TIDMCLI
RNS Number : 2713S
CLS Holdings PLC
08 March 2023
CLS HOLDINGS PLC
("CLS", the "Company" or the "Group")
ANNOUNCES ITS UNAUDITED ANNUAL RESULTS
FOR THE YEARED 31 DECEMBER 2022
The best offices in our locations
CLS is a leading FTSE250 office space specialist and a
supportive, progressive and sustainably focused commercial
landlord, with a c.GBP2.35 billion portfolio in the UK, Germany and
France, offering geographical diversification with local presence
and knowledge. For the year ended 31 December 2022, the Group has
delivered the following results:
UNAUDITED 31 December Change (%)
2022 2021
------------------------------------------------------- ---------- ---------- ----------
EPRA Net Tangible Assets ("NTA") per share (pence) (1) 329.6 350.5 (6.0)
Statutory NAV per share (pence)(1) 307.3 326.6 (5.9)
Contracted rents (GBP'million) 110.2 107.6 2.4
(Loss)/profit before tax (GBP'million) (82.0) 91.5 NM (2)
EPRA Earnings per share ("EPS") (pence) (1) 11.6 11.3 2.7
Statutory EPS from continuing operations (pence) (1) (20.2) 29.3 NM (2)
Dividend per share (pence) 7.95 7.70 3.2
Notes: (1) A reconciliation of statutory to alternative
performance measures is set out in Note 6 to the financial
statements (2) Not Meaningful
Fredrik Widlund, Chief Executive Officer of CLS, commented:
"Against the backdrop of a challenging economy and uncertain
property market, CLS has delivered solid and resilient results
ahead of market expectations with lower relative valuation and NTA
declines, reflecting the quality and locations of our properties
and higher EPRA earnings.
"Over the last year, we have continued to invest in our
properties to make them sustainable and attractive to tenants and
ensure that we have the best offices in our locations. With the
economic outlook and monetary policy conditions across our markets
remaining uncertain, our focus in 2023 is to optimise our planned
refinancings and leverage our in-house asset management
capabilities to reduce vacancy rates, which will position the
company well for the future."
FINANCIAL HIGHLIGHTS
-- EPRA NTA down 6.0% primarily as a result of property
valuation declines of 2.6% in Group currency (5.3% in local
currencies), partially offset by increased EPRA earnings
-- Portfolio valuation down 5.3%% in local currencies, better
than the declines in the market reflecting the quality of our
portfolio and indexed-linked leases. Yield expansion resulted in
valuation decreases of 6.7% in the UK, 3.5% in Germany and 5.3% in
France
-- Loss before tax of GBP82.0 million (2021: GBP91.5 million
profit) principally due to valuation declines on investment
properties of GBP136.5 million (2021: GBP28.5 million gain)
-- EPRA EPS up 2.7% to 11.6 pence per share from higher profits
from our hotel and student operations and tax savings following
conversion to a REIT in the UK, partly offset by lower net rental
income from our offices given higher vacancy. Statutory EPS of
(20.2) pence per share reflecting the valuation declines
-- A proposed final dividend maintained at 5.35 pence per share
to be paid on 2 May 2023, resulting in a total 2022 dividend of
7.95 pence per share, an increase of 3.2% (2021: 7.70 pence per
share)
-- Total accounting return for the year of -3.7% (2021: 3.7%)
-- We anticipate increased financing costs in 2023 given higher
interest rates but are focussed on reducing vacancy from our
refurbished schemes and other vacant space
OPERATIONAL HIGHLIGHTS
-- Net rental income stable at GBP107.8 million (2021: GBP108.0
million) due to disposals, redevelopment and leasing expiries
resulting in higher vacancy offset by contributions from net
acquisitions, higher student and hotel income, and the benefits of
indexation
-- Properties with contractual rental indexation increased to
55.5% (2021: 50.1%) of the Group portfolio
-- Acquired two properties in Germany for GBP76.9 million, which
completed in April and July respectively. These properties were
bought for their asset management opportunities at a combined net
initial yield of 5.1% and a reversionary yield of 5.6%
-- Disposed of six properties for GBP57.9 million (5.4% net
initial yield) at 2.5% above 2021 book values
-- Completed 106 lease events securing GBP8.2 million of annual
rent at 4.8% above 31 December 2021 estimated rental values
-- Vacancy rate increased to 7.4% (2021: 5.8%) with most of this
increase due to the completion of developments currently being
marketed to prospective tenants as well as some net lease
expiries
-- Rent collection has continued to remain strong with 99% collected (2021: 99%)
Financing
-- Weighted average cost of debt at 31 December 2022 up 47 basis
points to 2.69% (2021: 2.22%) resulting from the impact of central
bank interest rate increases
-- Loan-to-value at 42.2% (2021: 37.1%) reflecting valuation
declines and net acquisitions during the year. Gross debt of
GBP1,105.9 million (2021: GBP1,031.6 million) with cash of GBP113.9
million (2021: GBP167.4 million) and GBP50 million (2021: GBP50
million) of undrawn facilities
-- Weighted average debt maturity of 3.8 years (2021: 4.4 years)
-- Financed or refinanced GBP229.9 million of debt in 2022 at an
average of 3.24%, including GBP58.4 million fixed at 3.17%, and
repaid GBP166.6 million of debt
-- The loan portfolio as at 31 December 2022 had 72% at fixed
rates and 4% subject to interest rate caps (31 December 2021: 85%
fixed and 5% caps)
-- Well advanced with 2023 and 2024 refinancing activity with
GBP237 million out of GBP505 million executed or with credit
approval secured, leaving GBP94 million to refinance in 2023 which
we are confident will be completed successfully
ENVIRONMENTAL, SOCIAL AND Governance
-- GRESB score remained good at 85 (2021: 85) and 4 green stars,
with 86% (2021: 83%) of the managed portfolio achieving at least a
'Good' BREEAM In-Use rating
-- 99.9% (2021: 92%) of Group electricity is now carbon-free,
our rooftop solar PV energy output increased by 51% by installing a
further 347kWp of new solar arrays in the UK and 43 electric
vehicle charging points installed at 12 of our buildings in the
UK
-- Progress continues with implementing our ambitious, but
achievable, long-term sustainability targets including our 2030 Net
Zero Carbon Pathway at a total cost of GBP65 million. We completed
57 carbon reduction projects this year with spend on track with the
plan which will save an estimated 612 tonnes CO2e per annum and we
were in-line with our Scope 1 & 2 target for 2022
-- We are fully compliant with 2023 minimum EPC regulations in
the UK and reduced our EPC D rated buildings by nearly 20% through
a combination of refurbishments and disposals
-- Continued action on social challenges including 562 employee
volunteering hours given to community and charitable organisations,
new diversity, equity & inclusion plan created and committed to
Living Wage Foundation accreditation in the UK
Dividend Timetable
Further to this announcement, in which the Board recommended a
final dividend of 5.35 pence per ordinary share, the Company
confirmed its dividend timetable as follows:
Announcement 8 March 2023
date
Ex-Dividend 23 March
date 2023
-------------
Record date 24 March
2023
-------------
Payment date 2 May 2023
-------------
- ends -
Results presentation
A presentation for analysts and investors will be held in-person
at Liberum Capital, by webcast and by conference call on Wednesday
8 March 2023 at 8:30am followed by Q&A. Questions can be
submitted either online via the webcast or to the operator on the
conference call.
-- Liberum Capital: Ropemaker Place, 25 Ropemaker Street, London EC2Y 9L
-- Webcast: The live webcast will be available here:
https://secure.emincote.com/client/cls/cls006
-- Conference call: In order to dial in to the presentation via
phone, please register at the following link and you will be
provided with dial-in details and a unique access code
https://secure.emincote.com/client/cls/cls006/vip_connect
For further information, please contact:
CLS Holdings plc
(LEI: 213800A357TKB2TD9U78)
www.clsholdings.com
Fredrik Widlund, Chief Executive Officer
Andrew Kirkman, Chief Financial Officer
+44 (0)20 7582 7766
Liberum Capital
Richard Crawley
Jamie Richards
+44 (0)20 3100 2222
Panmure Gordon
Hugh Rich
+44 (0)20 7886 2733
Berenberg
Matthew Armitt
Richard Bootle
+44 (0)20 3207 7800
Edelman Smithfield (Financial PR)
Alex Simmons +44 7970 174353
Hastings Tarrant +44 7813 407665
Forward-looking statements
This document may contain certain 'forward-looking statements'.
By their nature, forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances.
Actual outcomes and results may differ materially from those
expressed or implied by such forward-looking statements. Any
forward-looking statements made by or on behalf of CLS speak only
as of the date they are made and no representation or warranty is
given in relation to them, including as to their completeness or
accuracy or the basis on which they were prepared. Except as
required by its legal or statutory obligations, the Company does
not undertake to update forward-looking statements to reflect any
changes in its expectations with regard thereto or any changes in
events, conditions or circumstances on which any such statement is
based. Information contained in this document relating to the
Company or its share price, or the yield on its shares, should not
be relied upon as an indicator of future performance.
Chairman's statement
" One of CLS' big attractions and differentiators is its open,
positive culture, reflected in our Pan-European presence, which
ensures the continued success of the Company"
Dear Shareholder
In 2022 the evolution of offices continued with the bifurcation
of the market becoming more pronounced between high quality,
attractive properties and those of a more secondary nature.
Responding to these trends, CLS is continuing to invest significant
amounts to ensure that we supply the best offices in our locations
to meet the changing demands of tenants. There is much more on this
theme throughout this report.
Performance and our property portfolio
In 2022, CLS delivered a resilient and solid performance with
relative valuation outperformance compared to the market and higher
earnings from a solid letting performance, improved operations from
our one student and hotel operation and the benefits from the UK
REIT conversion. Our balance sheet remains well capitalised and our
diversified but focused approach continues to deliver.
EPRA NTA per share decreased by 6.0% to 329.6 pence per share
(2021: 350.5 pence per share) and total accounting return,
including the dividends paid in the year, was -3.7% (2021: 3.7%).
The value of our property portfolio rose by 0.9% to GBP2.4 billion
(2021: GBP2.3 billion) with the property portfolio now split 46% in
the UK, 42% in Germany and 12% in France. The movement in the
property portfolio was as a result of: GBP58.3 million capital
expenditure; GBP26.9 million of net acquisitions (GBP83.4 million
acquisitions less GBP56.5 million disposals); and an increase of
GBP63.4 million as a result of the weakening of sterling by 5.0%,
offset by GBP127.0 million from net valuation decreases of 5.3% in
local currencies.
"Since CLS was established 30 years ago in 1992, the Company has
successfully weathered several difficult periods. This current
period is no different and our resilient strategy, quality offices
and dedicated team are continuing to deliver, which leaves CLS well
placed for future growth."
Environmental, Social and Governance
In a year that has again seen extreme events linked to climate
change, it is even more important for companies like ours to lead
the transition to a carbon-free future. As highlighted in this
report, I am pleased that we are seeing positive results from
implementing our Net Zero Carbon Pathway underlining our aim to
reduce carbon emissions and energy intensity, whilst providing
modern, sustainable office space that meets the needs of our
tenants including reducing the overall cost of office occupation.
Our commitment to the communities in which we invest remains a
central part of our culture and this will be strengthened with the
implementation of our Social Value Framework. This work is
underpinned by our strong governance oversight; establishing our
new Sustainability Committee further demonstrates our vision of
being a leading sustainably-focused commercial landlord.
Strategic outlook
CLS has pursued a highly successful, focused strategy over the
last 30 years with a commitment to delivering shareholder value
through our long-term approach, which has been demonstrated in our
track record. Our strategy and business model remain unchanged
through the investment in, and active asset management of, well
located, high quality offices in Europe's three largest economies.
However, during this uncertain economic period, we will: be more
cautious in considering acquisitions and only make disposals at the
right values; execute our planned refinancings; and deliver
lettings of our quality refurbishments, to drive growth.
Against the rising interest rate backdrop, CLS' treasury team
continues to seek to match our borrowing with our properties'
characteristics as set out in the later case study. In addition,
CLS also has considerable rental upside within the existing
portfolio which would more than offset the expected financing cost
increase.
Dividends
Reflecting the more difficult economy currently, the Board has
decided to propose a flat final 2022 dividend which, together with
the 10.6% increase in the interim dividend, results in an increase
of 3.2% in the full year dividend, which is 1.47x covered by EPRA
earnings. The full-year dividend is in-line with our revised policy
of having the dividend covered by EPRA earnings 1.2x-1.6x and
in-line with the guidance given in May 2022 that 2022's dividend
would be in the middle of the range.
Our staff and our culture
I was pleased to attend, and speak at, our first staff
conference for three years and to experience first-hand the
enthusiasm, positivity and resilience of our staff. As commented
upon before, CLS' open, inclusive and supportive culture is a key
differentiator and it is great to see that it continues to flourish
with our dedicated team well-prepared and motivated to deal with
all the ongoing challenges and opportunities.
Finally, I would like to thank our shareholders for their
ongoing support as the Board continues to deliver long-term value
for all stakeholders.
Lennart Sten
Non-Executive Chairman
8 March 2023
Maintaining the right culture
Maintaining a healthy culture
We continue to promote an open, collaborative culture within our
workforce, with an efficient decision making structure which
facilitates ownership and enables a hands-on operating process.
CLS' culture and the role of the Board
The Board recognises the need to establish the correct culture,
values and ethics to ensure good standards of behaviour are
maintained throughout the Group.
We engage with our employees in a number of ways, such as
through the Workforce Advisory Panel, staff surveys, Board visits
and property tours, and informal meetings, to ensure the voice of
the workforce is prominent in our decision-making process.
The Board also receives information on human resourcing matters
such as employee turnover and diversity statistics at each meeting.
These feedback mechanisms allow the Board to understand how the
culture of the Group evolves and, through the Chief Executive
Officer, facilitates changes to ensure the Group maintains its
Purpose, Vision and Values which underpin our culture.
How the Board assesses and monitors culture
The Board is able to assess and monitor Group culture through a
range of key sources. The Board understands that these key sources
of data are crucial in maintaining good communication with the
employees who are integral in ensuring the success of the
Company.
Five culture priorities are used to embed culture within our
business activities and Board oversight:
-- Promoting integrity and openness
-- Valuing diversity
-- Being responsive to the views of stakeholders
-- Culture aligned to purpose and values
-- Culture aligned to strategy
Chief Executive's review
" CLS continues to stay close to tenants and respond to their
changing office demands. We are investing in our existing
properties to improve their quality through well-being, amenity,
flexibility, sustainability and digital enhancements to deliver the
best offices in our locations."
Delivering on our strategy
Delivering on our strategy
2022 was very much a year of two halves, somewhat apt in a World
Cup year, with the first half seeing a fairly stable market before
the second half saw significant market deterioration in response to
rising interest rates and a worsening economic outlook. Against
this backdrop, CLS has, and is, very much focused on operational
performance. To that end, we have included two larger case studies
on investment into our properties to meet the greater quality
demands and on our financing activity to ensure that we maintain
sufficient liquidity and flexibility to allow us to deal with
challenges and opportunities.
We have also included a longer piece on the office of the future
in which we highlight that whilst hybrid working is likely to lead
to lower demand for some offices, sustainability requirements are
expected to reduce supply which will act as an offset. However, I
think it is also worth reiterating why offices work for employees
and employers, and why the attractions and necessities are being
increasingly recognised again.
It is easy to confuse flexibility with working from home which
are two very different things. Flexibility, alongside empowering
employees, promotes a good work-life balance and helps employees
achieve both personal and professional goals. As has become
increasingly clear, working from home, more than a day or two, has
been shown to simply not work very well for many roles and
teams.
Fundamentally human beings are social creatures and the work
benefits of this sociability such as collaboration, spontaneity,
creativity, learning and mentoring are only effective when people
meet. To encourage and help employees meet their objectives, the
offices of the future must be flexible, inclusive and attractive.
They must also provide both individual workspace as well as meeting
rooms, video conferencing, chill-out areas, cafés and canteens
amongst other amenities whilst being well-located to transport and
urban facilities.
Ultimately, this might seem to be an unsurprising message from
an owner of offices but we believe that deep down most people and
organisations know this to be true. This belief is fundamental to
our conviction of remaining a long-term office investor. To that
end, we were a net acquirer in 2022, making two acquisitions for
GBP76.9 million and six disposals for GBP57.9 million, resulting in
net additions of GBP19.0 million. Given greater uncertainty in the
market and focus, we expect to be a net disposer in 2023 although
we do expect that there will be attractive acquisition
opportunities emerging towards the end of the year.
In 2022, we completed on two properties in Dortmund and
Dusseldorf for GBP76.9 million, which had exchanged in the first
quarter of the year. Kanzlerstrasse, Dusseldorf completed at the
end of April 2022 for GBP20.9 million and had a WAULT of c.8 years,
an initial yield of 5.1% and a reversionary yield of 5.7%. The
Yellow, Dortmund completed at the start of July 2022 for GBP56.0
million and had a WAULT of 5.2 years, an initial yield of 5.1% and
a reversionary yield of 5.6%. We are actively asset managing the
properties to secure market rents and lease the small amount of
vacant space. More detail on these buildings is given in the
country sections.
We continue to recycle capital on a selective basis, making
disposals when: the business plan has been completed and there are
limited opportunities to add value/drive returns; a more economic
alternative use exists; or we are offered a compelling price.
Additionally, we are seeking to increase the average size of our
properties by disposing of smaller properties which usually consume
a disproportionate amount of management time and are less economic
to equip with the best amenities. To that end we sold six smaller
properties (five in the UK and one in France), most for alternative
uses, at a net initial yield of 5.4% for consideration of GBP57.9
million which was 2.5% above 31 December 2021 valuations.
In order to deliver the higher quality offices demanded by
tenants, as discussed above and in the investing in our portfolio
case study, we are investing greater amounts in our portfolio. We
spent capital expenditure of GBP58.3 million in 2022 and would
expect to spend similar amounts in 2023 as we are refurbishing more
offices, from single floors to whole buildings, than at any time in
our history. A description of our four largest developments and
refurbishments across all three countries is set out in the case
study about investing in our properties, which also highlights the
considerable rental upside to be delivered. We are forecasting
capital expenditure to fall for 2024 onwards from the heightened
levels of 2022 and 2023 to a more normalised level of GBP20 to
GBP30 million per annum including our 2030 Net Zero Carbon pathway
spend.
Asset and property management
For CLS, active management is one of the five parts of our
business model and "our tenants, our focus" is one of our four
values. In a period of higher interest rates, the importance of
being adept at asset management as a means of driving long-term
value from a property portfolio has greatly increased and plays to
CLS' strengths. Pre-pandemic, during the pandemic and now we are
hopefully post-pandemic, CLS' rent collection has remained in
excess of 99% as a result of building strong tenant relationships.
On the whole, our properties are multi-let with over 700 tenants,
of which 26% are government agencies, 39% are large corporations
(with Group turnover over GBP36 million) and 13% are medium-sized
corporations (with Group turnover between GBP10 and GBP36
million).
Last year was very much a tale of two markets with the
investment market being sluggish at best whereas the letting market
remained mostly favourable, particularly for higher-quality,
sustainable offices. In 2022, the overall Group EPRA vacancy rate
increased to 7.4% (2021: 5.8%) which is above our long-term target
of 5% due to the impact of refurbishments and expiries. We are
expecting the vacancy rate to remain elevated in the medium-term
until we let our pipeline of refurbishments.
The vacancy position was mixed across the Group with
considerable differences between countries. In France, the vacancy
rate has fallen to 2.6% (2021: 3.0%) as a result of higher demand
for smaller units (below 1,000 sqm) which fits with CLS' France
space offering and we would expect vacancy to remain low in 2023.
In Germany, the vacancy rate fell from 7.4% in 2021 to 6.1% in 2022
as we made further progress with letting the vacancy that was
deliberately acquired for its asset management upside in 2021, and
we are confident to see further reductions in German vacancy in
2023. In the UK, there is a much more difficult letting market and
hence we are putting in considerable investment to upgrade the
quality of our portfolio. The UK vacancy rate increased to 10.0%
(2021: 5.4%) as a result of refurbished space being completed and
lease expiries in excess of lettings. The vacancy rate may well
increase in 2023 for the same reasons if lettings continue to take
longer.
At 31 December 2022, the value of the portfolio was marginally
up (by 0.9%) as a result of our investment in the portfolio,
foreign exchange gains and net acquisitions largely offset by
revaluation declines of 5.3% in local currencies. There were
decreases in all countries with Germany down 3.5%, France down 5.3%
and the UK down 6.7% in local currencies. Across all countries, the
increase in interest rates and the risk-off nature of investors
impacted valuations but there were also some regional and property
specific differences.
In the UK, our government, Central London offices, developments,
student and hotel performed well whilst other London and Southeast
offices were in-line with the market, with equivalent yields
increasing by 25 basis points to 5.61% (2021: 5.36%), ERVs
decreasing by 0.3% and vacancy increasing.
In Germany, values in most of the cities where we have our
properties fell by about 3% to 4% with equivalent yields expanding
by 36 basis points to 4.75% (2021: 4.39%) with partial offset from
ERVs increasing by 1.4% as well as benefits from reducing vacancy
and significant indexation.
In France, values in Paris dropped 7.4% whilst valuations in
Lyon and Lille were down 2.1% as overall equivalent yields
increased by 9 basis points to 5.13% (2021: 5.04%) with some offset
from ERVs increasing by 4.9% as well as benefits from reducing
vacancy and all leases being indexed.
In aggregate, fair value declines reduced property values by
GBP127.0 million including GBP7.8 million lease incentive debtor
adjustments.
Financial results
We delivered resilient and solid results in 2022 against a
challenging economic backdrop. Property valuations were down but
outperformed relative to the market and EPRA earnings were ahead of
last year as our student and hotel operations delivered record
results and we saved tax by converting our UK business to a REIT at
the start of 2022.
Loss from recurring operations was GBP81.9 million (2021: profit
GBP77.3 million). Partly mirroring but outperforming the more
challenging market, CLS suffered revaluation losses (with marginal
gains on the sale of investment properties) in 2022 of GBP136.5
million (2021: GBP28.5 million gain) with a foreign exchange loss
of GBP0.3 million (2021: GBP2.3 million). Earnings per share were a
loss of 20.2p (2021: 29.3p gain) reflecting the revaluation
loss.
As highlighted, EPRA earnings per share rose 2.7% from 11.3p in
2021 to 11.6p in 2022 as a result of improved hotel and student
performance, the benefits of REIT conversion in the UK and lower
foreign exchange losses partly offset by higher vacancy and related
property costs.
EPRA NTA decreased by 6.0% (2021: 1.5% increase) to 329.6 pence
per share, reflecting revaluation reductions of 5.3% in local
currency and the payment of an increased dividend partly offset by
EPRA earnings, a GBP33.6 million foreign exchange gain from the
5.0% weakening of sterling against the euro (2021: GBP39.5 million
loss) and a 2.6 pence per share or 0.7% uplift from the September
2022 tender share buyback. The GBP25.5 million share buyback (1 for
40 at 250 pence per share) demonstrated our belief in the value of
our portfolio.
At the year end, we had liquid resources of GBP113.9 million
(2021: GBP167.4 million), reflecting net acquisitions and ongoing
investment, as well as GBP50.0 million of undrawn credit facilities
(GBP2021: GBP50.0 million). We are well progressed with our 2023
and 2024 financing, more of which in the 'financing at CLS'
section.
In 2022, we generated GBP43.0 million net cash from operating
activities (2021: GBP44.2 million) compared with EPRA earnings of
GBP47.0 million (2021: GBP45.9 million) showing the continued
strong cash generation of our business model. Of this cash, GBP32.4
million (2021: GBP30.8 million) was paid as a dividend to
shareholders. Overall, we balance the use of the cash generated
between dividends and reinvestment in the business to drive the
total accounting return to shareholders, which was -3.7% in 2022
(2021: 3.7%) due to negative property revaluations.
Purpose, people and planet
Retaining the carbon value of existing real estate is being
increasingly recognised as an important component of a low carbon
future and this reinforces the long-term viability of our purpose
and portfolio.
We recognise the importance of future proofing our assets in the
face of ever tightening regulations across the UK and Europe. To
this end, I am exceptionally proud of our progress against our
sustainability strategy. We continue to improve the energy
efficiency of our buildings as we refurbish them and, in line with
our Net Zero Carbon pathway, this has resulted in the completion of
57 projects saving an estimated 612 tonnes of CO2e, equivalent to
taking over 130 cars off our roads
(https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-typical-passenger-vehicle).
We have yet again increased the amount of electricity we generate
from on-site photovoltaic arrays, which is used for the benefit of
our tenants and ultimately reduces their cost of office occupation,
and totalled 706,787 kWh, enough to power 244 homes
(https://www.ofgem.gov.uk/).
For the first time we are now reporting against our social value
framework, measuring all aspects of our contributions to the
societies and communities in which we invest. We have undertaken
41% more volunteering hours during 2022 than in 2021 and, along
with all other areas measured, our Social Value is equivalent to
GBP191,916, and I commend our teams for their efforts. We have
committed to further enhancing the measurement of our social value
contribution in the coming years.
We know we have an important part to play across our three
strategic pillars and we are well placed to achieve our aims.
In 2022 we also recognised the impact of cost of living
pressures on our employees. We introduced differentiated pay
increases, rewarding our lower paid employees more given the
greater impact of higher inflation upon them. Our employees are one
of CLS' best assets and we remain committed to helping them
thrive.
