CLI Cls Holdings Plc

 

 

 

 

 

 

 

PRESS RELEASE

 

Release date:                7 August 2024

Embargoed until:           07:01

 

CLS HOLDINGS PLC

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

ANNOUNCES ITS HALF-YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS TO 30 JUNE 2024

 

Delivering on our strategic priorities with positive letting progress and achievement of greater sales

 

CLS is a leading office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a c.£1.9 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the half-year ended 30 June 2024, the Group has delivered the following results:

 

	30 June 2024	31 December 2023	Change (%)
EPRA Net Tangible Assets ("NTA") per share (pence) 1	227.4	253.0	(10.1)
Statutory NAV per share (pence) 1	210.6	233.8	(9.9)
Contracted rents (£'million)	111.7	112.6	(0.8)

 

	30 June 2024	30 June 2023	Change (%)
Net rental income	58.9	55.6	5.9
(Loss) after tax (£'million)	(61.1)	(104.1)	Nm2
EPRA Earnings per share ("EPS") (pence) 1	4.8	5.2	(7.7)
Statutory EPS from continuing operations (pence) 1	(15.4)	(26.2)	Nm2
Dividend per share (pence)	2.60	2.60	-

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

² Nm = Not meaningful

 

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"In the first half of 2024, CLS made strong progress on its strategic priorities and delivered good underlying performance across the portfolio. Net rental income was up over 5% with new leases signed nearly 6% above ERV such that this positive leasing momentum resulted in a slight fall in underlying vacancy. Valuations were lower but the rate of decline slowed and we are seeing values start to bottom as the challenging conditions begin to ease.

 

"Following the investment in recent years to further improve the quality of our portfolio, we are expecting further letting progress in the second half of the year such as our first letting at Artesian. In the first half of the year, we completed on three disposals with a fourth completed this week for a total of £61 million. There will be further sales such as Spring Mews Student which is progressing well alongside ongoing refinancings to reduce net debt and loan-to-value.

 

"We see considerable opportunities within the portfolio to drive rental growth and valuation increases in all three of our geographies. The largest being Spring Gardens in Vauxhall, for which the planning process for a mixed-use development is advancing well. Overall, there are encouraging signs in the market for quality offices in the right locations."

 

OPERATIONAL HIGHLIGHTS

·      Net rental income increased by 5.9% to £58.9 million (30 June 2023: £55.6 million) as a result of higher income from indexation, stronger performance from our hotel and student operations, retention of part of the deposit from previous failed sale of Westminster Tower and higher other income, with some offset from disposals

·      Completed the disposals of: Quatour, Paris; Westminster Tower, London; and Aqueous II, Birmingham, and unconditionally exchanged Hansastrasse, Dortmund in May 2024 which completed at the start of August 2024. In aggregate, the four properties had a net initial yield of 3.3% and sold for a total of £61.0 million, which was in line with 2023 book values

·      Sales process for Spring Mews Student is progressing well and has generated significant interest with several bids received from experienced and well-funded PBSA owners

·      Completed 58 lease events (30 June 2023: 69) securing £6.4 million (30 June 2023: £7.8 million) of annual rent at 5.9% above ERV with like-for-like contracted rent increasing by 1.9%. Excluding the very large lease signed for The Brix in Essen in early 2023, the value of leases completed was 23% ahead of 2023 at £5.2 million

·      Vacancy rate increased to 13.2% (31 December 2023: 11.0%) as the remaining floors at Artesian, Prescot Street in London completed at the start of 2024. On an underlying basis, excluding recently completed space, vacancy reduced slightly to 10.8%. Post the half-year, Médecins Sans Frontières agreed a lease for one floor at Artesian

·      Rent collection remained at the same, consistently high levels with 99% of first half rent collected and 97% of third quarter contracted rent due collected to date

 

FINANCIAL HIGHLIGHTS

·      EPRA NTA down 10.1% primarily as a result of property valuation declines of 4.1% in local currencies (5.3% in Group currency), partially offset by EPRA earnings

·      Portfolio valuation down 4.1% in local currencies was overall better than the declines in the respective countries reflecting the quality of our portfolio and indexed-linked leases. Yield expansion resulted in valuation decreases of 4.4% in the UK, 3.6% in Germany and 5.0% in France in local currencies

·      Loss after tax £61.1 million (30 June 2023: £104.1 million) principally due to valuation declines on investment properties of £82.8 million (30 June 2023: £132.9 million decline)

·      EPRA EPS down 7.7% to 4.8 pence per share from higher financing costs, partly offset by increased net rental income from indexation and higher other income and lower tax. Statutory EPS of (15.4) pence per share reflected valuation declines for the portfolio

·      Interim dividend flat at 2.60 pence per share (30 June 2023: 2.60 pence per share) to be paid on 2 October 2024

·      Total accounting return of -8.0% (30 June 2023: -9.9%)

 

FINANCING

·      Weighted average cost of debt at 30 June 2024 up 20 basis points to 3.81% (31 December 2023: 3.61%) due to the impact of refinancing at higher interest rates but limited movement expected in the second half of 2024

·      Loan-to-value at 50.3% (31 December 2023: 48.5%) reflecting valuation declines in the period. Gross debt of £1,028.5 million (31 December 2023: £1,070.6 million) with cash of £68.5 million (31 December 2023: £70.6 million) and £50.0 million (31 December 2023: £50.0 million) of undrawn facilities. CLS has no interest cover or loan-to-value covenants at a Group level

·      At 30 June 2024, 78% of our debt was at fixed rates and 4% was hedged by interest rate caps (31 December 2023: 76% at fixed rates and 4% subject to interest rate caps)

