tightening to 5.0% (2020: 5.2%) but ERVs down 1.6% (2020: 0.2% up) (net
initial yield fell to 3.8% (2020: 4.0%)). In aggregate, fair value uplifts
added 9.0 pence per share to EPRA NTA (£36.7 million including £2.7 million
lease incentive debtor adjustments) before the impact of lease incentives and
depreciation.
Financial results
Overall, results in 2021 were robust with excellent rent collection continuing
and revaluation uplifts across all countries. However, as flagged earlier in
the year, results in 2021 were impacted by the 6.3% strengthening of sterling
against the euro and reduced occupancy in the first half of the year in our
student and hotel operations as a result of pandemic restrictions. As the
impacts of the pandemic have receded, the performance of the student and hotel
operations have rebounded such that our student building is now fully occupied
(2020/21: 46%) and the hotel is forecasting occupancy of 88% in 2022 (2021:
70%).
Profit from recurring operations was £77.3 million (2020: £77.4 million).
Revaluation gains and the sale of investment properties in 2021 of £28.4
million (2020: £43.1 million) were below last year given lower valuation
uplifts with a foreign exchange loss of £2.3 million (2020: £2.1 million
gain). Including non-recurring items, earnings per share of 29.3p was ahead of
last year (2020: 19.0p) as a result of the release of UK deferred tax
liabilities on revaluation gains following CLS' conversion of its UK
operations to a REIT.
As highlighted, EPRA earnings were impacted by negative exchange rate
movements and student and hotel occupancy. Consequently, EPRA earnings per
share in 2021 were down at 11.3p (2020: 12.2p). The second half of the year
contributed strongly with earnings of 5.9p reflecting an accelerating recovery
and momentum as we go into 2022 as well as actions to lower the cost base.
EPRA NTA increased by 1.5% (2020: 5.8%) reflecting EPRA earnings, revaluation
gains of 1.6% in local currency and a positive uplift from UK REIT conversion
offset by a £39.5 million reduction from the 6.3% weakening of sterling
against the euro (2020: £29.7 million gain) and the payment of an increased
dividend.
At the year end, we had liquid resources of £167.4 million (2020: £235.7
million), reflecting net acquisitions and ongoing investment, as well as
£50.0 million of undrawn credit facilities (£2020: £50.0 million).
In 2021, we generated £44.2 million net cash from operating activities
(2020: £44.3 million) compared with EPRA earnings of £45.9 million (2020:
£49.5 million) showing the continued strong cash generation of our business
model. Of this cash, £30.8 million (2020: £30.1 million) was paid as a
dividend to shareholders. We balance the use of the cash generated between
dividends and reinvestment in the business to drive the total accounting
return to shareholders, which was 3.7% in 2021 (2020: 8.1%).
Purpose, people and planet
In 2021, we made significant progress in future proofing our portfolio with
the publication of our enhanced sustainability strategy, incorporating our Net
Zero Carbon pathway to 2030, which has been validated by the Science Based
Targets initiative, and our Social Value Framework. We have set ourselves
clear and ambitious targets that mirror our aspirations as a sustainably
focused landlord. The fully costed plan has an estimated cost of £58 million
with a minimum expected recovery of 20% through normal service charge
expenditure.
Whilst the focus in the years ahead is on the delivery of the Net Zero Carbon
pathway and the Social Value Framework, this year has seen improvements and
developments in a number areas related to our sustainability strategy. We have
implemented the results of our energy and carbon audits into our capex
budgets, identifying initiatives that ensure our buildings become more
environmentally efficient and reduce our energy usage as well as informing our
investment and divestment decisions.
It is especially gratifying that our progress has been recognised by external
assessors with a big increase in our GRESB score from 72 to 85, reflecting
the continuous improvements made throughout the business. We met our 2021
target to double PV generation across the portfolio through five
installations, increasing total generation to 469,411 kWh per year,
representing 2% of energy used in our managed portfolio. We will continue this
progress though further ambitious targets during 2022. Finally, we continued
to align our sustainability objectives with those of our lenders. We secured
our second 'green' loan in 2021 and now have over 20% of our loans linked to
ESG targets.
Our sustainability agenda is more than simply environmental measures and
targets. At various times throughout the year, the majority of our employees
and I took part in at least one day of community support. In total, we
invested c.400 hours in our communities in which we are an active participant
and supporter. We also delivered initiatives aimed at supporting workplace
health and wellbeing across our managed portfolio, supporting our tenants
during what has been a very difficult period.
Never before have our culture and values been more important, both during the
various lockdowns but moreover in ensuring we maintain and build on
those strong relationships as we return to the new norm. Our clear
purpose, underpinned by our core values has continued to inspire our teams
across our countries and I thank all of our employees for stepping up to the
challenges of 2021, which has enabled us to deliver a robust set of results.
Looking to the future
To demonstrate more clearly the opportunities within the portfolio to capture
higher rents, we have included a waterfall chart in recent investor
materials. The updated rent progression figures are:
Ð contracted rent at the end of 2021 of £107.6 million;
Ð the current potential Estimated Rental Value ('ERV') of the
portfolio of £120.0 million if all vacant space let (£7.0 million increase)
and net reversionary potential (£5.4 million increase) were captured. We do
though benefit from some vacancy/churn within the portfolio to capture
reversion more quickly and to allow the refurbishment of older properties and
thus recognise that not all of this vacancy upside should be captured;
Ð net acquisitions exchanged in 2022 to reporting date (c.£3.5
million);
Ð the potential increase to ERV over 2022 and 2023 to £134 million
from refurbishments (c.£9 million increase), committed developments (£1.5
million from Vauxhall Walk); and
Ð the potential increase to ERV between 2023 and 2025 to £139
million from the uncommitted developments of LichtHof, St Cloud Gate and the
rooftop extension at Adlershofer Tor (c.£5 million increase).
In addition to these increases up to 2025, there is further potential from:
inflation indexation, with over half the portfolio having contractual
increases; market movements; and executing value-enhancing transactions, both
acquisitions and disposals, to focus the portfolio on faster growing
properties. Post 2025, we have significant development, redevelopment or
rental increase opportunities at Spring Gardens and New Printing House Square,
both of which are in Zone 1 in London.
Our strategy and our focus on the three largest countries in Europe remains
unchanged but with slightly different priorities: growing Germany; driving
UK long-term value; and realising French profitability and cash returns. By
concentrating on the Location, Quality and Flexibility of our offices and
ensuring that we respond to client and market demands, we are confident that
CLS will continue to be successful for all of our stakeholders.
Fredrik Widlund
Chief Executive Officer
16 March 2022
Chief Financial Officer's review
"Robust results in 2021 with continuing excellent rent collection, strong EPRA
NTA and revaluation uplifts across all countries."
Summary
EPRA net tangible assets ('NTA') per share, rose by 1.5% to 350.5 pence (2020:
345.2 pence) and basic net assets per share by 4.7% to 326.6 pence (2020:
311.9 pence). Profit after tax of £119.5 million (2020: £77.4 million)
generated basic earnings per share of 29.3 pence (2020: 19.0 pence) and EPRA
earnings per share of 11.3 pence (2020: 12.2 pence). EPRA EPS provided 1.5x
cover of the full year dividend of 7.70 per share.
On 1 January 2022, we converted our UK operations to a REIT. As a result of
the conversion, CLS will pay no UK corporation tax on its UK property
operations (rental income, gains on property sales and sales of companies
owning UK property) which fall within the REIT regime from the 2022 financial
year onwards. One of the reasons for conversion was so as to shield the UK
operations from being subject to the increase in the rate of UK corporation
tax from 19% to 25% from 1 April 2023. Conversion has increased EPRA NTA
by 4.5 pence and will save between £3 million to £5 million annually in UK
corporation tax from 2022 onwards. The low end of the range being the tax
saving in EPRA EPS and the high end being the usual tax saving in statutory
EPS including the tax on the realisation of valuation gains on property
disposals.
The overall level of CLS' dividend under the REIT regime will be reassessed
in the second half of the year.
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 gives a full description and reconciliation of
our APMs.
Income statement
Net rental income in 2021 of £108.0 million was £1.8 million lower than in
2020. Acquisitions added £8.3 million but this was more than offset by income
lost from disposals (£2.7 million); properties being redeveloped (£2.3
million); net lease expiries as vacancy increased (£2.2 million); the impact
of a stronger sterling on German and French rent receipts (£1.6 million); and
lower dilapidation income (£1.4 million). Both the hotel and student income
rebounded in the second half, as businesses recovered following the easing of
Covid-19 restrictions, such that overall hotel revenue increased by £0.8
million to £2.7 million (2020: £1.9 million). Given the timing of the
academic year relative to Covid-19 restrictions, student income fell £0.7
million to £4.1 million (2020: £4.8 million) but occupancy rates are back
to, or above, normal levels at 99% for the current academic year.
As the difficult trading environment continued during 2021, we also continued
our focus on our tenant relationships and monitoring rent collection. Rent
collection statistics in 2021 and the first quarter of 2022, as set out below,
remained excellent throughout.
H1 H2 2021 Q1
Year
2021 2021 2022
UK 99% 99% 99% 96%
Germany 99% 99% 99% 98%
France 99% 99% 99% 98%
Total 99% 99% 99% 97%
Due to the continued 99% level of rent collection, we have been able to reduce
our 2021 bad debts provision by £0.3 million (2020: £1.8 million increase).
Index-linked rent represents 50.1% of the total contracted rent of the
portfolio which is a slight increase from 48.5% in 2020. This level of
indexation is particularly helpful in a time of higher inflation and
increasing interest rates.
We monitor the costs of running the business closely and as a result of
several cost control measures, including limited redundancies, and lower bad
debt charges, the administration cost ratio fell to 14.1% (2020: 16.7%) and
the EPRA cost ratio fell to 22.6% (2020: 26.6%).
The net surplus on revaluation of investment properties of £28.5 million
(2020: £31.5 million) resulted from valuation increases from all three
countries; in local currencies, Germany again had the strongest year with a
3.1% rise in values, UK by 0.7% and France by 0.3%.
Eight properties were sold in 2021 at 3.2% above book value but after costs
resulted in a loss on sale of properties before tax of £0.1 million (2020:
£11.6 million profit).
Finance income of £5.9 million (2020: £1.1 million) included unrealised
gains on derivative financial instruments of £5.2 million (2020: £1.6
million loss). Excluding the derivative financial instruments, finance income
fell by £0.4 million as interest received fell to £0.5 million (2020: £1.0
million) and dividends receivable increased to £0.2 million (2020: £0.1
million).
Excluding the 2020 derivative financial instruments cost, finance costs
increased to £25.4 million (2020: £24.4 million) mainly due to the increase
in borrowings offset by the further reduction in the cost of borrowing and the
higher exchange rate.
Approximately 53% of the Group's sales are conducted in the reporting currency
of sterling and 47% in euros. Compared to last year, relative movements of
sterling against the euro had a notable negative impact on the Group's
results for the year both in terms of the translation of our balance sheet
and the monetary assets recognised in the income statement. At 31 December
2021 sterling was 6.3% stronger against the euro than 12 months previously
and sterling's average rate strengthened against the euro by 3.4%. This
strengthening resulted in a foreign exchange loss of £2.3 million in the
income statement (2020: £2.1 million gain).
Exchange rates to the £ EUR
At 31 December 2019 1.1825
2020 average rate 1.1251
At 31 December 2020 1.1185
2021 average rate 1.1634
At 31 December 2021 1.1893
The effective tax rate of -30.6% (2020: 19.8%) was below the weighted average
rate of the countries in which we operate, primarily due to the release
of UK deferred tax liabilities following our transfer to a REIT of our UK
operations.
Overall, EPRA earnings were lower than last year at £45.9 million (2020:
£49.5 million) and generated EPRA earnings per share of 11.3 pence (2020:
12.2 pence). The decrease of 0.9 pence in EPRA EPS was primarily due to the
3.4% strengthening of the average rate of sterling (1.1 pence comparative
movement), without which EPRA EPS would have slightly increased. We were able
to achieve operational cost savings of 1.0 pence mostly offset by reduced net
rental income of 0.4 pence, as commented on above, and increased finance costs
and tax of 0.4 pence.
Additional income of £7.5 million was recognised in 2021 in statutory EPS as
a result of the sale and revaluation of our remaining two legacy non-core
Swedish investments. CLS now directly holds 3.23% of Fragbite Group AB and
indirectly 9.68% of Vo2 Cap Holding AB.
EPRA net tangible assets and gearing
At 31 December 2021, EPRA net tangible assets per share were 350.5 pence
(2020: 345.2 pence), a rise of 1.5%, or 5.3 pence per share. The main reasons
for the increase were; EPRA earnings per share of 11.3 pence; property
valuation increases of 1.6% equivalent to 8.4 pence per share; and the impact
of the REIT conversion of 4.5 pence per share from the release of UK deferred
tax liabilities related to future sales and timing differences, less foreign
exchange of 9.7 pence per share; dividends of 7.6 pence per share; and other
movements of 1.6 pence per share.
Balance sheet loan-to-value (net debt to property assets) at 31 December 2021
increased to 37.1% (2020: 33.7%) as a result of net acquisitions. The
loan-to-value of secured loans by reference to the value of properties secured
against them was 46.3% (2020: 48.8%). The value of properties not secured
against debt fell to £100.8 million (2020: £138.8 million).
Cash flow and net debt
As at 31 December 2021, the Group's cash balance had fallen to £167.4
million (2020: £235.7 million). Net cash flow from operating activities
generated £44.2 million, a reduction of £0.1 million from 2021. £30.8
million was distributed as dividends and £33.4 million paid out for financing
costs, tax and other costs, with the remainder reinvested in the business to
grow net tangible assets. Acquisitions of £164.6 million and capital
expenditure of £36.4 million were partly funded by proceeds after tax from
property disposals of £35.7 million and the net drawdown of loans of £88.1
million. The net result of property and financing transactions being the
investment of £68.3 million in our property portfolio.
Gross debt increased by £60.9 million to £1,031.6 million (2020: £970.7
million) due to the net drawdown of loans of £88.1 million, amortisation of
loan issue costs of £1.9 million and the decrease of £29.1 million due to
the strengthening of sterling against the euro. In the year, £196.7 million
(£195.3 million net of fees) of new or replacement loans were taken out,
loans of £88.2 million were repaid and £21.1m of contractual periodic or
partial repayments were made. Year end net debt rose to £864.2 million
(2020: £735.0 million). At the year end, CLS' additional facilities remained
unchanged comprising undrawn bank facilities of £50.0 million, of which
£30.0 million was committed.
The weighted average cost of debt at 31 December 2021 was 2.22%, 6 basis
points ('bps') lower than 12 months earlier and a new all-time low for CLS.
The movement was as a result of new lower cost debt drawn for German
acquisitions (8 bps reduction) and from refinancing debt at a lower
all-in-rate (4 bps reduction) partly offset by an increased proportion of
more expensive UK financing due to stronger sterling (3 bps increase), an
increase in the UK base rate (2 bps increase) and cheaper euro-denominated
debt being repaid following disposals (1 bps increase). In 2021, interest
cover remained at a healthy level of 3.2 times (2020: 3.3 times).
Financing strategy and covenants
The Group's financing strategy remains to utilise non-recourse bank debt in
the currency used to purchase the asset. In this way credit and liquidity risk
can be managed easily, around 49% of the Group's exposure to foreign currency
is naturally hedged and an efficient use can be made of the GroupÕs assets.
Most of the Group's investment properties are held in special purpose vehicles
('SPVs') and the majority are financed on the basis of one property, one
company and one loan. This is particularly advantageous in Germany and France
where secured, SPV financing rates are very low. In addition, the Group has a
number of portfolio loans or secured notes including our two ÔgreenÕ loans.
The advantage of these portfolio loans is that they can be structured to
afford the Group greater flexibility such that properties, with the
appropriate attributes, can be substituted into and out of such portfolios.
In 2020, we executed our first 'green' loan, a £154.0 million 11-year loan
with Aviva Investors and during 2021, we signed our second with Scottish
Widows. The £61.7 million loan was secured on a portfolio of five properties
for 12 years. The sustainability objectives on both our 'green' loans are
aligned with the targets set out in our sustainability strategy. The year one
targets to achieve the margin reduction have been met and subsequent
objectives are on target and will be tested on an annual basis.