2.7%
Increase in EPRA earnings
99%
Rental collection
Looking to the future
We included our rent progression waterfall chart in last year's
annual report and an updated version is included this year as
securing these increases is critical to drive rental growth over
and above rising financing costs. Set out below is an updated chart
which shows:
-- c ontracted rent at the end of 2022 of GBP110.2 million;
-- the current potential Estimated Rental Value ("ERV") of the
portfolio of GBP121.4 million if all vacant space (GBP9.0 million
increase) and net reversionary potential (GBP2.2 million increase)
were captured. We do though benefit from some vacancy/churn within
the portfolio to capture reversion more quickly and/or to allow the
refurbishment of older properties. It is therefore recognised that
not all of this vacancy upside should or will be captured;
-- the potential increase to ERV over 2023 and 2024 to GBP136
million from refurbishments and committed developments (GBP14.5
million); and
-- the potential increase to ERV between 2024 and 2026 to GBP139
million from uncommitted development opportunities in the portfolio
(GBP3.0 million increase)
In addition to these increases up to 2026, there is further
potential from indexation, with over half the portfolio having
contractual increases, and market movements as well as executing
transactions, both acquisitions and disposals, to focus the
portfolio on faster growing properties. Post 2026, we have
significant development, redevelopment or rental increase
opportunities at Spring Gardens and New Printing House Square, both
of which are in Zone 1 in London.
We expect 2023 to be in many ways the reverse of 2022 with the
first six months being challenging whilst inflation and interest
rates are forecast to peak before the economy and property market
improve in the second half. Our strategy and our focus on the three
largest countries in Europe remains unchanged but as usual with
slightly different priorities as we expect to be a net seller in
2023 and thus will place even greater emphasis on operational
improvements. Ultimately, we are confident that CLS will remain
successful by responding to tenant and market needs by having the
best properties in our locations.
Fredrik Widlund
Chief Executive Officer
8 March 2023
Chief Financial Of cer's review
" in 2022 CLS delivered solid results with lower valuation falls
relative to the market and we have made significant progress with
the planned refinancing activity for 2023 and 2024."
Summary
EPRA net tangible assets ('NTA') per share, fell by 6.0% to
329.6 pence (2021: 350.5 pence) and basic net assets per share by
5.9% to 307.3 pence (2021: 326.6 pence). Loss after tax of GBP81.9
million (2021: GBP119.5 million profit) generated basic earnings
per share of (20.2) pence (2021: 29.3 pence) but EPRA earnings per
share of 11.6 pence (2021: 11.3 pence). EPRA EPS provided 1.47x
cover of the full year dividend of 7.95 pence per share.
On 1 January 2022, we converted our UK operations to a REIT
which has resulted in a saving of at least GBP3 million per annum
in tax. In May 2022, in response to becoming a REIT, CLS also
updated its dividend policy as described below. The other notable
event was the 1 for 40 share buyback tender offer executed in
September 2022 to demonstrate our belief in the value of our
portfolio.
CLS uses a number of alternative performance measures ('APMs')
alongside statutory figures. We believe that these assist in
providing stakeholders with additional useful information on the
underlying trends, performance and position of the Group. Note 6
gives a full description and reconciliation of our APMs.
Income statement
Net rental income in 2022 of GBP107.8 million, was little
changed from 2021 (GBP108.0 million). The increases arose from
acquisitions (GBP4.1 million) made in 2021 and the start of 2022,
and indexation gains of GBP1.5 million as the majority of our
properties have index-linked rent. As a result of a post pandemic
bounce, we recorded record results from our hotel and student
operations with rental increases of GBP2.2 million and GBP2.1
million respectively. Disposals reduced rental income by GBP3.4
million and the movement of properties into refurbishments lowered
rental income by GBP1.9 million. Higher vacancy, mainly in the UK,
resulted in higher net service expenses of GBP2.2 million and net
lease expiries of GBP1.8 million. Other, including FX, lowered
rents by GBP0.8 million.
The strength of CLS' tenant relationships and the quality and
diversity of our tenant base has continued to be reflected in our
rent collection. CLS collected over 99% of rent before Covid-19,
over 99% during the pandemic and over 99% in 2022. Rent collection
for the first quarter of 2023 is over 95% as is usual at this point
in time.
Overall administration and property expenses increased by GBP2.5
million to GBP31.9 million (2021: GBP29.4 million) primarily as a
result of: higher student and hotel expenses of GBP1.2 million
given higher occupancy; a one-off release of bad debt provisions in
2021 of GBP0.3 million with a more normal charge of GBP0.6 million
in 2022; and an increase in operating costs of GBP0.4 million given
higher vacancy. The proportion of index-linked rent increased to
55.5% (2021: 50.1%) of the total contracted rent of the portfolio.
This high level of indexation continues to be a significant benefit
in a time of higher inflation and increasing interest rates.
Due to the higher level of costs, CLS' administration cost ratio
increased to 14.5% (2021: 14.1%) and the EPRA cost ratio rose to
25.8% (2021: 22.6%).
Given market weakness from higher interest rates and economic
uncertainty, the valuation of CLS' properties fell, although the
reduction was lower than wider market movements. The reduction in
the value of investment properties, excluding lease incentive
movements, was GBP136.5 million (2021: GBP28.5 million gain) with
falls in the UK of 6.7%, Germany 3.5% and France 5.3% in local
currencies.
CLS has small shareholdings in two listed non-core Swedish
companies. CLS now directly holds 2.92% of Fragbite Group AB and
indirectly 8.9% of Vo2 Cap Holding AB, both of which are classified
as investments given that CLS has no control over their affairs.
The share prices of both companies fell in 2022 resulting in a loss
of GBP3.8 million (2021: GBP7.5 million profit including a part
disposal).
Six properties were sold in 2022 for an aggregate consideration
of GBP57.9 million. This was 2.5% above book value which, after
costs, resulted in a profit on sale of properties before tax of
GBP0.5 million (2021: GBP0.1 million loss).
Finance income of GBP10.1 million (2021: GBP5.9 million)
included unrealised gains on derivative financial instruments of
GBP8.8 million (2021: GBP5.2 million) from higher interest
rates.
Excluding the derivative financial instruments, finance income
increased by GBP0.6 million as interest received increased to
GBP1.3 million (2021: GBP0.5 million) given higher interest rates
on cash deposits and dividends receivable fell by GBP0.2 million
(2021: GBP0.2 million).
Finance costs increased to GBP26.8 million (2021: GBP25.4
million) due to the increase in the amount of borrowings and cost,
given wider market interest rate increases.
Approximately 49% of the Group's sales are conducted in the
reporting currency of sterling and 51% in euros. Whilst the average
sterling rate against the Euro strengthened marginally by 0.8%,
there were far fewer transactions in 2022 compared to 2021 and
consequently FX losses were at a much lower level. In 2022, foreign
exchange losses were GBP0.3 million in the income statement (2021:
GBP2.3 million).
Exchange rates to the GBP EUR
-------------------------- ------
At 31 December 2020 1.1185
-------------------------- ------
2021 average rate 1.1634
-------------------------- ------
At 31 December 2021 1.1893
-------------------------- ------
2022 average rate 1.1732
-------------------------- ------
At 31 December 2022 1.1295
-------------------------- ------
The effective tax rate of 0.0% (2021: -30.6%) was below the
weighted average rate of the countries in which we operate
principally as a result of the conversion of CLS' UK operations to
a REIT and thus minimal tax is now paid in the UK.
Overall, EPRA earnings were higher than last year at GBP47.0
million (2021: GBP45.9 million) and generated EPRA earnings per
share of 11.6 pence (2021: 11.3 pence). The increase of 0.3 pence
in EPRA EPS was primarily due to: the strong performance of the
hotel and student operation; tax savings following the conversion
of CLS' UK operations to a REIT; and relative improvement in FX
losses, partly offset by: increased vacancy in the UK leading to
lower revenue and higher costs; and higher interest costs.
EPRA net tangible assets and gearing
At 31 December 2022, EPRA net tangible assets per share were
329.6 pence (2021: 350.5 pence), a fall of 6.0%, or 20.9 pence per
share. The main reasons for the decrease were: property valuation
decreases of 5.3% or 33.9 pence per share; dividends of 7.95 pence
per share paid in the year; and other movements of 1.5 pence per
share, partly offset by: EPRA earnings per share of 11.6 pence per
share; foreign exchange gains on our European business of 8.6 pence
per share; and a 2.6 pence per share benefit from the share
buyback.
Balance sheet loan-to-value (net debt to property assets) at 31
December 2022 increased to 42.2% (2021: 37.1%) as a result of net
acquisitions and capital expenditure, and property valuation
reductions. The loan-to-value of secured loans by reference to the
value of properties secured against them was 49.2% (2021: 46.3%).
The value of properties not secured against debt increased to
GBP105.1 million (2021: GBP100.8 million). In 2023, CLS is expected
to be a net disposer of property and thus, in the absence of
significant property valuation falls, LTV is expected to
reduce.
Cash flow and net debt
As at 31 December 2022, the Group's cash balance had fallen to
GBP113.9 million (2021: GBP167.4 million). Net cash flow from
operating activities generated GBP43.0 million, a reduction of
GBP1.2 million from 2021. GBP32.4 million was distributed as
dividends and GBP27.5 million paid out for financing costs and tax,
with the remainder reinvested in the business to grow net tangible
assets. Acquisitions of GBP83.8 million and capital expenditure of
GBP57.2 million were partly funded by proceeds after tax from
property disposals of GBP53.0 million and the net drawdown of loans
of GBP51.3 million. The net result of property and financing
transactions, and after the share buyback cost of GBP25.8 million
and other of GBP1.6 million, being the investment of GBP53.5
million in our property portfolio.
Gross debt increased by GBP74.3 million to GBP1,105.9 million
(2021: GBP1,031.6 million) due to: the net drawdown of loans of
GBP43.6 million, amortisation of loan issue costs of GBP1.9 million
and the increase of GBP28.8 million due to the weakening of
sterling against the euro. In the year, GBP144.1 million (GBP143.0
million net of capitalised fees) of new or replacement loans were
taken out, loans of GBP80.9 million were repaid and GBP18.5m of
contractual periodic or partial repayments were made. Year-end net
debt rose to GBP992.0 million (2021: GBP864.2 million). At the year
end, CLS' additional facilities remained unchanged comprising
undrawn bank facilities of GBP50.0 million, of which GBP30.0
million was committed.
The weighted average cost of debt at 31 December 2022 was 2.69%,
47 basis points ('bps') higher than 12 months earlier. The movement
was as a result of: an increase in the reference rates on floating
rate loans (28 bps increase); new higher cost debt drawn for
acquisitions and various refinancings completed (29 bps increase),
partly offset by: the expiration of legacy interest rate swaps (6
bps reduction); repayments of higher cost debt on disposals (3 bps
reduction); and the strengthening of the euro against the pound (1
bps reduction). In 2022, interest cover remained at a healthy level
of 3.0 times (2021: 3.2 times).
Financing strategy and covenants
A larger section on the Group's financing strategy is included
in this report but a few of the key points are worth repeating
here. Significant progress has been made with the refinancing
activity for 2023 but also for 2024 when a greater proportion of
the Group's debt falls due. The Group's financing priorities remain
to keep the cost of debt low whilst maintaining an appropriate LTV,
maintaining a high proportion of fixed debt, increasing the amount
of green loans and seeking to match the Group's weighted average
debt maturity against the Group's WAULT.
As noted, CLS' objective remains to keep a high proportion of
fixed rate debt. However, in 2022 more floating rate loans than
usual were executed given that: some properties are to be sold and
thus wanting to avoid break costs; some loans were extended whilst
the letting profile was improved in advance of securing a longer
term fixed rate loan; and a belief that interest rates were
temporarily higher given the quickened pace of interest rate
increases and greater market volatility.
In 2022, the Group financed, refinanced or extended 12 loans to
a value of GBP229.9 million for a weighted average duration of 2.8
years and at a weighted average all-in rate of 3.24%, and of these
GBP58.4 million were fixed at a weighted average all-in rate of
3.17%. Consequently, at 31 December 2022, 72.4% of the Group's
borrowings were at fixed rates or subject to interest rate swaps,
3.8% were subject to caps and 23.8% of loans were unhedged. The
fixed rate debt had a weighted average maturity of 4.4 years and
the floating rate 2.2 years. The overall weighted average unexpired
term of the Group's debt was 3.8 years (2021: 4.4 years).
The Group's financial derivatives, predominantly interest rate
swaps, are marked to market at each balance sheet date. At 31
December 2022 they represented a net asset of GBP8.5 million (2021:
GBP0.4 million liability).
At 31 December 2022, the Group had 46 loans (36 SPVs, eight
portfolios and two facilities) from 25 lenders. The loans vary in
terms of the number of covenants with the three main covenants
being ratios relating to loan-to-value, interest cover and debt
service cover. However, some loans only have one or two of these
covenants, some have other covenants and some have none. The loans
also vary in terms of the level of these covenants and the headroom
to these covenants.
On average across the 46 loans, CLS has between 25% and 35%
headroom for these three main covenants. In the event of an actual
or forecast covenant breach, all of the loans have equity cure
mechanisms to repair the breach which allow CLS to either repay
part of the loan, substitute property or deposit cash for the
period the loan is in breach, after which the cash can be
released.
Distributions to shareholders and total accounting return
In May 2022, following the conversion of CLS' UK business to a
REIT, the Group announced an updated dividend policy for the 2022
financial year onwards. CLS announced that it would maintain a
progressive dividend policy, with a dividend cover of 1.2 to 1.6
times EPRA earnings (previously 1.5 to 2.0 times) which equates to
a pay out range of 63% to 83% of EPRA earnings. It was also
announced that it was expected that FY 2022 dividend cover would be
around the middle of the new range.
The proposed final dividend for 2021 of 5.35 pence per share
(GBP21.8 million) was paid in April 2022. In October 2022,
following the completion of the share buyback tender offer, CLS
paid an interim dividend of 2.60 pence per share (GBP10.6 million),
an increase of 10.6% compared to 2021 interim dividend of 2.35
pence per share.
Given ongoing uncertainty, the proposed final dividend for 2022
is maintained at 5.35 pence per share (GBP21.4 million), the same
level as 2021. This would result in a full year distribution of
7.95 pence per share (GBP32.0 million), covered 1.47 times by EPRA
earnings per share. The 2022 dividend is an increase of 3.2% over
the prior year and the total accounting return, being the reduction
in EPRA NTA plus the dividends paid in the year, was -3.7% (2021:
3.7%).
As a result of the conversion of our UK operations to a REIT,
shareholders receive dividends comprising two elements. The
dividends comprise a Property Income Distribution ('PID') from the
UK REIT operations and a second element from CLS' remaining
operations. For the interim dividend of 2.60 pence per share, the
PID was 1.20 pence per share and for the proposed final dividend of
5.35 pence per share, the PID will be 1.36 pence per share giving a
full year dividend of 7.95 pence per share of which 2.56 pence per
share is the PID. The split between the PID and the dividend from
our remaining operations is likely to fluctuate over time, and will
depend on the level of capital allowances and inter-company
interest, amongst other things.
Andrew Kirkman
Chief Financial Officer
8 March 2022
United Kingdom
GBP1,170.6m
Value of property portfolio
46%
Percentage of Group's property interests
39
Number of properties
204
Number of tenants
10.0%
EPRA vacancy rate
1.8m sq. ft
Lettable space
78%
Government and large companies
3.7 years
Weighted average lease length to end
33.0%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the UK portfolio decreased by GBP90.3 million as a
result of: net disposals of GBP12.9 million (capital expenditure of
GBP36.7 million partly offset by five disposals for GBP49.6
million); a valuation decline of GBP77.3 million or 6.7%; and
depreciation of GBP0.1 million. The 6.7% valuation decline was as a
result of equivalent yields increasing by 27 basis points on a
like-for-like basis and ERVs decreasing by 0.3%. However, this does
not give the full picture with some strong segment performance
offsetting area weakness.
CLS' UK portfolio valuation movements most logically split
as:
-- Government, Central London offices, Artesian and the Coade,
student and hotel operations (56% of the portfolio) delivered
relative outperformance against the market with a 1.4% decrease in
valuation with yield expansion of 36 basis points partially offset
by ERV growth of 1.1%. The relative outperformance is due to the
attractiveness of government income with its higher proportion of
indexation, stronger covenant and some lease regears alongside the
stronger performance of the hotel and student with some offset from
our major developments until they are let;
-- Other London offices (31% of the portfolio) which were more
in-line with wider office market movements being down 10.3% with
yield expansion of 25 basis points and ERV reduction of 2.5% on a
like-for-like basis; and
-- Southeast offices (13% of the portfolio) were reflective of
the Southeast market generally as values fell 18.0% with yield
expansion of 59 basis points and a decrease in ERV of 1.5% on a
like-for-like basis.
"The UK is our most challenging occupational market currently -
we are responding by carrying out our largest number of
refurbishments and this is already leading to an increase in
enquiries."
Developments and refurbishments
Construction of "The Coade", our 28,400 sq. ft (2,638 sqm) new
office development at Vauxhall Walk, London, is almost complete. We
have had several viewings and are confident to secure our first
tenant shortly. "Artesian", our development at 9 Prescot Street,
London, is also progressing well. The 92,500 sq. ft (8,594 sqm)
development, is expected to complete in Q2/Q3 2023. More details
are available on both developments in the 'investing in our
portfolio' section.
Other smaller refurbishments were carried out, including a
pre-let at Reflex in Bracknell with a full CAT A refurbishment of
the 5,700 sq. ft (530 sqm) suite as well as undertaking a bespoke
tenant fit-out to enhance their space. Our property at 6 Lloyds
Avenue in the City of London is a Grade II listed building,
therefore the refurbishments, which encompass both CAT A and CAT A+
specifications, have required a sensitive approach. The resulting
works created modern and attractive spaces which provide
flexibility for tenants seeking either managed solutions or
traditional leases.
Disposals
During the course of 2022 we continued with our strategy of
disposing of some of our smaller assets or those that have a
greater value for alternative uses.
In line with our strategy, we sold five assets for GBP50.0
million, which was 0.9% above the 31 December 2021 valuation. For
more details, see the case study.
Asset management
The vacancy rate increased to 10.0% as at 31 December 2022
(2021: 5.4%) as result of a number of significant refurbishments,
such as at 405 Kennington Road and Harman House in London, being
completed throughout the year. There were also a few instances
where tenants sought to downsize their space in response to
changing working patterns amongst their staff.
In 2022, we let or renewed leases on 105,782 sq. ft (9,827 sqm)
and lost 201,170 sq. ft (19,454 sqm) of space from expiries.
Excluding rent reviews, 54 lease extensions and new leases secured
GBP2.9 million of rent at an average of 2.8% above ERV. The most
significant transactions were a new 10-year lease with ATS
Euromaster at Aqueous II, Birmingham for 13,114 sq. ft (1,218 sqm)
and a new 10-year lease with BioHorizons UK Limited for 5,700 sq.
ft (529 sqm) at Reflex in Bracknell. Not included in our 54 deals
was the removal of break clauses for leases with the Secretary of
State for: Unicorn House, Bromley; Armstrong Road, Acton; and 62
London Road, Staines, which secured a total rent of GBP2.7 million
p.a. for an additional five years past the previous break date of
April 2023. Furthermore, the lease associated with our largest
asset at Spring Gardens is subject to annual indexation and
contracted rent increased by approximately GBP1 million as a result
of the 10.5% RPIx uplift.
Our student and hotel operations continued to perform extremely
well throughout the year, achieving record results. The student
accommodation was fully let for the 2022/23 academic year and the
hotel occupancy was at an average of 87% for 2022 (70% in 2021)
with much higher average daily rates. The hotel has just undergone
a limited refurbishment programme to ensure it continues to provide
best in class accommodation for both short and extended stay
customers.
Market overview and outlook
The UK economy has continued its recovery from the effects of
the pandemic and 2022 GDP growth of 4.1% exceeded estimates made
earlier in the year. This also reflects recent comments from the
Bank of England that any downturn in the UK economy is due to be
shorter and less severe than had been previously predicted. During
2022, to control the inflation which was close to 10%, the Bank of
England increasingly raised the base rate from 0.25% in January
2022 to 4% by February 2023 and the market is expecting further
rate rises in the first half of the year.
In terms of the UK property investment market, commercial
volumes for the year fell to c. GBP41 billion, which was down by
more than 20% compared with 2021, and reflects the political and
economic uncertainty which occurred during last year.
Leasing transactions and activity in Central London were
positive with 20% growth while the rest of the South-East office
market showed a decline of a similar order with a 25% drop in
leasing volumes. This illustrated the flight to quality both in
terms of the buildings themselves but also location, with
well-located and modern offices performing strongly irrespective of
geographical location. Vacancy in London was relatively stable
during the year at 8.5%.
Early evidence however suggests that activity has picked up at
the start of 2023 which it is hoped will lead to a further increase
in take-up.
We continually assess whether to hold or sell properties
49%
Year on year increase in UK capital expenditure
UK Disposal Programme
During the course of 2022, CLS successfully completed the
disposal of five assets within the UK for a total consideration of
GBP50.0m which was 0.9% above the book value of these properties as
at 31 December 2021.
The assets were sold as part of the Group's strategy of
disposing of assets which are either too small to have a meaningful
impact on the Group's profitability or have greater value for
alternative uses. This is with a view to re-investing the proceeds
in our core portfolio through development and refurbishment or
through acquisitions.
The largest transaction was the sale of Great West House. This
is a prominent office building close to the M4 in West London which
had been part of the Group's portfolio since 1996 and has
significant potential for alternative uses, subject to planning.
Other buildings, such as Kings House in Bromley and Crosspoint
House in Wallington were sold with the benefit of prior approval
for conversion to residential.
Sentinel House in Coulsdon was sold to an owner occupier at the
end of a 10-year lease which allowed the Group to realise a capital
receipt having benefited from the rent for the majority of the
lease term.
Germany
GBP996.0m
Value of property portfolio
42%
Percentage of Group's property interests
33
Number of properties
372
Number of tenants
6.1%
EPRA vacancy rate
3.9m sq. ft
Lettable space
56%
Government and large companies
5.2 years
Weighted average lease length to end
64.5%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the German portfolio increased by GBP108.0 million
as a result of: net additions of GBP93.3 million (two acquisitions
for GBP83.4 million including costs and capital expenditure of
GBP9.9 million); and a foreign exchange gain of GBP49.0 million,
partly offset by a valuation loss of GBP34.2 million or 3.5% in
local currency and depreciation of GBP0.1 million. The
like-for-like valuation decrease, which excludes the acquisition
costs, was 3.3%. The 3.5% valuation decline was as a result of
equivalent yields expanding by 36 basis points (30 basis points on
a like-for-like basis) with partial offset from ERVs increasing by
1.4% as well as benefits from reducing vacancy and significant
indexation.
Values in most of the cities where we have our properties fell
by about 3% to 4%. The two exceptions were firstly Stuttgart where
values were down 11.2% given both a weaker market and CLS' decision
to delay the development of Vor dem Lauch given this market
uncertainty and secondly, in Berlin, where valuations were down
0.8%, which was mainly driven by the valuation increase for
Adlershofer Tor following the granting of building consent for a
rooftop extension.
"Whilst Germany experienced some economic turmoil in 2022, the
market fundamentals remain strong and we expect vacancy to reduce
further in 2023."
Acquisitions and disposals
In 2022 we purchased two properties for GBP76.9 million with
combined initial yields of 5.1% and a combined reversionary yield
of 5.6%. There were no disposals in the year.
The acquisition of these two properties is discussed in more in
the 'investing in our portfolio' section.
Developments and refurbishments
Various refurbishments continue across our portfolio focusing on
improving the quality of our assets by meeting tenants' needs and
enhancing the sustainability credentials of our properties. At
Office Connect in Cologne and Hansaallee in Düsseldorf, the
entrance areas as well as outdoor facilities have been completely
redesigned and the buildings now include co-working spaces, as well
as refurbished receptions.
Flexion in Berlin was purchased in 2021. The 71% acquired
vacancy rate has been reduced through a substantial re-design,
allowing us to re-position the property in the local market and
successfully let 30,279 sq. ft (2,813 sqm). All space not currently
under development in this building is now let. Grafelfing in
Munich, was previously occupied by a single tenant for 15 years. We
are currently working closely with our new tenant Toptica on their
62,458 sq. ft (5,803 sqm) space, improving it by tailoring to their
needs. In terms of executing our longer term development strategy,
planning has been granted for a rooftop extension at Adlershofer
Tor, Berlin which would increase the lettable area of the building
by approximately 46,285 sq. ft (4,300 sqm).
Asset management
EPRA vacancy rates reduced from 7.4% at 31 December 2021 to 6.1%
the end of 2022. This reduction was due to a significant number of
lettings during the year, acquisitions with lower weighted average
vacancy and ongoing refurbishment of vacant units. In 2022, we let
or renewed leases on 503,473 sq. ft (46,774 sqm) and lost 507,074
sq. ft (47,109 sqm) of space from expiries. Excluding those arising
from contractual indexation uplifts, 32 lease extensions and new
leases secured GBP3.8 million of rent at an average of 8.2% above
ERV. Leases subject to indexation increased by an average of 6.3%.