·      In the first half of 2024, extended or refinanced £137.1 million of debt at 5.64% for 1.7 years. Most financing was short-term extensions in advance of sale such as Westminster Tower or completion of reletting activity

·      Discussions are well advanced for the remaining four loan refinancings for £49.1 million, excluding amortisation, due in 2024. In addition, discussions started on over three-quarters of the £372.3 million of refinancings due in 2025, although over half are not due until Q4 2025

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

·    To deliver our 2030 Net Zero Carbon Pathway, a total programme spend to date of £17 million is expected to be invested by the end of 2024. So far this year, 13 projects have been completed with another 57 projects due to finish before year end, which will save over 750 tonnes CO2e per annum. We remain on track to achieve our 2030 targets

·    We have maintained or improved our BREEAM In-use ratings for office buildings in our French and UK portfolios as we upgrade to the latest version. Over 78% of our BREEAM rated assets are now rated "good" or above demonstrating the progress we are making

·    Over half of our UK office buildings are now EPC A or B

 

DIVIDEND TIMETABLE

Further to this announcement, in which the Board declared an interim dividend of 2.60 pence per ordinary share, the Company confirmed its dividend timetable as follows:

 

Announcement Date	7 August 2024
Ex-Dividend Date	5 September 2024
Record Date	6 September 2024
Payment Date	2 October 2024

 

-ends-

 

Results presentation

 

A presentation for analysts and investors will be held in-person at Panmure Liberum, by webcast and by conference call on Wednesday 7 August 2024 at 8:30am followed by Q&A. Questions can be submitted either online via the webcast or to the operator on the conference call.

 

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

·      Webcast: The live webcast will be available here: https://secure.emincote.com/client/cls/cls008

·      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/cls008/vip_connect

 

For further information, please contact:

 

CLS Holdings plc

(LEI: 213800A357TKB2TD9U78)

www.clsholdings.com

Fredrik Widlund, Chief Executive Officer

Andrew Kirkman, Chief Financial Officer

+44 (0)20 7582 7766

 

Panmure Liberum

Jamie Richards

David Watkins

+44 (0)20 3100 2000

 

Berenberg

Matthew Armitt

Richard Bootle

+44 (0)20 3207 7800

 

Edelman Smithfield (Financial PR)

Alex Simmons +44 7970 174 353

Hastings Tarrant +44 7813 407 665

cls@edelmansmithfield.com

 

 

Forward-looking statements

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

Chief Executive's statement

 

Delivering on our strategic priorities with positive letting progress and achievement of greater sales

 

OVERVIEW

 

In the first half of 2024, CLS made strong progress on its strategic priorities and delivered good underlying performance across the portfolio. Net rental income was up over 5% with new leases signed nearly 6% above ERV such that this positive leasing momentum resulted in a slight fall in underlying vacancy. Valuations were lower but the rate of decline slowed and we are seeing values start to bottom as the challenging conditions begin to ease. Following the investment in recent years to further improve the quality of our portfolio, we are expecting further letting progress in the second half of the year such as our first letting at Artesian. In the first half of the year, we completed on three disposals with a fourth completed this week for a total of £61 million. There will be further sales such as Spring Mews Student which is progressing well alongside ongoing refinancings to reduce net debt and loan-to-value.

 

We see considerable opportunities within the portfolio to drive rental growth and valuation increases in all three of our geographies. The largest being Spring Gardens in Vauxhall, for which the planning process for a mixed-use development is advancing well. Overall, there are encouraging signs in the market for quality offices in the right locations.

 

We secured 225,009 sq. ft (20,904 sqm) of lettings and renewals and lost 221,838 sq. ft (19,681 sqm) of space from expiries in the first half of 2024. Over the same period, vacancy increased to 13.2% (31 December 2023: 11.0%) as the remaining floors at Artesian, Prescot Street in London completed at the start of 2024 and the refurbishment of three floors at Front de Parc in Lyon were finished. On an underlying basis, excluding recently completed space, vacancy reduced slightly to 10.8% (31 December 2023: 11.0%). Following the significant investments made in 2022 and 2023 to improve the quality of our portfolio, capital expenditure has reduced to our more usual level with £8.8 million invested in the first half.

 

Over the six months to 30 June 2024, EPRA NTA decreased by 10.1% to 227.4p per share (31 December 2023: 253.0p) mainly from a reduction in property valuations and negative foreign exchange movements due to sterling strengthening. Total accounting return per share for the six months was -8.0% (30 June 2023: -9.9%).

 

We completed the disposals of three properties and exchanged on one other which completed this week for a total of £61.0 million. To reduce loan-to-value, we expect to make more disposals in the second half.

 

RESULTS AND FINANCING

 

The loss after tax for the six months to 30 June 2024 was £61.1 million (30 June 2023: £104.1 million), equivalent to a statutory loss per share of 15.4p (30 June 2023: 26.2p). The decrease was as a result of: lower revaluation losses of £82.8 million (30 June 2023: £132.9 million); and higher net finance expense of £20.8 million (30 June 2023: £16.2 million), partly offset by higher net rental income of £58.9 million (30 June 2023: £55.6 million); flat expenses, other and tax of £15.0 million debit (30 June 2023: £13.4 million debit) and loss on disposal of £1.4 million (30 June 2023: £2.7 million profit). EPRA earnings per share were 4.8p (30 June 2023: 5.2p), 7.7% down on last year.

 

Shareholders' funds decreased in the six months by 9.9% to £836.9 million reflecting property valuation declines and the strengthening of sterling.