At 31 December 2021, the 12-year Scottish Widows loan has added to the longer
term loans such that the weighted average unexpired term of the Group's debt
remained similar at 4.4 years (2020: 4.6 years).
Given the significant refinancing activity in 2024, and to a lesser extent in
2022, options are already being assessed. One potential solution is a larger
RCF to give greater optionality regarding the encumbered buildings, whether
new lettings, refurbishment or redevelopment.
To the extent that Group borrowings are not at fixed rates, the Group's
exposure to interest rate risk is mitigated by financial derivatives, mainly
interest rate swaps. In the recent medium-term low interest rate environment,
the Group continued to choose to take advantage of the conditions, fixing
most of the medium-term debt taken out during the year.
In 2021, the Group financed, refinanced or extended ten loans to a value of
£196.7 million for a weighted average duration of 6.9 years and at a weighted
average all-in rate of 1.62%, and of these £172.8 million were fixed at a
weighted average all-in rate of 1.70%. Consequently, at 31 December 2021,
85.0% of the Group's borrowings were at fixed rates or subject to interest
rate swaps, 4.5% were subject to caps and 10.5% of loans were floating and
unhedged. The fixed rate debt had a weighted average maturity of 5.1 years and
the floating rate 3.3 years.
The Group's financial derivatives, predominantly interest rate swaps,
are marked to market at each balance sheet date. At 31 December 2021 they
represented a net liability of £0.4 million (2020: £5.6 million).
At 31 December 2021, the Group had 47 loans (36 SPVs, nine portfolios and two
facilities) from 25 lenders. The loans vary in terms of the number of
covenants with the three main covenants being ratios relating to
loan-to-value, interest cover and debt service cover. However, some loans only
have one or two of these covenants, some have other covenants and some have
none. The loans also vary in terms of the level of these covenants and the
headroom to these covenants.
On average across the 47 loans, CLS has between 29% and 48% 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 proposed final dividend for 2020 of 5.20 pence per share (£21.2 million)
was paid in April. In September 2021, given the ongoing uncertainty, CLS
maintained its interim dividend for 2021 at the same level as 2020 and an
interim dividend of 2.35 pence per share (£9.6 million) was paid. The
proposed final dividend for 2021 is 5.35 pence per share (£21.8 million).
This represents a full year distribution of 7.70 pence per share (£31.4
million) which was covered 1.5 times by EPRA earnings per share.
The 2021 dividend is an increase of 2.0% over the prior year and the total
accounting return, being the increase in EPRA NTA plus the dividends paid in
the year, was 3.7% (2020: 8.1%).
As a result of the conversion of our UK operations to a REIT, for the 2022
interim dividend, expected to be paid in September 2022, and for all dividends
going forward, shareholders will receive dividends comprising two elements.
The dividends will comprise a Property Income Distribution ('PID') from the UK
REIT operations and a second element from CLS' remaining operations.
Andrew Kirkman
Chief Financial Officer
16 March 2022
Business review
United Kingdom
Value of property
portfolio
£1,160.9m
Percentage of Group’s property interests 50%
Number of properties
44
Number of
tenants
227
EPRA vacancy rate
5.4%
Lettable space
2.0m
sq. ft
Government and major corporates
64.6%
Weighted average lease length to end 4.3
years
Leases subject to indexation
28.0%
“The market in the United Kingdom, for both investment and occupation, is
favouring modern, sustainable and flexible space as the return to the office
ramps up.”
Portfolio movement and valuation summary
The value of the UK portfolio increased by £35.2 million as a result of: net
additions of £27.6 million (one acquisition for £17.9 million including
costs and capital expenditure of £20.6 million partly offset by three
disposals for £10.9 million); and a valuation gain of £8.0 million or 0.7%,
marginally offset by depreciation of £0.4 million.
The like-for-like valuation increase, which excludes acquisition costs, was
also 0.7%. The valuation increase was due to an increase in ERVs and a slight
decline in equivalent yields (from 5.70% to 5.51%) as government income and
long-term development project opportunities are now more sought after. The net
initial yield decreased to 5.1% (2020: 5.2%) whilst like-for-like ERVs grew by
1.3% and like-for-like contracted rents increased 1.1%.
Acquisitions
In January 2021, we completed on the acquisition of Radius House in Watford
for £16.9 million which had exchanged in December 2020. The well-located
property comprises 41,226 sq. ft (3,830 sqm) and, at completion, was fully
let to four tenants with a WAULT of 8.1 years. The net initial yield was 5.6%
with secure long-term income as 51% is contracted to The Secretary of State
for Housing, Communities and Local Government until 2030 without break.
Developments and refurbishments
In July 2021, construction started on “The Coade”, our new 28,500 sq. ft
office development at Vauxhall Walk with completion forecast for the first
quarter of 2023. We are targeting a minimum 20% profit on cost and the
10-storey building is expected to achieve EPC A and BREEAM Excellent ratings.
“The Artesian”, our development at 9 Prescot Street, London, is
progressing well with strip out works of the lower floors complete. The scope
of the project has expanded such that the remaining floors will also be
redeveloped upon expiry of leases in the first half of 2022. The 94,000 sq. ft
tenant-focused development will feature a café/reception, ample bike storage,
showers and a large roof terrace. A full case study is set out in the Annual
Report.
In 2021, a number of refurbishments to capture rental increases were also
completed. The most notable being the completion of the refurbishment of the
entirety of 45 London Road in Reigate (discussed below) and the 1st floor at
Columbia in Bracknell, both of which resulted in improvements in the EPC
ratings to a Grade B.
Disposals
During 2021, we continued with our strategy of repositioning the UK Portfolio
by way of £12.0 million of selected disposals of a limited number of assets
which were either too small to have a meaningful impact or had a greater
alternative use value. This capital has been deployed into higher growth
opportunities across the portfolio.
In January 2021, we completed on the sale of Atholl House in Aberdeen at book
value and in April and July, we completed on the sale of Quest House and
Falcon House in Hounslow for £11.8 million, a 10.2% premium over the 2020
year end value.
It is intended that this programme of disposing of smaller assets of less than
£10 million will continue into 2022. In January 2022, we completed on the
sale of Kings House in Bromley for £5.4 million which was 6.4% over the 2020
year end value of £5.1 million. In February 2022, we exchanged on the
disposal of Crosspoint House in Wallington for £4.7 million, which was at
book value. The disposal will complete in the first half of 2022.
Asset management
The vacancy rate in the UK reduced to 5.4% as at 31 December 2021 (2020: 5.9%)
with the reduction being largely driven by sales and a general improvement in
letting conditions.
In 2021, we let or renewed leases on 118,357 sq. ft (10,996 sqm) and lost
238,843 sq. ft (22,189 sqm) of space from expiries or new vacancies. For a
number of these expiries, we took the opportunity to refurbish the buildings
to ensure that they provide the requisite quality and amenities for tenants.
In 2021, excluding those arising from contractual indexation uplifts, 55 lease
extensions and new leases were signed which added £3.8 million of rent at an
average of 1.1% above 31 December 2020 ERVs. The portfolio was 4.5% net
reversionary at the year end.
In tandem with reduced restrictions for the hospitality sector and the
reintroduction of face-to-face tuition at universities, the occupation of our
one hotel and one student accommodation building improved significantly
towards the end of 2021. Going into 2022, the hotel occupancy and room rates
are now at pre-pandemic levels, and the occupancy of the student accommodation
at 99% is the highest since its opening in 2014.
Market overview and outlook
The UK economy has continued its recovery from the effects of the pandemic and
2021 GDP growth of 7.2% was among the highest in the G7 countries.
Commercial property investments in 2021 were c.£55 billion which was an
almost 30% increase on the previous year and marginally below the five-year
average. For the office sector, transactions in the South-East were £3.8
billion in the year which is 67% above the five-year average. In the
occupational market, vacancy rates in the South-East range from c.6.5% in the
M25 market to closer to 10% along the M4 corridor. For central London, the
vacancy rate stabilised around 8% as take up increased during the year.
Ultimately, and despite temporary Government guidance for staff to work from
home if they can, the trend amongst UK occupiers is increasingly to recognise
the office as part of their overall business strategy. In tandem with the end
of all restrictions and finding ways to live with Covid, we remain convinced
of the attractiveness of offices as an asset class and believe that our
portfolio of affordable office space in attractive locations is well placed to
capture future occupier demand.
Germany
Value of property
portfolio
£888.0m
Percentage of Group’s property interests 38%
Number of
properties
31
Number of
tenants
367
EPRA vacancy
rate
7.4%
Lettable
space 3.5m
sq. ft
Government and major corporates 40.5%
Weighted average lease length to end 5.0 years
Leases subject to indexation
63.5%
“The market in Germany remains well supported given: low vacancy; limited
high quality, sustainable supply; and high replacement costs.”
Portfolio movement and valuation summary
The value of the German portfolio increased by £140.3 million as a result of:
net additions of £160.9 million (five acquisitions for £161.6 million
including costs and capital expenditure of £9.4 million partly offset by two
disposals for £10.1 million); and a valuation gain of £27.9 million or 3.1%
in local currency, offset by depreciation of £0.2 million and a foreign
exchange loss of £48.3 million.
The like-for-like valuation increase, which excludes the acquisition costs,
was 4.4%. The valuation increase was as a result of letting activity driving
higher rents, particularly towards the end of the year, and yield compression
as the equivalent yield fell to 4.39% (2020: 4.42%). The net initial yield
fell to 4.2% (2020: 4.3%) whilst like-for-like ERVs increased by 0.6% and
like-for-like contracted rents increased by 1.6% as we have actively sought to
capture rental growth.
Acquisitions
The first half of 2021 was an especially busy period with the completion of
five acquisitions for £147.9 million (two of which for a combined £70.2
million had exchanged in December last year). Two of the properties are
located in Berlin with one in each of Hamburg, Dusseldorf and Essen. The
overall net initial yield was 3.8% with a reversionary yield of 5.9%. This
considerable upside is because of: deliberately acquiring vacancy in three
of the buildings and reversionary rental levels, which CLS will seek to
capture through our active asset management model; as well as being able to
source off-market deals given our business network and reputation as a trusted
buyer.
The acquisition of three of these properties is discussed in more detail in
the Annual Report.
Since the year end, we have exchanged on the acquisitions of a further two
properties for £75.7 million in Dusseldorf and Dortmund. The properties,
which are due to complete in the first half of 2022, have an initial yield of
5.1% and a reversionary yield of 5.6%.
Developments and refurbishments
Our German portfolio continues to offer several added-value development and
refurbishment opportunities. The most significant development is the LichtHof
building in Stuttgart, comprising at least 141,000 sq. ft (13,099 sqm) of
lettable space. We are currently marketing the building to secure a
significant pre-let before proceeding and have signed a construction contract
which is conditional on this pre-letting. We are also progressing two roof top
extensions: firstly, the construction of c.2,000 sqm additional office space
at the Technical Town Hall in Bochum which is leased to the City of Bochum,
our existing tenant; and, secondly, c.3,500 sqm of speculative offices at
Adlershofer Tor in Berlin with planning consent expected in spring 2022. Both
extensions are due in late 2023/early 2024.
Disposals
Limited portfolio adjustments have taken place with the sale of two smaller
assets, Frohbösestrasse in Hamburg and Kreuzberger Ring in Wiesbaden,
at a combined price of £9.0 million.
Asset management
EPRA vacancy rates rose sharply from 3.6% at 31 December 2020 to 9.3% at 30
June 2021 as a result of the vacancy acquired with the new building purchases
and then rose to 11.0% at 30 October 2021 as a result of a few significant
lease expiries. Given very substantial leasing activity, particularly in the
fourth quarter, the vacancy rate was reduced to 7.4% at the year end. Of note,
the re-letting campaigns for two of the three new acquisitions with vacancy
are well ahead of their business plans.
In 2021, we let or renewed leases on 446,914 sq. ft (42,449 sqm) and lost
498,787 sq. ft (46,339 sqm) of space from expiries or new vacancies. Excluding
those arising from contractual indexation uplifts, 50 rent reviews, lease
extensions and new leases secured £6.9 million of rent at an average of 4.2%
above ERV. On a like-for-like basis, ERVs rose by 0.6% in the year and at the
end of 2021 the portfolio was 7.2% net reversionary. In light of the continued
recovery of the letting markets and despite the increased vacancy rates we
believe that there is the potential for further rental growth.
Market overview and outlook
The German economy recovered in 2021 with GDP increasing close to 3% and is
forecast to grow by another 4% in 2022, which will result in the economy
returning to pre-pandemic levels by the end of 2022.
The investment market for commercial property finished the year strongly with
c.€20 billion in the fourth quarter which took the full year to c.€58
billion. Although overall investment volumes were down 10%, offices
represented c.€31 billion, which is the second-best volume ever recorded and
30% above the 10-year average. The majority of these transactions was
attributed to deals above €300 million. Demand remains high with investments
in commercial property in 2022 forecast to increase further.
The letting market recovered further, especially in the second half of 2021,
with a take-up of c.3.4 million sqm, which is an increase of 27% from 2020 and
in line with the 10-year average. There were differences between the main
cities but pleasingly there was a significant increase in larger lettings as
occupier confidence returns. Whilst vacancy has increased in the top-seven
cities from 4.5% in 2020 to close to 5.0% by December 2021, the rate of
increase has significantly slowed, and we expect that demand will continue to
be high for the right properties.
France
Value of property
portfolio
£282.4m
Percentage of Group’s property interests 12%
Number of properties
18
Number of
tenants 158
EPRA vacancy
rate 3.0%
Lettable space
0.8m sq. ft
Government and major corporates
46.4%
Weighted average lease length to end 5.0
years
Leases subject to
indexation 100.0%
“The market in France is mixed with good demand in central Paris and
regional markets like Lyon but weaker in Parisian suburbs such as the Western
Crescent, albeit with some offset from contractual indexation"
Portfolio movement and valuation summary
The value of the French portfolio decreased by £27.2 million as a result
of: net reductions of £10.0 million (three disposals for £16.0 million
offset by capital expenditure of £6.0 million); and a foreign exchange
decline of £18.0 million, partly offset by a valuation gain of £0.8 million
or 0.3% in local currency.
In the absence of any acquisitions, the like-for-like valuation increase was
also 0.3%. The valuation increase was as a result of a decrease in ERVs with
some offset for a slight hardening of equivalent yields. The net initial yield
fell to 4.5% (2020: 4.7%) whilst like-for-like ERVs decreased by 1.6% and
like-for-like contracted rents declined by 0.3% as we have actively sought to
reduce vacancy.
Developments and refurbishments
During the year we embarked on a programme of refurbishing several of
our French properties. The most significant of these is the redevelopment of
Park Avenue, Lyon for which our revised application was approved in September
2021. The planned works include refurbishment of common areas, replacement of
the existing façade and creation of new common terraces through the extension
of existing landings. The works will improve the sustainability credentials of
the building through the installation of new windows, electric shades and a
green roof. Our existing tenants have been temporarily relocated while the
works are carried out to allow us to complete the project much quicker than if
they were in situ. The works are expected to complete in Q4 2022 at a cost of
€10.7 million resulting in expected uplifts in the ERV of the building.
Disposals
During the course of 2021 we disposed of three smaller assets for €19.3
million (5.5% above book value) which offered greater value through
alternative use. Further details are provided in the Annual Report.
Asset management
EPRA vacancy in France reduced to 3.0% as at 31 December 2021 (2020: 5.1%)
with the reduction largely driven by active asset management in spite of
market challenges. The majority of our 2021 expiries were renewed, and
existing vacancy was filled by attracting new tenants and leasing additional
space to our existing tenants.
In 2021, we let or renewed leases on 112,625 sq. ft (10,463 sqm) and lost
90,602 sq. ft (8,417 sqm) of space from expiries or new vacancies. Excluding
contractual indexation uplifts, 24 lease extensions and new leases secured
£2.2 million of rent at an average of 10.8% below ERV. The deficit to ERV was
mainly driven by the lease extension and renewal with Veolia at Inside, Paris.