The most significant transactions were a new 10-year letting for
62,458 sq. ft (5,803 sqm) to Toptica at Grafelfing in Munich and a
new 5-year letting for 19,343 sq. ft (1,797 sqm) to All3Media. Both
deals were executed at rents above ERV and helped significantly
decrease vacancy in their respective buildings. At the end of 2022,
the portfolio was 2.1% net reversionary. In light of the continued
recovery of the letting markets and despite the market increased
vacancy rates, we believe that there is the potential for further
rental growth.
Market overview and outlook
The German economy has continued to recover and achieved 2022
GDP growth of 1.9% as a result of a strong finish to the year.
German industry has proven to be much more resilient than some
anticipated, with dependency from Russian gas reduced to such a
level that the implementation of emergency plans did not
materialise, and the entire winter supply was secured. Inflation
was close to 9% in 2022 and the ECB increasingly raised the base
rate from 0% in January 2002 to 2.5% by February 2023 with a
further 0.50% increase announced for March.
The commercial property investment market for the year fell to
c. EUR51 billion which was 16% below 2021 reflecting rising
interest costs and continued uncertainty around the geopolitical
situation.
Leasing transactions and take-up in the top seven cities were
similar to 2021 and in-line with the 10-year average. Berlin and
Munich performed strongly and we are continuing to see rental
growth in most cities. Vacancy across the seven cities increased
slightly to an average of 5% with Stuttgart and Cologne at 3%,
Berlin, Hamburg, and Munich at circa 4%, and Frankfurt and
Dusseldorf around 8%.
Many occupiers have started to show a willingness to return to
the market and we expect activity to improve gradually over the
year in the larger cities.
We acquire the right properties
GBP76.9m
Properties acquired in 2022
Acquisitions
Despite a challenging market, 2022 provided selected, attractive
opportunities to grow the portfolio in our locations.
In April we completed on the purchase of Kanzlerstrasse 8,
Dusseldorf for GBP20.9 million which is situated in a
well-connected and growing submarket of the city. The 98,684 sq. ft
(9,168 sqm) property is occupied by three tenants including the
anchor tenant Amevida with a WAULT of c.8 years and net initial
yield of 5.1%.
In July we completed on the purchase of The Yellow, Dortmund for
GBP56.0 million. The 258,140 sq. ft (23,982 sqm) office is located
in the central business district of Dortmund, next to the central
shopping district. The property is occupied by Postbank, a
department of the federal state of North Rhine-Westphalia and two
smaller tenants with an overall WAULT of 5.2 years and net initial
yield of 5.1%.
Both properties provide opportunities to take advantage of the
net reversion through improving the ESG credentials of the
buildings, under-renting and letting remaining vacancy. The
combined reversionary yield is 5.6%.
France
GBP286.1m
Value of property portfolio
12%
Percentage of Group's property interests
17
Number of properties
147
Number of tenants
2.6%
EPRA vacancy rate
0.8m sq. ft
Lettable space
56%
Government and large companies
4.9 years
Weighted average lease length to end
100.0%
Leases subject to indexation
Portfolio movement and valuation summary
The value of the French portfolio increased by GBP3.7 million as
a result of: net acquisitions of GBP4.8 million (capital
expenditure of GBP11.7 million offset by disposals of GBP6.9
million); and a foreign exchange increase of GBP14.4 million,
partly offset by a revaluation decline of GBP15.5 million or 5.3%
in local currency. The 5.3% valuation decline was as a result of
equivalent yields expanding by 9 basis points (12 basis points on a
like-for-like basis) with some offset from ERVs increasing by 4.9%
as well as benefits from reducing vacancy and all leases being
indexed.
Values in Paris dropped 7.4% reflecting our more suburban
locations whilst valuations in Lyon and Lille were down 2.1% given
the stronger Lyon investment market.
"The market in France remains mixed with good demand in central
Paris and Lyon but weaker demand in Parisian suburbs such as those
around La Défense. There is also good demand for smaller space, as
offered by CLS, which is keeping our vacancy low."
Developments and refurbishments
During the year we continued on a programme of refurbishing
several of our French properties. The two most significant are the
redevelopment of D'Aubigny and Park Avenue, both in Lyon.
The works at Park Avenue are close to completion with the
building launch taking place in January 2023. Several agents
attended and were given a tour of the EUR11.2 million refurbishment
which included replacement of the existing façade and creation of
new common terraces through the extension of existing landings. The
sustainability credentials of the building were improved through
the installation of new windows, electric shades and a green roof.
During the works, the tenants have been relocated to temporary
office space to ensure the project was delivered as quickly as
possible. They will resume occupation in Q1 2023. There has been
good interest in the refurbished vacant areas with two deals
already executed with the tenants moving in on completion of the
works towards the end of Q1 2023.
The works completed at D'Aubigny included the replacement of the
existing façade and new windows. This project completed on time in
October 2022 and at the budgeted cost of EUR3.2 million. The
improvements will be BREEAM certified and are expected to achieve
"Excellent".
Disposals
During the course of 2022 we disposed of Rue Nationale and a
small piece of land for GBP7.8 million. The disposals were
completed at 13.6% above 31 December 2021 valuation. In February we
exchanged on the sale of a property in Paris which offers higher
value as a development opportunity. The sale price of EUR11.1
million was 0.5% above the 31 December 2022 year end valuation and
is expected to complete in April 2023.
Asset management
EPRA vacancy in France reduced to 2.6% as at 31 December 2022
(2021: 3.0%) with the reduction largely driven by active asset
management. Despite several tenants leaving during the period, new
tenants were secured to the fill the vacancies, with new lettings
exceeding expiries.
In 2022, we let or renewed leases on 67,130 sq. ft (6,237 sqm)
and lost 65,261 sq. ft (6,063 sqm) of space from expiries or
vacancies. Excluding contractual indexation uplifts, 20 lease
extensions and new leases secured GBP1.5 million of rent at an
average of 0.3% above ERV. The most significant transactions during
the year were: a lease renewal at Rhône Alpes for 11,345 sq. ft
(1,054 sqm) with Aesio Mutuelle via a 1/3/6/9 year lease; and a
pre-letting at Park Avenue for 9,289 sq. ft (863 sqm) with
Hopscotch Group. On a like-for-like basis, ERVs increased by 4.9%,
with index-linked rental increases at an average of 3.3%.
Market overview and outlook
The French economy achieved GDP growth of 2.5% in 2022, also on
the back of a strong fourth quarter, and again proved its
resilience with the benefits of a diversified and large domestic
market. French inflation was lower than other European countries at
6% driven by state interventions in the energy markets and other
stimuli. In common with Germany, the ECB increasingly raised the
base rate from 0% to 2.5% by February 2023 with a further 0.50%
increase announced for March.
The French property investment market had a strong year with an
increase of 6% to c. EUR25 billion. The strongest growth was
recorded in the larger regional cities like Lyon and Lille, while
Greater Paris was marginally up but with a mixed picture between
the different districts.
In the letting market, after two relatively flat years, we saw a
return to a more dynamic market with 10% growth in take-up in
Greater Paris. The Lyon market continued to perform strongly with
16% growth over the year. Vacancy in Greater Paris was up
marginally to 7.8% but with large variances between the districts;
Paris CBD has 3.5% vacancy while La Défense is close to 16%.
Vacancy in Lyon fell from 5.2% to 4.4% on the back of the strong
demand mentioned above.
We expect to see a similar picture for this year with a strong
Lyon market and a fragmented Greater Paris market with pockets of
growth and other areas proving more challenging.
We deliver value through active management
2.6%
2022 year end vacancy rate
Letting success in the French portfolio
At the end of 2022, CLS' French portfolio had a 2.6% vacancy
rate. This is an excellent outcome in the context of average
vacancy rates in Greater Paris in the region of 7.8% and 4.4% in
Lyon. There were no stand-out lettings and thus it is worth
highlighting some of the factors behind our successful active asset
management.
Whilst having offices that are highly competitive in terms of
location, building quality and services with efficient operating
costs is critical, successful lettings are ultimately about
satisfying our current and future tenants. There are a number of
actions that our team take to achieve this:
-- Maintain a close relationship with tenants to meet their
needs and deliver excellent service;
-- React as quickly as possible when a tenant intends to change
their space requirements - offering the best options in our
portfolio;
-- Adapt the premises to the market rapidly in terms of
specifications, size of space, etc.;
-- Renovate any areas immediately upon becoming vacant to
current market quality;
-- Ensure all internal and external team members deliver actions
in progress; and
-- Always meet prospective clients in person.
Rental data(1)
Rental Net rental
income income Contracted Contracted
for the for the Lettable rent at ERV at rent subject EPRA vacancy
year year space year end year end to indexation rate at
GBPm GBPm sqm GBPm GBPm GBPm year end
---------------- -------- ---------- -------- ---------- --------- -------------- ------------
United Kingdom 48.5 48.5 166,234 48.1 54.2 15.9 10.0%
---------------- -------- ---------- -------- ---------- --------- -------------- ------------
Germany 38.0 35.4 357,865 47.4 51.5 30.6 6.1%
---------------- -------- ---------- -------- ---------- --------- -------------- ------------
France 12.9 12.7 71,015 14.7 15.7 14.7 2.6%
---------------- -------- ---------- -------- ---------- --------- -------------- ------------
Total portfolio 99.4 96.6 595,144 110.2 121.4 61.2 7.4%
---------------- -------- ---------- -------- ---------- --------- -------------- ------------
Valuation data(1)
Valuation movement
in the year
---------------- ------------ --------------------- -------- ---------------- --------- ----------- ----------
Market
value Foreign EPRA net EPRA 'topped-up'
of property Underlying exchange initial net initial Equivalent
GBPm GBPm GBPm yield yield Reversion Over-rented yield
---------------- ------------ ---------- --------- -------- ---------------- --------- ----------- ----------
United Kingdom 946.8 (74.7) - 4.9% 5.2% 6.2% 4.9% 5.6%
---------------- ------------ ---------- --------- -------- ---------------- --------- ----------- ----------
Germany 994.1 (34.6) 49.0 3.9% 4.3% 9.1% 7.0% 4.7%
---------------- ------------ ---------- --------- -------- ---------------- --------- ----------- ----------
France 284.2 (15.4) 14.3 4.1% 4.8% 8.1% 4.3% 5.1%
---------------- ------------ ---------- --------- -------- ---------------- --------- ----------- ----------
( 124
Total portfolio 2,225.1 .7) 63.3 4.3% 4.7% 7.7% 5.7% 5.2%
---------------- ------------ ---------- --------- -------- ---------------- --------- ----------- ----------
Lease data(1)
Average lease Contracted rent of leases
length expiring in: ERV of leases expiring in:
---------------- ------------------- -------------------------------- --------------------------------
3 to 5 After 3 to 5 After
To break To expiry Year 1 Year 2 years 5 years Year 1 Year 2 years 5 years
years years GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------- ------ ------ ------ -------- ------ ------ ------ --------
United Kingdom 2.9 3.7 3.6 6.0 26.6 11.9 3.7 5.8 27.4 11.8
---------------- -------- --------- ------ ------ ------ -------- ------ ------ ------ --------
Germany 5.1 5.2 7.7 9.0 16.4 14.3 8.6 9.0 16.9 13.9
---------------- -------- --------- ------ ------ ------ -------- ------ ------ ------ --------
France 2.1 4.9 2.2 1.0 3.1 8.4 2.0 0.9 3.1 9.2
---------------- -------- --------- ------ ------ ------ -------- ------ ------ ------ --------
Total portfolio 3.7 4.5 13.5 16.0 46.1 34.6 14.3 15.7 47.4 34.9
---------------- -------- --------- ------ ------ ------ -------- ------ ------ ------ --------
1 The above tables comprise data for our offices in investment
properties and held for sale (see note 12). They exclude owner
occupied, land, student accommodation and hotel.
Key performance indicators
Measuring the performance of our strategy
EPRA earnings per share
Definition
EPRA earnings is a measure of operational performance and
represents the net income generated from the Group's underlying
operational activities.
Why this is important to CLS
This KPI gives relevant information to investors on the income
generation of the Group's underlying property investment business
and an indication of the extent to which current dividend payments
are supported by earnings.
Our target
We will seek to grow the earnings of the business alongside net
asset value.
Progress
EPRA earnings per share for 2022 was 11.6 pence.
Total accounting return
Definition
Total accounting return is the aggregate of the change in EPRA
NTA plus the dividends paid, as a percentage of the opening EPRA
NTA.
Why this is important to CLS
This KPI measures the increase in EPRA NTA per share of the
Company before the payment of dividends and so represents the value
added to the Company in the year.
Our target
Our target total accounting return is between 3% and 9%.
Progress
In 2022, the total accounting return was -3.7%.
More detail is provided in the Chief Financial Officer's review
and in note 6.
Vacancy rate
Definition
Estimated rental value (ERV) of immediately available space
divided by the ERV of the lettable portfolio.
Why this is important to CLS
This KPI measures the potential rental income of unlet space
and, therefore, the cash flow which the Company would seek to
capture.
Our target
We target a vacancy rate of between 3% and 5%; if the rate
exceeds 5%, other than through recent acquisitions, we may be
setting our rental aspirations too high in the current market; if
it is below 3% we may be letting space too cheaply.
Progress
At 31 December 2022, the EPRA vacancy rate was 7.4%.
More detail is provided in the Country business reviews and in
note 6.
Total shareholder return - Relative
Definition
The annual growth in capital in purchasing a share in CLS,
assuming dividends are reinvested in the shares when paid, compared
to the TSR of the 24 companies in the FTSE 350 Real Estate Super
Sector Index.
Why this is important to CLS
This KPI measures the increase in the wealth of a CLS
shareholder over the year, against the increase in the wealth of
the shareholders of a peer group of companies.
Our target
Our target total shareholder return (relative) is between the
median and upper quartile.
Progress
The TSR was -24.3%, making CLS the 11th ranked share of the FTSE
350 Real Estate Super Sector Index of 24 companies.
Other performance indicators
In addition to these key performance indicators, the Group also
has a number of other performance indicators by which it measures
its progress. These are regularly reviewed. Three are shown here
but others are in note 6 and are discussed throughout this
strategic report. Our environmental and social indicators
(including health and safety) are discussed in the ESG section of
the Annual Report.
Net initial yield vs cost of debt
We seek to maintain a cost of debt at least 200 bps below the
Group's net initial yield. At 31 December 2022, the cost of debt of
2.69% was 202 bps below the net initial yield of 4.71%.
More detail is provided in the Chief Financial Officer's review
and in note 6.
Administration cost ratios
These measure the administration cost of running the core
property business by reference to the net rental income that it
generates, and provides a direct comparative to most of our peer
group. We aim to maintain the CLS ratio between 15% and 17%. The
administration cost ratio was for 2022 14.4%.
GRESB (ESG) score/100
Our main sustainability indicator is the Group's GRESB rating as
this is an industry standard measure and also due to the difficulty
in drawing conclusions from carbon-related measures due to the
variability in occupancy of our buildings during the pandemic. In
2022 we maintained our GRESB rating of 85 and four green stars.
More detail is provided in the ESG section of the Annual
Report.
Our investment proposition
1. A clear strategy
Key investment tenets
Diversified approach
This approach is across: Countries (we invest in Europe's three
largest economies); Tenants (over 700 tenants spread across most
sectors); and Financing (25 different lenders).
Sole focus on multi-let offices
Long-term investment in high yielding, multi-let offices in
London and the South East of the UK and the larger cities in
Germany and France.
Selected development schemes
Occasional opportunities arise in the portfolio to carry out
development projects to capture rental and capital growth; the
amount of development is kept below 10% of the portfolio value at
any one time. Opportunities to secure alternative uses are pursued
usually until planning permission is secured and then the property
is sold to a developer.
2. Active management
Key investment tenets
Experienced in-house capabilities
In-house asset, property and facilities management teams result
in better cost control, closer asset knowledge and synergies across
the property portfolio.
Secure rents and high occupancy
Targeted occupancy levels above 95%, whilst providing affordable
rents and flexible lease terms to meet tenant demand and so create
opportunities to capture above market rental growth.
Interest rate management
Financing facilities, which are arranged in-house, seek to
balance flexibility, diversity and maturity of funding whilst
ensuring a low cost of debt which is targeted to be at least 200
basis points below the Group's net initial yield.
95%
Targeted occupancy rate
3. Leading track record
Key investment tenets
Disciplined approach to investment
Acquisitions are assessed against strict return and strategic
fit criteria but are pursued on an opportunistic basis with no set
capital allocation across countries. Low yielding assets with
limited potential or where the risk/reward ratio is unfavourable
are sold.
Cash-backed progressive dividend
CLS is a total return share using cash flow generated to pay a
progressive dividend and also to reinvest in the business to
generate further net asset growth. We aim to grow the dividend in
line with the growth of the business, targeting the dividend to be
covered 1.2 to 1.6 times by EPRA earnings.
Financing headroom
Our aim is to keep at least GBP100 million of liquid resources
including financing headroom. This approach gives the ability to
move quickly to complete acquisition opportunities as well as the
flexibility to secure the optimal financing solution.
GBP100m
Targeted liquid resources including financing headroom
4. A focus on sustainability
Key investment tenets
Responsible profit
Across our business model, in everything we do, we seek to
generate responsible profit through employing sustainable long-term
decisions with the environment in mind.
Strong ESG performance
We believe in full transparency and therefore continually submit
our progress to global ESG benchmark schemes in our industry, such
as GRESB. This also allows us to monitor our progress and gives our
stakeholders confidence in our delivery against our
commitments.
Climate risk mitigation
Our in-house sustainability programme is focused on mitigating
our impact on environmental climate risks and energy security
whilst maximising the benefits we deliver to the communities in
which we are involved.
99%
of rated portfolio achieving at least BREEAM In-Use "Good" or
better
Investing in our portfolio
As an active asset manager who stays close to our tenants, CLS
has always invested in our properties to ensure that our offices
provide attractive work environments. Before the Covid pandemic,
CLS was investing around GBP20 to GBP25 million per annum in
refurbishments and routine upkeep across around 10-20
buildings.
in 2022, CLS invested GBP58.3 million in our properties
reflecting changing tenant demands and increased opportunities in
the portfolio with refurbishments taking place in over 30
properties. The works have focussed on the five areas CLS has
identified to enhance value being improved amenity, flexibility,
sustainability, health & wellbeing and digital - more of which
is highlighted in the descriptions of the individual projects.
In 2023, CLS expects capital expenditure to remain at a higher
level of c.GBP40 to GBP60 million as ongoing and other identified
refurbishments are completed. Going forward, we expect capital
expenditure to be around GBP20 to GBP30 million reflecting overall
greater investment, including more sustainability spend. Clearly as
and when more opportunities emerge, spending may be higher
again.
CLS' approach
CLS' underlying philosophy when carrying out a refurbishment or
new development is to transform the space to create distinctive,
unique offices, that are on-trend and provide best-in-class
facilities, appropriate to their location. Our buildings are set
apart from the competition by ensuring flexibility to meet the
changing market and our commitment to the idea that good design is
about people. We carefully consider the tenants who use and enjoy
the spaces to determine the optimum way to modernise the building,
thereby creating the best environment for businesses and their
staff to thrive.
Our approach is to make key improvements that will make the
building more attractive to potential occupiers by providing
services and space, such as better air quality, digital services
and meeting rooms, that help them work more productively. In
addition, this involves introducing or improving amenities that
contribute to their health and wellbeing, such as roof terraces,
biodiversity and end-of-trip facilities. Wherever possible, we also
seek to add value by repositioning/rebranding or increasing the
lettable space on the site.
Sustainability has always been a fundamental part of CLS' DNA
and our approach to refurbishments and developments. However, this
was elevated further by the publication of our enhanced 2021
Sustainability Strategy including our Net Zero Carbon Pathway with
a forecast spend of GBP58 million (now GBP65 million) to achieve
the goal of being New Zero Carbon by 2030. Practically, this has
meant the introduction of photovoltaics across most of our schemes
but also a focus to: improve energy efficiency when refurbishing
buildings; reduce carbon emissions; as well as looking to support
our local communities so they share in the benefit of the
investment we are making.
In 2022, CLS successfully undertook a new development and three
significant refurbishments (in addition to many smaller schemes)
which show this approach in action.
The Coade, Vauxhall Walk
New Build
28,400 sq. ft NIA
GBP18.5 million total investment
ERV on letting GBP1.5 million
This highly sustainable, ground plus 9 storey office, represents
a substantial increase in lettable office space on the site from
4,500 sq. ft to 28,400sq. ft.
Digital
Our Digital Building Strategy places technology at the service
of people to create more comfortable, safe and productive office
environments.
The development of The Coade is an example of CLS' digital
building strategy in action. For example, 2 fibre lines have been
installed to provide a main internet connection and a backup line,
thereby reducing the risk of internet outages to the tenant's
business. Cat 6A cables have been distributed throughout the
building and placed in risers across all the floors allowing
tenants to establish swift internet access, without the delay
usually experienced by requiring wayleave agreements. Wi-Fi points
have been installed throughout all landlord/communal areas,
including the terraces but also on the office floors as part of the
internet package.
Community
CLS is committed to sharing the value of the investment it makes
in buildings with the surrounding community.
At The Coade, this has involved developing Employment and Skills
Construction and Occupation Plans to target various work
opportunities for people normally resident within Lambeth and
payments toward training and employability programmes. An
Affordable Workspace of 72sqm will also be provided on a 15 year
lease and fitted-out to support a local charity or not-for-profit
organisation.
Health & Wellbeing
One of the key drivers for improved staff productivity within an
office setting is the air quality. At The Coade, CLS ensured that
occupiers could benefit from having openable windows and also
increased the amount of fresh air to the BCO COVID recommendation
of 14 litres per second.
Artesian, Prescot Street
92,500 sq. ft NIA
GBP31 million total investment
ERV on letting GBP4.8 million
Digital
Artesian is the first CLS building designed to achieve
Wiredscore Platinum certification. Key features include the diverse
points of entry on different sides of the building for incoming
internet providers, free WiFi in common areas including the roof
terrace to enable tenants and their guests to remain connected
throughout the building and provision of pre-defined space on the
roof top for tenants who have additional communication equipment or
want their own backup generator space.
Sustainability
CLS takes the view that green modes of transport, such as
cycling and walking, should be encouraged through provision of
end-of-trip facilities to reduce the impact of travel on the
environment. At Artesian, an area of the lower ground floor,
unsuitable for letting, was identified to provide 163 cycle parks,
15 showers (plus a Disability Discrimination Act shower at ground
floor) and 183 lockers. Drying rooms are also provided on floors
1-6. This new amenity area is designed to achieve Cyclescore
Platinum certification and meets the Greater London Authorities
cycle requirements for a new building.
Originally, only 36 cycle spaces were provided on two separate
floors of the building along with 3 showers.
Health & Wellbeing
Many years ago, approximately half the eastern windows at Lower
Ground, Ground and 1st Floor had been blocked or utilised as vents
for a kitchen, which severely reduced the amount of natural light
available to occupiers. As part of the planning application, CLS
argued for opening up these windows but also, identified areas on
the western and southern elevation for new windows on the upper
floors. The purpose of this is to maximise the amount of natural
daylight available to people working in the building.
Flexion, Berlin
48,400 sq. ft refurbishment
EUR1.4 million total investment
ERV on letting EUR0.7 million
Vacancy of approximately 65,000 sq. ft provided the opportunity
to refurbish the ground floor entrance and four tired, single
office floor layouts into a more modern, flexible space. Following
the refurbishment, which includes co-working space, the building
was rebranded Flexion.
Flexibility
Refurbishment work involved the stripping out of the ground and
4 office floors of the building back to shell and the addition of
new fire protection. This allows for the flexibility to split the
floors down to 2,700 sq. ft areas and therefore suitable for
traditional individual and open-plan offices, as well as think
tanks, creative spaces and meeting spaces.
Improved amenity
Refurbishment work has created a welcoming entrance and
reception area which provides collaboration space. Occupiers and
their guests now have the opportunity to hold informal meetings,
exchange ideas and relax over a coffee.
Sustainability
As part of the CLS commitment to decarbonise its buildings, a
review was undertaken of the technical equipment at the building.
The existing inefficient system has been replaced with natural
ventilation via the windows and cooling at the lowest possible
energy level. In future, a change will be made to the use of heat
pumps for heating and cooling at the lowest possible energy
level.
Park Avenue, Lyon
75,700 sq. ft refurbishment and addition of 2,300 sq. ft
EUR11.2 million total investment
ERV on letting EUR1.7 million
CLS' strategy to acquire all the floors previously in other
ownerships secured the ability to transform the internal and
external parts of the building into a truly sustainable modern
office. An additional 2,300 sq. ft of rentable area was created on
the 2nd, 8th and 9th floors.
Sustainability
Works included the complete façade replacement and new windows,
which is expected to achieve BREEAM 'Excellent' certification and
reduce the carbon emissions of the building by approximately 50%.
New solar shading has also been provided which helps reduce
overheating and the amount of air conditioning required.
Health & Wellbeing
Through the design process, a 1,991 sq. ft communal roof terrace
and a 2,088 sq. ft private roof terrace space were added by
extending over landings. This will provide outdoor space for
tenants to relax and unwind, with stunning views towards the green
space of Parc de la Tête d'Or.
Improved amenity
Arriving at the building, occupiers are now greeted by a
landscaped pedestrian square and new reception which gives easier
access. WC's in the building have been refurbished and converted to
provide DDA facilities. Bicycle facilities have been enlarged to
provide parking for 40 cycles and 6 electric vehicle chargers have
been installed in the underground carpark.