 

Our balance sheet liquidity remains strong with £68.5 million of cash and £50 million of undrawn facilities, and our loan book remains substantially at fixed rates with 82% fixed/capped (31 December 2023: 80%). Our weighted average cost of debt increased to 3.81% (31 December 2023: 3.61%) principally as a result of higher rates on our refinancings and loan extensions. Only four loans for £49.1 million remain to be refinanced in 2024. Net debt excluding leasehold liabilities was down by £40.0 million to £960.0 million (31 December 2023: £1,000.0 million) but loan-to-value rose to 50.3% (31 December 2023: 48.5%) reflecting valuation declines. Interest cover remained high at 2.0 times (30 June 2023: 2.5 times) demonstrating the Group's operating strength and ongoing ability to generate cash.

PROPERTY PORTFOLIO

 

At 30 June 2024, the value of the property portfolio, including properties held for sale, was £1,910.4 million, £152.5 million lower than six months earlier. This decrease was as a result of: net valuation decreases of £82.3 million; disposals of £53.7 million; and foreign exchange losses of £25.2 million, partly offset by investment in the portfolio through capital expenditure of £8.8 million less depreciation of £0.1 million.

 

We completed the disposals of Quatour, Paris; Westminster Tower, London and Aqueous II, Birmingham and unconditionally exchanged Hansastrasse, Dortmund in May 2024 which completed at the start of August 2024. In aggregate, the four properties had a net initial yield of 3.3% and sold for a total of £61.0 million, which was in line with 2023 book values.

 

As previously announced, to reduce our loan-to-value, we are targeting a greater amount of disposals in 2024 and in addition to the disposals already completed, the sales process for Spring Mews Student is progressing well. It has generated significant interest with several bids received from experienced and well-funded PBSA owners.

 

In the six months to 30 June 2024, the like-for-like valuation of the property portfolio (which excludes acquisitions and disposals) fell by 4.1% in local currency. There were like-for-like valuation decreases of 4.4% in the UK (2.9% excluding Spring Gardens), 3.6% in Germany and 5.0% in France. In Sterling, the valuation decrease was 5.3% reflecting the strengthening of Sterling in the period. Across the Group, like-for-like ERVs were down 1.5% but up 0.8% if New Printing House Square is excluded as the valuation assumptions changed following our decision to delay a substantial redevelopment to the end of the decade. At 30 June 2024, the EPRA 'topped up' net initial yield of the portfolio was 5.7% (31 December 2023: 5.4%), 189 basis points above the Group's average cost of debt, demonstrating the Group's continuing ability to generate cash.

 

The EPRA vacancy rate as at 30 June 2024 was 13.2% (31 December 2023: 11.0%) as the remaining floors at Artesian, Prescot Street in London completed at the start of 2024. On an underlying basis, excluding recently completed space, vacancy reduced slightly to 10.8%. Post the half-year, Médecins Sans Frontières agreed a lease for one floor at Artesian with many other discussions ongoing on the remaining space and other vacancies.

 

DIVIDENDS

 

In October 2024, the Group will pay an interim dividend for the current financial year of 2.60 pence per share, which is at the same level as the 2023 interim dividend, and in line with the revised dividend policy announced in May 2022 of 1.20x to 1.60x EPRA earnings dividend cover. The PID part of the dividend is 1.75 pence per share.

 

ENVIRONMENT, SOCIAL AND GOVERNANCE

 

In 2024, across many ESG objectives, we are maintaining good momentum. Of primary focus, we are continuing to invest in our assets and work towards the targets in our Sustainability Strategy and Net Zero Carbon (NZC) Pathway.

 

So far in 2024, we have continued with the implementation of cost-effective NZC projects across all regions. During the first half of this year, 13 carbon reduction projects were completed with a further 57 projects due to be completed by the end of 2024. These projects will save an estimated 750 tonnes CO2e per annum, keeping us on track to achieve our 2030 NZC targets. The projects include LED lighting and heating control upgrades in all regions, Solar PV in Germany and smart water metering (including automatic leak detection) across our UK portfolio. Smart metering now covers over 80% of our utility supplies. For the first six months of 2024 this resulted in a 4.3% decrease in like-for-like energy usage across the managed portfolio which is ahead of our annual 3% energy reduction target.

 

Our focus this year is to ensure major future capital spending as part of the NZC Pathway is derisked and aligned with our leasing and refurbishment plans to achieve our 2030 targets. In particular, we continue the complex task of replacing gas heating systems with electric heat pumps or similar. Feasibility studies and designs are underway for many of the c.30 buildings needing heating replacements in the UK and Germany. This should ensure that we maintain a comprehensive picture of the costs and compliance risks which will be incorporated into the long-term asset management strategies for each property.

 

We are on track to meet future regulatory requirements, such as expected higher minimum EPC standards in the UK, and the 2030 Décret Tertiaire energy efficiency targets in France. Over half of our UK office buildings are already EPC A or B. Meeting tenant demand for refurbished "net zero carbon ready" office space can also be a differentiator versus competitors.

 

Work continues on biodiversity with action plans rolling out at key UK sites to support our rewilding and biodiversity net gain targets. Finally, as part of being a responsible company and long-term investor, we have continued to support local and industry related charities, with our core focus being to support the issues of homelessness, food poverty, youth skills and environmental sustainability.

 

OUTLOOK

 

There are signs of improvements in the real estate investment market and leasing activity continues to be positive as occupiers are increasingly prepared to commit to the right locations and buildings.  The bifurcation seen in the last few years has carried on with stronger demand for centrally located and/or higher quality offices, like those core to our portfolio, while more peripheral office locations or lower quality buildings, which we are disposing of, continued to decline.