Excluding this deal, the remaining transactions secured rent at 1.7% below
ERV. On a like-for-like basis, ERVs fell by 1.6% in the year and at the end of
2021 the portfolio was 1.4% net reversionary.
In 2021, Energy audits were completed for the whole French portfolio, allowing
the group Net Zero Carbon pathway to be calibrated with milestones set until
2030. Smart metering was installed to allow us to focus on managing
consumption and reporting in compliance with “Decret Tertiaire”
requirements.
Market overview and outlook
The French economy delivered a very respectable 7% GDP growth in 2021 and the
economy is forecast to grow around 4% in 2022 on the back of economic stimulus
irrespectively of the outcome of the upcoming presidential election.
Commercial property investments in 2021 were c.£24 billion which was
marginally up on the previous year. The regional market performed well and now
represents 25% of the overall investment volume with Lyon being the top
regional investment destination.
More than 1.8 million sqm of office space was let in 2021 in the Paris Region,
which exceeded expectations and the prior year, on the back of a strong
fourth quarter with 631,000 sqm of take-up. Supply has stabilised with four
million sqm of office space available in the Paris Region which is a vacancy
rate of 7.5%. There is a widening gap between Paris CBD at 4% vacancy and the
western districts of la Défense and Péri-Défense at 15% vacancy which are
suffering from over-supply. The southern and northern Paris districts are
performing relatively well. Vacancy in Lyon continues to be between 5% and 6%.
We expect these differences to remain or even widen further in 2022 which
should benefit our French portfolio both in terms of flexibility, floor plate
sizes and the quality that is required.
Key data
Rental data(1) Rental income for the year Net rental income Lettable Contracted rent at ERV at Contracted rent subject to indexation EPRA vacancy
for the year
space
rate at
£m
year end year end £m
year end
£m sqm
£m £m
United Kingdom 53.3 53.7 188,356 55.0 60.7 15.4 5.4%
Germany 33.8 33.3 327,418 38.8 44.9 24.7 7.4%
France 14.1 14.2 73,383 13.8 14.4 13.8 3.0%
Total portfolio 101.2 101.2 589,157 107.6 120.0 53.9 5.8%
Valuation data(1) Market value of property Valuation movement EPRA EPRA ‘topped-up’ Reversion Over- Equivalent
in the year
net initial
net initial
rented
yield
£m
yield
yield
Underlying Foreign exchange
£m £m
United Kingdom 1,034.5 3.1 – 4.8% 5.1% 7.5% 3.0% 5.5%
Germany 883.0 27.2 48.0 3.8% 4.2% 11.8% 4.6% 4.4%
France 280.1 0.9 17.9 3.8% 4.5% 5.1% 3.8% 5.0%
Total portfolio 2,197.6 32.2 65.9 4.3% 4.6% 8.7% 3.7% 5.0%
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 After Year 1 Year 2 3 to 5 After
years years £m £m years 5 years £m £m years 5 years
£m £m £m £m
United Kingdom 3.2 4.3 5.0 3.9 31.4 14.7 5.7 4.0 32.7 15.0
Germany 4.9 5.0 8.2 6.4 11.8 12.4 9.7 6.9 12.2 12.8
France 2.6 5.0 0.5 2.3 3.3 7.7 0.6 2.1 3.2 8.1
Total portfolio 3.7 4.6 13.7 12.6 46.5 34.8 16.0 13.0 48.1 35.9
1 The above tables comprise data of the investment properties and properties
held for sale (see note 12). They exclude owner occupied, land, student
accommodation and hotel.
Key performance indicators
EPRA earnings per share
Definition
EPRA earnings is a measure of operational performance and represents the net
income generated from the Group’s underlying operational activities.
Why this is important to CLS
This KPI gives relevant information to investors on the income generation of
the Group’s underlying property investment business and an indication of the
extent to which current dividend payments are supported by earnings.
Our target
We will seek to grow the earnings of the business alongside net asset value.
Following REIT conversion in the UK, the tax saving is expected to increase
EPRA earnings by at least 0.7 pence.
Progress
EPRA earnings per share for 2021 was 11.3 pence.
More detail is provided in the Chief Financial Officer’s review and in note
5.
Total accounting return
Definition
As described in more detail in note 5, EPRA NTA has replaced EPRA NAV as the
Group’s primary measure of net assets. Total accounting return is the
aggregate of the change in EPRA NTA plus the dividends paid, as a percentage
of the opening EPRA NTA.
Why this is important to CLS
This KPI measures the increase in EPRA NTA per share of the Company before the
payment of dividends and so represents the value added to the Company in
the year.
Our target
Our target total accounting return is between 3% and 9%.
Progress
In 2021, the total accounting return was 3.7%.
More detail is provided in the Chief Financial Officer’s review and in note
5.
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 above the current market; if it is below 3% we may be letting space too
cheaply.
Progress
At 31 December 2021, the EPRA vacancy rate was 5.8%.
More detail is provided in the Country business reviews and in note 5.
Total shareholder return – relative
Definition
The annual growth in capital in purchasing a share in CLS, assuming dividends
are reinvested in the shares when paid, compared to the TSR of the 24
companies in the FTSE 350 Real Estate Super Sector Index.
Why this is important to CLS
This KPI measures the increase in the wealth of a CLS shareholder over the
year, against the increase in the wealth of the shareholders of a peer group
of companies.
Our target
Our target total shareholder return (relative) is between the median
and upper quartile.
Progress
The TSR was 0.4%, making CLS the 23rd ranked share of the FTSE 350 Real Estate
Super Sector Index of 24 companies.
Other performance indicators
In addition to these key performance indicators, the Group also has a number
of other performance indicators by which it measures its progress. Three are
shown here but others are summarised in note 5 and are discussed throughout
this strategic report. Our environmental and social indicators (including
health and safety) are discussed in the ESG section in the annual report.
Net initial yield vs cost of debt
We seek to maintain a cost of debt at least 200 bps below the Group’s net
initial yield. At 31 December 2021, the cost of debt of 2.22% was 205 bps
below the net initial yield of 4.27%.
More detail is provided in the Chief Financial Officer’s review and in note
5.
Administration cost ratios
These measure the administration cost of running the core property business
by reference to the net rental income that it generates, and provides a
direct comparative to most of our peer group. We aim to maintain the CLS ratio
between 15% and 17%. The administration cost ratio was for 2021 was 14.1%.
More detail is provided in the Chief Financial Officer’s review and in note
5.
GRESB (ESG) score/100
Our main sustainability indicator has changed to be 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. We achieved a further thirteen
GRESB points this year, and an additional green star taking our total score
for 2021 to 85 points and four green stars.
Our principal risks
“The effective management of risk is critical for the Group to be able to
deliver its strategy, which is especially important in these times of
heightened uncertainty. Our organisational structure allows the close
involvement of senior management in all significant decisions, which together
with the CLS in-house teams, embeds the management of risks and opportunities
throughout the operation of the Group.”
Risk management framework
The risks, being both principal and emerging, which the Group faces are
reviewed and monitored in Senior Leadership Team meetings throughout the year
and presented to the Board and Audit Committee at least every six months for
further discussion and oversight. The Senior Leadership Team comprises the
CEO, the CFO, the COO, regional business heads as well as other
senior managers.
In addition, major business-wide decisions such as property acquisitions,
disposals and significant strategy changes are discussed at the Executive
Committee Meetings and reviewed by the Board before implementation, subject to
authorisation limits. The Executive Committee meets weekly and comprises the
CEO and the CFO.
An update on risks and the control environment is presented at each
Audit Committee meeting including the results of any internal control review
procedures undertaken in the period. Senior managers also attend Audit
Committee meetings to discuss specific risk areas and these discussions are
supplemented by external advisors where relevant.
Risk management processes, which include health and safety, human resources
and sustainability risk management, are employed within the business and
updates are reported to the Board at each meeting.
Covid-19 has not changed our risk processes but increased the frequency
of our considerations.
A summary of our risk management structure is provided in the diagram
opposite.
Our key activities for the year
* Purchased and started implementation of risk and internal control software to
allow the Group to monitor and test its internal controls and the risks
associated with them more efficiently and extensively.
* Published 2030 sustainability strategy and Net Zero Carbon pathway.
* Grant Thornton conducted internal controls and risk reviews with limited
findings.
* Rolled out improvement recommendations from 2020 staff survey.
* Increased percentage of ‘green’ loans to over 20% of our loan portfolio
and fixed rate debt to 85% whilst lowering average cost of debt from 2.28% to
2.22%.
Our priorities for 2022
* Roll-out of risk and internal control software.
* Implement Grant Thornton findings.
* Establish milestone targets for Net Zero Carbon pathway.
* Engage external consultants to assist us with in-depth analysis of
climate-related resilience risk set across different climate scenarios.
* Establish Risk and Sustainability Committee.
* Establish benchmarks and targets for Social Value Framework.
* Make improvements based on tenant surveys.
* Simulate a major business interruption to test the Group’s updated business
continuity plan.
* Ensure Cyber Essentials plus ranking retained.
Our risk management structure is set out below:
The Board
* Overall responsibility for risk management and internal controls
* Monitors the long-term viability of the business
* Sets strategic objectives and considers risk as part of this process
* Determines the level of risk appetite
* Sets business-wide delegated authority limits
Audit Committee
* Key oversight and assurance function on risk management, internal controls and
viability
* Reports to the Board on the effectiveness of risk management processes and
internal controls
Executive Committee
* Day-to-day operational oversight of risk management
* Consideration of business wide decisions and their impact on risk appetite
Senior Leadership Team
* Oversight function of business activities and risk considerations
* Identifies strategic objectives and assesses risk
Underpinned by:
Policies
* Multi-level review of annual budget quarterly forecasts and four-year
strategic plans
* Tenant covenant testing and leasing objectives
* Occupancy targets
* Acquisition and development appraisal criteria
* Gearing and liquidity benchmarks
* Security covenant compliance
Controls
* High level risk assessment
* Policy and procedure framework
* Strict authorisation structures
* Extensive back-up documentation for all decision-making
* External review of key controls
* Recommendations from external Auditor
People
* Extensive market expertise
* Highly qualified staff with defined roles and responsibilities
* Open and transparent internal and external communication
* Integrity and diligence
* Alignment of interests with investors
Management of risks throughout the business
Each business area operates various processes to ensure that key risks are
identified, evaluated, managed and reviewed appropriately. For example:
* a monthly asset management portfolio review for each region is prepared and
circulated to the Board which outlines key business risks, developments and
opportunities; and
* the development team convenes risk and opportunity workshops with the design
team at the feasibility stage of development projects. Regular reviews are
then part of the design development to ensure the continuous identification
and management of risks throughout the development process.
The potential risks associated with loss of life or injury to members of the
public, customers, contractors or employees arising from operational
activities are continually monitored. Competency
checks are undertaken for the consultants and contractors we engage and
regular safety tours of our assets are undertaken by the property management
team.
In addition, the wellbeing of our employees is a key focus for the Group and
various activities are supported by the Board including the delivery of annual
mental health workshops and company-funded employee contributions to promote
healthy lifestyle initiatives such as gym, or other sports club, memberships.
In this way some of the people risks are somewhat mitigated.
During the year we purchased a suite of internal controls and risk software so
that we can fully embed an effective risk management structure within our
operations as well as monitor and report the risks and their associated
internal controls more efficiently to the Audit Committee and the Board.
Risk appetite
The Board recognises its overall responsibility for undertaking a robust risk
assessment and for establishing the extent to which it is willing to
accept some level of risk to deliver its strategic priorities.
Our risk appetite is reviewed at least annually and assessed with reference
to changes both that have occurred, or trends that are beginning to emerge in
the external environment, and changes in the principal risks and their
mitigation. These will guide the actions we take in executing our strategy.
Whilst our appetite for risk will vary over time, in general we maintain a
balanced approach to risk. The Group allocates its risk appetite into five
categories:
Very low: Avoid risk and uncertainty
Low: Keep risk as low as reasonably practical with very limited, if any,
reward
Medium: Consider options and accept a mix of low and medium risk options with
moderate rewards
High: Accept a mix of medium and high risk options with better rewards
Very high: Choose high risk options with potential for high returns
The Board has assessed its risk appetite and current status for each of the
Group’s principal risks as follows:
Board risk appetite Principal risk assessment
Property Medium High
Sustainability Medium Medium
Business Interruption Low Medium
Financing Medium Medium
Political & Economic Medium High
People Medium Medium
The Board’s risk appetite in relation to the Group’s principal risks is
broadly aligned. As shown in the table above, there is divergence of risk
appetite and risk status in relation to the property, sustainability,
business interruption, and political and economic principal risks. The Board
accepts there are factors in relation to these principal risks that are
outside the Group’s control and are likely to change over time. Mitigating
actions have been put in place to ensure these risks are adequately managed
and monitored to reduce the potential impact on the Group. The Board also
recognises that not all risk can be fully mitigated and that they need to be
balanced alongside commercial considerations. If a difference between the
Board’s risk appetite and the risk assessment persists for an extended
period, this variance is debated as to whether and how the gap should
be closed.
Risk environment
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
continuing effects of the Covid-19 outbreak, and associated uncertainty,
together with the increased world-wide focus on sustainability.
Covid-19 presented a new and major risk to the business in 2020 and this has
continued in 2021. Whilst much is starting to return to normal, it is still
hard to predict the long-term impacts on the Global and European economies and
consequentially the impacts on our key markets and our business. In 2021, the
impact of the pandemic was most strongly felt at our Spring Mews hotel and
student accommodation through lower occupancy but we have seen a strong
recovery at both sites during the final few months of the year. Rent
collection rates have remained at the same very high rate of 99% in 2021
(2020: 99%) for our office tenants which comprise over 90% of the portfolio.
Throughout the year, the Board monitored the continually changing situation
and considered its effect on the business and will continue to do so going
forward. Some of the potential longer-term effects that may result from the
pandemic are discussed in the CEO review and the individual country property
reviews.
CLS condemns the invasion of Ukraine by Russia and we are looking at ways that
we can support the Ukrainian people. We continue to monitor whether additional
risk mitigation actions need to be taken to counter greater expected increases
in inflation and overall economic disruption.
In considering our principal risks, set out on the following pages, any
potential impact as a result of Covid-19 has been taken into account.
As discussed in more detail in the political and economic risk section, Brexit
has had a limited direct impact on our business but we continue to monitor the
situation.
Principal risks
Our principal risks are set out in the diagram below and are discussed in the
following pages along with the change in their risk profile since the last
year end and the current direction of travel as well as our risk mitigation
actions and plans. Whilst we do not consider there has been any material
change to the nature of the Group’s principal risks over the last 12 months,
several risks remain elevated as a result of the challenging external
environment and significant ongoing uncertainty.
The diagram and 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.
1. Property risk
Market fundamentals and/or internal behaviours lead to adverse changes to
capital values of the property portfolio or ability to sustain and improve
income generation from these assets.
Risk assessment:
High
Change in risk profile in year: Current direction of travel:
Unchanged No change
Key risks:
*Cyclical downturn in the property market which may be indicated by
an increase in yields
*Changes in supply of space and/or demand
*Poor property/facilities management
*Inadequate due diligence and/or poor commercial assessment of acquisitions
*Failure of tenants
*Insufficient health and safety risk protection
*Building obsolescence
KPI/OPI link:
EPS
TSR(R)
TAR
VR
ACR
Business Model Link:
We acquire the right properties
We secure the right finance
We deliver value through active management and cost control
More detail is provided in the Country business reviews.
Risk mitigation in action
As part of our diversified approach, acquisitions continue to be made in line
with our strategic objective to grow both rental income and capital returns
through filling vacancies and refurbishment. In 2021, we made six
acquisitions, all with asset management opportunities.
We have rigorous and established governance and approval processes and we
have continued to be resolute with our pricing discipline in assessing
opportunities. Our Financial Investment Committee meets at least monthly to
discuss potential acquisition opportunities in each of our regions.