Financing at CLS
One of the key parts of CLS' business model is "Securing the
right finance" with the clear objectives of achieving a low cost of
debt, utilising diversified sources of funding and maintaining a
high level of liquid resources. This approach has served CLS well
over its history but CLS retains a dynamic approach which is
continually assessed as market conditions change.
CLS ensures that its flexible approach to the Group financing
strategy fits into a framework where the company's appetite for
financial risk and approach to controlling it are defined. The
treasury policy considers both individual transactions as well as
their cumulative impact and the policy is presented to the Board
for review and approval annually. Overall, CLS has an active
approach to its treasury management with the key aspects
highlighted below.
Our Approach
Secured vs unsecured, Special Purpose Vehicle ("SPV") and
portfolio financings, and other facilities
The preferred financing model for CLS has been, and continues to
be, non-recourse financing arranged for individual properties and
secured by these properties (mortgage-type loans in SPVs). As a
result, the parameters and characteristics of the properties being
financed are decisive for the financing terms and conditions
agreed.
Portfolio loans secured by multiple properties are also used
when circumstances require it or to obtain better terms. CLS has
more portfolio financings in the UK as this has allowed longer term
loans (i.e. longer than 5-years) to be secured whereas in Europe, 7
or even 10-year loans can be secured on individual properties.
From time to time, CLS has evaluated unsecured loans but has
concluded against a switch as the rates obtained on our European
secured loans are very competitive and that across the portfolio,
but particularly in the UK, very high break costs would be
incurred. Also in the current market, secured financing is cheaper
than the unsecured market and thus remains our preference.
CLS had 46 loans at the end of 2022 with 25 different lenders
and places great importance on the value, and diversity, of these
relationships. In addition, CLS had unsecured and undrawn
facilities of GBP50 million, being an overdraft of GBP20 million
and a GBP30 million Revolving Credit Facility ("RCF"). We continue
to explore whether to increased the size of the RCF, recognising
the increased size of the Group, to provide greater
flexibility.
Loan To Value ("LTV")
For the CLS Group, a LTV in the range 35% to 45% is targeted,
albeit it could be higher or lower for a short period of time. As
it is a net debt measure, it should be noted that Group LTV is not
impacted by the original LTV of loan transactions but instead by
valuations, acquisitions, capex and disposals. Given the more
uncertain economic backdrop currently, a loan to value below 40% is
being targeted in the short-to-medium-term which is expected to
result in CLS being a net seller of property in 2023.
For individual financing transactions, CLS will try to secure as
high a loan amount as available from the lenders approached, whilst
remaining conservative and ensuring that the cost of debt is not
adversely affected. The general aim is to secure LTVs at prevailing
levels, based on market knowledge and understanding of lenders'
appetite, with an individual maximum LTV of 80%. If the LTV of a
loan transaction falls below 35% (through amortisation or an
increase in valuation), the aim is to refinance the loan to release
some equity on expiry or earlier if significant break costs are not
incurred.
Debt maturity
For individual loan transactions, the general aim is to secure
as long a maturity as available from the lenders approached,
assuming the property financed is a long-term investment. The
maturity though will be adapted to the specifics of the property.
For instance, it may be best to execute a short-term extension to a
loan when a property's letting situation is expected to improve and
then refinance longer-term when that letting situation has
improved.
The overall intention is to align the maturity of the debt
portfolio with that of the WAULT of the property portfolio.
However, if market lease terms continue to shorten, a longer
relative debt maturity may be preferred. The intention is to avoid
large refinancing risks over short time periods where possible. The
general rule is that a maximum of 30% of the Group's debt is in one
currency or 20% of consolidated Group debt should mature in any
12-month period, although, pre the recently agreed refinancings,
2024 was an outlier. However, this is somewhat dependent on the
availability of longer-term debt at different periods of time.
Fixed/floating debt mix and hedging strategy
Fixed rate debt is targeted to be in the range 60% to 90% of
total group debt. Fixed rate debt is defined as fixed rate loans
and floating rate loans swapped to fixed rate via interest rate
swaps. The advantage of fixed rate debt is that it gives certainty
of cash flow but on the downside can result in high break costs
when repaid early due to make whole clauses with the vice versa
true for floating rate debt. Fixed rate debt will not usually be
chosen if there is much doubt about keeping the property for the
life of the loan.
On the whole, lenders require floating rate loans to be hedged.
When negotiating loans, CLS will aim for a flexible interest rate
hedging approach if possible (e.g. only hedge part of the loan, or
only if underlying index rate resets above a defined level). A
minimum 50% of floating rate debt is to be hedged.
Whilst fixed rate debt is the default position, CLS always
evaluates each property on its merits. Floating rate debt is
sometimes preferred as a short-term solution whilst the letting
situation is improved or as a sale of the building is expected in
the near term. In the current market, more floating rate loans have
been executed partly in the expectation that interest rate
volatility and swap levels will reduce in the short to medium
term.
CLS uses natural FX hedging by borrowing in the currency of the
country in which the property is located and does not seek to hedge
the equity portion of a property's financing. Interest rate hedging
is limited to simple vanilla instruments such as interest rate
swaps, and interest rate caps or collars. There are no speculative
transactions over-hedging, speculative transactions nor hedging at
a group level.
Sustainable finance
Sustainability is a fundamental part of CLS' DNA with it being
one of: our key performance indicators; our quality differentiators
for refurbishments; and our investment tenets. In 2020 and 2021,
CLS executed our first two "green" loans with Aviva and Scottish
Widows, each of which had a 10-basis point incentive for meeting
certain sustainability targets which align with our Net Zero Carbon
Pathway for these properties. All KPIs have been met.
CLS has approximately 20% of its debt portfolio in green loans
and is targeting to have over 50% by 2030. We think this target
should be achievable as the UK financing market is fairly well
advanced in terms of sustainable financing, the markets in Germany
and France are now increasingly maturing. We would therefore
anticipate securing more green financing in the next couple of
years.
Going forward
2023 focus and priorities
On the whole, CLS only starts to engage with banks around six
months before the expiry of a loan as at that point there is good
clarity around the property's letting situation and the loan is now
within the bank's period of focus. The same situation holds true in
2023 but CLS is now more focused on all the financings in 2023 and
2024 given the relatively higher proportion of the debt portfolio
maturing during this period and greater uncertainty in the
market.
Considerable progress has been made in the first two months of
2023 with extending or refinancing 2023 and 2024 maturities such
that 6 financings have been executed, received credit approval or
been agreed. These actions not only spread out the debt profile but
would have resulted in an increase in the debt maturity from 3.8 to
4.2 years.
Once these financings have been executed, the total debt to be
refinanced over 2023 and 2024 would have reduced from GBP505
million to GBP301 million. This would leave 7 refinancings left in
2023 for GBP94 million, all of which are in Germany and France, and
we are confident that these will be completed successfully.
Evolution of our cost of debt
Given the increase in the cost of debt for floating rate loans
during 2022 and the start of 2023, and as existing fixed rate loans
mature, CLS' cost of debt will increase. CLS' cost of debt hit an
all time low of 2.22% at 31 December 2021 and had risen to 2.69% at
31 December 2022.
Based on the current interest rate yield curve, it is expected
that CLS' overall cost of debt will increase by 50-60 basis points
in 2023 (14% of total debt to be refinanced at c.250 basis points
higher than the current group weighted average and 24% floating and
unhedged) cost of debt will rise by a further by 20-25 basis points
in 2024 despite rates having peaked in 2022 due to the expiration
of historic low cost fixed rate debt (a further 13% of total debt
to be refinanced at c.200 basis points higher than the current
weighted group average as well as 38% unhedged or recently
refinanced). However, the increases in the cost of debt will be
lower if disposals of properties financed with higher rate floating
debt are made as expected.
It should be noted that 5-year sterling swap rates have already
fallen by 120 basis points since their peak rates at the end of the
third quarter of 2022 and could well drop further. In addition, as
highlighted in the Chief Executive Office's Review, there are
considerable increases in rental income that can be captured by
filling existing vacancy and upcoming vacancy in refurbishment
schemes which would more than offset these increased finance costs,
albeit this rental income may take longer to come through.
From the future of the office to the office of the future
In the 2020 Annual Report, which was published at the height of
the Covid-19 pandemic, we wrote about the then current thinking
regarding the future of the office. There was considerable
uncertainty and a whole spectrum of views about the future shape of
the market and the use of space. The future of offices remains a
very pertinent topic of debate for many audiences including
workers, urban dwellers, journalists and the more general
population, but moreover it is of paramount importance for office
investors.
In the past two years, much more clarity has emerged with: many
of the trends evident before Covid having accelerated; hybrid
working becoming much more established and accepted; and the office
market becoming bifurcated with quality, in its many forms,
becoming the determining criteria. Consequently, tenants are
becoming much more certain about their letting needs and have
therefore made letting enquiries or decisions on this basis. What
is also clear is that any concerns of a seismic shift in office
demand, comparable to the retail property market, have been
disproved.
It has also become evident that not all countries in our
portfolio or even macro (and some micro) locations are responding
in the same ways.
Working from home is more popular in the UK, particularly in
London with its longer commuting times, whereas, often for cultural
reasons, the office is more popular in Germany and France. Given
that CLS has more of its properties in the UK, much of the
commentary refers to this market. At its essence, the future
direction and trends of the market come down to the balance between
demand and supply; albeit even this is somewhat nuanced with the
increased demand for quality limiting and reducing the available
supply.
Demand
Hybrid working and occupancy
One of the clearest indicators of a shift in office demand has
been the reduction in office occupancy, and the consequent
reduction in travel, leisure and other associated infrastructure,
as a result of hybrid working. It does though need to be remembered
that pre-pandemic, occupancy (which was not hugely then monitored)
was thought to be only 60% to 70% as a result of holidays, illness,
working at other sites and existing flexible work policies, amongst
others.
Since the roll-out of vaccines and the lifting of Covid
restrictions, occupancy has been slowly rising to anywhere between
30% and 50% on average, with far greater attendance on Tuesdays,
Wednesdays and Thursdays. However, this is not an even trend across
all types of property or locations and there are great variations
by industry as many jobs are just not feasible at home.
The appeal of working from home appears to be diminishing with
LinkedIn reporting in January 2023 that the number of fully remote
jobs advertised in the UK had fallen for the eight month in a row
to 11% - the lowest level since the site began collecting data. The
return to the office is driven by multiple factors such as an
improved office environment and better user experience and also,
maybe counterintuitively, more presenteeism due to a weakening jobs
market and greater employer power. As highlighted by Fredrik in his
review, the benefits of being in an office such as collaboration,
communication and creativity are also being increasingly valued
again.
The Flex market has risen in importance but it only suits
central locations and employers who are willing to pay much higher
prices for greater flexibility and top-end amenities.
CLS has a limited flex offering, Base Offices, which we are
currently rolling out in a few, select locations as a business
incubator to encourage future take-up of greater amounts of space
in the same building.
Quality
One of the other reasons that working from home is diminishing
is the increase in the quality of offices that are now being
offered. Both the challenges and opportunities in European offices
can be summarised as recognising, and responding to, the
experience, behaviour and needs of the end user. To a large extent
it is about enticing workers back to the office but also
recognising what the office does well that cannot be replicated by
video conferencing and using better office design to reinforce
these qualities. In the war for talent, the office acts as the
physical embodiment of a company's culture and plays a vital part
in attracting staff to join a company.
Quality is now the key market differentiator and, in this
bifurcated market, higher prices and greater rental growth are
being commanded by the better-quality space. The elements that we
are seeing, and acting upon, are amenity, flexibility,
sustainability, health & well-being, and digital. More about
how CLS is implementing these quality factors can be read in our
sections on "Investing in our properties" and Sustainability.
Supply
Sustainability
As with quality, sustainability dynamics are nuanced with both
the pull effects of greater requirements for almost all
stakeholders as well as the push impacts of increased regulation.
At its simplest, there is increasing evidence that more sustainable
buildings command higher prices. It is though somewhat hard to
disaggregate the "green" elements of a property's value and more
sustainable buildings tend to be newer. However, it is also clear
that more sustainable buildings lead to a reduction in negative
environmental impacts, lower operational and maintenance costs, and
greater appeal to occupiers concerned with corporate reputation and
sustainability targets.
On the regulatory front, Governments are increasing the Energy
Performance Certificate (or equivalent) ratings with which office
buildings need to comply. In a period of heightened energy and thus
total occupancy costs, this also accords well with tenants'
considerations. In addition, there is an increased emphasis on
"retrofit first" as favoured by CLS rather than new build as the
embodied carbon within existing buildings is taken into account in
considering a building's carbon footprint lifecycle.
In 2023, in response to the post-pandemic world of work with the
new era of flexible working and to meet zero carbon targets, the
British Council for Offices increased its recommended average
density to 10-12m(2) per person compared with the average in 2018
of 9.6m(2) .
With the ability to convert offices to residential under
permitted development rights in the UK being reduced, all of this
is leading to an increased risk of stranded and unlettable assets,
for which as yet there is no obvious solution, and overall less
supply. Colliers estimates that some 20m sq. ft of London office
space, or 10% of the total market, will be unlettable from April
2023 when the new minimum EPC E regulations come in.
Construction
The increased demand for quality, sustainable offices is leading
to a shortage of available supply, at least in the short to medium
term. England's office footprint had already declined by 6 per cent
between 2014 and 2021. In Q4 2022, Cushman and Wakefield reported
that the availability of grade-A office space in London was at its
lowest level since 2010 and assuming demand remained consistent,
further rent increases could be expected. Whilst Knight Frank
estimates that London will have an office shortfall of 11 million
sq. ft between 2023 and 2026.
This situation has been exacerbated by unfavourable economic
conditions in the construction market with DZ HYP commenting on the
German market in October 2022 that, "Since space under construction
is usually already let, the postponement of planned projects due to
increased construction and financing costs could lead to an even
scarcer supply of space."
This reduced supply and more pre-lets for new-build offices will
also start to benefit the office refurbishments that CLS is
carrying out.
Conclusion
In summary, there is still no definitive answer to all the
questions around the future of the office in a post-pandemic world
but there are much clearer trends which continue to evolve, e.g. we
are currently seeing greater employer demands and employee desires
for increased time in the office. It is expected that the market,
as before, will still be heavily subject to overall supply and
demand factors. We believe that as a result of hybrid working there
will be around 10% lower demand but there will also be much lower
supply particularly for the "Future Office Winners" which are high
quality, sustainable, and well-connected to public transport and
urban amenities.
Valuation trends are currently dominated by macro-economic
factors in terms of forecast interest rates, GDP and employment.
Although rental indexation, which applies to the majority of CLS'
properties, is acting as a significant offset. Ultimately, the
Future Office Winners will start to see higher valuations coming
through from rental growth and lower yields. CLS' business model,
to own the best offices in our locations, fits very well into the
new world.
Our risk management framework
How we manage and govern risk
Top down - the Board and its committees create the
boundaries
The Board
The Board has overall responsibility for risk and for
maintaining robust risk management and internal controls. The Board
is responsible for establishing the extent to which it is willing
to accept some level of risk to deliver CLS' strategy i.e.
determining a risk appetite. It is also responsible for undertaking
a thorough risk assessment. The strategy and strategic objectives
for any one year are discussed alongside monitoring the longer-term
viability of the Group. The Board sets business wide delegated
authority limits. Risk management processes, which include health
and safety, human resources and sustainability risk management
amongst others, are employed within the business and updates are
reported to the Board at each meeting.
The Audit Committee
The Audit Committee is the key oversight and assurance function
for risk management, internal controls and viability. An update on
risks and the control environment is presented at each Audit
Committee meeting including the results of any internal control
review procedures undertaken in the period. Senior managers also
attend Audit Committee meetings to discuss specific risk areas and
these discussions are supplemented by external advisors where
relevant. The Audit Committee then reports up to the Board on the
effectiveness of risk management and internal controls.
The Executive Committee
The Executive Committee meets weekly and comprises the CEO and
the CFO together with other senior leaders as required. It has
day-to-day operational oversight of risk management. Major
business-wide decisions such as property acquisitions, disposals
and significant strategy changes are discussed at the Executive
Committee meetings including consideration of their impact on risk
assessment and appetite. These are reviewed by the Board before
implementation, subject to authorisation limits.
The Senior Leadership Team
The risks, being both principal and emerging, which the Group
faces are reviewed and monitored in Senior Leadership Team meetings
throughout the year and presented to the Board and Audit Committee
at least every six months for further discussion and oversight. The
Senior Leadership Team comprises the CEO, the CFO, the COO,
regional business heads as well as other senior managers and meets
every fortnight.
Bottom up - Management of risks throughout the business
Each business area operates various processes to ensure that key
risks are identified, evaluated, managed and reviewed
appropriately. For example:
-- a monthly asset management portfolio review for each region
is prepared and circulated to the Board which outlines key business
risks, developments and opportunities; and
-- the development team convenes risk and opportunity workshops
with the design team at the feasibility stage of development
projects. Regular reviews are then part of the design development
to ensure the continuous identification and management of risks
throughout the development process.
The potential risks associated with loss of life or injury to
members of the public, customers, contractors or employees arising
from operational activities are continually monitored. Competency
checks are undertaken for the consultants and contractors we engage
and regular safety tours of our assets are undertaken by the
property management team.
In addition, the wellbeing of our employees is a key focus for
the Group and various activities are supported by the Board
including the delivery of annual mental health workshops and
company-funded employee contributions to promote healthy lifestyle
initiatives such as gym, or other sports club, memberships. In this
way some people risks are somewhat mitigated.
The Group invested in an internal controls and risk software at
the end of 2021. Work continued throughout 2022 to populate this
system so that we can fully embed an effective risk management
structure within our operations as well as monitor and report the
risks and their associated internal controls more efficiently to
the Audit Committee and the Board.
Our priorities for 2022
-- Roll-out of risk and internal control software.
-- Implement Grant Thornton findings.
-- Establish milestone targets for Net Zero Carbon pathway.
-- Engage external consultants to assist us with in-depth
analysis of climate-related resilience risk set across different
climate scenarios.
-- Establish Risk and Sustainability Committee.
-- Establish benchmarks and targets for Social Value
Framework.
-- Make improvements based on tenant surveys.
-- Simulate a major business interruption to test the Group's
updated business continuity plan.
-- Ensure Cyber Essentials plus ranking retained.
What we did in 2022
-- We established our Sustainability Committee to oversee the
implementation our sustainability strategy, incorporating our Net
Zero Carbon Pathway and Social Value framework. The Committee
discussed strategy implementation, Net Zero Carbon Pathway
progression and development of our Social Value Framework.
-- Software for modelling the impact of physical climate risk on
our property portfolio was launched.
-- The Board and Senior Leadership Team had an externally
facilitated risk workshop to discuss the principal risks of the
Group, the associated risk appetite and risk assessment and
emerging risks.
-- Cyber security protection levels have been raised to a market
leading position as well as ensuring compliance with industry
standards such as Cyber Essential Plus.
Risk assessment and appetite
Risk appetite
Our risk appetite is reviewed at least annually and assessed
with reference to changes both that have occurred, or trends that
are beginning to emerge in the external environment, and changes in
the principal risks and their mitigation. These will guide the
actions we take in executing our strategy. Whilst our appetite for
risk will vary over time, in general we maintain a balanced
approach to risk. The Group allocates its risk appetite into five
categories:
Very low: Avoid risk and uncertainty
Low: Keep risk as low as reasonably practical with very limited,
if any, reward
Medium: Consider options and accept a mix of low and medium risk
options with moderate rewards
High: Accept a mix of medium and high risk options with better
rewards
Very high: Choose high risk options with potential for high
returns
The Board has assessed its risk appetite for each of the Group's
principal risks as follows:
Change in risk
Principal risk 2022 Risk appetite 2021 Risk appetite appetite
--------------
1. Property High Medium Increased
------------------------ ------------------ ------------------ --------------
2. Sustainability Medium Medium No change
------------------------ ------------------ ------------------ --------------
3. Business interruption Low Low No change
------------------------ ------------------ ------------------ --------------
4. Financing Medium Medium No change
------------------------ ------------------ ------------------ --------------
5. Political & economic Medium Medium No change
------------------------ ------------------ ------------------ --------------
6. People Medium Medium No change
------------------------ ------------------ ------------------ --------------
On reviewing our risk appetite, the Board recognised that there
are factors outside of the Group's control, for example the market
that influences their appetite in any one year. In 2022, the market
uncertainty meant that in order to continue to operate our business
model effectively, a model that has been tried and tested over
decades, it was necessary to increase appetite for property risk.
The Board do not consider this an increase in their appetite per se
but rather a reflection that that their appetite for property risk
will align with the market in which the Group does business. In
addition to the macro-economic factors, on reviewing our risk
appetite the Board took note of the prior year divergence between
risk appetite and risk assessment.
Risk assessment
The general risk environment in which the Group operates has
remained at a higher level over the course of the year. This is
largely due to the uncertain Global and European economic
conditions, particularly higher interest rates and inflation and
the impacts of the continued war in Ukraine.
Throughout the year, the Board monitored the changing situation
and considered its effect on the business, as it will continue to
do so going forward. The impact of the market uncertainty is
discussed in the CEO review and the individual country property
reviews. The Board continues to be confident in the CLS business
model and the office market.
In considering our principal risks, set out on the following
pages, any potential impact as a result of the market uncertainties
has been taken into account.
Change in risk Current direction
Principal risk Risk assessment profile in year of travel
-----------------
1. Property High Unchanged No change
------------------------ --------------- ---------------- -----------------
2. Sustainability Medium Unchanged Increasing
------------------------ --------------- ---------------- -----------------
3. Business interruption Low Reduced No change
------------------------ --------------- ---------------- -----------------
4. Financing High Increased No change
------------------------ --------------- ---------------- -----------------
5. Political & economic High Unchanged No change
------------------------ --------------- ---------------- -----------------
6. People Medium Unchanged Reducing
------------------------ --------------- ---------------- -----------------
Risk assessment vs risk appetite
The Board's risk appetite in relation to the Group's principal
risks is broadly aligned. As shown in the table below, there is
divergence of risk appetite and risk status in relation to the
financing, and political and economic principal risks. The Board
accepts there are factors in relation to these principal risks that
are outside the Group's control and are likely to change over time.
Mitigating actions have been put in place to ensure financing risk
is adequately managed and monitored to reduce the potential impact
on the Group. The Board recognises that not all risk can be fully
mitigated and that they need to be balanced alongside commercial
and political and economic considerations. If a difference between
the Board's risk appetite and the risk assessment persists for an
extended period, this variance is debated as to whether and how the
gap should be closed.
1. 2. 3. Business 4. 5. Political 6.
2022 ratings Property Sustainability interruption Financing & economic People
-------
Risk assessment High Medium Low High High Medium
--------------- --------- --------------- ------------- ---------- ------------ -------
Risk appetite High Medium Low Medium Medium Medium
--------------- --------- --------------- ------------- ---------- ------------ -------
Our principal risks
Our principal risks are discussed over the following pages along
with any change in their risk profile since the last year end and
the current direction of travel as well as our risk mitigation
actions and plans. Whilst we do not consider there has been any
material change to the nature of the Group's principal risks over
the last 12 months, several risks remain elevated as a result of
the challenging external environment and significant ongoing
uncertainty.
The following pages are only focused on our principal risks
being those that have the greatest impact on our strategy and/or
business model. In addition, there are many lower level operational
and financial risks which are managed on a day-to-day basis through
the effective operation of a comprehensive system of internal
controls.
Change in Link to
risk Strategy
profile Current and
Risk Risk in the direction Business
Principal risk description assessment year of travel Key risks KPI/OPI Model:
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
1. Market High Unchanged No change EPS We acquire
Property fundamentals * Cyclical downturn in the property market which may be TSR(R) the right
and/or indicated by an increase in yields TAR properties
internal VR We secure
behaviours ACR the right
lead to * Changes in supply of space and/or demand (vacancy finance
adverse rate) We deliver
changes to value
capital through
values of * Poor property/ facilities management active
the property management
portfolio or and cost
ability to * Inadequate due diligence and/or poor commercial control
sustain and assessment of acquisitions
improve
income
generation * Failure of tenants
from these
assets.
* Insufficient health and safety risk protection
* Building obsolescence
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
2. As a result Medium Unchanged Increasing Transition risks: EPS We acquire
Sustainability of a failure These include regulatory changes, economic shifts, TSR(R) the right
to plan obsolescence and the changing availability TAR properties
properly for, and price of resources. VR We deliver
and act upon, Physical risks: ACR value
the potential These are climate-related events that affect our supply through
environmental chain as well as the buildings' physical active
and form and operation; they include extreme weather events, management
social impact pollution and changing weather patterns. and cost
of our control
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.
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
3. Data loss; or Low Reduced No change EPS We acquire
Business disruption to * Cyber threat TSR(R) the right
interruption corporate or TAR properties
risk building VR We secure
management * Large scale terrorist attack ACR the right
systems; or finance
catastrophic We deliver
external Environmental disaster, power shortage or pandemic value
attack; or through
disaster; may active
limit the management
ability of and cost
the business control
to operate
resulting in
negative
reputational,
financial and
regulatory
implications
for long term
shareholder
value.