 

The investment market improved in the first half of 2024, albeit from historically low numbers, but an increase compared to the same period last year and certainly Q2 2024 was more active with buyers slowly returning to the market. Our strategic priorities remain clear and for the second half of this year we will continue to drive occupancy while executing on selective sales to reduce LTV.

 

We see considerable opportunities in the existing portfolio to drive long-term shareholder value and in the medium-term our focus is on: Bismarckstrasse, Berlin, a refurbishment and repositioning of an office building in central Berlin; The Brix, Essen, a refurbishment and ESG investment for a committed lease with the City of Essen; Debussy, Paris, an asset repositioning as serviced apartments; and progressing our mixed-use development of Citadel Place in Vauxhall.

 

As we have seen in past cycles, the UK entered the downturn earlier and is now ahead in its recovery while Germany and France are a bit further away. We remain confident that in responding to the market demands by having some of the best properties in our locations, alongside an expectation of more favourable monetary policies, CLS is well placed to capitalise on these trends and remain successful.

 

Business review

 

United Kingdom

 

Letting market is positive with expected interest rate falls to kickstart investments

 

	30 June 2024	31 December 2023
Value of properties	£839.7m	£919.9m
Percentage of Group's property interests	44%	45%
Number of properties	35	37
Number of tenants	217	221
EPRA vacancy rate	19.6%	15.8%
Lettable space	1.6m sq. ft	1.9m sq. ft
Government and large companies	74.7%	72.1%
Weighted average lease length to end	3.3 years	3.5 years
Leases subject to indexation	32.6%	32.7%

 

The value of the UK portfolio decreased by £80.2 million as a result of: two disposals for £43.9 million; and valuation decreases of £38.7 million or 4.4%, partly offset by capex of £2.5 million less depreciation of £0.1 million. The biggest valuation decrease was for our largest property, Spring Gardens, Vauxhall (also known as Citadel Place) as the lease to the NCA nears expiry in February 2026. Excluding Spring Gardens, the valuation decline was 2.9%. Encouragingly, there were valuation uplifts on our better let offices and hotel and student properties.

 

The occupational market in London and the South-East remains active. During the period, we secured our first letting at "The Coade", our 28,400 sq. ft (2,638 sqm) new office development at Vauxhall Walk, London. This was to a cyber security company, Cybanetix Limited, who moved from a nearby serviced office. We have also completed our first letting at our recently refurbished building, "Artesian", Prescot Street, London for the entire 5th floor of c.12,000 sq. ft. Similarly to our recent letting at The Coade, the tenant was drawn to the sustainability credentials of the fully electric building with an EPC A rating.

 

Overall, vacancy increased in the period from 15.8% at 31 December 2023 to 19.6% essentially due to completion of the refurbishment of the remaining three floors at Artesian. On an underlying basis, vacancy fell from 15.8% to 15.3%. Since 1 January 2024, we let or renewed leases on 54,288 sq. ft (5,044 sqm) and lost 45,699 sq. ft (4,246 sqm) from expiries. There were 31 lease extensions and new leases added £3.7 million of rent at an average of 5.6% above 31 December 2023 ERV. The most significant transactions were a lease re-gear with BAE Systems for the c.35,000 sq. ft (3,252 sqm) they occupy at Apex Tower in New Malden which extended the lease by 5 years and removed the 2025 break clause. We also secured a 5-year lease extension with Bindmans LLP at New Printing House Square for 13,864 sq. ft (1,288 sqm) and exchanged on an agreement for lease with E.S. Pipelines Limited for a 10-year lease of c.13,000 sq. ft (1,208 sqm) at Kings Court in Leatherhead. Across the portfolio, like-for-like ERVs were down 3.3% but up 1.5% if New Printing House Square is excluded as the valuation assumptions changed following our decision to delay a substantial redevelopment to the end of the decade.

 

In terms of disposals, we completed the sale of Westminster Tower to London Square Developments for £40.8 million. In addition, we completed the sale of Aqueous II in Birmingham for £3.0 million. As a result, the UK portfolio is a now based entirely in London and the South-East of England. We have received significant interest in the sale of the student accommodation at Spring Mews in Vauxhall and are anticipating completion in H2 2024.

 

There are a number of opportunities in the portfolio and we have begun the public consultation process for the development of Citadel Place, Vauxhall which is aimed at bringing forward a vibrant mixed-use scheme on the 2½ acre site on the expected departure of the NCA in February 2026.

 

In terms of the UK property market, commercial investment volumes were c.£20.8 billion in the first half of 2024 an increase of 4.5% on same period in 2023 (c.£19.9 billion).

 

Leasing take-up in London in the first half of 2024 was 4.3 million sq. ft, which is roughly flat compared to the same period last year while take-up across the Southeast office market reached 1.3 million sq. ft, which was 45% above H1 2023 and in line with the five-year average. Market vacancy in London is now 9.2% and 12.6% in the South-East.

 

Germany

 

Economic recovery has been slow but the property investment market is starting to revive

 

	30 June 2024	31 December 2023
Value of properties	£839.0m	£885.5m
Percentage of Group's property interests	44%	43%
Number of properties	32	32
Number of tenants	370	368
EPRA vacancy rate	7.2%	6.8%
Lettable space	3.5m sq. ft	3.8m sq. ft
Government and large companies	58.2%	55.6%
Weighted average lease length to end	4.7 years	4.9 years
Leases subject to indexation	57.2%	65.9%

 

The value of the German portfolio decreased by £46.5 million as a result of: a valuation decrease of £31.2 million or 3.6% in local currency; and foreign exchange loss of £19.8 million, partly offset by capex of £4.5 million. The valuation loss was as a result of yield expansion as ERVs remained stable across the portfolio.