Eight disposals were made in 2021 of assets which were low yielding with
limited asset management potential or where the risk/reward ratio was
unfavourably balanced. We are also increasing the average size of the
properties in our portfolio by disposing of smaller properties, which require
disproportionate amounts of management time and are less economic to upgrade
in terms of amenities and sustainability.
We have a high quality and diversified tenant base and monitor any exposure to
individual tenants or sectors. A focused review of the strength of the tenant
covenant is carried out when assessing each new lease opportunity.
We closely monitor all health and safety related issues and our in-house teams
ensure compliance with all regulations supplemented by external oversight.
Reports outlining progress, issues and potential risks are presented at each
Board meeting.
Risk mitigation priorities for 2022
We will continue to target properties with asset management opportunities in
good locations as well as focusing on disposing of smaller properties with
limited potential and reinvest the proceeds in locations and properties
with the opportunity to add value through active asset management.
We will continue to monitor the covenant strength and health of our tenants
and provide support where appropriate.
Commentary
There still remains uncertainty regarding the full economic and social impacts
of Covid-19. In particular, the impacts on the demand for, and supply of,
office space. It is though becoming increasingly clear that there is a market
preference for well-located, high quality and flexible space – a trend to
which CLS is actively responding.
The CLS in-house management model allows us to build close links with our
tenants in order to understand their needs and to provide timely insights into
potential occupier/property issues and facilitate resolution. These ties have
allowed us to react quickly and work collaboratively to respond dynamically
to tenants’ changing requirements. Our Asset Management Committees meet
once a month to discuss each of our properties with regard to new leases,
lease events and tenant issues.
2. Sustainability risk
As a result of a failure to plan properly for, and act upon, the potential
environmental and social impact of our activities, changing societal
attitudes, and/or a breach of any legislation, this could lead to damage to
our reputation and customer relationships, loss of income and/or property
value, and erosion of shareholder confidence in the Group.
Risk assessment:
Medium
Change in risk profile in year: Current direction of travel:
Increased Increasing
Key risks:
Transition risks:
These include regulatory changes, economic shifts, obsolescence and
the changing availability and price of resources.
Physical risks:
These are climate-related events that affect our supply chain as well as the
buildings’ physical form and operation; they include extreme weather events,
pollution and changing weather patterns.
KPI/OPI link:
EPS
TSR(R)
TAR
VR
ACR
Business Model Link:
We acquire the right properties
We deliver value through active management and cost control
More detail is provided in the environmental, social and governance review in
the Annual Report.
Risk mitigation in action
All physical and transition risks are captured by the sustainability risk
register maintained by our in-house sustainability team which is reviewed
twice a year or when a material change in the risk landscape occurs.
Additionally, each of our buildings is reviewed annually.
Our Net Zero Carbon pathway to 2030, which is aligned to a science-based
carbon reduction target (SBTi), was published in August together with our new
sustainability strategy and are discussed in more detail in the Annual report.
We have BREEAM In-Use assessments on all managed assets with 83%
achieving at least a “Good” rating. We have also undertaken a full Scope
3 carbon emissions baseline.
We employed an external consultant to provide independent assurance for
our Scope 1 and 2 greenhouse gas 2021 disclosures.
We continue to carry out ongoing risk reviews of environmental legislation for
any upcoming changes.
A portfolio-wide programme of energy audits was carried out in 2021.
An Asset Management Plan for all managed assets was carried out to ensure they
are as energy efficient as possible, aiming for net zero carbon.
Risk mitigation priorities for 2022
Our focuses for 2022 are set out in the environmental, social and governance
section of the Annual Report. These include starting to implement our
sustainability strategy and Net Zero Carbon pathway. More detail can be found
in the Annual Report.
We continue to maintain our focus on energy reduction at our existing assets
while also identifying potential climate related physical risks on new
acquisitions. Sustainability assessments will continue to be a key focus of
asset management decision making across the business in each region.
We will continue to expand the coverage of our automatic data collection
across our energy and water supplies to enable the roll-out of portfolio-wide
performance reports
A new Sustainability acquisitions checklist will be rolled out in 2022 to
improve our due diligence on acquisitions further and a Sustainability Design
Guide will be implemented to address energy efficiency/health and wellbeing
issues for development and refurbishments.
Commentary
Whilst we have identified an increase in this risk this year, the overall
assessment remains at Medium. This increase is in response to the trend of
global increases in emissions and the increasing world-wide focus on this
area, as well as the resulting focus on carbon and waste/resource reduction
and habitat preservation and restoration.
Increased monitoring of all carbon-related activities, both directly and
indirectly, was a priority for 2021, and will be again in 2022, given an
increase in government policies around reporting the carbon impact on supply
chain and direct use.
For the first time in this report, we are reporting against the Task Force on
Climate-related Financial Disclosures and UNSDG disclosures.
3. Business interruption risk
Data loss; or disruption to corporate or building management systems; or
catastrophic external attack; or disaster; may limit the ability of the
business to operate resulting in negative reputational, financial and
regulatory implications for long term shareholder value.
Risk assessment:
Medium
Change in risk profile in year: Current direction of travel:
Unchanged No change
Key risks:
*Cyber threat
*Large scale terrorist attack
*Environmental disaster, power shortage or pandemic
KPI/OPI link:
EPS
TSR(R)
TAR
VR
ACR
Business Model Link:
We acquire the right properties
We secure the right finance
We deliver value through active management and cost control
Risk mitigation in action
The Group’s business continuity plan was reviewed and updated during the
year.
An annual review of each property’s specific emergency plan is carried out
which considers a range of different physical, utility and catastrophic risks.
As remote working continued to be the norm for a large part of the year, we
ensured that there was the necessary system infrastructure to cope with the
increase in the volume of remote access. In addition, we ensured the ability
to carry out key operational procedures such as payment authorisations safely
and effectively.
We have continued a programme of employee cyber training which evolves as the
threat landscape changes.
During the year, we have regularly tested the Group’s capability to recover
business critical IT systems to secondary hosting environments and restored
data from back-ups.
Risk mitigation priorities for 2022
Independent reviews of our cyber defences are performed periodically. The
Group’s “Cyber Essentials Plus” certification was achieved in 2020 and
we aim to exceed this benchmark following the 2022 review.
Simulate a major business interruption to test the Group’s updated business
continuity plan.
The Group’s insurance coverage is regularly reviewed, particularly to assess
the relevance of cyber cover, and revised where relevant.
Commentary
Whilst the risks associated with the pandemic have mostly continued during the
year, the business interruption risk to long-term shareholder value is deemed
to remain unchanged due to our mitigation of this risk through robust IT
infrastructure.
Whilst companies continue to be subject to an increasing number of attempted
cyber attacks and the pandemic has resulted in an increase in Covid-19 related
phishing and fraud attempts, we have continued to develop and invest in our
mitigation controls to reduce these risks.
We continue to implement a new shared property and finance system across the
Group to mitigate against data, cyber, system integration and control issues.
This platform is operational in the UK region, with the French and German
implementations due to complete within the next 12 months.
4. Financing risk
The risk of not being able to source funding in cost effective forms will
negatively impact the ability of the Group to meet its business plans or
satisfy its financial obligations.
Risk assessment:
Medium
Change in risk profile in year: Current direction of travel:
Unchanged No change
Key risks:
*Inability to refinance debt at maturity due to lack of funding sources, market
liquidity, etc.
*Unavailability of financing at acceptable debt terms
*Risk of rising interest rates on floating rate debt
*Risk of breach of loan covenants
*Foreign currency risk
*Financial counterparty risk
*Risk of not having sufficient liquid resources to meet payment obligations
when they fall due
KPI/OPI link:
EPS
TSR(R)
TAR
Business Model Link:
We secure the right finance
We continually assess whether to hold or sell properties
More detail is provided in the Chief Financial Officer’s review.
Risk mitigation in action
The Group continues to maintain a wide number of banking relationships to
diversify funding sources.
During the year the Group executed its second ‘green’ loan of £61.7
million, which was secured on a portfolio of five properties for 12 years,
taking the Group’s percentage of ‘green’ loans to over 20%, which are
aligned to achieving our sustainability targets. Including this loan, we
financed, refinanced or extended 10 loans to a value of £196.7 million for a
weighted average duration of 6.9 years and a weighted all-in rate of 1.62% and
of these £172.8 million were fixed at a weighted average all-in rate of
1.70%.
The Group’s weighted average cost of debt at 31 December 2021 fell to 2.22%
(2020: 2.28%). At the same time, as a result of deliberately targeting longer
term loans, the Group’s average debt maturity has been broadly maintained at
4.4 years (2020: 4.6 years).
The Group’s debt portfolio is split 51% in sterling and 49% in euros
providing a ’natural’ hedge against foreign currency risk.
On average across the Group’s 49 loans, we have between 29% and 48%
headroom across the 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 us to either repay part of the loan or deposit
cash for the period the loan is in breach, after which the cash can
be released.
Risk mitigation priorities in 2022
The Group has facilities with 25 lenders and will seek to continue to
maintain its existing relationships and develop new ones, whilst also
exploring the feasibility of other funding sources in 2022 to diversify
funding sources further and achieve longer debt maturities. The Group will
continue to focus on its core financing risk mitigation strategies including:
* Obtaining bids from multiple counterparties to compete for new lending;
* Fixing a high proportion of new debt, in particular in France and Germany due
to the negative interest rate environment;
* Ensuring that new debt facilities have appropriate covenants and provisions
to allow borrower cure of covenant breaches;
* Matching foreign currency liabilities with foreign currency assets by
borrowing in the local markets to create natural hedging relationships;
* Monitoring lender exposure and ensure that no one lender represents more than
20% of total Group debt; and
* Managing cash balances with the aim of maintaining a minimum of £100m of
liquid resources on average to mitigate refinancing and liquidity risk.
Further ‘green’ loans will also be targeted.
Commentary
Inflation concerns have increased and central banks are now increasing
interest rates in response. By having 85% of our at fixed rates, CLS is
relatively well insulated.
In our core markets, the appetite and support of lenders varies and for real
estate, covenant strength and quality of property remain key.
Maintaining our strong lending relationships across multiple, diversified
finance providers remains a key strength of the Group in more volatile
markets.
5. Political and economic risk
Significant events or changes in the Global and/or European political and/or
economic landscape may increase the reluctance of investors and customers to
make timely decisions and thereby impact the ability of the Group to plan
and deliver its strategic priorities in accordance with its core business
model.
Risk assessment:
High
Change in risk profile in year: Current direction of travel:
Unchanged Increasing
Key risks:
*Ongoing transition of the UK from the EU
*Global geopolitical and trade environments
KPI/OPI link:
EPS
TSR(R)
TAR
VR
ACR
Business Model Link:
We acquire the right properties
We secure the right finance
We deliver value through active management and cost control
Risk mitigation in action
As part of the Group’s budgeting and forecasting processes, a range of
scenarios were modelled to determine how various changes to property values,
rental income and interest cost may impact the business model and funding.
This review also provided a key input into the conclusions formed in the
viability statement.
CLS has a diversified approach in terms of countries, tenants and financing
which provides some in-built risk mitigation.
Risk mitigation priorities for 2022
We will continue to maintain geographical, customer and financing
diversification of the business model.
Where appropriate, we will continue to engage in relevant industry forums to
discuss and contribute to policy and regulatory changes that may have a direct
or indirect impact on the property sector and our business.
To date, CLS has experienced little direct impact following the UK’s exit
from the EU. However, it is hard to assess whether there have been indirect
impacts particularly in terms of overseas property investment and occupation.
We monitor the economic and political situations in our country markets
closely and flex investment decisions accordingly.
Commentary
The direct and indirect impacts of Covid-19 continue to influence global
and local economies in terms of interest rates, inflation, supply chain
dynamics etc. For many countries, GDP is near or above pre-pandemic levels
but GDP growth in 2022 is likely to be below 2021.
As noted by many commentators, including the World Economic Forum, the global
level of uncertainty has increased. CLS continues to monitor events and trends
closely, making business responses if needed.
6. People risk
The failure to attract, develop and retain the right people with the required
skills, and in an environment where employees can thrive, will inhibit the
ability of the Group to deliver its business plans in order to create long
term sustainable value.
Risk assessment:
Medium
Change in risk profile in year: Current direction of travel:
Increased Increasing
Key risks:
*Failure to recruit senior management and key executives with the right skills
*Excessive staff turnover levels
*Lack of succession planning
*Poor employee engagement levels
KPI/OPI link:
EPS
TSR(R)
TAR
VR
ACR
Business Model Link:
We deliver value through active management and cost control
Risk mitigation in action
An annual review of employees’ salary and benefits is carried out to ensure
they are at appropriate levels. Our annual appraisal process focuses on future
development opportunities and we continue to maintain high levels of
training and development.
These measures seek to ensure we are able to retain key staff and attract new
staff with the relevant skills and experience to the company.
In 2021, the staff turnover level was 25% as a result of a restructure during
the year. Excluding redundancies it was 18%. This relatively high level was
due to a tight labour market and the much discussed ‘Great Resignation’.
35% of the vacated positions were filled with internal transfers or
promotions.
Following the results of last year’s staff survey which were reviewed by our
Workforce Advisory Panel, we;
* introduced a flexible working policy during the year whereby staff can work up
to two days per week at home;
* have run Group-wide mental wellbeing workshops; and
* have rolled out Group-wide training including ‘how better to collaborate
across teams’.
We ensure that we have a modern workplace, and a comfortable and collaborative
environment which is inviting for employees. We also maintain effective IT
systems including all relevant IT resources to enable working from home.
Risk mitigation priorities for 2022
We will continue:
* our workforce engagement through the Workforce Advisory Panel;
* Group training activities and events;
* to ensure remuneration and benefits are at market levels;
* the annual review of succession planning at all levels, which will be
presented to the Board;
* to progress our health and wellbeing programme; and
* to ensure we have appropriate systems in place to allow employees to perform
at their best, in line with our vision and values.
Commentary
We employ a diverse team of people with a range of skills and experience and
we ensure that CLS is a great place to work so that our employees remain
motivated and engaged to deliver the Group’s strategy.
Covid-19 presents a continuing health and safety challenge for our people and
has made day-to-day operations more difficult and complex. The safety of our
people is paramount and we were swift in restructuring our offices and
encouraging our office-based staff to work from home. As conditions return to
greater normality, we continue to monitor our staff wellbeing.
The People risk is deemed to have increased since last year due to skills
shortages, tight labour markets and a general war on talent. However, it has
not increased sufficiently to increase the risk assessment.
Emerging risks
We define emerging risks to be those that may either materialise or impact
over a longer timeframe. They may be a new risk, a changing risk or a
combination of risks for which the broad impacts, likelihoods and costs are
not yet well understood, and which could have a material effect on CLS’
business strategy.
Emerging risks may also be superseded by other risks or cease to be relevant
as the internal and external environment in which we operate evolves. The
Senior Leadership Team, which has representatives from each area of the
business, is tasked with identifying emerging risks for the business and
discussing what impact these risks may have on the business and what steps we
should be taking to mitigate these risks. The Board reviews these assessments
on an annual basis. In 2021, both the Board and the Senior Leadership Team
were surveyed about their views on emerging risks. A list, which given it
relates to emerging risks is likely to be non-exhaustive, and the time when
these ongoing risks may have a material effect on the business are set out
below:
Time Horizon
Risk Potential Impact Mitigation Short Medium Long
< 2yrs
2-5 yrs
> 5 yrs
Regulation/ compliance Increased capital cost of maintaining our property portfolio. Continued ongoing assessment of all properties against emerging regulatory X X
changes and benchmarking of fit-out and refurbishment projects against
third‑party schemes.
Increasing energy and construction costs Increased cost of operating properties will reduce attractiveness of tenancies Ongoing consideration of, and investment in, energy efficient plant and X X X
to existing and potential customers. building-mounted renewable energy systems.
Increased costs of refurbishments and developments leading to reduced Continued monitoring of materials, investment in key skills for staff and
investment returns. viability assessments of buildings.
Changes in technology The attractiveness of our properties may decline if the challenges to adapt Each region updates the Senior Leadership Team on trends, including X X X
office facilities, to changing work practices/environment expectations of technology, throughout the business. The in-house management model also gives
customers and advances in technology and digitisation, are not met. valuable insights into tenants’ ongoing needs and potential trend changes
that can be incorporated into the future fit-out of properties.