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
4. The risk of High Increased No change EPS We secure
Financing risk not being * Inability to refinance debt at maturity due to lack TSR(R) the right
able to of funding sources, market liquidity, etc. TAR finance
source Cost of We
funding in debt continually
cost * Unavailability of financing at acceptable debt terms assess
effective whether to
forms will hold or
negatively * Risk of rising interest rates on floating rate debt sell
impact properties
the ability
of the Group * Risk of breach of loan covenants
to meet its
business
plans or * Foreign currency risk
satisfy its
financial
obligations. * Financial counterparty risk
* Risk of not having sufficient liquid resources to
meet payment obligations when they fall due
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
5. Significant High Unchanged Reducing EPS We acquire
Political and events or * Ongoing transition of the UK from the EU TSR(R) the right
economic changes in TAR properties
the Global VR We secure
and/or * Global geopolitical and trade environments ACR the right
European finance
political We deliver
and/or value
economic through
landscape active
may increase management
the and cost
reluctance of control
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.
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
6. The failure Medium Unchanged Reducing EPS We deliver
People to attract, * Failure to recruit senior management and key TSR(R) value
develop and executives with the right skills TAR through
retain the VR active
right people ACR management
with the * Excessive staff turnover levels and cost
required control
skills, and
in an * Lack of succession planning
environment
where
employees can * Poor employee engagement levels
thrive, will
inhibit the
ability of
the Group to
deliver
its business
plans in
order to
create long
term
sustainable
value.
-------------- ------------- ---------- --------- ---------- ----------------------------------------------------------- ------- -----------
1. Property risk
This risk remained high during 2022 due to an uncertain market
in response to rising interest rates and a worsening economic
outlook.
Mitigation in 2022 Mitigation in 2023
----------------------------------------------------------- -----------------------------------------------------------
* In-house management model allowing close links with * Continued engagement with tenants to understand their
our tenants needs and space requirements
* First hand knowledge of tenants changing requirements * Targeted capital expenditure often with a focus on
ESG credentials
* Asset management committees meet once a month to
discuss each property * Deliver the disposal of low yielding and asset
management opportunity poor properties
* Investment of GBP58.3 million in our properties
reflecting tenant demands * Continued monitoring of covenant strength and health
of tenants
* Refurbishments taking place in over 30 properties
* Continue high quality provision of property and
facilities management services with an in-house team
* Rigorous and established governance approval
processes for capital and leasing decisions
* Maintain focus on operating our buildings safely
* Disposal of six properties with low yield, limited
asset management potential or risk/reward ratio
unfavourably balanced
* Continue to maintain a high quality and diversified
tenant base
* Health and safety committee that closely monitors
activity and regulation and reports to every Board
meeting
----------------------------------------------------------- -----------------------------------------------------------
2. Sustainability risk
The overall risk assessment remains at Medium. The trend of
global increases in emissions and the increasing world-wide focus
on this area, as well as the resulting focus on carbon and
waste/resource reduction and habitat preservation and restoration
means the risk in this area is increasing.
Mitigation in 2022 Mitigation in 2023
---------------------------------------------------------- -----------------------------------------------------------
* Sustainability Committee instigated to monitor * Continue delivery of NZC pathway
progress
* Complete planned energy efficiency and PV projects
* Detailed sustainability risk registers maintained by
our in-house team which were formally reviewed every
six months * Build on physical risk assessment to develop a
climate resilience strategy
* Acquisition of climate score platform and TCFD
physical risk assessment * Implement a Sustainable and Responsible Supplier Code
of Conduct
* All KPIs for 2022 on green loans met
* Complete and commence implementation of biodiversity
net gain plan
* On track with NZC pathway projects and performance
* Start update to BREEAM In-use V6
* Independent assurance received on all environmental
EPRA SBPR KPI data for more detail
* Improve social value calculation to include supply
chain
* Scope 3 tracking commenced with full calculation for
the first time
* Apply for Living Wage accreditation in the UK
* Baseline social value calculation completed
* Continue implementation of diversity, equity and
inclusion plan
---------------------------------------------------------- -----------------------------------------------------------
3. Business interruption risk
The business interruption risk to long-term shareholder value is
deemed to have reduced in the year due to our robust IT
infrastructure. Companies will continue to see attempted cyber
attacks, phishing and fraud but knowledge and expertise in this
area remains strong and so there is no change in the current
direction of travel.
Mitigation in 2022 Mitigation in 2023
--------------------------------------------------------- -----------------------------------------------------------
* Obtained a Centre of Internet Security 'A' rating * Maintain market leading protection position and Cyber
Essentials Plus certification
* Started the transition from annual penetration
testing to a continuous penetration testing regime * Progress work on digital assets within the Group's
through automation properties (e.g. cyber-attacks on building management
systems)
* Employees tested and trained on cyber security
* Continued implementation of shared property and
finance system across the Group
* External partners used to compliment internal
resource and provide independent reviews
* Continued use of external partners to deliver
holistic approach
* Annual review of each property's specific emergency
plan
--
--------------------------------------------------------- -----------------------------------------------------------
4. Financing risk
The heighted economic uncertainty and interest rate increases
throughout the year has resulted in this risk increasing to
High.
Mitigation in 2022 Mitigation in 2023
----------------------------------------------------------- ----------------------------------------------------------
* Financed, refinanced or extended 12 loans to a value * Be a net seller of property in 2023 to try to reduce
of GBP229.9 million Group LTV below 40%
* Weekly treasury meetings take place with the CEO and * Obtain bids from multiple counterparties to compete
CFO including discussion of financings, rolling 12 for new lending
month cash flow forecasts, FX requirements and
hedging, amongst other items
* Continue weekly treasury meetings
* Weekly cash flow forecasts prepared and distributed
to Senior Leadership Team * Continue weekly updates to cash flow forecasts
* 72% of the Group's borrowings are fixed rate plus a * Maintain level of fixed rate debt between 60 and 90%
further 4% of interest rate caps
* Monitoring lender exposure to ensure no one lender
* Regularly monitored loan covenants represents more than 20% of total Group debt
* CLS borrows in local markets, and in local currencies * Continue to ensure a minimum 50% of floating rate
via individual SPVs to provide a 'natural' hedge debt is hedged
* Maintained a wide number of banking relationship with * Given the significant quantum of debt expiry in 2023
25 lenders across the Group to diversify funding and 2024 conversations with banks to be started
sources earlier than the usual 6 months ahead of refinancing
* Maintained low weighted average cost of debt (2.69%) * Continue implementing well-established Group
financing strategy
* Maintained average debt maturity of 3.8 years
* Significant headroom across three main loan covenants
of between 25% and 35%
* All loans have equity cure mechanisms to repair
breaches
----------------------------------------------------------- ----------------------------------------------------------
5. Political and economic risk
The economic and political uncertainty experienced throughout
2022 remain heightened and the risk is classified as High. However,
there are tentative signs that geopolitical turmoil is calming and
it appears that interest rates and inflation have peaked but as yet
there is no change in current direction of travel.
Risk mitigation in 2022 Mitigation in 2023
----------------------------------------------------------- ---------------------------------------------------------
* Reviewed sanctions processes * Continue to monitor events and trends closely, maki
ng
business responses if needed
* Used third party compliance screening tool for
anti-money laundering checks, and sanction and PEP
lists * Continue to monitor tenants for sanction issues
* Monitored changing regulation particularly in respect * Maintain membership of key industry bodies for
of decoupling from EU for any impact on our business example the British Property Federation, British
model Council of Offices and Better Buildings Partnership
* Encouraged employees to join key industry forums
----------------------------------------------------------- ---------------------------------------------------------
6. People risk
The risk assessment remains medium with the direction of travel
somewhat reducing with the post Covid-19 "great resignation" over
however low unemployment rates across Europe means CLS must remain
an attractive employer as the war for talent continues.
Risk mitigation in 2022 Mitigation in 2023
---------------------------------------------------------- ---------------------------------------------------------
* CLS Group wide staff conference held in Windsor, UK * Undertake staff survey
* Engaged workforce advisory panel * Continue work with workforce advisory panel
* Quarterly mental health workshops carried out * Monitor market to ensure competitive remuneration
packages across the Group
* Successful recruitment of Head of Germany Asset
Management * Introduce revised employee bonus scheme aligned to
Group performance
* Implemented multi-lingual learning platform
---------------------------------------------------------- ---------------------------------------------------------
Emerging risks
We define emerging risks to be those that may either materialise
or impact over a longer timeframe. They may be a new risk, a
changing risk or a combination of risks for which the broad
impacts, likelihoods and costs are not yet well understood, and
which could have a material effect on CLS' business strategy.
Emerging risks may also be superseded by other risks or cease to
be relevant as the internal and external environment in which we
operate evolves. The Senior Leadership Team, which has
representatives from each area of the business, is tasked with
identifying emerging risks for the business and discussing what
impact these risks may have on the business and what steps we
should be taking to mitigate these risks. The Board reviews these
assessments on an annual basis.
In 2022, the Board and the Senior Leadership Team participated
in a facilitated risk workshop to explore the risks and emerging
risks for the CLS Group. No new emerging risks were identified and
the mitigations remain the same.
Time Horizon
------------------ --------------------------------- ---------------------------------- ---------------------
Short Medium Long
< 2-5 >
Risk Potential Impact Mitigation 2yrs yrs 5 yrs
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Regulation/ Increased capital cost Continued ongoing assessment X X
compliance of maintaining our property of all properties against
portfolio. emerging regulatory changes
Increased administration and benchmarking of fit-out
costs to ensure resources and refurbishment projects
sufficient to deliver against third -- party
corporate compliance. schemes.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Increasing Increased cost of operating Ongoing consideration X X X
energy and properties will reduce of, and investment in,
construction attractiveness of tenancies energy efficient plant
costs to existing and potential and building-mounted renewable
customers. energy systems.
Increased costs of refurbishments Continued monitoring of
and developments leading materials, investment
to reduced investment in key skills for staff
returns. and viability assessments
of buildings.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Changes in The attractiveness of Each region updates the X X X
technology our properties may decline Senior Leadership Team
if the challenges to adapt on trends, including technology,
office facilities, to throughout the business.
changing work The in-house management
practices/environment model also gives valuable
expectations of customers insights into tenants'
and advances in technology ongoing needs and potential
and digitisation, are trend changes that can
not met. be incorporated into the
future fit-out of properties.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Changes in Changes in social attitudes In-house asset management X X X
office occupation to agile and flexible model provides the means
trends working practices may for the property team
reduce demand for space to: proactively manage
compared to historic trends customers; and gain real-time
as well as there being insight and transparency
changing needs of occupiers. on changes in needs and
trends.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Workforce Failure to adapt to evolving The establishment of the X X X
and society expectations of an Workforce Advisory Panel
intergenerational and the staff survey process
working population may provide forums for employees
reduce attractiveness to communicate views on
as an employer in the the working environment.
market. The Group also interacts
In response to conflicts, with recruitment agents
economic disparity and to keep abreast of trends
climate change, there in the employment marketplace.
may be greater social
tensions and movements
which may cause staffing
issues.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Climate change Increased risk of weather-related Our sustainability strategy X X
damage to property portfolio continues to evolve and
and reputational impact has been developed in
of not evolving sustainability alignment with Global
goals in line with global Real Estate Sustainability
benchmarks and/or public Benchmarks (GRESB), consideration
expectations. of the UN Sustainable
Development Goals (SDGs)
and climate risk modelling.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Inability to obtain sufficient We are investigating various X
carbon credits at suitable solutions to achieve sufficient
price to offset residual offsets by 2030.
carbon emissions in order
to achieve net zero carbon.
------------------ --------------------------------- ---------------------------------- ----- ------ ------
Going concern & viability
Going concern
Background
CLS' strategy and business model include regular secured loan
refinancings, and capital deployment and recycling through
acquisitions, capital expenditure and disposals. Over the last
thirty years, the Group has successfully navigated several periods
of economic uncertainty, including the recent economic stress
resulting from the Covid-19 pandemic, Russia's invasion of Ukraine
and the cost-of-living crisis. The Group continues to have high
rent collection and low bad debts, and has a long-term track record
in financing and refinancing debt including GBP229.9 million
completed in 2022 and a further GBP237.3 million subsequent to year
end, of which roughly half has been executed and half for which
credit approval has been obtained by lenders or terms have been
agreed.
Going concern period and basis
The Group's going concern assessment covers the period to 31
July 2024 ("the going concern period"). The period chosen takes
into consideration the maturity date of loans totalling GBP474.4
million that expire by July 2024, of which GBP226.0 million expire
in the last three months of the going concern period. The going
concern assessment uses the forecast cash flows approved by the
Board at its November 2022 meeting as the Base case, updated for
the actual results achieved for 2022, benchmarked against 2023. The
assessment also considers a Severe but plausible case and Reverse
stress testing.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case take account
of the Group's principal risks and uncertainties, and reflect the
current greater uncertainty and more challenging economic backdrop.
The forecast cash flows have been updated using assumptions
regarding forecast forward interest curves, inflation and foreign
exchange, updated for a worsening of these assumptions in 2023 and
2024. The Base case includes the impact of revenue growth,
principally from contractual increases in rent, and increasing cost
levels in line with forecast inflation. An assumed property
valuation reduction of 5% over the going concern period has also
been included.
The Base case is focussed on the cash and working capital
position of the Group throughout the going concern period. In this
regard, the Base case assumes continued access to lending
facilities in the UK, Germany and France, and specifically that
debt facilities of GBP474.4 million expiring within the going
concern period will be refinanced as expected (GBP335.0 million) or
will be repaid (GBP139.4 million, of which GBP125.4 million is
linked to forecast property disposals, with the balance being
planned repayments). The Group acknowledges that these refinancings
are not fully within its control; however, it is highly confident
that refinancings or extensions of these loans will be executed
within the required timeframe, having taken into account:
-- existing banking relationships and ongoing discussions with
the lenders in relation to these refinancings;
-- CLS' track record of prior refinancings, particularly in 2022
when GBP229.9 million was successfully refinanced or extended;
and
-- recent refinancings subsequent to the year end that have been
executed, credit approved by lenders, or where the terms have been
agreed, totalling GBP237.3 million.
Both the Base case and the Severe but plausible case also
include property disposals in the going concern period in line with
the Group's business model and the forecast cash flows approved by
the Board in November 2022. The Group acknowledges that property
disposals are not fully within its control; however, it is highly
confident these transactions will be completed within the going
concern period, based on its history of achieving disposals,
disposals post year end and the status of transactions. The value
of the properties available for disposal is significantly in excess
of the value of the debt maturing during the going concern
period.
The Group's financing arrangements contain Loan to Value
('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage
Ratio ('DSCR') covenants. In the Base case, minimal cure payments
have been forecast given that the Group expects to maintain its
compliance with the covenant requirements.
The near-term impacts of climate change risks within the going
concern period have been considered in both the Base and the Severe
but plausible case and are expected to be immaterial.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been
produced by flexing key assumptions further including: lower rents;
increased service charges; higher property and administration
expenses; falling property values; and higher interest rates. The
flexed assumptions are more severe than CLS experienced during the
2007-2009 global financial crisis and other downturns such as that
experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of
20% until July 2024, impacting forecast refinancings, sales and
cash cures. This is in addition to the 5% in the Base case and the
reduction experienced in 2022.
In the Severe but plausible case, CLS would need to take some
mitigating actions in terms of depositing cash to equity cure some
loans, scaling back uncommitted capital expenditure (without
impacting revenue streams over the going concern period) and
reducing the dividend to the Property Income Distribution required
under the UK REIT rules as well as drawing some of its existing
GBP50 million of currently unutilised facilities of which GBP30
million is committed until 30 June 2023 and GBP20 million is
available subject to certain criteria being met and until further
notice. As with the Base case, it is assumed that loan facilities
are refinanced as they become due. If needed, further disposals
could be considered as there are no sale restrictions on CLS'
GBP2.4 billion of properties.
Reverse Stress Testing
The use of a Severe but plausible case above allows for the
simultaneous consideration of the impact of a number of the Group's
principal risks at the same time. The Board has also considered
Reverse stress testing of the individual assumptions which were
flexed in the Severe but plausible case to determine at which point
the Group runs out of liquidity. These included lower rents,
increased service charges, higher property and administration
expenses, falling property values and higher interest rates. The
most sensitive of the impacts of the Reverse stress tests is on the
Group's loan covenants, given that non-compliance would trigger
cure payments that would further reduce available liquidity. On
average across its 46 loans, CLS has comfortable headroom for the
three main covenant ratios of LTV, ICR and DSCR. This headroom has
reduced from the half-year 2022 position given the investment
property valuation reductions.
The Board considers that the Reverse stress testing is a remote
scenario, given the magnitude of the downside assumptions applied,
in the context of the historic and forecast performance of the
Group and the current economic environment. There is also a remote
likelihood that all the changes modelled would occur at the same
time, and to this extent, during the going concern period, due to
the severity of the assumptions applied and their magnitude, and
the length of the going concern period. In addition, the
assumptions have been applied equally to all regions and thus there
is no benefit given for CLS' geographic and tenant diversity.
Conclusion
Given our track-record, and the progress made on refinancing and
disposals since 31 December 2022, the Directors are highly
confident that the debt falling due for repayment in the going
concern period will be refinanced or settled in line with their
plans for the reasons set out above, rather than requiring
repayment on maturity, or will be extinguished as part of property
disposals in the period. After due consideration, and having taken
into account the key judgements made in relation to the magnitude
and timing of debt maturity and asset disposals during the going
concern period, and the current progress on both these categories
of transactions, the Directors can confirm that they have a
reasonable expectation that the Group and the Company will be able
to continue in operation and meet its liabilities as they fall due,
with no material uncertainties that would cast significant doubt on
the ability of the Group and the Company to continue as a going
concern for the period to 31 July 2024. The Directors continue to
adopt the going concern basis in preparing these Group and Company
financial statements.
Viability statement
Background, period and basis
The Group's viability assessment follows a similar methodology
to the going concern assessment in terms of analysing the Base case
financial forecasts and a Severe but plausible case but makes the
assessment of the viability of the company to continue in operation
and meet its liabilities as they fall due over a considerably
longer period. The same strategy and business model, and track
record, are relevant considerations for the viability
assessment.
The viability assessment covers the period to 31 December 2026
("the viability period"), a period chosen as it is aligned with the
period of the forecast cash flows approved by the Board at its
November 2022 Board meeting. These forecasts comprise the Base case
but they have been updated for the actual results achieved for 2022
and the first two months of 2023. The period of 4 years was chosen
as this is similar to the Group's WAULT and weighted average debt
maturity, and so aligns with the period over which the Group has
sufficient visibility to reliably assess viability.
Forecast cash flows - Base case
As with the Going Concern assessment, the forecast cash flows
prepared for the Base case take account of the Group's principal
risks and uncertainties, and reflect the current greater
uncertainty and more challenging economic backdrop. The forecast
cash flows have been updated using assumptions regarding forecast
forward interest curves, inflation and foreign exchange, updated
for a worsening of these assumptions in 2023 and 2024 but with some
improvement in 2025 and 2026. The Base case includes the impact of
revenue growth, principally from contractual increases in rent, and
increasing cost levels in line with forecast inflation. An assumed
property valuation reduction of 5% over the viability period but no
subsequent bounce back in valuations has also been included.
The Base case is focussed on the cash and working capital
position of the Group throughout the viability period. In this
regard, the Base case assumes continued access to lending
facilities in the UK, Germany and France but given the longer time
period than the going concern period the amounts are
consequentially greater. Within the viability period, debt
facilities of GBP674.5 million expiring will be refinanced as
expected (GBP535.1 million) or will be repaid (GBP139.4 million, of
which GBP125.4 million is linked to forecast property disposals,
with the balance being planned repayments). The Group acknowledges
that these refinancings are not fully within its control; however,
it is highly confident that refinancings or extensions of these
loans will be executed within the required timeframe, having taken
into account:
-- existing banking relationships and ongoing discussions with
the lenders in relation to these refinancings;
-- CLS' track record of prior refinancings, particularly in 2022
when GBP229.9 million was successfully refinanced or extended;
and
-- recent refinancings subsequent to the year end that have been
executed, credit approved by lenders, or where the terms have been
agreed, totalling GBP237.3 million.
Both the Base case and the Severe but plausible case also
include property disposals in the viability period in line with the
Group's business model and the forecast cash flows approved by the
Board in November 2022. The Group acknowledges that property
disposals are not fully within its control; however, it is highly
confident these transactions will be completed within the viability
period, based on their history of achieving disposals, disposals
post year end and the status of transactions. The value of the
properties available for disposal is significantly in excess of the
value of the debt maturing during the viability period.
The Group's financing arrangements contain Loan to Value
('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage
Ratio ('DSCR') covenants. In the Base case, minimal cure payments
have been forecast given that the Group expects to maintain its
compliance with the covenant requirements.
The near-term impacts of climate change risks within the
viability period have been considered in both the Base and the
Severe but plausible case and are expected to be insignificant.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been
produced by flexing key assumptions further including: lower rents;
increased service charges; higher property and administration
expenses; falling property values; and higher interest rates. The
flexed assumptions are more severe than CLS experienced during the
2007-2009 global financial crisis and other downturns such as that
experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of
20% until June 2024, impacting forecast refinancings, sales and
cash cures, with no further falls or recovery of values thereafter.
This is in addition to the 5% in the Base case and the reduction
experienced in 2022.
In the Severe but plausible case, CLS would need to take some
mitigating actions in terms of depositing cash to equity cure some
loans as envisaged under the facilities of up to GBP65 million,
scaling back uncommitted capital expenditure (without impacting
revenue streams over the going concern period) and reducing the
dividend to the Property Income Distribution required under the UK
REIT rules as well as drawing some of its existing GBP50 million of
currently unutilised facilities of which GBP30 million is committed
until 30 June 2023 and GBP20 million is available subject to
certain criteria being met and until further notice. As with the
Base case, it is assumed that loan facilities are refinanced as
they become due. If needed, further disposals could be considered
as there are no sale restrictions on CLS' GBP2.4 billion of
properties.
Conclusion
Given our track-record, and the progress made on refinancings
and disposals since 31 December 2022, the Directors are highly
confident that the debt falling due for repayment in the viability
period will be refinanced or settled in line with their plans for
the reasons set out above, rather than requiring repayment on
maturity, or will be extinguished as part of property disposals in
the period. After due consideration, and having taken into account
the key judgements made in relation to the magnitude and timing of
debt maturity and asset disposals during the viability period, and
the current progress on both these categories of transactions, the
Directors can confirm that they have a reasonable expectation that
the Group and the Company will be able to continue in operation and
meet its liabilities as they fall due over the viability
period.
Directors' responsibility statement
Directors' responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with the Companies Act 2006 and United Kingdom adopted
International Accounting Standards and International Financial
Reporting Standards (IFRSs) and have elected to prepare the parent
company financial statements in accordance with FRS101 of United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company law the
Directors must not approve the accounts unless they are satisfied
that they give a true and fair view of the state of affairs of the
Group and of the profit or loss of the Group for that period.