 

Vacancy increased slightly to 7.2% compared with 6.8% at 31 December 2023 due to lease expiries. Since 1 January 2024, 120,972 sq. ft (11,239 sqm) was let or renewed but 135,782 sq. ft (12,615 sqm) of space expired. 17 lease extensions and new leases were signed adding £1.7 million of rent at an average of 7.6% above 31 December 2023 ERV. The most significant transaction was at Office Connect, Cologne with a new 6-year lease with Eviden, a technology transformation leader, for 15,220 sq. ft (1,414 sqm). Other notable transactions were a new 10-year lease at Fleethaus, Hamburg with the German Red Cross for 13,197 sq. ft (1,226 sqm) and a new 6-year lease at Flexion, Berlin with Pulsation IT, a leading software company, for 9,139 sq. ft (849 sqm). Across the portfolio, like-for-like ERVs grew by 0.5%. Vacancy in the second half of the year is expected to increase following the expiry of a large lease at our Gotic Haus property in Dortmund although we are in active discussions with potential new tenants.

 

In May 2024 we exchanged on the £7.7 million sale of Hansastrasse, Dortmund, a 42,902 sq. ft (3,986 sqm) office building originally constructed 1957 and completion took place post the half-year in early August 2024.

 

In terms of larger scale projects, we are about to commence our €20 million refurbishment at Kruppstrasse ("The Brix") in Essen. This will substantially improve the building where we have secured a 30-year lease with the City of Essen.

 

The outlook for the second half of the year is influenced by the delayed German economic recovery, which is impacting demand and sentiment as larger companies are still cautious to commit to new space while Government and Mittelstand companies are more active. However, there has been an improvement in sentiment in the investment markets with more sales as investors are becoming increasingly confident in both the current and future market environment. A moderate upward trend is evident, which we expect to accelerate somewhat in the second half of the year.

 

The German office markets recorded a take-up of 1.26 million sqm in the first half of 2024, similar to the same period in 2024 of 1.23 million sqm. Prime rents are increasing given that new and newly built offices are in short supply in the CBDs.

 

The commercial property market showed signs of growth compared with 2023. For the first half of 2024, investment volume totalled c.€11.9 billion, which is an encouraging increase compared with the same period in 2023 when c.€9.9 billion was invested.

 

Market vacancy rates in the Top 7 office markets is now 6.1%, ranging from 3.5% in Cologne to 10.0% in Dusseldorf.

France

 

Letting market remains resilient for small to medium sized floorplates

 

	30 June 2024	31 December 2023
Value of properties	£231.7m	£257.5m
Percentage of Group's property interests	12%	12%
Number of properties	16	17
Number of tenants	148	155
EPRA vacancy rate	7.1%	5.6%
Lettable space	0.7m sq. ft	0.8m sq. ft
Government and major corporates	54.4%	49.0%
Weighted average lease length to end	5.3 years	5.2 years
Leases subject to indexation	100.0%	100.0%

 

The value of the French portfolio decreased by £25.8 million as a result of: a valuation decrease of £12.4 million or 5.0% in local currency; disposals of £9.8 million; and a foreign exchange loss of £5.4 million, partly offset by capex of £1.8 million. The valuation loss was as a result of yield expansion.

 

Vacancy increased to 7.1% from 5.6% at 31 December 2023 mainly due to the completion of refurbishments. During the period, 49,749 sq. ft (4,622 sqm) was let or renewed but 30,359 sq. ft (2,820 sqm) of space expired. Since 1 January 2024, 10 lease extensions and new leases were signed adding £1.1 million of rent at an average of 4.6% above 31 December 2023 ERV. The most significant transaction was a lease extension at Cap G in Paris for 11,000 sq. ft (1,022 sqm) to IT company Pixid on a 3/6/9 year lease. We also let 8,393 sq. ft (780 sqm) of our newly refurbished space in Park Avenue, Lyon to Smile IT on a 3/6/9 year lease. Across the portfolio, like-for-like ERVs fell by 0.1%.

 

In May 2024, we completed the disposal of Quatuor, located in the Montrouge area in Paris. The 2,500 sqm office building was originally acquired for €4.6m in 2002 and is located in front of the future Grand Paris metro station. The City of Montrouge purchased the property for €11.3 million, which was in-line with the latest valuation.

 

During the first half of the year, we launched the redevelopment of two properties. The first of these is the 45,187 sq. ft (4,198 sqm) office building Debussy in the western crescent of Paris to be converted into serviced apartments. This will be let to Edgar Suites, a national operator in serviced apartments by way of a 12-year lease. The conversion will be executed by Nexity via a fixed-price redevelopment contract for c.€12 million. Completion is targeted for the end of 2026.

 

The second major project is at Petits Hotels, in Central Paris close to Gare du Nord. This is a refurbishment of one of the buildings including the facade, windows, roof, terraces and garden. The budgeted works of €1.7 million will improve the sustainability credentials of the building and are expected to complete in H1 2025.

 

Investment volume in commercial real estate over the first half of 2024 reached €5.8 billion, down 4.9% compared to first half 2023 but is still expected to reach €10 billion by the end of 2024. This is partly because yields appear to be stabilising while central Paris shows healthy rental growth.