Changes in office occupation trends Changes in social attitudes to agile and flexible working practices may reduce In-house asset management model provides the means for the property team to: X X X
demand for space compared to historic trends. proactively manage customers; and gain real-time insight and transparency
on changes in needs and trends.
Workforce Failure to adapt to evolving expectations of an intergenerational working The establishment of the Workforce Advisory Panel and the staff survey X X X
population may reduce attractiveness as an employer in the market. process provide forums for employees to communicate views on the working
environment. The Group also interacts with recruitment agents to keep abreast
of trends in the employment marketplace.
Climate change Increased risk of weather-related damage to property portfolio and Our sustainability strategy continues to evolve and has been developed in X X
reputational impact of not evolving sustainability goals in line with global alignment with Global Real Estate Sustainability Benchmarks (GRESB),
benchmarks and/or public expectations. consideration of the UN Sustainable Development Goals (SDGs) and climate risk
modelling.
Inability to obtain sufficient carbon credits at suitable price to offset We are investigating various solutions to achieve sufficient offsets by 2030. X
residual carbon emissions in order to achieve net zero carbon.
Viability statement
In accordance with Provision 31 of the Code, the Board has assessed the
prospects of the Group over a longer period than the twelve months that has
in practice been the focus of the going concern statement.
Covid-19, and the associated responses, are continuing to have a profound
impact on the global economy and it is currently the single biggest direct and
indirect negative influence on the Group leading to both current and forecast
impacts as well as far greater levels of uncertainty. e.g. The future of the
Office. In addition, ongoing events in Ukraine and the potential impacts on
commodity prices and overall inflation, and supply chains have been considered
and are being monitored. CLS continues to weather these impacts well with high
rent collection, low bad debts and an ongoing ability to meet its financing
and refinancing needs. CLS has no direct exposure to Russian and Ukrainian
interests.
The Board reviews the viability and going concern assessments every six months
alongside the approval of the financial statements. For the year end
assessment, a new four-year forecast was reviewed and approved by the Board at
its November 2021 meeting. The viability and the going concern assessments
apply the same methodology that was used for the 2020 year-end viability
statement. i.e. using the Board approved forecast for the next four years.
The latest forecast reflects current negative, but overall diminishing,
expectations arising as a result of Covid-19 with the impacts largely
restricted to slower reductions in vacancy and prudently no general valuation
increases.
This forecast is used as the base case for our viability and going concern
assessments which has focused on the cash, liquid resources and working
capital position of the Group. The Directors are confident that loans expiring
within at least the next 12 months will be refinanced as expected given
existing banking relationships and ongoing discussions.
Two downside scenarios, being mid and severe cases, have also been prepared.
The key potential property risks have been incorporated in the modelling by
assuming: lower rents; increased service charges and property expenses;
falling property values; and reduced loan to value covenants on refinancing
reflecting expected greater risk aversion by banks. More general economic
factors such as higher interest and tax rates, and foreign exchange changes
through a strengthened sterling have also been assumed.
The downside scenarios modelled are based off the negative market and economic
impacts experienced during the 2007-2009 global financial crisis with the mid
case being somewhat less extreme and the severe case being somewhat more
extreme (for example property falls of 35% over four years and 40% over two
years respectively). It is worth noting that these scenarios are potentially
overly harsh as: it is unlikely all the changes would occur at the same time;
the assumptions have been applied equally to all regions and thus there is no
benefit given for the geographic and tenant diversity benefits of the Group;
and the base case already reflects current expectations of the impact of
Covid-19.
The modelling has focused on the cash position of the Group and potential
covenant breaches. On average across its 47 loans, CLS has between 27% and 48%
headroom for the three main covenant ratios of loan-to-value, interest cover
and debt service cover. In addition, our loan agreements have equity cure
mechanisms and in the downside scenarios it is assumed that sufficient,
available cash is used to avoid covenant breaches. It has also been assumed
that acquisitions, capital expenditure and dividends are either reduced or
cancelled. Finally, property sales at the reduced modelled values are assumed.
In the downside scenarios, a minimum cash balance of £100 million has been
maintained and no use has been made of the current £50 million of undrawn
facilities. In the severe case, only 1% of the property portfolio, at the
assumed lower valuations, on top of planned disposals, would need to be sold
to maintain this £100 million cash buffer. In a downside scenario, the £50
million of facilities could be withdrawn but if they were not withdrawn and
were used, no properties would need to be sold.
The longer term operational and financial implications of Covid-19 are hard to
forecast accurately. However, based on flexing the key financial assumptions
impacting core drivers of CLS’ cash flows, it appears that the potential
negative outcomes can be mitigated without risking the going concern and
longer-term viability of the Group.
As a result, the Directors can confirm that they have a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment.
Going concern
The current macro-economic conditions have created a number of uncertainties
as set out on this and the previous pages. The Group’s business
activities, and the factors likely to affect its future development and
performance, are set out in this strategic report. The financial position of
the Group, its liquidity position and borrowing facilities are described in
this strategic report and in notes 19 to 22 of the Group financial statements.
The Directors regularly stress-test the business model to ensure that the
Group has adequate working capital and have reviewed the current and projected
financial positions of the Group, taking into account the repayment profile
and covenants of the Group’s loan portfolio, and making reasonable
assumptions about future trading performance. The Directors have a reasonable
expectation that the Company and the Group have adequate resources to continue
in operational existence for the foreseeable future, being a period of at
least twelve months to March 2023 and further details of this analysis are set
out in the viability statement on this page. Therefore, the Directors continue
to adopt the going concern basis in preparing the Annual Report
and Accounts.
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 15 March 2022.
Approved and authorised on behalf of the Board
David Fuller BA FCG
Company Secretary
16 March 2022
Group income statement
for the year ended 31 December 2021
2021 2020
Notes Recurring items Non-recurring items Total Recurring items Non-recurring items Total
£m
£m £m £m
£m £m
Note 10
Revenue 4 139.8 – 139.8 139.4 – 139.4
Net rental income 4 108.0 – 108.0 109.8 – 109.8
Administration expenses (15.0) (1.2) (16.2) (18.5) – (18.5)
Other expenses (14.4) – (14.4) (15.1) – (15.1)
Revenue less costs 78.6 (1.2) 77.4 76.2 – 76.2
Net revaluation movements on investment property 13 28.5 – 28.5 31.5 – 31.5
Net revaluation movements on equity investments 1.0 – 1.0 – – –
(Loss)/profit on sale of investment property (0.1) – (0.1) 11.6 – 11.6
Operating profit 108.0 (1.2) 106.8 119.3 – 119.3
Finance income 8 5.9 – 5.9 1.1 – 1.1
Finance costs 9 (25.4) – (25.4) (26.0) – (26.0)
Foreign exchange (loss)/gain (2.3) – (2.3) 2.1 – 2.1
Share of profit of associates after tax 31 5.1 1.4 6.5 – – –
Profit before tax 91.3 0.2 91.5 96.5 – 96.5
Taxation 11 (14.0) 42.0 28.0 (19.1) – (19.1)
Profit for the year attributable to equity shareholders 6 77.3 42.2 119.5 77.4 – 77.4
Basic and diluted earnings per share 5 29.3p 19.0p
Group statement of comprehensive income
for the year ended 31 December 2021
Notes 2021 2020
£m
£m
Profit for the year 119.5 77.4
Other comprehensive income
Items that will not be reclassified to profit or loss
Foreign exchange differences 25 (32.8) 24.2
Items that may be reclassified to profit or loss
Revaluation of property, plant and equipment 14 5.5 (3.6)
Deferred tax on fair value movements 18 (1.0) 0.5
Total items that may be reclassified to profit or loss 4.5 (3.1)
Total other comprehensive (expense)/income (28.3) 21.1
Total comprehensive income for the year attributable to equity shareholders 91.2 98.5
Group balance sheet
at 31 December 2021
Notes 2021 2020
£m
£m
Non-current assets
Investment properties 13 2,153.0 2,032.8
Property, plant and equipment 14 135.4 130.5
Goodwill and intangible assets 3.1 2.2
Investment in associate 31 4.9 –
Other financial investments 1.7 –
Deferred tax 18 2.6 7.7
Derivative financial instruments 20 0.4 –
Other receivables 15 7.7 8.2
2,308.8 2,181.4
Current assets
Trade and other receivables 15 18.1 22.0
Assets held for sale 44.2 21.9
Cash and cash equivalents 16 167.4 235.7
229.7 279.6
Total assets 2,538.5 2,461.0
Current liabilities
Trade and other payables 17 (57.6) (54.3)
Current tax (4.5) (0.3)
Borrowings 19 (169.1) (103.6)
Derivative financial instruments 20 (0.7) –
(231.9) (158.2)
Non-current liabilities
Deferred tax 18 (109.9) (159.5)
Borrowings 19 (862.5) (867.1)
Leasehold liabilities (3.4) –
Derivative financial instruments 20 (0.1) (5.6)
(975.9) (1,032.2)
Total liabilities (1,207.8) (1,190.4)
Net assets 1,330.7 1,270.6
Equity
Share capital 23 11.0 11.0
Share premium 83.1 83.1
Other reserves 25 88.7 117.3
Retained earnings 1,147.9 1,059.2
Total equity 1,330.7 1,270.6
The financial statements of CLS Holdings plc (registered number: 02714781)
were approved by the Board of Directors and authorised for issue on 16 March
2021 and were signed on its behalf by:
Mr F Widlund Mr A
Kirkman
Chief Executive Officer Chief
Financial Officer
Group statement of changes in equity
for the year ended 31 December 2021
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 23 Note 25
Arising in 2021:
Total comprehensive income for the year – – (28.3) 119.5 91.2
Share-based payment charge – – (0.3) – (0.3)
Dividends to shareholders – – – (30.8) (30.8)
Total changes arising in 2021 – – (28.6) 88.7 60.1
At 1 January 2021 11.0 83.1 117.3 1,059.2 1,270.6
At 31 December 2021 11.0 83.1 88.7 1,147.9 1,330.7
Share Share Other Retained Total equity
capital
premium
reserves
earnings
£m
£m
£m
£m
£m
Note 23 Note 25
Arising in 2020:
Total comprehensive income for the year – – 21.1 77.4 98.5
Share-based payment charge – – (0.2) – (0.2)
Dividends to shareholders – – – (30.1) (30.1)
Total changes arising in 2020 – – 20.9 47.3 68.2
At 1 January 2020 11.0 83.1 96.4 1,011.9 1,202.4
At 31 December 2020 11.0 83.1 117.3 1,059.2 1,270.6
Group statement of cash flows
for the year ended 31 December 2021
Notes 2021 2020
£m
£m
Cash flows from operating activities
Cash generated from operations 26 73.1 76.9
Interest received 0.5 1.0
Interest paid (24.3) (22.1)
Income tax paid on operating activities (5.1) (11.5)
Net cash inflow from operating activities 44.2 44.3
Cash flows from investing activities
Purchase of investment properties (164.6) (124.6)
Capital expenditure on investment properties (35.8) (18.9)
Proceeds from sale of properties 37.0 62.2
Income tax paid on sale of properties (1.3) (9.0)
Purchases of property, plant and equipment (0.6) (0.3)
Net cash flow from sale of subsidiaries – (1.4)
Purchase of intangibles (0.9) (0.8)
Distributions received from associate and investment undertakings 0.2 0.1
Disposal of associate undertakings 0.5 –
Net cash flow on foreign currency transactions – 0.3
Net cash outflow from investing activities (165.5) (92.4)
Cash flows from financing activities
Dividends paid 24 (30.8) (30.1)
New loans 196.7 182.5
Issue costs of new loans (1.4) (2.5)
Repayment of loans (107.2) (128.3)
Net cash inflow from financing activities 57.3 21.6
Cash flow element of net decrease in cash and cash equivalents (64.0) (26.5)
Foreign exchange (loss)/gain (4.3) 2.8
Net decrease in cash and cash equivalents (68.3) (23.7)
Cash and cash equivalents at the beginning of the year 235.7 259.4
Cash and cash equivalents at the end of the year 16 167.4 235.7
Notes to the Group financial statements
for the year ended 31 December 2021
1. General information
CLS Holdings plc (the “Company”) 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 registered and incorporated in the UK, registration number
02714781, with its registered address at 16 Tinworth Street, London SE11 5AL.
The Company is listed on the London Stock Exchange.
2. Annual financial report
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 2021 Annual Report and Accounts will be posted to
shareholders on 28 March 2022 and will also be available on the Company’s
website.
The financial information contained in this announcement has been prepared on
the basis of the accounting policies set out in the statutory accounts for the
year ended 31 December 2021. 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). Whilst the financial information included in this
announcement has been computed in accordance International Financial Reporting
Standards adopted by the United Kingdom, this announcement does not itself
contain sufficient information to comply with IFRS. Those accounts give a
balanced, true and fair view of the assets, liabilities, financial position
and profit and loss of the Group and the undertakings included in the
consolidation taken as a whole.
The financial information set out in this announcement does not constitute the
Group’s financial statements for the year ended 31 December 2021 or 31
December 2020 as defined by Section 434 of the Companies Act 2006. Statutory
accounts for 2020 have been delivered to the Registrar of Companies and those
for 2021 will be delivered following the Company’s Annual General Meeting.
The Auditors, Deloitte LLP, have reported on those accounts and their reports
on both the 2021 and 2020 accounts 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.
3. Going concern
The current macro-economic conditions have created a number of uncertainties
as set out on the previous pages. The Group’s business activities, and the
factors likely to affect its future development and performance, are set out
in the previous pages. The financial position of the Group, its liquidity
position and borrowing facilities are described in the previous pages and in
notes 19 to 22. The Directors regularly stress-test the business model to
ensure that the Group has adequate working capital and have reviewed the
current and projected financial positions of the Group, taking into account
the repayment profile and covenants of the Group’s loan portfolio, and
making reasonable assumptions about future trading performance. The Directors
have a reasonable expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable future and
further details of this analysis are set out in the viability statement above.
Therefore, the Directors continue to adopt the going concern basis in
preparing the Annual Report and Accounts.
4. Segment information
The Group has two operating divisions – investment properties and other
investments. Other investments comprise the hotel and student accommodation at
Spring Mews and other small corporate investments. The Group manages the
investment properties division on a geographical basis due to its size and
geographical diversity. Consequently, the Group’s principal operating
segments are:
Investment properties: United Kingdom
Germany
France
Other investments
Year ended 31 December 2021 Investment properties Other investments(1) £m Central administration Non-recurring items Total
£m
£m £m
Note 10
United Kingdom(1) Germany France
£m
£m
£m
Rental income 53.3 33.8 14.1 – – – 101.2
Other property-related income 1.9 0.3 0.5 6.8 – – 9.5
Service charge income 12.3 11.2 5.6 – – – 29.1
Revenue 67.5 45.3 20.2 6.8 – – 139.8
Service charges and similar expenses (13.8) (12.0) (6.0) – – – (31.8)
Net rental income 53.7 33.3 14.2 6.8 – – 108.0
Administration expenses (6.9) (2.9) (1.7) 0.2 (3.7) (1.2) (16.2)
Other expenses (5.9) (3.3) (1.1) (4.6) 0.5 – (14.4)
Revenue less costs 40.9 27.1 11.4 2.4 (3.2) (1.2) 77.4
Net revaluation movements on investment property 3.7 24.2 0.6 – – – 28.5
Net revaluation movements on equity investments – – – 1.0 – – 1.0
Profit/(loss) on sale of investment property 0.7 (1.1) 0.3 – – – (0.1)
Segment operating profit/(loss) 45.3 50.2 12.3 3.4 (3.2) (1.2) 106.8
Finance income 3.8 0.2 – 1.9 – – 5.9
Finance costs (15.7) (5.4) (2.7) (1.3) (0.3) – (25.4)
Foreign exchange loss – – – (2.3) – – (2.3)
Share of profit of associate after tax – – – 5.1 – 1.4 6.5
Segment profit/(loss) before tax 33.4 45.0 9.6 6.8 (3.5) 0.2 91.5
Year ended 31 December 2020 Investment properties Other investments(1) £m Central administration Non-recurring items Total
£m
£m £m
Note 10
United Kingdom(1) Germany France
£m
£m
£m
Rental income 58.2 33.3 15.0 – – – 106.5
Other property-related income 3.8 – 0.2 1.9 – – 5.9
Service charge income 11.2 10.3 5.5 – – – 27.0
Revenue 73.2 43.6 20.7 1.9 – – 139.4
Service charges and similar expenses (12.8) (10.9) (5.9) – – – (29.6)
Net rental income 60.4 32.7 14.8 1.9 – – 109.8
Administration expenses (7.5) (2.9) (1.8) (0.2) (6.1) – (18.5)
Other expenses (8.9) (2.8) (1.4) (2.0) – – (15.1)
Revenue less costs 44.0 27.0 11.6 (0.3) (6.1) – 76.2
Net revaluation movements on investment property (29.1) 60.1 0.5 – – – 31.5
(Loss)/profit on sale of investment property (0.1) 11.7 – – – – 11.6
Segment operating profit/(loss) 14.8 98.8 12.1 (0.3) (6.1) – 119.3
Finance income – – – 1.1 – – 1.1
Finance costs (17.3) (5.1) (2.7) (0.9) – – (26.0)
Foreign exchange gain – – – 2.1 – – 2.1
Segment (loss)/profit before tax (2.5) 93.7 9.4 2.0 (6.1) – 96.5
1 On 1 January 2021 the student accommodation was transferred from the
United Kingdom investment property segment to the ‘Other investments’
segment due to the property’s reclassification to property, plant and
equipment at 31 December 2020.