In preparing the parent company financial statements, the
Directors are required to:
-- select suitable accounting policies and then apply them
consistently;
-- make judgements and accounting estimates that are reasonable
and prudent;
-- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
In preparing the Group financial statements, International
Accounting Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Group's ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole;
-- the strategic report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face; and
-- the annual report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
This statement of responsibilities was approved by the Board on
8 March 2023.
Approved and authorised on behalf of the Board
David Fuller BA FCG
Company Secretary
8 March 2023
Group income statement
for the year ended 31 December 2022
2022 2021
------------------ ----- ------------------------------------------- ----------------------------------------------
Restated Non-recurring Restated
Non-recurring Recurring items items Total
Recurring items items Total GBPm GBPm GBPm
Notes GBPm GBPm GBPm Note 4 Note 11 Note 4
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Revenue 5 139.7 - 139.7 139.8 - 139.8
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Costs (31.9) - (31.9) (31.8) - (31.8)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Net rental income 5 107.8 - 107.8 108.0 - 108.0
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Administration
expenses (15.7) - (15.7) (15.0) (1.2) (16.2)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Other expenses (16.2) - (16.2) (14.4) - (14.4)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Operating profit
before
revaluation and
disposals 75.9 - 75.9 78.6 (1.2) 77.4
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Net revaluation
movements on
investment
property 14 (136.5) - (136.5) 28.5 - 28.5
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Net revaluation
movements on
equity
investments (3.8) - (3.8) 6.1 - 6.1
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Profit/(loss) on
sale of
investment
property 0.5 - 0.5 (0.1) - (0.1)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Operating
(loss)/profit (63.9) - (63.9) 113.1 (1.2) 111.9
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Finance income 9 10.1 - 10.1 5.9 - 5.9
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Finance costs 10 (26.8) - (26.8) (25.4) - (25.4)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Foreign exchange
loss (0.3) - (0.3) (2.3) - (2.3)
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Impairment of
goodwill (1.1) - (1.1) - - -
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Share of profit
of associates
after tax - - - - 1.4 1.4
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
(Loss)/profit
before tax (82.0) - (82.0) 91.3 0.2 91.5
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Taxation 12 0.1 - 0.1 (14.0) 42.0 28.0
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
(Loss)/profit for
the year
attributable to
equity
shareholders (81.9) - (81.9) 77.3 42.2 119.5
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Basic and diluted
earnings per
share 6 (20.2)p 29.3p
------------------ ----- --------------- ----------------- ------- ---------------- ------------------ --------
Group statement of comprehensive income
for the year ended 31 December 2022
2022 2021
Notes GBPm GBPm
-------------------------------------------------------------------------------------- ----- ------ ------
(Loss)/profit for the year (81.9) 119.5
-------------------------------------------------------------------------------------- ----- ------ ------
Other comprehensive income:
-------------------------------------------------------------------------------------- ----- ------ ------
Items that may be reclassified to profit or loss
-------------------------------------------------------------------------------------- ----- ------ ------
Revaluation of property, plant and equipment 27 1.9 5.5
-------------------------------------------------------------------------------------- ----- ------ ------
Foreign exchange differences 27 28.5 (32.8)
-------------------------------------------------------------------------------------- ----- ------ ------
Deferred tax on revaluation of property, plant and equipment 20 (0.4) (1.0)
-------------------------------------------------------------------------------------- ----- ------ ------
Total items that may be reclassified to profit or loss 30.0 (28.3)
-------------------------------------------------------------------------------------- ----- ------ ------
Total other comprehensive income/(expense) 30.0 (28.3)
-------------------------------------------------------------------------------------- ----- ------ ------
Total comprehensive (expense)/income for the year attributable to equity shareholders (51.9) 91.2
-------------------------------------------------------------------------------------- ----- ------ ------
Group balance sheet
at 31 December 2022
Restated
2021
2022 GBPm
Notes GBPm Note 4
----------------------------------- ----- --------- ---------
Non-current assets
----------------------------------- ----- --------- ---------
Investment properties 14 2,295.0 2,247.1
----------------------------------- ----- --------- ---------
Property, plant and equipment 15 39.6 41.3
----------------------------------- ----- --------- ---------
Goodwill and intangible assets 2.8 3.1
----------------------------------- ----- --------- ---------
Equity investments 2.7 6.6
----------------------------------- ----- --------- ---------
Deferred tax 20 2.8 2.6
----------------------------------- ----- --------- ---------
Derivative financial instruments 22 8.5 0.4
----------------------------------- ----- --------- ---------
Other receivables 17 - 7.7
----------------------------------- ----- --------- ---------
2,351.4 2,308.8
----------------------------------- ----- --------- ---------
Current assets
----------------------------------- ----- --------- ---------
Trade and other receivables 17 15.8 18.1
----------------------------------- ----- --------- ---------
Cash and cash equivalents 18 113.9 167.4
----------------------------------- ----- --------- ---------
129.7 185.5
----------------------------------- ----- --------- ---------
Assets held for sale 16 20.3 44.2
----------------------------------- ----- --------- ---------
Total assets 2,501.4 2,538.5
----------------------------------- ----- --------- ---------
Current liabilities
----------------------------------- ----- --------- ---------
Trade and other payables 19 (58.6) (57.6)
----------------------------------- ----- --------- ---------
Current tax (2.0) (4.5)
----------------------------------- ----- --------- ---------
Borrowings 21 (173.4) (169.1)
----------------------------------- ----- --------- ---------
Derivative financial instruments 22 - (0.7)
----------------------------------- ----- --------- ---------
(234.0) (231.9)
----------------------------------- ----- --------- ---------
Non-current liabilities
----------------------------------- ----- --------- ---------
Deferred tax 20 (110.5) (109.9)
----------------------------------- ----- --------- ---------
Borrowings 21 (932.5) (862.5)
----------------------------------- ----- --------- ---------
Leasehold liabilities (3.6) (3.4)
----------------------------------- ----- --------- ---------
Derivative financial instruments 22 - (0.1)
----------------------------------- ----- --------- ---------
(1,046.6) (975.9)
----------------------------------- ----- --------- ---------
Total liabilities (1,280.6) (1,207.8)
----------------------------------- ----- --------- ---------
Net assets 1,220.8 1,330.7
----------------------------------- ----- --------- ---------
Equity
----------------------------------- ----- --------- ---------
Share capital 25 11.0 11.0
----------------------------------- ----- --------- ---------
Share premium 83.1 83.1
----------------------------------- ----- --------- ---------
Other reserves 27 115.4 88.7
----------------------------------- ----- --------- ---------
Retained earnings 1,011.3 1,147.9
----------------------------------- ----- --------- ---------
Total equity 1,220.8 1,330.7
----------------------------------- ----- --------- ---------
The financial statements of CLS Holdings plc (registered number:
02714781) were approved by the Board of Directors and authorised
for issue on 8 March 2023 and were signed on its behalf by:
Mr F Widlund Mr A Kirkman
Chief Executive Officer Chief Financial Officer
Group statement of changes in equity
for the year ended 31 December 2022
Share Share Other Retained
capital premium reserves earnings Total equity
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- -------- -------- --------- --------- ------------
Note 25 Note 27
---------------------------------------------------------- -------- -------- --------- --------- ------------
Arising in 2022:
---------------------------------------------------------- -------- -------- --------- --------- ------------
Total comprehensive expense for the year - - 30.0 (81.9) (51.9)
---------------------------------------------------------- -------- -------- --------- --------- ------------
Share-based payments - - 0.2 - 0.2
---------------------------------------------------------- -------- -------- --------- --------- ------------
Dividends to shareholders - - - (32.4) (32.4)
---------------------------------------------------------- -------- -------- --------- --------- ------------
Transfer of fair value on property, plant and equipment - - (3.5) 3.5 -
---------------------------------------------------------- -------- -------- --------- --------- ------------
Purchase of own shares - - - (25.8) (25.8)
---------------------------------------------------------- -------- -------- --------- --------- ------------
Total changes arising in 2022 - - 26.7 (136.6) (109.9)
---------------------------------------------------------- -------- -------- --------- --------- ------------
At 1 January 2022 11.0 83.1 88.7 1,147.9 1,330.7
---------------------------------------------------------- -------- -------- --------- --------- ------------
At 31 December 2022 11.0 83.1 115.4 1,011.3 1,220.8
---------------------------------------------------------- -------- -------- --------- --------- ------------
Share Share Other Retained
capital premium reserves earnings Total equity
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- -------- -------- --------- --------- ------------
Note 25 Note 27
---------------------------------------- -------- -------- --------- --------- ------------
Arising in 2021:
---------------------------------------- -------- -------- --------- --------- ------------
Total comprehensive income for the year - - (28.3) 119.5 91.2
---------------------------------------- -------- -------- --------- --------- ------------
Share-based payments - - (0.3) - (0.3)
---------------------------------------- -------- -------- --------- --------- ------------
Dividends to shareholders - - - (30.8) (30.8)
---------------------------------------- -------- -------- --------- --------- ------------
Total changes arising in 2021 - - (28.6) 88.7 60.1
---------------------------------------- -------- -------- --------- --------- ------------
At 1 January 2021 11.0 83.1 117.3 1,059.2 1,270.6
---------------------------------------- -------- -------- --------- --------- ------------
At 31 December 2021 11.0 83.1 88.7 1,147.9 1,330.7
---------------------------------------- -------- -------- --------- --------- ------------
Group statement of cash flows
for the year ended 31 December 2022
2022 2021
Notes GBPm GBPm
------------------------------------------------------------------ ----- ------ -------
Cash flows from operating activities
------------------------------------------------------------------ ----- ------ -------
Cash generated from operations 28 70.5 73.1
------------------------------------------------------------------ ----- ------ -------
Interest received 1.3 0.5
------------------------------------------------------------------ ----- ------ -------
Interest paid (24.2) (24.3)
------------------------------------------------------------------ ----- ------ -------
Income tax paid on operating activities (4.6) (5.1)
------------------------------------------------------------------ ----- ------ -------
Net cash inflow from operating activities 43.0 44.2
------------------------------------------------------------------ ----- ------ -------
Cash flows from investing activities
------------------------------------------------------------------ ----- ------ -------
Purchase of investment properties (83.4) (164.6)
------------------------------------------------------------------ ----- ------ -------
Capital expenditure on investment properties (57.2) (35.8)
------------------------------------------------------------------ ----- ------ -------
Proceeds from sale of properties 56.2 37.0
------------------------------------------------------------------ ----- ------ -------
Income tax paid on sale of properties (3.2) (1.3)
------------------------------------------------------------------ ----- ------ -------
Purchases of property, plant and equipment (0.4) (0.6)
------------------------------------------------------------------ ----- ------ -------
Purchase of intangibles (0.8) (0.9)
------------------------------------------------------------------ ----- ------ -------
Repayment of vendor loan 7.7 -
------------------------------------------------------------------ ----- ------ -------
Cost on foreign currency transactions (0.2) -
------------------------------------------------------------------ ----- ------ -------
Distributions received from associate and investment undertakings - 0.2
------------------------------------------------------------------ ----- ------ -------
Disposal of associate undertakings - 0.5
------------------------------------------------------------------ ----- ------ -------
Net cash outflow from investing activities (81.3) (165.5)
------------------------------------------------------------------ ----- ------ -------
Cash flows from financing activities
------------------------------------------------------------------ ----- ------ -------
Dividends paid 26 (32.4) (30.8)
------------------------------------------------------------------ ----- ------ -------
Purchase of own shares (25.8) -
------------------------------------------------------------------ ----- ------ -------
New loans 144.1 196.7
------------------------------------------------------------------ ----- ------ -------
Issue costs of new loans (1.1) (1.4)
------------------------------------------------------------------ ----- ------ -------
Repayment of loans (99.4) (107.2)
------------------------------------------------------------------ ----- ------ -------
Net cash (outflow)/inflow from financing activities (14.6) 57.3
------------------------------------------------------------------ ----- ------ -------
Cash flow element of net decrease in cash and cash equivalents (52.9) (64.0)
------------------------------------------------------------------ ----- ------ -------
Foreign exchange loss (0.6) (4.3)
------------------------------------------------------------------ ----- ------ -------
Net decrease in cash and cash equivalents (53.5) (68.3)
------------------------------------------------------------------ ----- ------ -------
Cash and cash equivalents at the beginning of the year 167.4 235.7
------------------------------------------------------------------ ----- ------ -------
Cash and cash equivalents at the end of the year 18 113.9 167.4
------------------------------------------------------------------ ----- ------ -------
Notes to the Group financial statements
for the year ended 31 December 2022
1. General information
CLS Holdings plc (the 'Company' or 'Ultimate Parent') and its
subsidiaries (together 'CLS Holdings' or the 'Group') is an
investment property group which is principally involved in the
investment, management and development of commercial properties.
The Group's principal operations are carried out in the United
Kingdom, Germany and France.
The Company is an incorporated public limited company and is
registered and incorporated in the United Kingdom. Its registration
number is 02714781, with its registered address at 16 Tinworth
Street, London SE11 5AL. The Company is listed on the London Stock
Exchange and domiciled in the United Kingdom. The Company did not
change its name during the year ended 31 December 2022 or the year
ended 31 December 2021.
2. Annual financial report
This financial information has been prepared in accordance with
the Companies Act 2006 and United Kingdom adopted International
Accounting Standards and International Financial Reporting
Standards (IFRSs). The Company prepares its Parent Company
financial statements in accordance with FRS 101.
The financial information set out in this announcement is
unaudited and does not constitute the Group's financial statements
for the year ended 31 December 2022 or 31 December 2021 as defined
by Section 434 of the Companies Act 2006. Statutory accounts for
2021 have been delivered to the Registrar of Companies and those
for 2022 will be delivered following the Company's Annual General
Meeting.
The 2021 accounts were audited Deloitte LLP and their report was
unqualified, did not contain an emphasis of matter paragraph and
did not contain any statement under Section 498 (2) or (3) of the
Companies Act 2006.
The Group's full financial statements for the year ended 31
December 2022 will be approved by the Board of Directors and
reported on by the auditors, Ernst & Young LLP, in March 2023.
Accordingly, the financial information for 2022 is presented
unaudited in this announcement.
The financial statements have been prepared on the historical
cost basis, except for the revaluation properties and financial
instruments that are measured at fair values at the end of each
reporting period, as explained in the accounting policies. The
consolidated financial statements, including the results and
financial position, are presented in pounds sterling, which is the
functional and presentational currency of CLS Holdings plc. The
amounts presented in the financial statements are rounded to the
nearest GBP0.1 million.
The annual financial report (produced in accordance with the
Disclosure and Transparency Rules) can be found on the Company's
website www.clsholdings.com. The 2022 Annual Report and Accounts is
expected to be posted to shareholders on 23 March 2023 and will
also be available on the Company's website.
3. Going concern
Background
CLS' strategy and business model include regular secured loan
refinancings, and capital deployment and recycling through
acquisitions, capital expenditure and disposals. Over the last
thirty years, the Group has successfully navigated several periods
of economic uncertainty, including the recent economic stress
resulting from the Covid-19 pandemic, Russia's invasion of Ukraine
and the cost-of-living crisis. The Group continues to have high
rent collection and low bad debts, and has a long-term track record
in financing and refinancing debt including GBP229.9 million
completed in 2022 and a further GBP237.3 million subsequent to year
end, of which roughly half has been executed and half for which
credit approval has been obtained by lenders or terms have been
agreed.
Going concern period and basis
The Group's going concern assessment covers the period to 31
July 2024 ("the going concern period"). The period chosen takes
into consideration the maturity date of loans totalling GBP474.4
million that expire by July 2024, of which GBP226.0 million expire
in the last three months of the going concern period. The going
concern assessment uses the forecast cash flows approved by the
Board at its November 2022 meeting as the Base case, updated for
the actual results achieved for 2022, benchmarked against 2023. The
assessment also considers a Severe but plausible case and Reverse
stress testing.
Forecast cash flows - Base case
The forecast cash flows prepared for the Base case take account
of the Group's principal risks and uncertainties, and reflect the
current greater uncertainty and more challenging economic backdrop.
The forecast cash flows have been updated using assumptions
regarding forecast forward interest curves, inflation and foreign
exchange, updated for a worsening of these assumptions in 2023 and
2024. The Base case includes the impact of revenue growth,
principally from contractual increases in rent, and increasing cost
levels in line with forecast inflation. An assumed property
valuation reduction of 5% over the going concern period has also
been included.
The Base case is focussed on the cash and working capital
position of the Group throughout the going concern period. In this
regard, the Base case assumes continued access to lending
facilities in the UK, Germany and France, and specifically that
debt facilities of GBP474.4 million expiring within the going
concern period will be refinanced as expected (GBP335.0 million) or
will be repaid (GBP139.4 million, of which GBP125.4 million is
linked to forecast property disposals, with the balance being
planned repayments). The Group acknowledges that these refinancings
are not fully within its control; however, it is highly confident
that refinancings or extensions of these loans will be executed
within the required timeframe, having taken into account:
-- existing banking relationships and ongoing discussions with
the lenders in relation to these refinancings;
-- CLS' track record of prior refinancings, particularly in 2022
when GBP229.9 million was successfully refinanced or extended;
and
-- recent refinancings subsequent to the year end that have been
executed, credit approved by lenders, or where the terms have been
agreed, totalling GBP237.3 million.
Both the Base case and the Severe but plausible case also
include property disposals in the going concern period in line with
the Group's business model and the forecast cash flows approved by
the Board in November 2022. The Group acknowledges that property
disposals are not fully within its control; however, it is highly
confident these transactions will be completed within the going
concern period, based on its history of achieving disposals,
disposals post year end and the status of transactions. The value
of the properties available for disposal is significantly in excess
of the value of the debt maturing during the going concern
period.
The Group's financing arrangements contain Loan to Value
('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage
Ratio ('DSCR') covenants. In the Base case, minimal cure payments
have been forecast given that the Group expects to maintain its
compliance with the covenant requirements.
The near-term impacts of climate change risks within the going
concern period have been considered in both the Base and the Severe
but plausible case and are expected to be immaterial.
Forecast cash flows - Severe but plausible case
A Severe but plausible case has been assessed which has been
produced by flexing key assumptions further including: lower rents;
increased service charges; higher property and administration
expenses; falling property values; and higher interest rates. The
flexed assumptions are more severe than CLS experienced during the
2007-2009 global financial crisis and other downturns such as that
experienced in 2020-2022 during the Covid-19 pandemic. A key
assumption in this scenario is a reduction in property values of
20% until July 2024, impacting forecast refinancings, sales and
cash cures. This is in addition to the 5% in the Base case and the
reduction experienced in 2022.
In the Severe but plausible case, CLS would need to take some
mitigating actions in terms of depositing cash to equity cure some
loans, scaling back uncommitted capital expenditure (without
impacting revenue streams over the going concern period) and
reducing the dividend to the Property Income Distribution required
under the UK REIT rules as well as drawing some of its existing
GBP50 million of currently unutilised facilities of which GBP30
million is committed until 30 June 2023 and GBP20 million is
available subject to certain criteria being met and until further
notice. As with the Base case, it is assumed that loan facilities
are refinanced as they become due. If needed, further disposals
could be considered as there are no sale restrictions on CLS'
GBP2.4 billion of properties.
Reverse Stress Testing
The use of a Severe but plausible case above allows for the
simultaneous consideration of the impact of a number of the Group's
principal risks at the same time. The Board has also considered
Reverse stress testing of the individual assumptions which were
flexed in the Severe but plausible case to determine at which point
the Group runs out of liquidity. These included lower rents,
increased service charges, higher property and administration
expenses, falling property values and higher interest rates. The
most sensitive of the impacts of the Reverse stress tests is on the
Group's loan covenants, given that non-compliance would trigger
cure payments that would further reduce available liquidity. On
average across its 46 loans, CLS has comfortable headroom for the
three main covenant ratios of LTV, ICR and DSCR. This headroom has
reduced from the half-year 2022 position given the investment
property valuation reductions.
The Board considers that the Reverse stress testing is a remote
scenario, given the magnitude of the downside assumptions applied,
in the context of the historic and forecast performance of the
Group and the current economic environment. There is also a remote
likelihood that all the changes modelled would occur at the same
time, and to this extent, during the going concern period, due to
the severity of the assumptions applied and their magnitude, and
the length of the going concern period. In addition, the
assumptions have been applied equally to all regions and thus there
is no benefit given for CLS' geographic and tenant diversity.
Conclusion
Given our track-record, and the progress made on refinancing and
disposals since 31 December 2022, the Directors are highly
confident that the debt falling due for repayment in the going
concern period will be refinanced or settled in line with their
plans for the reasons set out above, rather than requiring
repayment on maturity, or will be extinguished as part of property
disposals in the period. After due consideration, and having taken
into account the key judgements made in relation to the magnitude
and timing of debt maturity and asset disposals during the going
concern period, and the current progress on both these categories
of transactions, the Directors can confirm that they have a
reasonable expectation that the Group and the Company will be able
to continue in operation and meet its liabilities as they fall due,
with no material uncertainties that would cast significant doubt on
the ability of the Group and the Company to continue as a going
concern for the period to 31 July 2024. The Directors continue to
adopt the going concern basis in preparing these Group and Company
financial statements.
4. Restatement of prior period
The restatements of the prior period noted below do not change
profit, earnings per share or the net assets of the Group; they are
presentational restatements that reclassify amounts to alternative
financial statement lines.
GBP94.1 million reclassification from property plant and
equipment to investment property
The student accommodation at Spring Mews was held as investment
property until 31 December 2020 when it was reclassified to
property, plant and equipment. The accounting judgement made at
that time was reconsidered and it was determined that it was more
appropriate and market sector comparable to classify the student
accommodation as an investment property and so it has been
reclassified back to investment property. There is no material
impact on the income statement, other comprehensive income or basic
and diluted earnings per share.
GBP4.9 million reclassification from investment in associate to
equity investments
The Group has a 24.2% holding in 24 Media Network AB ("N24").
This holding was accounted for as an investment in associate
(carried interest GBP4.9 million at 31 December 2021 and GBPnil at
1 January 2021. It was determined that significant influence did
not exist and therefore this holding should be reclassified as an
unlisted equity investment under IFRS 9. This has been corrected by
restating each of the affected financial statement lines for the
prior period.
In the income statement the GBP5.1 million presented as 'share
of profit of associates after tax' at 31 December 2021 has
therefore been reclassified to 'net revaluation movements on equity
investments'.
5. Segment information
The Group has two operating divisions - investment properties
and other investments. Other investments comprise the hotel at
Spring Mews and other small corporate investments. The Group
manages the investment properties division on a geographical basis
due to its size and geographical diversity. Consequently, the
Group's principal operating segments are:
Investment properties: United Kingdom
---------------------- --------------
Germany
---------------------- --------------
France
---------------------- --------------
Other investments
2022
------------------- -------------------------------------------------------------------------------------------------
Investment properties
------------------- ----------------------------- --------------- ------------------- ------------------- -------
United Other Central
Year ended 31 Kingdom (1) Germany France investments(1) administration Non-recurring items Total
December 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Rental income 48.5 38.0 12.9 - - - 99.4
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Other
property-related
income 8.2 0.2 - 4.9 - - 13.3
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Service charge
income 11.2 11.3 4.5 - - - 27.0
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Revenue 67.9 49.5 17.4 4.9 - - 139.7
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Service charges and
similar expenses (13.1) (14.1) (4.7) - - - (31.9)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Net rental income 54.8 35.4 12.7 4.9 - - 107.8
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Administration
expenses (6.4) (2.8) (1.4) (0.2) (4.9) - (15.7)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Other expenses (8.1) (4.2) (0.7) (3.2) - - (16.2)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Revenue less costs 40.3 28.4 10.6 1.5 (4.9) - 75.9
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Net revaluation
movements on
investment
property (79.6) (41.5) (15.4) - - - (136.5)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Net revaluation
movements on
equity investments - - - (3.8) - - (3.8)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
(Loss)/profit on
sale of investment
property (0.3) - 0.8 - - - 0.5
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Segment operating
loss (39.6) (13.1) (4.0) (2.3) (4.9) - (63.9)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Finance income 5.3 1.4 1.4 2.0 - - 10.1
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Finance costs (16.4) (6.8) (2.4) (0.8) (0.4) - (26.8)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Foreign exchange
loss - - - - (0.3) - (0.3)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Impairment of
goodwill - (0.3) (0.8) - - - (1.1)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
Segment loss before
tax (50.7) (18.8) (5.8) (1.1) (5.6) - (82.0)
------------------- ------------ ------- ------ --------------- ------------------- ------------------- -------
2021
-------------------- ------------------------------------------------------------------------------------------------
Investment properties
-------------------- ----------------------------- --------------- ------------------- ------------------- ------
United Other Central
Year ended 31 Kingdom (1) Germany France investments(1) administration Non-recurring items Total
December 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Rental income 53.3 33.8 14.1 - - - 101.2
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Other
property-related
income 6.0 0.3 0.5 2.7 - - 9.5
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Service charge
income 12.3 11.2 5.6 - - - 29.1
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Revenue 71.6 45.3 20.2 2.7 - - 139.8
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Service charges and
similar expenses (13.8) (12.0) (6.0) - - - (31.8)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Net rental income 57.8 33.3 14.2 2.7 - - 108.0
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Administration
expenses (6.9) (2.9) (1.7) 0.2 (3.7) (1.2) (16.2)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Other expenses (8.0) (3.3) (1.1) (2.5) 0.5 - (14.4)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Revenue less costs 42.9 27.1 11.4 0.4 (3.2) (1.2) 77.4
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Net revaluation
movements on
investment property 3.7 24.2 0.6 - - - 28.5
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Net revaluation
movements on equity
investments - - - 6.1 - - 6.1
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Profit/(loss) on
sale of investment
property 0.7 (1.1) 0.3 - - - (0.1)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Segment operating
profit/(loss) 47.3 50.2 12.3 1.4 (3.2) (1.2) 111.9
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Finance income 3.8 0.2 - 1.9 - - 5.9
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Finance costs (15.7) (5.4) (2.7) (1.3) (0.3) - (25.4)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Foreign exchange
loss - - - (2.3) - - (2.3)
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Share of profit of
associate after tax - - - - - 1.4 1.4
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
Segment
profit/(loss)
before tax 35.4 45.0 9.6 4.8 (3.5) 0.2 91.5
-------------------- ------------ ------- ------ --------------- ------------------- ------------------- ------
1 Due to the prior year balance sheet restatement in respect of
the student accommodation (see note 4), the associated income and
expenses have been transferred from the 'Other investments' segment
to the United Kingdom investment property segment.
Other segment information
Assets Liabilities Capital expenditure
---------------------- ------------------ ---------------- ---------------------
2022 2021 2022 2021 2022 2021
GBPm GBPm (1) GBPm GBPm GBPm GBPm
---------------------- ------- --------- ------- ------- ---------- ---------
Investment properties
---------------------- ------- --------- ------- ------- ---------- ---------
United Kingdom 1,083.6 1,159.7 551.7 555.0 36.6 20.6
---------------------- ------- --------- ------- ------- ---------- ---------
Germany 1,011.6 900.2 536.4 462.4 9.8 9.4
---------------------- ------- --------- ------- ------- ---------- ---------
France 294.3 293.8 185.7 183.8 11.7 6.0
---------------------- ------- --------- ------- ------- ---------- ---------
Other investments 111.9 184.8 6.8 6.6 0.4 0.5
---------------------- ------- --------- ------- ------- ---------- ---------
2,501.4 2,538.5 1,280.6 1,207.8 58.5 36.5
---------------------- ------- --------- ------- ------- ---------- ---------
1 Due to the prior year balance sheet restatement in respect of
the student accommodation (see note 4), the associated assets and
liabilities have been transferred from the 'Other investments'
segment to the United Kingdom investment property segment.
6. Alternative performance measures
Alternative performance measures ('APMs') should be considered
in addition to, and are not intended to be a substitute for, or
superior to, IFRS measurements.