 

Office take-up in the first half of 2024 in the Greater Paris Region reached 853 000 sqm, down 5% compared with the same period last year. Immediate office supply in the Greater Paris Region at 30 June 2024 was estimated to be 4.9 million sqm, up 11% compared with the same period last year. Market vacancy in Paris is at 9%.

 

Whilst the demand is relatively stable, supply is likely to be the key issue in France for the next 12-18 months, although, the stronger demand for smaller floorplates bodes well for our French portfolio.

 

Key data

 

Valuation Data

 

		H1 Valuation Movement
	Market Value of Property (£m)	Underlying (£m)	Foreign Exchange (£m)	EPRA Net Initial Yield	EPRA Topped-up Net Initial Yield	Reversion	Over-rented	Equivalent Yield
UK	695.8	(48.8)	-	5.6%	6.5%	3.7%	7.7%	7.0%
Germany	837.4	(31.2)	(19.7)	5.1%	5.2%	5.3%	10.8%	5.3%
France	230.0	(12.4)	(5.4)	5.0%	5.4%	4.5%	4.8%	6.1%
Total Portfolio	1,763.2	(92.4)	(25.1)	5.3%	5.7%	4.6%	8.7%	6.0%

 

Rental Data

 

	Rental Income for the Period (£m)	Net Rental Income for the Period (£m)	Lettable Space (sqm)	Contracted Rent at 30 June 2024 (£m)	ERV at 30 June 2024 (£m)	Contracted Rent Subject to Indexation (%)	EPRA Vacancy rate at 30 June 2024
UK	23.3	25.8	172,837	50.2	59.8	32.6	19.6%
Germany	21.3	20.2	346,480	47.6	48.6	57.2	7.2%
France	6.5	6.3	68,213	13.9	14.8	100.0	7.1%
Total Portfolio	51.1	52.3	587,530	111.7	123.2	51.4	13.2%

 

Lease Data

 

	Average Lease Length		Contracted Rent of Lease Expiring In:				ERV of Lease Expiring In:
	To Break (Years)	To Expiry (Years)	Year 1 (£m)	Year 2 (£m)	Years 3 - 5 (£m)	After 5 Years (£m)	Year 1 (£m)	Year 2 (£m)	Years 3 - 5 (£m)	After 5 Years (£m)
UK	2.5	3.3	12.7	15.6	13.2	8.7	12.6	14.0	13.2	8.4
Germany	4.7	4.7	10.0	6.1	16.0	15.5	10.4	5.7	15.4	20.8
France	2.4	5.3	0.5	1.2	3.3	8.9	0.6	1.1	3.4	8.6
Total Portfolio	3.4	4.2	23.2	22.9	32.5	33.1	23.6	20.8	32.0	37.8

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

 

 

Tenant Industries by Contracted Rent   Government 22.2% Information Technology 13.9% Commercial and Professional 13.0% Communication Services 8.0% Consumer Discretionary 7.9% Health Care 6.9% Industrials 6.8% Financials 6.7% Other 5.8% Consumer Staples 4.6% Real Estate 4.2%

Property use by rent Offices 86.5% Student 5.9% Hotel 4.8% Food/Retail 2.8%

 

 

Our investor proposition

 

Strong and consistent long-term shareholder returns

 

Set out below are the key tenets of our investment proposition. A fuller description can be found on the inside front cover and page 1 of CLS' 2023 Annual Report and Accounts:

 

Clear strategy	Active management
·      Diversified approach ·      The best offices in our locations ·      Selected development schemes	·      Experienced in-house capabilities ·      Secure rents and high occupancy ·      Interest rate management

 

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

 

DIVIDEND POLICY

 

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

 

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

 

ANALYST COVERAGE

 

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

 

2024 INVESTOR ENGAGEMENT

 

Events which have taken place	Events which are due to take place
March 2024 Annual Results presentation Annual Results investor calls and meetings   April 2024 Annual General Meeting	August 2024 Half-Year Results presentation   August/September 2024 Half-Year Results investor calls and meetings   November 2024 Trading Update

 

 

Financial review

 

RESULTS FOR THE PERIOD

 

HEADLINES

 

The loss after tax of £61.1 million (30 June 2023: £104.1 million) generated a basic statutory loss per share of 15.4 pence (30 June 2023: 26.2 pence). EPRA earnings per share, which exclude valuation movements, were 4.8 pence (30 June 2023: 5.2 pence), down 7.7% year on year. This was due to: higher net rental income more than offset by higher finance expenses from higher interest rates on our floating rate debt and recently refinanced loans. There was also a positive benefit from lower tax given lower profits and a review of inter-company interest charges. Gross property assets at 30 June 2024, including those in property, plant and equipment and those held for sale, decreased to £1,910.4 million (31 December 2023: £2,062.9 million) as a result of: a revaluation decrease of £82.3 million; disposals of £53.7 million and foreign exchange reductions of £25.2 million; partly offset by capital expenditure of £8.8 million less depreciation of £0.1 million. Net assets per share fell by 9.9% to 210.6 pence (31 December 2023: 233.8 pence) and EPRA NTA per share fell by 10.1% to 227.4 pence (31 December 2023: 253.0 pence). Total accounting return per share including dividends paid in the period was -8.0% (30 June 2023: -9.9%).

 

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

 

STATEMENT OF COMPREHENSIVE INCOME

 

Net rental income for the six months to 30 June 2024 of £58.9 million (30 June 2023: £55.6 million) was higher than last year by 5.9% as a result of higher income from indexation, stronger performance of our hotel and student operations, retention of part of the deposit from previous failed sale of Westminster Tower and higher other income, with some offset from disposals. Rent collection remained at the same, consistently high levels with 99% of first half rent collected and 97% of third quarter contracted rent due collected to date.