Other segment information
Assets Liabilities Capital expenditure
2021 2020 2021 2020 2021 2020
£m
£m
£m
£m
£m
£m
Investment properties
United Kingdom 1,065.6 1,044.8 555.0 605.2 20.6 7.3
Germany 900.2 767.2 462.4 373.3 9.4 6.3
France 293.8 314.9 183.8 207.2 6.0 4.2
Other investments 278.9 334.1 6.6 4.7 0.5 0.1
2,538.5 2,461.0 1,207.8 1,190.4 36.5 17.9
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. APMs are used by the
Directors and management, both internally and externally, for performance
analysis, strategic planning, reporting and incentive-setting purposes.
APMs are not defined by IFRS and therefore may not be directly comparable with
other companies’ APMs, including peers in the real estate industry. There
are two sets of APMs which we utilise, and which are reconciled where possible
to statutory measures on the following pages.
EPRA APMs and similar CLS APMs
CLS monitors the Group’s financial performance using APMs which are European
Public Real Estate Association (‘EPRA’) measures as these are a set of
standard disclosures for the property industry and thus aid comparability for
our stakeholder users. In previous years, the two key APMs for CLS, which are
in accordance with the November 2016 EPRA guidelines, were:
– EPRA earnings, which gives relevant information to investors
on the long-term performance of the Group’s underlying property investment
business and an indication of the extent to which current dividend payments
are supported by earnings; and
– EPRA net asset value (NAV), which excludes certain items not
expected to crystallise in a long-term investment property business model,
such as CLS’.
The latest edition of the EPRA guidelines were issued in October 2019 and
replaced EPRA NAV and EPRA NNNAV with three other balance sheet reporting
measures, which are defined in the glossary:
– EPRA net tangible assets (NTA);
– EPRA net realisable value (NRV); and
– EPRA net development value (NDV).
CLS considers EPRA NTA to be the most relevant of these new measures as we
believe that this will continue to reflect the long-term nature of our
property investments most accurately. However, all the new measures have been
disclosed. EPRA Earnings remains the same.
Whilst CLS primarily uses the measures referred to above, we have also
disclosed all other EPRA metrics as well as disclosing the measures that CLS
used to prefer for certain of these categories. The notes below highlight
where the measures that we monitor differ and our previous rationale for
using them. From 2021 onwards, following CLS’ re-entry into the EPRA
indices, we will be just using EPRA measures which are:
– EPRA net initial yield;
– EPRA ‘topped-up’ net initial yield;
– EPRA vacancy;
– EPRA capital expenditure; and
– CLS administration cost ratio and EPRA cost ratio.
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;
– Dividend cover; and
– Interest cover.
There have been no changes to the Group’s APMs in the year with the same
APMs utilised by the business being defined, calculated and used
on a consistent basis. Set out below is a reconciliation of the APMs used in
these results to the statutory measures.
1. EPRA APMs and similar CLS APMs
For use in earnings per share calculations 2021 2020
Number
Number
Weighted average number of ordinary shares in circulation 407,395,760 407,395,760
For use in net asset per share calculations
Number of ordinary shares in circulation at 31 December 407,395,760 407,395,760
i) Earnings – EPRA earnings
Notes 2021 2020
£m £m
Profit for the year 119.5 77.4
Non-recurring items after tax 10 1.5 –
Recurring profit for the year 121.0 77.4
Net revaluation movement on investment property 13 (28.5) (31.5)
Deferred tax on revaluations (38.6) 10.9
Net revaluation movement on equities (1.0)
Loss/(profit) on sale of investment property 0.1 (11.6)
Current tax thereon 3.2 2.7
Movement in fair value of derivative financial instruments 8/9 (5.2) 1.6
Uplift in value of associates (5.1) –
EPRA earnings 45.9 49.5
Basic and diluted earnings per share 29.3p 19.0p
EPRA earnings per share 11.3p 12.2p
ii) Net asset value measures
2021 2020
2021 IFRS EPRA EPRA EPRA IFRS EPRA EPRA EPRA
NAV NTA NRV NDV NAV NTA NRV NDV
£m
£m
£m
£m
£m £m £m £m
Net assets 1,330.7 1,330.7 1,330.7 1,330.7 1,270.6 1,270.6 1,270.6 1,270.6
Goodwill as a result of deferred tax on acquisitions – (1.1) (1.1) (1.1) – (1.1) (1.1) (1.1)
Other intangibles – (2.0) – – – (1.1) – –
Fair value of fixed interest debt – – – (4.2) – – – (13.2)
Tax thereon – – – 0.8 – – – 2.5
Deferred tax on revaluation surplus – 108.1 108.1 – – 151.3 151.3 –
Capital allowances – (0.3) (0.3) – – (12.0) (12.0) –
Adjustment for short-term disposals – (7.8) – – – (6.9) – –
Fair value of financial instruments – 0.4 0.4 – – 5.6 5.6 –
Purchasers’ costs(1) – – 149.3 – – – 140.9 –
1,330.7 1,428.0 1,587.1 1,326.2 1,270.6 1,406.4 1,555.3 1,258.8
Per share 326.6p 350.5p 389.6p 325.5p 311.9p 345.2p 381.8p 309.0p
(1) EPRA NTA and EPRA NDV reflect IFRS values which are net of purchasers’
costs. Purchasers’ costs are added back when calculating EPRA NRV.
iii) Yield
EPRA net initial yield (NIY)
EPRA NIY is calculated as the annualised rental income based on the cash rents
passing at the balance sheet date less non-recoverable property operating
expenses, divided by the gross market value of the property (excluding those
that are under development, held as PPE or occupied by CLS).
2021 2020
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Rent passing 52.8 34.9 11.7 99.4 54.4 33.2 13.7 101.3
Adjusted for development stock (2.6) (0.5) – (3.1) (1.1) – – (1.1)
Forecast non-recoverable service charge (2.0) (0.6) (0.3) (2.9) (2.5) (0.8) (0.5) (3.8)
Annualised net rents (A) 48.2 33.8 11.4 93.4 50.8 32.4 13.2 96.4
Property portfolio(1) 1,034.5 883.0 280.1 2,197.6 1,003.8 743.3 307.6 2,054.7
Adjusted for development stock (103.7) (46.2) – (149.9) (49.5) (7.5) – (57.0)
Purchasers’ costs at 6.8% 63.3 56.9 19.0 139.2 64.6 50.0 20.9 135.5
Property portfolio valuation including 994.1 893.7 299.1 2,186.9 1,018.9 785.8 328.5 2,133.2
purchasers’ costs (B)
EPRA NIY (A/B) 4.8% 3.8% 3.8% 4.3% 5.0% 4.1% 4.0% 4.5%
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).
2021 2020
United Kingdom Germany France Total United Kingdom Germany France Total
£m
£m
£m
£m
£m £m £m £m
Contracted rent 55.0 38.8 13.8 107.6 57.2 34.7 16.0 107.9
Adjusted for development stock (2.6) (0.6) – (3.2) (1.2) – – (1.2)
Forecast non-recoverable service charge (2.0) (0.6) (0.3) (2.9) (2.5) (0.8) (0.5) (3.8)
‘Topped-up’ annualised net rents (A) 50.4 37.6 13.5 101.5 53.5 33.9 15.5 102.9
Property portfolio(1) 1,034.5 883.0 280.1 2,197.6 1,003.8 743.3 307.6 2,054.7
Adjusted for development stock (103.7) (46.2) – (149.9) (49.5) (7.5) – (57.0)
Purchasers’ costs (6.8%) 63.3 56.9 19.0 139.2 64.6 50.0 20.9 135.5
Property portfolio valuation including 994.1 893.7 299.1 2,186.9 1,018.9 785.8 328.5 2,133.2
purchasers’ costs (B)
EPRA ‘topped-up’ NIY (A/B) 5.1% 4.2% 4.5% 4.6% 5.2% 4.3% 4.7% 4.8%
1 The above tables comprise data of the investment properties and
properties held for sale. They exclude owner occupied, land, student
accommodation and hotel.
iv) Vacancy
The EPRA vacancy rate calculates vacancy as a proportion of the ERV of the
total portfolio and, from 2021, is the only measure used by the Group.
EPRA vacancy
2021 2020
£m £m
ERV of vacant space (A) 7.0 6.1
ERV of let space 113.0 113.9
ERV of total portfolio (B) 120.0 120.0
EPRA vacancy rate (A/B) 5.8% 5.1%
v) Capital expenditure
1.EPRA capital expenditure
This measure shows the total amounts spent on the Group’s investment
properties on an accrual and cash basis with a split between expenditure used
for the creation of incremental space and enhancing space (‘no incremental
space’).
Notes 2021 2020
£m £m
Acquisitions 13 179.5 119.1
Amounts spent on the completed investment property portfolio 13
Creation of incremental space 8.6 1.9
Creation of no incremental space 27.4 15.9
EPRA capital expenditure 215.5 136.9
Conversion from accrual to cash basis (15.1) 6.6
EPRA capital expenditure on a cash basis CF(1) 200.4 143.5
1 Group statement of cash flows
vi) Cost ratios
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 2021 2020
£m £m
Recurring administration expenses 15.0 18.5
Less: Other investment segment 4 0.2 (0.2)
Underlying administration expenses (A) 15.2 18.3
Net rental income (B) 4 108.0 109.8
Administration cost ratio (A/B) 14.1% 16.7%
EPRA cost ratio
Notes 2021 2020
£m £m
Recurring administration expenses 15.0 18.5
Other expenses 4 14.4 15.1
Less: Other investment segment 4 (4.4) (2.2)
25.0 31.4
Net service charge costs 4 2.7 2.6
Service charge costs recovered through rents but not separately invoiced (0.3) (0.3)
Dilapidations receipts (1.2) (2.6)
EPRA costs (including direct vacancy costs) (A) 26.2 31.1
Direct vacancy costs (3.4) (2.9)
EPRA costs (excluding direct vacancy costs) (B) 22.8 28.2
Gross rental income 4 101.2 106.5
Service charge components of gross rental income (0.3) (0.3)
EPRA gross rental income (C) 100.9 106.2
EPRA cost ratio (including direct vacancy costs) (A/C) 26.0% 29.3%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 22.6% 26.6%
2. Other APMs
i) Total accounting return
Notes 2021 2020
£m £m
EPRA NTA at 31 December 5 1,428.0 1,406.4
Distribution – prior year final 24 21.2 20.5
Distribution – current year interim 24 9.6 9.6
Less: EPRA NTA at 1 January (A) 5 (1,406.4) (1,329.3)
Return before dividends (B) 52.4 107.2
Total accounting return (NTA) (B/A) 3.7% 8.1%
ii) Net borrowings and gearing
Notes 2021 2020
£m £m
Borrowings short-term 19 169.1 103.6
Borrowings long-term 19 862.5 867.1
Add back: unamortised issue costs 19 5.9 6.3
Gross debt 19 1,037.5 977.0
Cash 16 (167.4) (235.7)
Net borrowings (A) 870.1 741.3
Net assets (B) 1,330.7 1,270.6
Net gearing (A/B) 65.4% 58.3%
iii) Balance sheet loan-to-value
Notes 2021 2020
£m £m
Borrowings short-term 19 169.1 103.6
Borrowings long-term 19 862.5 867.1
Less: cash 16 (167.4) (235.7)
Net debt (A) 864.2 735.0
Investment properties 13 2,153.0 2,032.8
Properties in plant, property and equipment 14 133.3 128.3
Properties and land held for sale 12 45.0 21.9
Total property portfolio (B) 2,331.3 2,183.0
Balance sheet loan-to-value (A/B) 37.1% 33.7%
iv) Dividend cover
Notes 2021 2020
£m £m
Interim dividend 24 9.6 9.6
Final dividend 24 21.8 21.2
Total dividend (A) 31.4 30.8
EPRA earnings (B) 5 45.9 49.5
Dividend cover (B/A) 1.46 1.61
v) Interest cover
Notes 2021 2020
£m £m
Net rental income 4 108.0 109.8
Recurring administration expenses (15.0) (18.5)
Other expenses 4 (14.4) (15.1)
Group revenue less costs (A) 78.6 76.2
Finance income (excluding derivatives and dividend income) 8 0.5 1.0
Finance costs (excluding derivatives) 9 (25.4) (24.4)
Net interest (B) (24.9) (23.4)
Interest cover (-A/B) 3.16 3.26
6. Profit for the year
Profit for the year has been arrived at after charging/(crediting):
Notes 2021 2020
£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 0.1 0.1
Depreciation of property, plant and equipment 14 1.0 0.7
Employee benefits expense 7 11.3 13.5
Foreign exchange loss/(gain) 2.3 (2.1)
Provision against trade receivables 15 (0.3) 1.8
Other services provided to the Group by the Company’s Auditor consisted of
the 2021 interim review of £40k (2020: £40k).
7. Employee benefits expense
2021 2020
£m
£m
Wages and salaries 8.6 9.1
Social security costs 1.1 1.1
Pension costs – defined contribution plans 0.4 0.4
Performance incentive plan 1.0 1.1
Other employee-related expenses 0.2 1.8
11.3 13.5
The Directors are considered to be the only key management of the Group.
Information on Directors’ emoluments, share options and interests in the
Company’s shares is given in the Remuneration Committee Report in the Annual
Report.
The monthly average number of employees of the Group in continuing operations,
including Executive Directors, was as follows:
2021 2020
Property Number Hotel Total Property Number Hotel Total
Number
Number
Number
Number
Male 46 9 55 47 7 54
Female 48 9 57 53 9 62
94 18 112 100 16 116
8. Finance income
2021 2020
£m
£m
Interest income
Financial instruments carried at amortised cost 0.5 1.0
Movement in fair value of derivative financial instruments 5.2 –
Dividend income 0.2 0.1
5.9 1.1
9. Finance costs
2021 2020
£m
£m
Interest expense
Secured bank loans 21.4 20.0
Secured notes 2.1 2.3
Amortisation of loan issue costs 1.9 2.1
Total interest costs 25.4 24.4
Movement in fair value of derivative financial instruments – 1.6
25.4 26.0
10. Non-recurring items
Notes 2021 2020
£m
£m
Administration costs – UK restructuring costs* A (1.2) –
Share of associates – profit on sale of associate* B 1.4 –
0.2
Taxation – tax credit on UK restructuring costs* A 11 0.2
Taxation – deferred tax liability release due to REIT conversion C 11 43.7 –
Taxation – deferred tax asset release due to REIT conversion* C 11 (1.9)
Non-recurring tax 42.0 –
Total non-recurring 42.2
A – UK restructuring costs
The Group incurred costs of £1.2m associated with redundancies made in the
UK. These costs are tax deductible and so the associated tax credit of £0.2m
has also been treated as non recurring.