Introduction
The Group has applied the October 2015 European Securities and
Markets Authority ('ESMA') guidelines on APMs and the October 2021
Financial Reporting Council ('FRC') thematic review of APMs in
these results, whilst noting the International Organization of
Securities Commissions (IOSCO) 2016 guidance and ESMA's December
2019 report on the use of APMs. An APM is a financial measure of
historical or future financial performance, position or cash flows
of the Group which is not a measure defined or specified in
IFRS.
Overview of our use of APMs
The Directors believe that APMs assist in providing additional
useful information on the underlying trends, performance and
position of the Group. APMs assist our stakeholder users of the
accounts, particularly equity and debt investors, through the
comparability of information across the European real estate
sector. APMs are used by the Directors and management, both
internally and externally, for performance analysis, strategic
planning, reporting and incentive-setting purposes.
APMs are not defined by IFRS and therefore may not be directly
comparable with other companies' APMs, including peers in the real
estate industry. There are two sets of APMs which we utilise, and
which are reconciled where possible to statutory measures on the
following pages.
EPRA APMs and similar CLS APMs
CLS monitors the Group's financial performance using APMs which
are European Public Real Estate Association ('EPRA') measures as
these are a set of standard disclosures for the property industry
and thus aid comparability for our stakeholder users. The latest
edition of the EPRA guidelines were issued in February 2022. The
October 2019 edition of the guidelines replaced EPRA NAV and EPRA
NNNAV with three other balance sheet reporting measures, which are
defined in the glossary:
-- EPRA net tangible assets (NTA);
-- EPRA net realisable value (NRV); and
-- EPRA net development value (NDV).
CLS considers EPRA NTA to be the most relevant of these new
measures as we believe that this will continue to reflect the
long-term nature of our property investments most accurately.
However, all the new measures have been disclosed. EPRA Earnings
remains the same.
Whilst CLS primarily uses the measures referred to above, we
have also disclosed all other EPRA metrics as well as disclosing
the measures that CLS used to prefer for certain of these
categories. The notes below highlight where the measures that we
monitor differ and our previous rationale for using them. From 2021
onwards, following CLS' re-entry into the EPRA indices, we are
using all EPRA measures.
The measures we disclose are:
-- EPRA net initial yield;
-- EPRA 'topped-up' net initial yield;
-- EPRA vacancy;
-- EPRA capital expenditure;
-- EPRA cost ratio; and
-- EPRA LTV.
Other APMs
CLS uses a number of other APMs, many of which are commonly used
by industry peers:
-- Total accounting return;
-- Net borrowings and gearing;
-- Loan-to-value;
-- Administration cost ratio;
-- Dividend cover; and
-- Interest cover.
Apart from the introduction of EPRA LTV, there have been no
changes to the Group's APMs in the year with the same APMs utilised
by the business being defined, calculated and used on a consistent
basis. Set out below is a reconciliation of the APMs used in these
results to the statutory measures.
1. EPRA APMs
2022 2021
For use in earnings per share calculations Number Number
---------------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares in circulation 404,410,051 407,395,760
---------------------------------------------------------- ----------- -----------
For use in net asset per share calculations
---------------------------------------------------------- ----------- -----------
Number of ordinary shares in circulation at 31 December 397,210,866 407,395,760
---------------------------------------------------------- ----------- -----------
i) Earnings - EPRA earnings
2022 2021
Notes GBPm GBPm
----------------------------------------------------------- ----- ------- ------
(Loss)/profit for the year (81.9) 119.5
----------------------------------------------------------- ----- ------- ------
Non-recurring items after tax 11 - 1.5
----------------------------------------------------------- ----- ------- ------
Recurring (loss)/profit for the year (81.9) 121.0
----------------------------------------------------------- ----- ------- ------
Net revaluation movement on investment property 14 136.5 (28.5)
----------------------------------------------------------- ----- ------- ------
Deferred tax on revaluations (4.8) (38.6)
----------------------------------------------------------- ----- ------- ------
Net revaluation movement on equities 3.8 (1.0)
----------------------------------------------------------- ----- ------- ------
(Profit)/loss on sale of investment property (0.5) 0.1
----------------------------------------------------------- ----- ------- ------
Current tax thereon 1.6 3.2
----------------------------------------------------------- ----- ------- ------
Movement in fair value of derivative financial instruments 9 (8.8) (5.2)
----------------------------------------------------------- ----- ------- ------
Impairment of goodwill 1.1 -
----------------------------------------------------------- ----- ------- ------
Uplift in value of equity investments - (5.1)
----------------------------------------------------------- ----- ------- ------
EPRA earnings 47.0 45.9
----------------------------------------------------------- ----- ------- ------
Basic and diluted earnings per share (20.2)p 29.3p
----------------------------------------------------------- ----- ------- ------
EPRA earnings per share 11.6p 11.3p
----------------------------------------------------------- ----- ------- ------
ii) Net asset value measures
2022 2021
---------------------------------------------- ---------------------------------- ----------------------------------
IFRS EPRA EPRA EPRA IFRS EPRA EPRA EPRA
NAV NTA NRV NDV NAV NTA NRV NDV
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net assets 1,220.8 1,220.8 1,220.8 1,220.8 1,330.7 1,330.7 1,330.7 1,330.7
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Goodwill as a result of deferred tax on
acquisitions - - - - - (1.1) (1.1) (1.1)
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Other intangibles - (2.8) - - - (2.0) - -
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Fair value of fixed interest debt - - - 87.2 - - - (4.2)
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Tax thereon - - - (6.4) - - - 0.8
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Deferred tax on revaluation surplus - 108.6 108.6 - - 107.8 107.8 -
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Adjustment for short-term disposals - (8.6) - - - (7.8) - -
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Fair value of financial instruments - (8.5) (8.5) - - 0.4 0.4 -
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Purchasers' costs(1) - - 149.3 - - - 149.3 -
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
1,220.8 1,309.5 1,470.2 1,301.6 1,330.7 1,428.0 1,587.1 1,326.2
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Per share 307.3p 329.6p 370.1p 327.7p 326.6p 350.5p 389.6p 325.5p
---------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
1 EPRA NTA and EPRA NDV reflect IFRS values which are net of
purchasers' costs. Purchasers' costs are added back when
calculating EPRA NRV.
iii) Yield
EPRA net initial yield (NIY)
EPRA NIY is calculated as the annualised rental income based on
the cash rents passing at the balance sheet date less
non-recoverable property operating expenses, divided by the gross
market value of the property (excluding those that are under
development, student accommodation, held as PPE or occupied by
CLS).
2022 2021
---------------------------------- ---------------------------------------- ----------------------------------------
United Kingdom Germany France Total United Kingdom Germany France Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Rent passing 46.0 42.6 12.8 101.5 52.8 34.9 11.7 99.4
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Adjusted for properties in
development (0.9) - - (0.9) (2.6) (0.5) - (3.1)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Forecast non-recoverable service
charge (1.5) (2.1) (0.3) (3.9) (2.0) (0.6) (0.3) (2.9)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Annualised net rents (A) 43.6 40.5 12.5 96.7 48.2 33.8 11.4 93.4
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Property portfolio(1) 946.8 990.1 284.2 2,221.1 1,034.5 883.0 280.1 2,197.6
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Adjusted for properties in
development (118.7) (4.9) - (123.6) (103.7) (46.2) - (149.9)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Purchasers' costs at 6.8% 56.3 67.0 19.3 142.6 63.3 56.9 19.0 139.2
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Property portfolio valuation
including purchasers' costs (B) 884.4 1,052.2 303.5 2,240.1 994.1 893.7 299.1 2,186.9
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
EPRA NIY (A/B) 4.9% 3.9% 4.1% 4.3% 4.8% 3.8% 3.8% 4.3%
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
EPRA 'topped-up' NIY
EPRA 'topped-up' NIY is calculated by making an adjustment to
EPRA NIY in respect of the expiration of rent-free periods (or
other unexpired lease incentives such as discounted rent periods
and step rents).
2022 2021
---------------------------------- ---------------------------------------- ----------------------------------------
United Kingdom Germany France Total United Kingdom Germany France Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Contracted rent 48.1 47.4 14.7 110.2 55.0 38.8 13.8 107.6
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Adjusted for properties in
development (0.9) - - (0.9) (2.6) (0.6) - (3.2)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Forecast non-recoverable service
charge (1.5) (2.1) (0.3) (3.9) (2.0) (0.6) (0.3) (2.9)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
'Topped-up' annualised net rents
(A) 45.7 45.3 14.4 105.4 50.4 37.6 13.5 101.5
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Property portfolio(1) 946.8 990.1 284.2 2,221.1 1,034.5 883.0 280.1 2,197.6
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Adjusted for properties in
development (118.7) (4.9) - (123.6) (103.7) (46.2) - (149.9)
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Purchasers' costs (6.8%) 56.3 67.0 19.3 142.6 63.3 56.9 19.0 139.2
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
Property portfolio valuation
including purchasers' costs (B) 884.4 1,052.2 303.5 2,240.1 994.1 893.7 299.1 2,186.9
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
EPRA 'topped-up' NIY (A/B) 5.2% 4.3% 4.8% 4.7% 5.1% 4.2% 4.5% 4.6%
---------------------------------- -------------- ------- ------ ------- -------------- ------- ------ -------
1 The above tables comprise data of the investment properties
and properties held for sale. They exclude owner occupied, land,
student accommodation and hotel.
iv) Vacancy
The EPRA vacancy rate calculates vacancy as a proportion of the
ERV of the total portfolio and, from 2021, is the only measure used
by the Group.
EPRA vacancy
2022 2021
GBPm GBPm
--------------------------- ----- -----
ERV of vacant space (A) 9.0 7.0
---------------------------- ----- -----
ERV of let space 112.4 113.0
---------------------------- ----- -----
ERV of total portfolio (B) 121.4 120.0
---------------------------- ----- -----
EPRA vacancy rate (A/B) 7.4% 5.8%
---------------------------- ----- -----
v) Capital expenditure
EPRA capital expenditure
This measure shows the total amounts spent on the Group's
investment properties on an accrual and cash basis with a split
between expenditure used for the creation of incremental space and
enhancing space ('no incremental space').
2022 2021
Notes GBPm GBPm
------------------------------------------------------------- ----- ----- ------
Acquisitions 14 83.4 179.5
------------------------------------------------------------- ----- ----- ------
Amounts spent on the completed investment property portfolio 14
------------------------------------------------------------- ----- ----- ------
Creation of incremental space 12.7 8.6
------------------------------------------------------------- ----- ----- ------
Creation of no incremental space 45.5 27.4
------------------------------------------------------------- ----- ----- ------
EPRA capital expenditure 141.6 215.5
------------------------------------------------------------- ----- ----- ------
Conversion from accrual to cash basis (1.0) (15.1)
------------------------------------------------------------- ----- ----- ------
EPRA capital expenditure on a cash basis CF(1) 140.6 200.4
------------------------------------------------------------- ----- ----- ------
1 Group statement of cash flows
vi) Cost ratios
EPRA cost ratio
2022 2021
Notes GBPm GBPm
------------------------------------------------------------------------- ----- ----- -----
Recurring administration expenses 15.7 15.0
------------------------------------------------------------------------- ----- ----- -----
Other expenses 5 16.2 14.4
------------------------------------------------------------------------- ----- ----- -----
Less: Other investments segment 5 (5.7) (4.4)
------------------------------------------------------------------------- ----- ----- -----
26.2 25.0
------------------------------------------------------------------------- ----- ----- -----
Net service charge costs 5 4.9 2.7
------------------------------------------------------------------------- ----- ----- -----
Service charge costs recovered through rents but not separately invoiced (0.3) (0.3)
------------------------------------------------------------------------- ----- ----- -----
Dilapidations receipts (1.2) (1.2)
------------------------------------------------------------------------- ----- ----- -----
EPRA costs (including direct vacancy costs) (A) 29.6 26.2
------------------------------------------------------------------------- ----- ----- -----
Direct vacancy costs (4.0) (3.4)
------------------------------------------------------------------------- ----- ----- -----
EPRA costs (excluding direct vacancy costs) (B) 25.6 22.8
------------------------------------------------------------------------- ----- ----- -----
Gross rental income 5 99.4 101.2
------------------------------------------------------------------------- ----- ----- -----
Service charge components of gross rental income (0.3) (0.3)
------------------------------------------------------------------------- ----- ----- -----
EPRA gross rental income (C) 99.1 100.9
------------------------------------------------------------------------- ----- ----- -----
EPRA cost ratio (including direct vacancy costs) (A/C) 29.9% 26.0%
------------------------------------------------------------------------- ----- ----- -----
EPRA cost ratio (excluding direct vacancy costs) (B/C) 25.8% 22.6%
------------------------------------------------------------------------- ----- ----- -----
vii) EPRA LTV
2022 2021
Notes GBPm GBPm
------------------------------------------------- ----- ------- -------
Borrowings from financial institutions 21 1,105.9 985.2
------------------------------------------------- ----- ------- -------
Bank loans (secured notes) 21 - 46.4
------------------------------------------------- ----- ------- -------
Foreign currency derivatives 22 - 0.7
------------------------------------------------- ----- ------- -------
Net payables 44.8 44.0
------------------------------------------------- ----- ------- -------
Cash and cash equivalents 18 (113.9) (167.4)
------------------------------------------------- ----- ------- -------
Net debt (A) 1,036.8 908.9
------------------------------------------------- ----- ------- -------
Properties held as property, plant and equipment 15 37.5 39.2
------------------------------------------------- ----- ------- -------
Investment properties 14 2,295.0 2,247.1
------------------------------------------------- ----- ------- -------
Properties held for sale 16 20.3 44.2
------------------------------------------------- ----- ------- -------
Financial assets - equity investments 2.7 1.7
------------------------------------------------- ----- ------- -------
Total property value (B) 2,355.5 2,344.8
------------------------------------------------- ----- ------- -------
EPRA LTV (A/B) 44.0% 38.8%
------------------------------------------------- ----- ------- -------
2. Other APMs
i) Total accounting return per share
2022 2021
Notes pence pence
--------------------------------------- ----- ------- -------
EPRA NTA at 31 December 6 329.6 350.5
--------------------------------------- ----- ------- -------
Distribution - prior year final(1) 26 5.4 5.2
--------------------------------------- ----- ------- -------
Distribution - current year interim(2) 26 2.6 2.4
--------------------------------------- ----- ------- -------
Less: EPRA NTA at 1 January (A) 6 (350.5) (345.2)
--------------------------------------- ----- ------- -------
Return before dividends (B) (12.9) 12.9
--------------------------------------- ----- ------- -------
Total accounting return (NTA) (B/A) (3.7)% 3.7%
--------------------------------------- ----- ------- -------
1 The 2022 prior year final dividend was 5.35p but has been
rounded to 5.4p for the purpose of this note.
2 The 2021 interim dividend was 2.35p but has been rounded to
2.4p for the purpose of this note.
ii) Net borrowings and gearing
2022 2021
Notes GBPm GBPm
------------------------------------ ----- ------- -------
Borrowings short-term 21 173.4 169.1
------------------------------------ ----- ------- -------
Borrowings long-term 21 932.5 862.5
------------------------------------ ----- ------- -------
Add back: unamortised issue costs 21 5.3 5.9
------------------------------------ ----- ------- -------
Gross debt 21 1,111.2 1,037.5
------------------------------------ ----- ------- -------
Cash 18 (113.9) (167.4)
------------------------------------ ----- ------- -------
Net borrowings (A) 997.3 870.1
------------------------------------ ----- ------- -------
Net assets (B) 1,220.8 1,330.7
------------------------------------ ----- ------- -------
Net gearing (A/B) 81.7% 65.4%
------------------------------------ ----- ------- -------
iii) Balance sheet loan-to-value
2022 2021
Notes GBPm GBPm
-------------------------------------------- ----- ------- -------
Borrowings short-term 21 173.4 169.1
-------------------------------------------- ----- ------- -------
Borrowings long-term 21 932.5 862.5
-------------------------------------------- ----- ------- -------
Less: cash 18 (113.9) (167.4)
-------------------------------------------- ----- ------- -------
Net debt (A) 992.0 864.2
-------------------------------------------- ----- ------- -------
Investment properties 14 2,295.0 2,247.1
-------------------------------------------- ----- ------- -------
Properties in plant, property and equipment 15 37.5 39.2
-------------------------------------------- ----- ------- -------
Properties and land held for sale 16 20.3 45.0
-------------------------------------------- ----- ------- -------
Total property portfolio (B) 2,352.8 2,331.3
-------------------------------------------- ----- ------- -------
Balance sheet loan-to-value (A/B) 42.2% 37.1%
-------------------------------------------- ----- ------- -------
iv) CLS administration cost ratio
CLS' administration cost ratio represents the cost of running
the property portfolio relative to its net income. CLS uses this
measure to monitor the efficiency of the business as it focuses on
the administrative cost of active asset management across three
countries.
2022 2021
Notes GBPm GBPm
--------------------------------------- ----- ----- -----
Recurring administration expenses 15.7 15.0
--------------------------------------- ----- ----- -----
Less: Other investment segment 5 (0.2) 0.2
--------------------------------------- ----- ----- -----
Underlying administration expenses (A) 15.5 15.2
--------------------------------------- ----- ----- -----
Net rental income (B) 5 107.8 108.0
--------------------------------------- ----- ----- -----
Administration cost ratio (A/B) 14.4% 14.1%
--------------------------------------- ----- ----- -----
v) Dividend cover
2022 2021
Notes GBPm GBPm
--------------------- ----- ----- -----
Interim dividend 26 10.6 9.6
--------------------- ----- ----- -----
Final dividend 26 21.3 21.8
--------------------- ----- ----- -----
Total dividend (A) 31.9 31.4
--------------------- ----- ----- -----
EPRA earnings (B) 6 47.0 45.9
--------------------- ----- ----- -----
Dividend cover (B/A) 1.47 1.46
--------------------- ----- ----- -----
vi) Interest cover
2022 2021
Notes GBPm GBPm
----------------------------------------------------------- ----- ------ ------
Net rental income 5 107.8 108.0
----------------------------------------------------------- ----- ------ ------
Recurring administration expenses (15.7) (15.0)
----------------------------------------------------------- ----- ------ ------
Other expenses 5 (16.2) (14.4)
----------------------------------------------------------- ----- ------ ------
Group revenue less costs (A) 75.9 78.6
----------------------------------------------------------- ----- ------ ------
Finance income (excluding derivatives and dividend income) 9 1.3 0.5
----------------------------------------------------------- ----- ------ ------
Finance costs (excluding derivatives) 10 (26.8) (25.4)
----------------------------------------------------------- ----- ------ ------
Net interest (B) (25.5) (24.9)
----------------------------------------------------------- ----- ------ ------
Interest cover (-A/B) 2.98 3.16
----------------------------------------------------------- ----- ------ ------
7. Loss/profit for the year
Loss/profit for the year has been arrived at after
charging/(crediting):
2022 2021
Notes GBPm GBPm
------------------------------------------------------------------- ----- ----- -----
Auditor's remuneration: Fees payable to the Company's Auditor for:
------------------------------------------------------------------- ----- ----- -----
Audit of the Parent Company and Group accounts 0.4 0.5
------------------------------------------------------------------- ----- ----- -----
Audit of the Company's subsidiaries pursuant to legislation 0.2 0.1
------------------------------------------------------------------- ----- ----- -----
Depreciation of property, plant and equipment 15 0.6 1.0
------------------------------------------------------------------- ----- ----- -----
Employee benefits expense 8 10.2 11.3
------------------------------------------------------------------- ----- ----- -----
Foreign exchange loss 0.3 2.3
------------------------------------------------------------------- ----- ----- -----
Provision against trade receivables 17 0.6 (0.3)
------------------------------------------------------------------- ----- ----- -----
Other services provided to the Group by the Company's Auditor
consisted of the 2022 interim review of GBP50k (2021: GBP40k) and
the provision of access to a technical financial reporting database
of GBP1k (2021: GBPnil).
8. Employee benefits expense
2022 2021
GBPm GBPm
------------------------------------------- ----- -----
Wages and salaries 7.3 8.6
------------------------------------------- ----- -----
Social security costs 0.8 1.1
------------------------------------------- ----- -----
Pension costs - defined contribution plans 0.3 0.4
------------------------------------------- ----- -----
Performance incentive plan 0.8 1.0
------------------------------------------- ----- -----
Other employee-related expenses 1.0 0.2
------------------------------------------- ----- -----
10.2 11.3
------------------------------------------- ----- -----
The Directors are considered to be the only key management of
the Group.
Information on Directors' emoluments, share options and
interests in the Company's shares is given in the Remuneration
Committee Report in the Annual Report .
The monthly average number of employees of the Group in
continuing operations, including Executive Directors, was as
follows:
2022 2021
------- --------------------------------- ---------------------------------
Hotel Total Hotel Total
Property Number Number Number Property Number Number Number
------- --------------- ------- ------- --------------- ------- -------
Male 47 9 56 46 9 55
------- --------------- ------- ------- --------------- ------- -------
Female 46 7 53 48 9 57
------- --------------- ------- ------- --------------- ------- -------
93 16 16 94 18 112
------- --------------- ------- ------- --------------- ------- -------
9. Finance income
2022 2021
GBPm GBPm
----------------------------------------------------------- ----- -----
Interest income
----------------------------------------------------------- ----- -----
Financial instruments carried at amortised cost 1.3 0.5
----------------------------------------------------------- ----- -----
Movement in fair value of derivative financial instruments 8.8 5.2
----------------------------------------------------------- ----- -----
Dividend income - 0.2
----------------------------------------------------------- ----- -----
10.1 5.9
----------------------------------------------------------- ----- -----
10. Finance costs
2022 2021
GBPm GBPm
--------------------------------- ----- -----
Interest expense
--------------------------------- ----- -----
Secured bank loans 23.3 21.4
--------------------------------- ----- -----
Secured notes 1.7 2.1
--------------------------------- ----- -----
Amortisation of loan issue costs 1.8 1.9
--------------------------------- ----- -----
Total interest costs 26.8 25.4
--------------------------------- ----- -----
11. Non-recurring items
2022 2021
Notes GBPm GBPm
----------------------------------------------------------------- ----- ----- -----
Administration costs - UK restructuring costs(1) A - (1.2)
----------------------------------------------------------------- ----- ----- -----
Share of associates - profit on sale of associate(1) B - 1.4
----------------------------------------------------------------- ----- ----- -----
- 0.2
-------------------------------------------------------------------- ----- ----- -----
Taxation - tax credit on UK restructuring costs(1) A 12 - 0.2
----------------------------------------------------------------- ----- ----- -----
Taxation - deferred tax liability release due to REIT conversion C 12 - 43.7
----------------------------------------------------------------- ----- ----- -----
Taxation - deferred tax asset release due to REIT conversion(1) C 12 - (1.9)
----------------------------------------------------------------- ----- ----- -----
Non-recurring tax - 42.0
--------------------------------------------------------------------- ----- ----- -----
Total non-recurring - 42.2
--------------------------------------------------------------------- ----- ----- -----
1 These items are included as non-recurring items in the ERPA
earnings reconciliation presented in note 6.
A - UK restructuring costs
The Group incurred costs of GBP1.2m associated with redundancies
made in the UK. These costs are tax deductible and so the
associated tax credit of GBP0.2m has also been treated as non
recurring.
B - Profit on sale of associate
This relates to the sale of our 21.8% share in Fragbite AB to
Funrock (now renamed Fragbite Group AB). The consideration for the
sale was a combination of cash and shares in the purchaser.
Subsequent to our sale, the purchaser listed on the Nasdaq Nordic
stock exchange and the shares are held as an 'equity investment' on
the Group balance sheet and were revalued at the year end. The
revaluation of GBP1.0m has been treated as a recurring item.
C - Deferred tax arising on conversion to REIT
The UK property business became a REIT on 1 January 2022. As a
result, the majority of the UK deferred tax liabilities and assets
were released. The majority of the deferred tax liability released
relates to the revaluation of the UK properties. The deferred tax
assets disclosed as non-recurring relate to the non property
business in the UK and were released as it is no longer probable
that sufficient taxable profits will be generated in the future for
the recognition criteria to be met.
12. Taxation
2022 2021
GBPm GBPm
---------------------------------------------------------------------- ----- ------
Corporation tax
---------------------------------------------------------------------- ----- ------
Current year charge 5.8 11.7
---------------------------------------------------------------------- ----- ------
Non-recurring tax on restructuring costs - (0.2)
---------------------------------------------------------------------- ----- ------
Adjustments in respect of prior years (0.5) (0.7)
---------------------------------------------------------------------- ----- ------
5.3 10.8
---------------------------------------------------------------------- ----- ------
Deferred tax (see note 20)
---------------------------------------------------------------------- ----- ------
Origination and reversal of temporary differences (5.4) 3.0
---------------------------------------------------------------------- ----- ------
Non-recurring deferred tax liability release due to REIT conversion - (43.7)
---------------------------------------------------------------------- ----- ------
Non-recurring deferred tax asset release due to REIT conversion - 1.9
---------------------------------------------------------------------- ----- ------
(5.4) (38.8)
---------------------------------------------------------------------- ----- ------
Tax credit for the year (0.1) (28.0)
---------------------------------------------------------------------- ----- ------
A deferred tax charge of GBP0.4 million (2021: charge of GBP1.0
million) was recognised directly in equity (note 20). The charge
for the year differs from the theoretical amount which would arise
using the weighted average tax rate applicable to profits of Group
companies as follows:
2022 2021
GBPm GBPm
-------------------------------------------------------- ------ ------
(Loss)/profit before tax (82.0) 91.5
-------------------------------------------------------- ------ ------
Expected tax charge at applicable tax rate (15.1) 17.0
-------------------------------------------------------- ------ ------
Expenses not deductible for tax purposes 1.0 2.6
-------------------------------------------------------- ------ ------
Non-taxable income - (3.8)
-------------------------------------------------------- ------ ------
Non-deductible loss from REIT 13.4
-------------------------------------------------------- ------ ------
Deferred tax on losses not recognised 1.2 0.7
-------------------------------------------------------- ------ ------
Adjustments in respect of prior years (0.5) (0.7)
-------------------------------------------------------- ------ ------
Release of deferred tax on election into UK REIT regime - (43.7)
-------------------------------------------------------- ------ ------
Other (0.1) (0.1)
-------------------------------------------------------- ------ ------
Tax credit for the year (0.1) (28.0)
-------------------------------------------------------- ------ ------
The weighted average applicable tax rate of 18.5% (2021: 18.6%)
was derived by applying to their relevant profits and losses the
rates in the jurisdictions in which the Group operated. The
standard UK rate of corporation tax applied to profits is 19.0%
(2021: 19.0%).