 

Operating loss of £43.9 million (30 June 2023: £90.5 million) was due primarily to the 4.1% revaluation decline in local currency equivalent to a loss of £82.8 million (30 June 2023: £132.9 million) which was only partially offset by higher operating profit before revaluation and disposals of £40.8 million (30 June 2023: £39.7 million) and loss on disposal of £1.4 million (30 June 2023: £2.7 million profit).

 

Net interest expense of £21.5 million (30 June 2023: £15.5 million), which was up £6.0 million, is comprised of three elements. Interest costs of £21.3 million (30 June 2023: £17.2 million) were up year-on-year as a result of higher interest rates on CLS' floating rate debt and recent refinancings. The movement in the fair value of derivatives was £0.7 million negative (30 June 2023: £0.7 million positive) as these are closer to expiry. Interest income was lower at £0.5 million (30 June 2023: £1.0 million) due to lower average cash balances.

 

The tax credit of £4.6 million (30 June 2023: tax credit £2.3 million) represented an effective rate of 7.0% (30 June 2023: 2.2%). The overall tax credit is primarily attributable to the release of deferred tax liabilities in France and Germany resulting from the reduction in property values.

 

EPRA NET TANGIBLE ASSETS PER SHARE

 

EPRA NTA per share fell from 253.0p to 227.4p in the six months to 30 June 2024, a decrease of 25.6p per share or 10.1%. On a per share basis, the decrease comprised the decrease in property values of 20.7p, foreign exchange losses of 3.1p, other negative movements of 1.2p and the final 2023 dividend of 5.35p, partly offset by EPRA earnings of 4.8p.

 

 

CASH FLOW, NET DEBT AND FINANCING

 

In the six months to 30 June 2024, gross borrowings decreased by £42.1 million to £1,028.5 million (31 December 2023: £1,070.6 million), principally due to a greater amount of loans being repaid due to disposals compared to loans being drawn.

 

As at 30 June 2024, the Group had cash of £68.5 million (31 December 2023: £70.6 million) and £50.0 million (31 December 2023: £50.0 million) of undrawn facilities. The cash balance decreased by £2.1 million from 31 December 2023 given net investment in our portfolio. During the period, we invested £9.4 million of capital expenditure including property, plant and equipment in our properties which was funded by net receipts from disposals of £30.9 million. Net proceeds from new financing were £26.3 million and £56.8 million of loans were repaid. Net cash flow from operating activities was £19.9 million (30 June 2023: £23.5 million) which was used to pay the 2023 final dividend of £20.3 million (net of withholding tax which was paid in July).

 

Net debt excluding leasehold liabilities at the half-year reduced to £960.0 million (31 December 2023: £1,000.0 million) but the Group's loan-to-value increased to 50.3% (31 December 2023: 48.5%) due to the valuation declines. LTV will reduce below 50% when the remaining £20.4 million Westminster Tower proceeds are received in September. We are forecasting to achieve c.45% LTV at year-end from further sales with more reduction targeted in future. CLS has no loan-to-value or interest cover covenants at a Group level.

 

The weighted average cost of debt increased to 3.81% (31 December 2023: 3.61%) principally as a result of higher rates on refinancings and loan extensions more than offsetting the reduction from loan repayments. Based on the current swap rate and expected refinancings and sales, we would expect the rate to stay flat or slightly decrease in the second half of 2024. Weighted average debt maturity was 3.3 years (31 December 2023: 3.3 years).

 

The proportions of fixed, capped and unhedged debt were 78%, 4% and 18% (31 December 2023: 76%, 4%, 20%) respectively. The proportion of fixed rate debt has increased in the first half of the year due to £21.8 million of loans at floating rate having been repaid due to disposals. The 4% of total debt subject to interest rate caps are all for French and German loans which are at a range of 0.5% to 1.5%, being on average 2.61% below the average 3-month EURIBOR of 3.81%.

 

CLS has 43 different loans secured by individual, or small portfolios of properties. The loans vary in terms of the number of covenants with the three main covenants being ratios relating to loan-to-value, interest cover and debt service cover. However, some loans only have one or two of these covenants, some have other covenants and some have none. The loans also vary in terms of the level of these covenants and the headroom to these covenants.

 

On average across the 43 loans, CLS has between 12% and 28% headroom for these three main covenants. In the event of an actual or forecast covenant breach, all of the loans have equity cure mechanisms to repair the breach which allow CLS to either repay part of the loan or deposit cash for the period the loan is in breach, after which the cash can be released.

 

In the first half of 2024, we extended or refinanced £137.1 million of debt at 5.64% for 1.7 years. Most financing was short-term extensions in advance of sale, such as Westminster Tower, or completion of reletting activity. Discussions are well advanced for the remaining four loan refinancings for £49.1 million, excluding amortisation, due in 2024.

 

CLS has a higher proportion of loans expiring in 2025 comprising 12 loans (four in each country) totalling £372.3 million. Discussions have already started on over three-quarters of the £372.3 million of refinancings, even though the majority are not due until Q4 2025.

 

PRINCIPAL RISKS AND UNCERTAINTIES

A detailed explanation of the principal risks and uncertainties affecting the Group, and the steps it takes to mitigate these risks, can be found on pages 48 to 53 of the 2023 Annual Report and Accounts, which is available at www.clsholdings.com/investors.