B – Profit on sale of associate
This relates to the sale of our 21.8% share in Fragbite AB to Funrock (now
renamed Fragbite Group AB). The consideration for the sale was a combination
of cash and shares in the purchaser. Subsequent to our sale, the purchaser
listed on the Nasdaq Nordic stock exchange and the shares are held as an
‘other financial investment’ on the Group Balance Sheet and were revalued
at the year end. The revaluation of £1.0m has been treated as a recurring
item.
C – Deferred tax arising on conversion to REIT
The UK property business became a REIT on 1 January 2022. As a result, the
majority of the UK deferred tax liabilities and assets were released. The
majority of the deferred tax liability released relates to the revaluation of
the UK properties. The deferred tax assets disclosed as non-recurring relate
to the non property business in the UK and were released as it is no longer
probable that sufficient taxable profits will be generated in the future for
the recognition criteria to be met.
* These items are included as non-recurring items in the ERPA earnings
reconciliation presented in note 5
11. Taxation
2021 2020
£m
£m
Corporation tax
Current year charge 11.7 8.1
Non-recurring tax on restructuring costs (0.2)
Adjustments in respect of prior years (0.7) 0.3
10.8 8.4
Deferred tax (see note 18)
Origination and reversal of temporary differences 3.0 5.7
Effect of change in UK tax rate – 5.0
Non-recurring deferred tax liability release due to REIT conversion (43.7) –
Non-recurring deferred tax asset release due to REIT conversion 1.9 –
(38.8) 10.7
Tax charge for the year (28.0) 19.1
A deferred tax charge of £1.0 million (2020: credit of £0.5 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:
2021 2020
£m
£m
Profit before tax 91.5 96.5
Expected tax charge at the weighted average applicable tax rate 17.0 16.3
Expenses not deductible for tax purposes 2.6 1.1
Change in tax basis of UK properties, including indexation uplift – 0.7
Change in UK tax rate – 5.0
Non-taxable income (3.8) (1.6)
Deferred tax on losses not recognised/(recognised) 0.7 (2.8)
Adjustments in respect of prior years (0.7) 0.3
Release of deferred tax on election into UK REIT regime (43.7) –
Other (0.1) 0.1
Tax charge for the year (28.0) 19.1
The weighted average applicable tax rate of 18.6% (2020: 16.9%) was derived by
applying to their relevant profits and losses the rates in the jurisdictions
in which the Group operated. The standard UK rate of corporation tax applied
to profits is 19.0% (2020: 19.0%).
12. Property portfolio
Notes United Kingdom Germany France Total
£m
£m
£m
£m
Investment property 13 996.4 883.0 273.6 2,153.0
Property held as property, plant and equipment 14 126.4 5.0 1.9 133.3
Properties held for sale 38.1 – 6.5 44.6
Land held for sale – – 0.4 0.4
Property portfolio at 31 December 2021 1,160.9 888.0 282.4 2,331.3
Notes United Kingdom Germany France Total
£m
£m
£m
£m
Investment property 13 997.9 733.2 301.7 2,032.8
Property held as property, plant and equipment 14 121.9 4.3 2.1 128.3
Properties held for sale 5.9 10.2 5.8 21.9
Property portfolio at 31 December 2020 1,125.7 747.7 309.6 2,183.0
13. Investment property
United Kingdom Germany France Total
£m
£m
£m
investment
properties
£m
At 1 January 2021 997.9 733.2 301.7 2,032.8
Acquisitions 17.9 161.6 – 179.5
Capital expenditure 20.6 9.4 6.0 36.0
Disposals (5.0) – (10.7) (15.7)
Net revaluation movement 3.7 24.2 0.6 28.5
Lease incentive debtor adjustments (0.6) 3.0 0.3 2.7
Exchange rate variances – (48.0) (17.9) (65.8)
Transfer to plant, property and equipment – (0.4) – (0.4)
Transfer to properties held for sale (38.1) – (6.5) (44.6)
At 31 December 2021 996.4 883.0 273.6 2,153.0
United Kingdom Germany France Total
£m
£m
£m
investment
properties
£m
At 1 January 2020 1,014.7 663.6 282.7 1,961.0
Acquisitions 98.1 17.3 3.7 119.1
Capital expenditure 7.3 6.3 4.2 17.8
Disposals – (40.4) – (40.4)
Net revaluation movement (29.1) 60.1 0.5 31.5
Lease incentive debtor adjustments 3.4 (1.7) 0.2 1.9
Exchange rate variances – 38.2 16.2 54.4
Transfer to plant, property and equipment (90.8) – – (90.8)
Transfer to properties held for sale (5.7) (10.2) (5.8) (21.7)
At 31 December 2020 997.9 733.2 301.7 2,032.8
Investment properties included leasehold properties with a carrying amount of
£48.6 million (2020: £32.8 million).
The property portfolio which comprises investment properties, properties held
for sale and the student accommodation, hotel and landholding, detailed in
note 12, was revalued at 31 December 2021 to its fair value. Valuations were
based on current prices in an active market for all properties. The property
valuations were carried out by external independent valuers as follows:
Investment property Other property Property portfolio Investment property Other property Property portfolio
2021 2021 2021 2020 2020 2020
£m
£m
£m
£m
£m
£m
Cushman and Wakefield 1,270.0 173.3 1,443.3 1,299.6 135.7 1,435.3
Jones Lang LaSalle 883.0 1.8 884.8 733.2 11.4 744.6
L Fällström AB – 3.2 3.2 – 3.1 3.1
2,153.0 178.3 2,331.3 2,032.8 150.2 2,183.0
The total fees, including the fees for this assignment, earned by each of the
valuers from the Group is less than 5% of their total revenues in each
jurisdiction.
Valuation process
The Group’s property portfolio was valued by external valuers on the basis
of fair value using information provided to them by the Group such as current
rents, terms and conditions of lease agreements, service charges and capital
expenditure. This information is derived from the Group’s property
management systems and is subject to the Group’s overall control
environment. The valuation reports are based on assumptions and valuation
models used by the external valuers. The assumptions are typically market
related, such as yields and discount rates, and are based on professional
judgement and market evidence of transactions for similar properties on
arm’s length terms. The valuations are prepared in accordance with RICS
standards.
Each region’s Head of Property, who report to the Chief Executive, verifies
all major inputs to the external valuation reports, assesses the individual
property valuation changes from the prior year valuation report and holds
discussions with the external valuers. When the process is complete, the
valuation report is recommended to the Audit Committee and the Board, which
considers it as part of its overall responsibilities.
Valuation techniques
The fair value of the property portfolio (excluding ongoing developments, see
below) has been determined using the following approaches in accordance with
International Valuation Standards:
United Kingdom an income capitalisation approach whereby contracted and market rental values
are capitalised with a market capitalisation rate
Germany a 10 year discounted cash flow model with an assumed exit thereafter
France both the market capitalisation approach and a 10 year discounted cash flow
approach
The resulting valuations are cross-checked against the equivalent yields and
the fair market values per square foot derived from comparable recent market
transactions on arm’s length terms. Other factors taken into account in the
valuations include the tenure of the property, tenancy details, and ground and
structural conditions.
Ongoing developments are valued under the ‘residual method’ of valuation,
which is the same of the 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 2021 or 2020.
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 gain of £28.5 million (2020: £31.5 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 £5.5 million (2020: deficit of £3.6 million) was included
within the revaluation reserve via other comprehensive income.
All gains and losses recorded in profit or loss in 2021 and 2020 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 2021 and 31 December 2020,
respectively.
Quantitative information about investment property fair value measurement using unobservable inputs (Level 3)
ERV Equivalent yield
Average Range Average Ra
ng
e
2021 2020 2021 2020 2021 2020 2021 2020
£ per sq. ft £ per sq. ft per sq. ft per sq. ft % % % %
UK 36.91 35.51 10.00-66.19 10.00-66.43 5.51 5.70 2.54-10.30 2.42-8.80
Germany 13.21 13.52 8.88-24.05 9.44-25.09 4.39 4.42 3.00-5.40 3.00-5.50
France 19.49 20.48 11.96-37.36 11.25-38.95 5.04 5.24 4.38-6.00 4.13-6.50
Sensitivity of measurement to variations in the significant unobservable inputs
All other factors remaining constant, an increase in ERV would increase
valuations, whilst an increase in the equivalent yield would result in a fall
in value, and vice versa. There are inter-relationships between these inputs
as they are partially determined by market conditions. An increase in the
reversionary yield may accompany an increase in ERV and would mitigate its
impact on the fair value measurement.
A decrease in the equivalent yield by 25 basis points would result in an
increase in the fair value of the Group’s investment property by £126.3
million (2020: £115.2 million) whilst a 25 basis point increase would reduce
the fair value by £125.4 million (2020: £103.7 million). A decrease in the
ERV by 5% would result in a decrease in the fair value of the Group’s
investment property by £88.8 million (2020: £75.8 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 £74.7 million (2020: £75.6 million).
Where the Group leases out its investment property under operating leases the
duration is typically three years or more. No contingent rents have been
recognised and no interest has been capitalised within capital expenditure in
either the current or comparative year.
Sustainability and climate change
The Group published its new sustainability strategy including a pathway to net
zero carbon in August 2021 and has set 2030 as its date to achieve this (see
Annual Report). During the year the Group employed technical experts to carry
out individual property energy audits to identify energy and carbon saving
opportunities. A total of 76 properties were visited from January to April
2021 across the UK, France and Germany, with new developments, properties
under refurbishment, and properties earmarked for sale all excluded from the
programme. The investment needed to deliver the audit findings amounts to an
estimated £58 million over nine years. We have integrated these energy
audits into each Asset Management Plan to enable strategic decisions about the
refurbishment, sale or full redevelopment of assets to be made.
14. Property, plant and equipment
Student Hotel Land and buildings Owner- occupied property Fixtures Total
£m
£m
£m
and fittings
£m
accommodation
£m
£m
Cost or valuation
At 1 January 2020 – 29.0 2.4 10.3 6.0 47.7
Additions – 0.1 – – 0.3 0.4
Reclassification from investment property(1) 90.8 – – – – 90.8
Revaluation – (4.1) 0.4 0.1 – (3.6)
Exchange rate variances – – 0.3 0.2 – 0.5
At 31 December 2020 90.8 25.0 3.1 10.6 6.3 135.8
Additions – – – – 0.5 0.5
Disposals (0.9) (0.9)
Reclassification from investment property(2) – – – 0.4 – 0.4
Reclassification to accumulated depreciation – (1.2) – – (2.7) (3.9)
Revaluation 3.3 1.2 0.4 0.1 – 5.0
Exchange rate variances – – (0.3) (0.1) – (0.4)
At 31 December 2021 94.1 25.0 3.2 11.0 3.2 136.5
Comprising:
At cost – – – – 3.2 3.2
At valuation 94.1 25.0 3.2 11.0 – 133.3
94.1 25.0 3.2 11.0 3.2 136.5
Accumulated depreciation and impairment
At 1 January 2020 – (1.0) – – (3.6) (4.6)
Depreciation charge – (0.2) – – (0.5) (0.7)
At 31 December 2020 – (1.2) – – (4.1) (5.3)
Depreciation charge (0.3) (0.1) – (0.1) (0.5) (1.0)
Reclassification from cost – 1.2 – – 2.7 3.9
Disposals – – – – 0.8 0.8
Revaluation 0.3 0.1 – 0.1 – 0.5
At 31 December 2021 – – – – (1.1) (1.1)
Net book value
At 31 December 2021 94.1 25.0 3.2 11.0 2.1 135.4
At 31 December 2020 90.8 23.8 3.1 10.6 2.2 130.5
1 As a result of the ending of an agreement with a third party the Group
will be managing the student accommodation internally and the services it
provides will no longer be ancillary. Therefore, the Group has decided that,
in accordance with IAS16 Plant, Property and Equipment, this property should
be reclassified from investment property to plant, property and equipment.
2 During 2021, the CLS Group opened an office in the City of Dusseldorf
within a property classified as investment property. This is the transfer of
the value of the part of this investment property that is now owner occupied
by CLS.
15. Trade and other receivables
2021 2020
£m
£m
Current
Trade receivables 8.8 7.3
Other receivables 3.9 4.3
Prepayments 2.4 8.5
Accrued income 3.0 1.9
18.1 22.0
Non-current
Other receivables(1) 7.7 8.2
25.8 30.2
1 This is the vendor loan granted on completion of the sale of First
Camp Sverige Holdings AB in March 2019. The loan is due for repayment no
later than June 2023 and can be repaid by the borrower at any time without
penalty. Given current economic uncertainty the Group has assessed the
likely repayment date to be more than 12 months from the year end.
Trade receivables are shown after deducting a provision of £2.4 million
(2020: £2.8 million) which is calculated as an expected credit loss on trade
receivables in accordance with IFRS 9 (see note 2). The movements in this
provision were as follows;
2021 2020
£m
£m
At 1 January 2.8 1.1
Debt write-offs (0.1) (0.1)
(Credit)/charge to the income statement (0.3) 1.8
At 31 December 2.4 2.8
The expected credit loss is recognised on initial recognition of a receivable
and is reassessed at each reporting period. In order to calculate the expected
credit loss, the Group uses historic default rates and applies a
forward-looking outlook. In the current reporting period, the forward-looking
outlook has considered the actual and potential impacts of Covid-19. The
historic default rates used are specific to how many days past due a
receivable is. Specific provisions are also made in excess of the expected
credit loss where information is available to suggest that a higher provision
than the expected credit loss is required. In the current reporting period, an
additional review of tenant debtors was undertaken to assess recoverability in
light of the Covid-19 pandemic.
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
2021 2020
£m
£m
Cash at bank and in hand 167.4 235.7
At 31 December 2021, cash at bank and in hand included £13.2 million (2020:
£14.5 million) which was restricted by a third-party charge.
17. Trade and other payables
2021 2020
£m
£m
Current
Trade payables 3.0 1.7
Social security and other taxes 1.9 5.8
Other payables 12.1 12.1
Deferred income 19.8 18.2
Accruals 20.8 16.5
57.6 54.3
18. Deferred tax
Liabilities Assets Total deferred
tax
£m
UK capital Fair value Other Total UK capital Fair value Other Total
allowances
adjustments to properties
£m
£m
allowances
adjustments to properties
£m
£m
£m
£m £m £m
At 1 January 2020 11.2 128.2 1.4 140.8 (0.2) (3.7) (0.8) (4.7) 136.1
Charged/(credited)
to income statement 1.1 12.2 0.4 13.7 (0.1) (2.3) (0.6) (3.0) 10.7
to OCI(1) – (0.5) – (0.5) – – – – (0.5)
Exchange rate variances – 5.4 0.1 5.5 – – – – 5.5
At 31 December 2020 12.3 145.3 1.9 159.5 (0.3) (6.0) (1.4) (7.7) 151.8
Charged/(credited)
to income statement (12.0) (32.0) 0.1 (43.9) 0.3 3.6 1.2 5.1 (38.8)
to OCI(1) – 1.0 – 1.0 – – – – 1.0
Exchange rate variances – (6.5) (0.2) (6.7) – – – – (6.7)
At 31 December 2021 0.3 107.8 1.8 109.9 – (2.4) (0.2) (2.6) 107.3
1 Other Comprehensive Income.
Deferred tax has been calculated at a weighted average across the Group of
23.3% (2020: 17.5%), and has been based on the rates applicable under
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 2021 the Group did not recognise
deferred tax assets of £7.5 million (2020: £5.7 million) in respect of
losses amounting to £43.3 million (2020: £35.3 million) which may be carried
forward and utilised against future taxable income or gains.