 

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

 

The Board has reviewed the risk status of each of the six risk categories, particularly with regard to the ongoing economic and geopolitical risks including higher but peaked interest rates given moderating inflation, election uncertainty and conflicts in Ukraine and the Middle East. The overall risk landscape remains heightened but with an increased likelihood of risk levels moderating in future although not yet sufficient to alter any of the risk ratings. Both property and financing risks remain as high risks and we continue to monitor the risks focused around; vacancy; disposals and loan-to-value; and refinancings, and mitigations vigilantly.

 

Work continues on implementing software to document, and help test, risks and internal controls with ongoing progress being made. In the second half of the year, end to end "walkthrough" tests of a number of processes and the associated controls will be performed as part of our ongoing controls testing programme.

 

Principal risk	Status at year end	Change since year end	Commentary
Property	High	No change	The office market remains bifurcated in two ways. The occupational market remains healthy with tenants seeking out, and paying more for, higher quality offices. CLS is responding by investing in its properties to provide the best offices in our locations. By contrast, the investment market is sluggish given higher interest rates, valuation uncertainty and lingering concerns about future office demand.
Sustainability	Medium	No change	We remain committed to, and are on track to deliver our 2030 Net Zero Carbon Pathway, which is a key part of our Sustainability (and wider ESG) Strategy. CLS believes that providing sustainable buildings, not only accords with regulatory demands but also meets changing office trends.
Business interruption	Low	No change	We prioritise investing in our IT and other equipment to give our employees the tools to perform their roles effectively, whilst taking on board comments from the staff survey. Ongoing penetration testing and other work has resulted in continued Cyber Essential Plus standard certification.
Financing	High	No change	Financing risk remains high despite inflation reducing and higher but peaked interest rates. This is reflected in higher interest costs for CLS with some increases in bank margins and lowering of Loan-To-Value ratios. Through ongoing selected disposals CLS is seeking to reduce Group LTV. In addition, CLS continues to maintain banking relationships, monitor covenants and engage early with upcoming refinancings. CLS has significant protection with c.80% of debt fixed and good covenant headroom. CLS also continues to monitor its compliance with the UK REIT rules.
Political and economic	Medium	No change	As noted, economic conditions remain challenging with higher interest costs and property valuation declines, and slower growth. These have been mitigated through CLS' high levels of inflation-indexed rent and higher replacement values for existing buildings. Geopolitical risks are heightened but CLS' diversified business model in Europe's three largest economies provides mitigation.
People	Medium	No change	CLS' staff turnover has reduced in 2024, partly in response to a loosening of the labour market. A new staff survey has recently been conducted which highlighted that the culture and our people were the best parts about CLS. However, to respond to staff needs and market trends more work is needed to improve communication, training and diversity.

 

GOING CONCERN

 

The Directors' assessment of going concern uses the same methodology as for the preparation and validation of the year end going concern (and viability) statement(s) (see pages 54 to 57 of the 2023 Annual Report and Accounts). This assessment uses forecasts that have been adjusted for the impacts of the current economic, property and financing markets. A more detailed description of the approach is set out in note 2 to these condensed Group financial statements.

 

The Group is reliant in the Base case and Severe but plausible case upon its ability to both refinance the debt maturing and to complete a number of investment property disposals in the going concern period in more challenging market conditions.

 

Whilst the Directors remain confident that a combination of sufficient refinancings and property disposals will be achieved, the timing and value of both the planned refinancing of facilities falling due within the going concern review period, and planned property disposals, is outside of management's control and consequently a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern.

 

Notwithstanding this material uncertainty on the going concern assumption, given our track-record and reputation, and the progress made since 31 December 2023 in terms of refinancing, the Directors are confident that the debt falling due for repayment in the going concern period will be refinanced or settled in line with their plans for the reasons set out above, rather than requiring repayment on maturity, or will be extinguished as part of property disposals in the period. Therefore, the Directors continue to adopt the going concern basis in preparing these Group financial statements.

 

The financial statements do not contain the adjustments that would result if the Group were unable to continue as a going concern.

 

RESPONSIBILITY STATEMENT

 

We confirm that to the best of our knowledge:

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

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

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

 

On behalf of the Board

 

 

 

Fredrik Widlund                       Andrew Kirkman

Chief Executive Officer              Chief Financial Officer

6 August 2024

 

Financial statements

 

Condensed Group income statement

 for the six months ended 30 June 2024

 

		Six months ended	Six months ended	Year ended
		30 June 2024	30 June 2024	31 December 2024
		£m	£m	£m
Notes		(unaudited)	(unaudited)	(audited)
Revenue	3	77.8	72.3	148.7
Costs	3	(18.9)	(16.7)	(35.7)
Net rental income		58.9	55.6	113.0
Administration expenses		(9.0)	(8.8)	(18.2)
Other property expenses		(9.1)	(7.1)	(15.6)
Operating profit before revaluation and disposals		40.8	39.7	79.2
Net revaluation movements on investment property	9, 11	(82.8)	(132.9)	(302.7)
Net revaluation movements on equity investments		(0.4)	-	(1.3)
(Loss)/profit on sale of investment property		(1.4)	2.7	1.4
Loss on sale of equity investments		(0.1)	-	-
Operating loss		(43.9)	(90.5)	(223.4)
Finance income	5	0.5	1.7	1.6
Finance costs	6	(22.0)	(17.2)	(41.3)
Foreign exchange loss		(0.3)	(0.4)	(0.3)
Loss before tax		(65.7)	(106.4)	(263.4)
Taxation	7	4.6	2.3	13.6
Loss for the period attributable to equity shareholders		(61.1)	(104.1)	(249.8)
			p
Basic and diluted earnings per share	14	(15.4p)	(26.2)p	(62.9)p