19. Borrowings
At 31 December 2021 At 31 December 2020
Current Non-current Total borrowings Current Non-current Total borrowings
£m
£m
£m £m £m £m
Secured bank loans 122.7 862.5 985.2 99.5 820.7 920.2
Secured notes 46.4 – 46.4 4.1 46.4 50.5
169.1 862.5 1,031.6 103.6 867.1 970.7
Issue costs of £5.9 million (2020: £6.3 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 5.5%
including margin (2020: 0.8% and 5.5%) and at floating rates of typically
LIBOR or EURIBOR plus a margin. Floating rate margins range between 1.1% and
2.3% (2020: 1.1% and 2.4%). The bank loans are secured by legal charges over
£2,194.3 million (2020: £1,904.3 million) of the Group’s properties, and
in most cases a floating charge over the remainder of the assets held in the
company which owns the property. In addition, the share capital of some
of the subsidiaries within the Group has been charged.
Secured notes
On 3 December 2013, the Group issued £80.0 million secured,
partially-amortising notes. The notes attract a fixed-rate coupon of
4.17% on the unamortised principal amount, the balance of which is repayable
in December 2022 and are secured by legal charges over £137.1 million (2020:
£139.9 million) of the Group’s properties. The fair value was determined by
the higher of the carrying principal amount and the discounted future cash
flows (adjusted by excluding the margin component of the fixed interest
rate(1)) at a discount rate derived from the market interest rate yield curve
at the date of the valuation.
1 The fixed interest rate is made up of a market interest rate
(typically a swap rate) plus a margin.
The maturity profile of the carrying amount of the Group’s borrowings was as
follows:
At 31 December 2021 Secured Secured Total
bank loans
notes
£m
£m
£m
Maturing in: 124.3 46.5 170.8
Within one year or on demand
One to two years 111.3 – 111.3
Two to five years 432.7 – 432.7
More than five years 322.7 – 322.7
991.0 46.5 1,037.5
Unamortised issue costs (5.8) (0.1) (5.9)
Borrowings 985.2 46.4 1,031.6
Due within one year (122.7) (46.4) (169.1)
Due after one year 862.5 – 862.5
At 31 December 2020 Secured Secured Total
bank loans
notes
£m
£m
£m
Maturing in: 101.2 4.2 105.4
Within one year or on demand
One to two years 116.1 46.5 162.6
Two to five years 432.0 – 432.0
More than five years 277.0 – 277.0
926.3 50.7 977.0
Unamortised issue costs (6.1) (0.2) (6.3)
Borrowings 920.2 50.5 970.7
Due within one year (99.5) (4.1) (103.6)
Due after one year 820.7 46.4 867.1
The carrying amounts of the Group’s borrowings are denominated in the
following currencies:
At 31 December 2021 At 31 December 2020
Sterling Euro Total Sterling Euro Total
£m
£m
£m
£m
£m
£m
Fixed rate financial liabilities 290.0 450.8 740.8 255.2 399.8 655.0
Floating rate financial liabilities – hedged 140.9 – 140.9 143.0 18.7 161.7
Total fixed rate 430.9 450.8 881.7 398.2 418.5 816.7
Floating rate financial liabilities – capped – 47.3 47.3 – 25.6 25.6
Floating rate financial liabilities – unhedged 94.3 14.2 108.5 119.1 15.6 134.7
Total floating rate 94.3 61.5 155.8 119.1 41.2 160.3
525.2 512.3 1,037.5 517.3 459.7 977.0
Unamortised issue costs (3.9) (2.0) (5.9) (4.0) (2.3) (6.3)
Borrowings 521.3 510.3 1,031.6 513.3 457.4 970.7
Of the Group’s total borrowings, 85% (2020: 84%) are considered fixed rate
borrowings.
The interest rate risk profile of the Group’s borrowings was as follows:
At 31 December 2021 Weighted average interest rate(1) Weighted average life
Sterling Euro Total Sterling Euro Total
%
%
%
Years
Years
Years
Fixed rate financial liabilities 2.9 1.4 2.0 8.0 3.2 5.1
Floating rate financial liabilities – hedged 3.4 – 3.4 2.2 – 2.2
3.1 1.4 2.2 6.1 3.2 4.6
Floating rate financial liabilities – capped – 1.3 1.3 – 5.1 5.1
Floating rate financial liabilities – unhedged 2.9 1.2 2.7 2.5 2.0 2.4
2.9 1.3 2.2 2.5 4.4 3.3
Gross borrowings 3.1 1.4 2.2 5.5 3.3 4.4
At 31 December 2020 Weighted average interest rate(1) Weighted average life
Sterling Euro Total Sterling Euro Total
%
%
%
Years
Years
Years
Fixed rate financial liabilities 3.0 1.4 2.1 7.4 3.9 5.3
Floating rate financial liabilities – hedged 3.3 1.9 3.1 3.2 1.0 2.9
3.2 1.5 2.3 5.9 3.7 4.8
Floating rate financial liabilities – capped – 1.5 1.5 – 4.6 4.6
Floating rate financial liabilities – unhedged 2.5 1.2 2.4 3.1 2.3 3.0
2.5 1.4 2.3 3.1 3.7 3.3
Gross borrowings 3.0 1.5 2.3 5.3 3.7 4.5
(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
2021 2020 2021 2020
£m
£m
£m
£m
Current borrowings 169.1 103.6 169.1 103.6
Non-current borrowings 862.5 867.1 866.7 880.3
1,031.6 970.7 1,035.8 983.9
The valuation methods used to measure the fair values of the Group’s fixed
rate borrowings were derived from inputs which were either observable as
prices or derived from prices (Level 2).
The fair value of non-current borrowings represents the amount at which a
financial instrument could be exchanged in an arm’s length transaction
between informed and willing parties, discounted at the prevailing market
rate, and excludes accrued interest.
The Group had the following undrawn committed facilities available at 31
December:
2021 2020
£m
£m
Floating rate:
– expiring within one year – 30.0
– expiring after one year 30.0 –
30.0 30.0
Contractual undiscounted cash outflows
The tables below show the contractual undiscounted cash outflows arising from
the Group’s gross debt.
At 31 December 2021 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 124.3 111.3 265.9 116.2 50.6 322.7 991.0
Secured notes 46.5 – – – – – 46.5
Total on maturity 170.8 111.3 265.9 116.2 50.6 322.7 1,037.5
Interest payments on borrowings(1) 21.1 18.4 14.6 9.7 7.6 30.0 101.4
Effect of interest rate swaps 1.1 – 0.1 – – – 1.2
Gross loan commitments 193.0 129.7 280.6 125.9 58.2 352.7 1,140.1
At 31 December 2020 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 101.2 116.1 73.8 258.6 99.6 277.0 926.3
Secured notes 4.2 46.5 – – – – 50.7
Total on maturity 105.4 162.6 73.8 258.6 99.6 277.0 977.0
Interest payments on borrowings(1) 19.9 17.3 14.1 11.8 7.1 24.7 94.9
Effect of interest rate swaps 2.4 2.1 1.0 0.5 – – 6.0
Gross loan commitments 127.7 182.0 88.9 270.9 106.7 301.7 1,077.9
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
2021 2021 2020 2020
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Non-current
Interest rate caps and swaps 0.4 (0.1) – (5.6)
Current
Forward foreign exchange contracts – (0.7) – –
0.4 (0.8) – (5.6)
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 2021 was
£nil (2020: £nil). The average period to maturity of these interest rate
caps was 4.2 years (2020: 4.6 years).
Interest rate swaps
The aggregate notional principal of interest rate swap contracts at 31
December 2021 was £159.4 million (2020: £161.9 million). The average period
to maturity of these interest rate swaps was 1.9 years (2020: 2.2 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 2021 and 31 December 2020 the Group had
no outstanding net 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.
2021 2021 2020 2020
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
Maturing in:
Less than 1 year – (1.1) – (2.4)
1 to 2 years – (0.1) – (2.1)
2 to 3 years 0.1 (0.1) – (1.0)
3 to 4 years – – – (0.5)
4 to 5 years – – – –
Over 5 years – – – –
0.1 (1.3) – (6.0)
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; investments in associates; 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 listed corporate bonds
and equity investments;
(d) In more illiquid conditions, non-derivative financial assets are
valued using multiple quotes obtained from market makers and from pricing
specialists. Where the spread of prices is tightly clustered the consensus
price is deemed to be fair value. Where prices become more dispersed or there
is a lack of available quoted data, further procedures are undertaken such as
evidence from the last non-forced trade; and
(e) The fair values of other non-derivative financial assets and
financial liabilities are determined in accordance with generally accepted
pricing models based on discounted cash flow analysis, using prices from
observable current market transactions and dealer quotes for similar
instruments.
Except for investments in associates and fixed rate loans, the carrying
amounts of financial assets and liabilities recorded at amortised cost
approximate to their fair value.
Capital risk management
The Group manages its capital to ensure that entities within the Group will be
able to continue as going concerns while maximising the return to stakeholders
through the optimisation of debt and equity balances. The capital structure of
the Group consists of debt, cash and cash equivalents, other investments and
equity attributable to the owners of the parent, comprising issued capital,
reserves and retained earnings. Management perform “stress tests” of the
Group’s business model to ensure that the Group’s objectives can be met
and these objectives were met during 2021 and 2020.
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 2021 2020
£m
£m
Debt 19 1,037.5 977.0
Liquid resources 16 (167.4) (235.7)
Net debt (A) 870.1 741.3
Equity (B) 1,330.7 1,270.6
Net debt to equity ratio (A/B) 65% 58%
Debt is defined as long-term and short-term borrowings before unamortised
issue costs as detailed in note 18. 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. 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 2021 2020
Income statement
Income statement
£m
£m
Cash +50 basis points 0.8 1.2
Variable borrowings (including swaps and caps) +50 basis points (1.0) (1.0)
Cash -50 basis points (0.8) (1.2)
Variable borrowings (including swaps and caps) -50 basis points 0.5 0.6
(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 2021 2021 2020 2020
Net
Profit
Net
Profit
assets
before tax
assets
before tax
£m
£m
£m
£m
1% increase in value of sterling against the Euro (6.2) (0.4) (6.1) (1.1)
1% fall in value of sterling against the Euro 6.3 0.4 6.2 1.2
(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 rental
deposits. 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 2021 the Group held £0.4 million (2020: £nil) of financial
assets at fair value through other comprehensive income or 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. 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.
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.
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 – 167.4 167.4
Derivative financial assets 0.4 – 0.4
Other assets – non-current(1) – 7.7 7.7
Other assets – current(1) – 15.7 15.7
0.4 190.8 191.2
Financial liabilities
Secured bank loans – (985.5) (985.5)
Secured notes – (46.4) (46.4)
Derivative financial liabilities (0.8) – (0.8)
Other liabilities – current(2) – (35.9) (35.9)
(0.8) (1,067.8) (1,068.6)
At 31 December 2021 (0.4) (877.0) (877.4)
Fair value through profit and loss Amortised Total
£m
cost
£m carrying
value
£m
Financial assets
Cash and cash equivalents – 235.7 235.7
Other assets – non-current(1) – 8.2 8.2
Other assets – current(1) – 13.5 13.5
– 257.4 257.4
Financial liabilities
Secured bank loans – (920.2) (920.2)
Secured notes – (50.5) (50.5)
Derivative financial liabilities (5.6) – (5.6)
Other liabilities – current(2) – (30.3) (30.3)
(5.6) (1,001.0) (1,006.6)
At 31 December 2020 (5.6) (743.6) (749.2)
1 Other assets included all amounts shown as trade and other receivables
in note 14 except prepayments of £2.4 million (2020: £8.5 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 16 except deferred income and sales and social security taxes
of £21.7 million (2020: £24.0 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
2021 2020
£m £m
Net financial assets and liabilities 877.4 749.2
Other assets – non-current 7.7 8.2
Other assets – current 15.7 13.5
Other liabilities – current (35.9) (30.3)
Cash and cash equivalents 167.4 235.7
Borrowings and derivative financial instruments 1,032.3 976.3
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 2020, 31 December 2020 407,395,760 31,382,020 438,777,780 10.2 0.8 11.0
and 31 December 2021
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 £3,394,964 representing one-third of the issued share capital of the
Company excluding treasury shares.
24. Dividend
Payment Dividend 2021 2020
£m
£m
date per share
p
Current year
2021 final dividend(1) 29 April 2022 5.35 – –
2021 interim dividend 24 September 2021 2.35 9.6 –
Distribution of current year profit 7.70 9.6 –
Prior year
2020 final dividend 29 April 2021 5.20 21.2 –
2020 interim dividend 25 September 2020 2.35 – 9.6
Distribution of prior year profit 7.55 21.2 9.6
2019 final dividend 29 April 2020 5.05 – 20.5
Dividends as reported in the Group statement of changes in equity 30.8 30.1
1 Subject to shareholder approval at the AGM on 28 April 2021.
25. 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 2021 22.7 64.0 0.5 2.0 28.1 117.3
Exchange rate variances – (32.8) – – – (32.8)
Property, plant and equipment
– net fair value gains in the year 14 – – 5.5 – – 5.5
– deferred tax thereon 18 – – (1.0) – – (1.0)
Share-based payment charge – – – (0.3) – (0.3)
At 31 December 2021 22.7 31.2 5.0 1.7 28.1 88.7
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 2020 22.7 39.8 3.6 2.2 28.1 96.4
Exchange rate variances – 24.2 – – – 24.2
Property, plant and equipment
– net fair value deficits in the year 14 – – (3.6) – – (3.6)
– deferred tax thereon 18 – – 0.5 – – 0.5
Share-based payment charge – – – (0.2) – (0.2)
At 31 December 2020 22.7 64.0 0.5 2.0 28.1 117.3
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
and owner-occupied property 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.
26. Notes to the cash flow
Cash generated from operations 2021 2020
£m
£m
Operating profit 106.8 119.3
Adjustments for:
Net movements on revaluation of investment properties (28.5) (31.5)
Net movements on revaluation of equity investments (1.0) –
Depreciation and amortisation 1.1 0.7
Profit on sale of investment property 0.1 (11.6)
Lease incentive debtor adjustments (2.7) (1.9)
Share-based payment charge (0.3) (0.2)
Changes in working capital:
Increase in receivables (3.7) (0.8)
Increase in payables 1.3 2.9
Cash generated from operations 73.1 76.9
Non-cash movements
Notes 1 January 2021 Financing cash flows Amortisation of loan Fair value adjustments Foreign exchange 31 December 2021
£m
£m
issue costs
£m
£m
£m
£m
Changes in liabilities arising from financing activities
Borrowings 19 970.7 88.1 2.0 – (29.2) 1,031.6
Interest rate swaps 20 5.6 – – (5.2) – 0.4
Forward foreign exchange contracts 20 – – – – – –
976.3 88.1 2.0 (5.2) (29.2) 1,032.0
Non-cash movements
Notes 1 January 2020 Financing cash flows Amortisation of loan Fair value adjustments Foreign exchange 31 December 2020
£m
£m
issue costs
£m
£m
£m
Changes in liabilities arising from financing activities
£m
Borrowings 19 891.7 51.7 2.1 – 25.2 970.7
Interest rate swaps 20 4.1 – – 1.6 (0.1) 5.6
Forward foreign exchange contracts 20 (0.3) 0.3 – – – –
895.5 52.0 2.1 1.6 25.1 976.3
27. Contingencies
At 31 December 2021 and 31 December 2020 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 £30.2 million at 31 December 2021 are also covered by guarantees
provided by CLS Holdings plc (£30.6 million at 31 December 2020).
28. 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 2021 2020
£m
£m
Within one year 99.9 100.5
Between one and two years 88.7 91,0
Between two and three years 73.3 77.3
Between three and four years 59.2 62.6
Between four and five years 38.9 48.6
More than five years 133.4 90.7
493.4 470.7
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 2021 the Group had contracted capital expenditure of £25.1
million (2020: £16.5 million). At the balance sheet date, the Group had not
exchanged contracts to acquire any investment properties (2020: £89.9
million). There were no authorised financial commitments which were yet to be
contracted with third parties (2020: nil).
29. Post balance sheet events
In February and March 2022, the Group exchanged on the acquisition of
properties for £20.8 million and £54.9 million, before costs.
On 1 January 2022, we converted our UK operations to a REIT. As a result of
the conversion, CLS will pay no UK corporation tax on its UK property
operations (rental income, gains on property sales and sales of companies
owning UK property) which fall within the REIT regime from the 2022 financial
year onwards.
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