13. Property portfolio
United Kingdom Germany France Total
Notes GBPm GBPm GBPm GBPm
----------------------------------------------- ----- -------------- ------- ------ -------
Investment property 14 1,030.0 990.5 274.5 2,295.0
----------------------------------------------- ----- -------------- ------- ------ -------
Property held as property, plant and equipment 15 33.6 2.0 1.9 37.5
----------------------------------------------- ----- -------------- ------- ------ -------
Properties held for sale 16 7.0 3.6 9.7 20.3
----------------------------------------------- ----- -------------- ------- ------ -------
Property portfolio at 31 December 2022 1,070.6 996.1 286.1 2,352.8
----------------------------------------------- ----- -------------- ------- ------ -------
United Kingdom Germany France Total
Notes GBPm (2) GBPm GBPm GBPm
----------------------------------------------- ----- -------------- ------- ------ -------
Investment property 14 1,090.5 883.0 273.6 2,247.1
----------------------------------------------- ----- -------------- ------- ------ -------
Property held as property, plant and equipment 15 32.3 5.0 1.9 39.2
----------------------------------------------- ----- -------------- ------- ------ -------
Properties held for sale(1) 16 38.1 - 6.5 44.6
----------------------------------------------- ----- -------------- ------- ------ -------
Land held for sale(1) 16 - - 0.4 0.4
----------------------------------------------- ----- -------------- ------- ------ -------
Property portfolio at 31 December 2021 1,160.9 888.0 282.4 2,331.3
----------------------------------------------- ----- -------------- ------- ------ -------
1 Total differs from the assets held for sale on the Group
balance sheet due to GBP0.8m of associated liabilities.
2 Restated for reclassification of student accommodation, see note 4 for detail.
14. Investment property
Total
investment
United Kingdom Germany France properties
GBPm GBPm GBPm GBPm
------------------------------------------------- -------------- ------- ------ -----------
At 1 January 2022 1,090.5 883.0 273.6 2,247.1
------------------------------------------------- -------------- ------- ------ -----------
Acquisitions - 83.4 - 83.4
------------------------------------------------- -------------- ------- ------ -----------
Capital expenditure 36.6 9.9 11.7 58.2
------------------------------------------------- -------------- ------- ------ -----------
Disposals (11.5) - - (11.5)
------------------------------------------------- -------------- ------- ------ -----------
Net revaluation movement (79.5) (41.6) (15.4) (136.5)
------------------------------------------------- -------------- ------- ------ -----------
Lease incentive debtor adjustments 0.9 6.9 - 7.8
------------------------------------------------- -------------- ------- ------ -----------
Exchange rate variances - 48.9 14.3 63.2
------------------------------------------------- -------------- ------- ------ -----------
Transfer from/(to) plant, property and equipment - - - -
------------------------------------------------- -------------- ------- ------ -----------
Transfer to properties held for sale (7.0) - (9.7) (16.7)
------------------------------------------------- -------------- ------- ------ -----------
At 31 December 2022 1,030.0 990.5 274.5 2,295.0
------------------------------------------------- -------------- ------- ------ -----------
Total
investment
United Kingdom(1) Germany France properties
GBPm GBPm GBPm GBPm
---------------------------------------------------- ----------------- ------- ------ -----------
At 1 January 2021 997.9 733.2 301.7 2,032.8
---------------------------------------------------- ----------------- ------- ------ -----------
Reclassification from property, plant and equipment 94.1 - - 94.1
---------------------------------------------------- ----------------- ------- ------ -----------
At 1 January 2021 (restated) 1,092.0 733.2 301.7 2,126.9
---------------------------------------------------- ----------------- ------- ------ -----------
Acquisitions 17.9 161.6 - 179.5
---------------------------------------------------- ----------------- ------- ------ -----------
Capital expenditure 20.6 9.4 6.0 36.0
---------------------------------------------------- ----------------- ------- ------ -----------
Disposals (5.0) - (10.7) (15.7)
---------------------------------------------------- ----------------- ------- ------ -----------
Net revaluation movement 3.7 24.2 0.6 28.5
---------------------------------------------------- ----------------- ------- ------ -----------
Lease incentive debtor adjustments (0.6) 3.0 0.3 2.7
---------------------------------------------------- ----------------- ------- ------ -----------
Exchange rate variances - (48.0) (17.9) (65.8)
---------------------------------------------------- ----------------- ------- ------ -----------
Transfer to properties held for sale (38.1) - (6.5) (44.6)
---------------------------------------------------- ----------------- ------- ------ -----------
At 31 December 2021 (restated) 1,090.5 883.0 273.6 2,247.1
---------------------------------------------------- ----------------- ------- ------ -----------
1 The prior year balances for investment property have been
restated as described in note 4 along with their respective
totals.
Investment properties included leasehold properties with a
carrying amount of GBP77.7 million (2021: GBP48.6 million).
Interest capitalised within capital expenditure in the year
amounted to GBP0.5 million (2021: GBPnil).
The property portfolio which comprises investment properties,
properties held for sale (note 16), and hotel and landholding,
detailed in note 15, was revalued at 31 December 2022 to its fair
value. Valuations were based on current prices in an active market
for all properties. The property valuations were carried out by
external independent valuers as follows:
Investment Property Investment Property
property Other property portfolio property Other property portfolio
2022 2022 2022 2021 2021 2021
GBPm GBPm GBPm GBPm (1) GBPm (1) GBPm
-------------------- -------------- -------------- --------------- -------------- -------------- ---------------
Cushman and
Wakefield 1,030.0 33.6 1,063.6 1,364.1 79.2 1,443.3
-------------------- -------------- -------------- --------------- -------------- -------------- ---------------
Jones Lang LaSalle 1,265.0 13.5 1,278.5 883.0 1.8 884.8
-------------------- -------------- -------------- --------------- -------------- -------------- ---------------
Directors'
valuation/L
Fällström
AB - 3.6 3.6 - 3.2 3.2
-------------------- -------------- -------------- --------------- -------------- -------------- ---------------
2,295.0 50.7 2,345.7 2,247.1 84.2 2,331.3
-------------------- -------------- -------------- --------------- -------------- -------------- ---------------
1 The prior year balances for investment property have been restated as described in note 4
The total fees, including the fees for this assignment, earned
by each of the valuers from the Group is less than 5% of their
total revenues in each jurisdiction.
Valuation process
The Group's property portfolio was valued by external valuers on
the basis of fair value using information provided to them by the
Group such as current rents, terms and conditions of lease
agreements, service charges and capital expenditure. This
information is derived from the Group's property management systems
and is subject to the Group's overall control environment. The
valuation reports are based on assumptions and valuation models
used by the external valuers. The assumptions are typically market
related, such as yields and discount rates, and are based on
professional judgement and market evidence of transactions for
similar properties on arm's length terms. The valuations are
prepared in accordance with RICS standards.
Each Country Head, who report to the Chief Executive Officer,
verifies all major inputs to the external valuation reports,
assesses the individual property valuation changes from the prior
year valuation report and holds discussions with the external
valuers. When the process is complete, the valuation report is
recommended to the Audit Committee and the Board, which considers
it as part of its overall responsibilities.
Valuation techniques
The fair value of the property portfolio (excluding ongoing
developments, see below) has been determined using the following
approaches in accordance with International Valuation
Standards:
United Kingdom an income capitalisation approach whereby contracted and market rental values are capitalised
with a market capitalisation rate
-------------- ---------------------------------------------------------------------------------------------
Germany a 10 year discounted cash flow model with an assumed exit thereafter
-------------- ---------------------------------------------------------------------------------------------
France both the market capitalisation approach and a 10 year discounted cash flow approach
-------------- ---------------------------------------------------------------------------------------------
The resulting valuations are cross-checked against the
equivalent yields and the fair market values per square foot
derived from comparable recent market transactions on arm's length
terms. Other factors taken into account in the valuations include
the tenure of the property, tenancy details, and ground and
structural conditions.
Ongoing developments are valued under the 'residual method' of
valuation, which is the same method as the income capitalisation
approach to valuation described above, with a deduction for all
costs necessary to complete the development, including a notional
finance cost, together with a further allowance for remaining risk.
As the development approaches completion, the valuer may consider
the income capitalisation approach to be more appropriate.
All valuations have considered the environmental, social and
governance credentials of the properties and the potential cost of
improving them to local regulatory standards along with the broader
potential impact of climate change.
These techniques are consistent with the principles in IFRS 13
Fair Value Measurement and use significant unobservable inputs such
that the fair value measurement of each property within the
portfolio has been classified as Level 3 in the fair value
hierarchy.
There were no transfers between any of the Levels in the fair
value hierarchy during either 2022 or 2021. The Group determines
whether transfers have occurred between levels in the fair value
hierarchy by re-assessing categorisation at the end of each
reporting period.
Gains and losses recorded in profit or loss for recurring fair
value measurements categorised within Level 3 of the fair value
hierarchy amount to a loss of GBP136.5 million (2021: a gain of
GBP28.5 million) and are presented in the income statement in the
line item 'Net movements on revaluation of investment properties'.
The revaluation deficit for the property, plant and equipment of
GBP1.9 million (2021: gain of GBP5.5 million) was included within
the revaluation reserve via other comprehensive income.
All gains and losses recorded in profit or loss in 2022 and 2021
for recurring fair value measurements categorised within Level 3 of
the fair value hierarchy are attributable to changes in unrealised
gains or losses relating to investment property held at 31 December
2022 and 31 December 2021, respectively.
Quantitative information about investment property fair value
measurement using unobservable inputs (Level 3)
ERV Equivalent yield
-------- ------------------------------------------------------------------ ---------------------------------
Average Range Average Range
-------------------------------- -------------------------------- ---------- ---------------------
2022 2021 2022 2021 2022 2021 2022 2021
GBP per sq. ft GBP per sq. ft GBP per sq. ft GBP per sq. ft % % % %
-------- --------------- --------------- --------------- --------------- ---- ---- --------- ----------
UK 34.01 37.12 10.00-58.09 10.00-66.19 5.61 5.36 2.94-9.61 2.54-10.30
-------- --------------- --------------- --------------- --------------- ---- ---- --------- ----------
Germany 14.10 13.21 10.14-25.27 8.88-24.05 4.75 4.39 3.30-5.90 3.00-5.40
-------- --------------- --------------- --------------- --------------- ---- ---- --------- ----------
France 21.69 19.49 13.26-41.38 11.96-37.36 5.13 5.04 4.05-6.75 4.38-6.00
-------- --------------- --------------- --------------- --------------- ---- ---- --------- ----------
Sensitivity of measurement to variations in the significant
unobservable inputs
All other factors remaining constant, an increase in ERV would
increase valuations, whilst an increase in the equivalent yield
would result in a fall in value, and vice versa. There are
inter-relationships between these inputs as they are partially
determined by market conditions. An increase in the reversionary
yield may accompany an increase in ERV and would mitigate its
impact on the fair value measurement.
A decrease in the equivalent yield by 25 basis points would
result in an increase in the fair value of the Group's investment
property by GBP138.5 million (2021: GBP126.9 million) whilst a 25
basis point increase would reduce the fair value by GBP107.0
million (2021: GBP125.9 million). A decrease in the ERV by 5% would
result in a decrease in the fair value of the Group's investment
property by GBP86.8 million (2021: GBP92.2 million) whilst an
increase in the ERV by 5% would result in an increase in the fair
value of the Group's investment property by GBP106.5 million (2021:
GBP71.3 million).
Where the Group leases out its investment property under
operating leases the duration is typically three years or more. No
contingent rents have been recognised in the current or prior
year.
Sustainability, climate change, Net Zero Carbon Pathway and EPC
compliance
The Group published its sustainability strategy including a
pathway to Net Zero Carbon ("NZC") in August 2021 and has set 2030
as its date to achieve this. During 2021 the Group employed
technical experts to carry out individual property energy audits to
identify energy and carbon saving opportunities. A total of 76
properties were visited from January to April 2021 across the UK,
France and Germany, with new developments, properties under
refurbishment and properties earmarked for sale all excluded from
the programme. The investment needed to deliver the audit findings
amounts to an estimated GBP65 million over 9 years for all
properties. We have integrated these energy audits into each Asset
Management Plan to enable strategic decisions about the
refurbishment, sale or full redevelopment of assets to be made. The
UK portfolio is already compliant with the 2023 Minimum Energy
Efficiency Standard (MEES) requirements and the 2030 target of EPC
B is factored in to the NZC Pathway model.
15. Property, plant and equipment
Fixtures
Hotel Land and buildings Owner- occupied property and fittings Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Cost or valuation
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 1 January 2021 - restated(1) 25.0 3.1 10.6 6.3 45.0
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Additions - - - 0.5 0.5
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Disposals - - - (0.9) (0.9)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Reclassification (to)/from investment
property(2) - - 0.4 - 0.4
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Reclassification to accumulated
depreciation (1.2) - - (2.7) (3.9)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Revaluation 1.2 0.4 0.1 - 1.7
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Exchange rate variances - (0.3) (0.1) - (0.4)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2021 25.0 3.2 11.0 3.2 42.4
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Additions - - 0.1 0.3 0.4
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Disposals - - - (0.1) (0.1)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Reclassification from investment property - - - - -
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Reclassification to held for sale - (3.6) - - (3.6)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Revaluation 1.7 0.4 (0.4) - 1.7
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Exchange rate variances - - 0.1 0.1 0.2
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2022 26.7 - 10.8 3.5 41.0
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Comprising:
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At cost - - - 3.5 3.5
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At valuation 26.7 - 10.8 - 37.5
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
26.7 - 10.8 3.5 41.0
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Accumulated depreciation and impairment
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 1 January 2021 (1.2) - - (4.1) (5.3)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Depreciation charge (0.1) - (0.1) (0.5) (0.7)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Reclassification from cost 1.2 - - 2.7 3.9
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Disposals - - - 0.8 0.8
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Revaluation 0.1 - 0.1 - 0.2
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2021 - - - (1.1) (1.1)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Depreciation charge (0.1) - (0.1) (0.4) (0.6)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Disposals - - - 0.1 0.1
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Revaluation 0.1 - 0.1 - 0.2
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2022 - - - (1.4) (1.4)
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
Net book value
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2022 26.7 - 10.8 2.1 39.6
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
At 31 December 2021 25.0 3.2 11.0 2.1 41.3
------------------------------------------- ----- ------------------ ------------------------ ------------- -----
1 The prior year balances for student accommodation have been
restated as described in note 4 along with their respective totals.
Student accommodation has not been presented as it has been
reclassified in its entirety to investment property.
2 During 2021, the CLS Group opened an office in the City of
Dusseldorf within a property classified as investment property.
This is the transfer of the value of the part of this investment
property that is now owner occupied by CLS.
Valuation techniques
The fair value of the hotel has been determined using the
following approach in accordance with International Valuation
Standards:
a 10 year discounted cash flow model with an assumed exit thereafter. The projected net operating
profit in the 11th year is capitalised at a market yield before being brought back to present
Hotel day values.
----- -------------------------------------------------------------------------------------------------
This technique is consistent with the principles in IFRS 13 Fair
Value Measurement and uses significant unobservable inputs such
that the fair value measurement of the hotel within the portfolio
has been classified as Level 3 in the fair value hierarchy.
Sensitivity of measurement to variations in the significant
unobservable inputs
All other factors remaining constant, an increase in EBITDA
would increase the valuation, whilst an increase in exit
capitalised yield would result in a fall in value, and vice versa.
A decrease in the exit capitalisation yield by 25 basis points
would result in an increase in the fair value of the hotel by
GBP1.1 million, whilst a 25 basis point increase would reduce the
fair value by GBP1.1 million. A decrease in EBITDA by 5% would
result in a decrease in the fair value of the hotel by GBP1.4
million whilst an increase in the EBITDA by 5% would result in an
increase in the fair value of the Hotel by GBP1.3 million.
16. Assets held for sale
2022 2021
-------------------------------------------- ------------------------------- ------------------------------
UK Germany France Total UK Germany France Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
At 1 January 37.3 - 6.9 44.2 5.9 10.2 5.8 21.9
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
Disposals (37.3) - (6.9) (44.2) (5.9) (10.2) (5.3) (21.4)
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
Transfer from investment property 7.0 - 9.7 16.7 37.3 - 6.5 43.8
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
Transfer from property, plant and equipment - 3.6 - 3.6 - - - -
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
Revaluation - - - - - - (0.1) (0.1)
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
At 31 December 7.0 3.6 9.7 20.3 37.3 - 6.9 44.2
-------------------------------------------- ------ ------- ------ ------ ----- ------- ------ ------
The balance above comprises 3 properties (2021: 5 properties).
The facts and circumstance of the disposals or expected disposals
are commercially sensitive and therefore are not disclosed.
Management expect that properties transferred to held for sale
during the year will be disposed of within 12 months, usually via
an open market process.
17. Trade and other receivables
2022 2021
GBPm GBPm
--------------------- ----- -----
Current
--------------------- ----- -----
Trade receivables 5.3 8.8
--------------------- ----- -----
Other receivables 4.9 3.9
--------------------- ----- -----
Prepayments 2.7 2.4
--------------------- ----- -----
Accrued income 2.9 3.0
--------------------- ----- -----
15.8 18.1
--------------------- ----- -----
Non-Current
--------------------- ----- -----
Other receivables(1) - 7.7
--------------------- ----- -----
15.8 25.8
--------------------- ----- -----
1 This is the vendor loan granted on completion of the sale of
First Camp Sverige Holdings AB in March 2019. The loan was repaid
in full during 2022.
Trade receivables are shown after deducting a provision of
GBP2.8 million (2021: GBP2.4 million) which is calculated as an
expected credit loss on trade receivables in accordance with IFRS 9
(see note 2). The movements in this provision were as follows:
2022 2021
GBPm GBPm
---------------------------------------- ----- -----
At 1 January 2.4 2.8
---------------------------------------- ----- -----
Debt write-offs (0.2) (0.1)
---------------------------------------- ----- -----
Charge/(credit) to the income statement 0.6 (0.3)
---------------------------------------- ----- -----
At 31 December 2.8 2.4
---------------------------------------- ----- -----
The group uses a provision matrix to calculate the expected
credit loss for trade receivables. The provision rates are based on
the Group's historical observed aging of debt and the probability
of default. At every reporting date, the provision rates are
updated to incorporate the previous 12 months data and
forward-looking information such as actual and potential impacts of
political and economic uncertainty, if applicable. In addition, on
a tenant-by-tenant basis, the Group takes into account any recent
payment behaviours and future expectations of likely default
events. Specific provisions are made in excess of the expected
credit loss where information is available to suggest a higher
provision is required, for example individual customer credit
ratings, actual or expected insolvency filings or company voluntary
arrangements, likely deferrals of payments due, agreed rent
concessions and market expectations and trends in the wider
macroeconomic environment in which our customers operate. An
additional review of tenant debtors was undertaken to assess
recoverability in light of the political and economic
uncertainty.
The Directors consider that the carrying amount of trade and
other receivables is approximate to their fair value. There is no
concentration of credit risk with respect to trade receivables as
the Group has a large number of customers who are paying their rent
in advance. Further details about the Group's credit risk
management practices are disclosed in note 23.
18. Cash and cash equivalents
2022 2021
GBPm GBPm
------------------------- ----- -----
Cash at bank and in hand 113.9 167.4
------------------------- ----- -----
At 31 December 2022, cash at bank and in hand included GBP15.8
million (2021: GBP13.2 million) which was restricted by a
third-party charge. GBP10.3 million of the restricted cash related
to tenant deposits (2021: GBP10.1 million) and GBP0.2 million from
a recently terminated contract for the provision of property
management services to a related party (2021: GBPnil) (see note
33).
19. Trade and other payables
2022 2021
GBPm GBPm
-------------------------------- ----- -----
Current
-------------------------------- ----- -----
Trade payables 4.6 3.0
-------------------------------- ----- -----
Social security and other taxes 2.1 1.9
-------------------------------- ----- -----
Tenant deposits 10.3 10.1
-------------------------------- ----- -----
Other payables 4.2 2.0
-------------------------------- ----- -----
Deferred income 13.0 19.8
-------------------------------- ----- -----
Accruals 24.4 20.8
-------------------------------- ----- -----
58.6 57.6
-------------------------------- ----- -----
20. Deferred tax
Liabilities Assets
------------------- ---------------------------------------- ---------------------------------------- -------------
Fair value
adjustments Fair value Total
UK capital to UK capital adjustments deferred
allowances properties Other Total allowances to properties Other Total tax
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
At 1 January 2021 12.3 145.3 1.9 159.5 (0.3) (6.0) (1.4) (7.7) 151.8
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
Charged/(credited)
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
to income
statement (12.0) (32.0) 0.1 (43.9) 0.3 3.6 1.2 5.1 (38.8)
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
to OCI(1) - 1.0 - 1.0 - - - - 1.0
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
Exchange rate
variances - (6.5) (0.2) (6.7) - - - - (6.7)
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
At 31 December 2021 0.3 107.8 1.8 109.9 - (2.4) (0.2) (2.6) 107.3
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
Charged/(credited)
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
to income
statement - (4.9) (0.2) (5.1) - (0.3) - (0.3) (5.4)
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
to OCI (1) - 0.4 - 0.4 - - - - 0.4
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
Exchange rate
variances - 5.3 - 5.3 - 0.1 - 0.1 5.4
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
At 31 December 2022 0.3 108.6 1.6 110.5 - (2.6) (0.2) (2.8) 107.7
------------------- ----------- ------------ ----- ------ ----------- ------------- ----- ----- -------------
1 Other Comprehensive Income.
Deferred tax has been calculated based on local rates applicable
under local legislation substantively enacted at the balance sheet
date.
Deferred tax assets are recognised in respect of tax losses
carried forward to the extent that the realisation of the related
tax benefit through future taxable profits is probable. At 31
December 2022 the Group offset tax losses valued at the applicable
local tax rate of GBP9.8 million (2021: GBP9.6 million) against the
deferred tax liability arising on the fair value adjustments to
properties. At 31 December 2022 the Group did not recognise
deferred tax assets of GBP8.0 million (2021: GBP7.5 million) in
respect of losses amounting to GBP45.6 million (2021: GBP43.3
million) which may be carried forward and utilised against future
taxable income or gains. There is no expiry period for the carried
forward tax losses.
21. Borrowings
At 31 December 2022 At 31 December 2021
------------------- ---------------------------------------- ----------------------------------------
Non- Non-
Current current Current current
GBPm GBPm Total borrowings GBPm GBPm GBPm Total borrowings GBPm
------------------- ------- -------- --------------------- ------- -------- ---------------------
Secured bank loans 173.4 932.5 1,105.9 122.7 862.5 985.2
------------------- ------- -------- --------------------- ------- -------- ---------------------
Secured notes - - - 46.4 - 46.4
------------------- ------- -------- --------------------- ------- -------- ---------------------
173.4 932.5 1,105.9 169.1 862.5 1,031.6
------------------- ------- -------- --------------------- ------- -------- ---------------------
Issue costs of GBP5.3 million (2021: GBP5.9 million) have been
offset in arriving at the balances in the above tables.
Secured bank loans
Interest on bank loans is charged at fixed rates ranging between
0.8% and 4.4% including margin (2021: 0.8% and 5.5%) and at
floating rates of typically SONIA or EURIBOR plus a margin.
Floating rate margins range between 1.1% and 2.2% (2021: 1.1% and
2.3%). The bank loans are secured by legal charges over GBP2,247.6
million (2021: GBP2,194.3 million) of the Group's properties, and
in most cases a floating charge over the remainder of the assets
held in the company which owns the property. In addition, the share
capital of some of the subsidiaries within the Group has been
charged.
Secured green loans
The Group's debt portfolio includes two sustainability linked
loans;
-- GBP151.9m maturing in 2032
-- GBP60.1m in 2033
These loans have an interest rate margin incentive for meeting
annual sustainability targets which align with our Net Zero Carbon
Pathway for the properties which are securing them. The targets
have been independently verified to be aligned with the Loan Market
Association (LMA) Sustainability-Linked loan principles. The
targets set for any given year are based on actual ESG
data/milestones achieved in the prior year. Each of the 2022
targets (tested on 31 December 2021 actual results) have been met
resulting in lower interest rates being applied to these loans. The
reduction in interest rate margin is not considered to be a
substantial modification of the loan terms.
Secured notes
On 3 December 2013, the Group issued GBP80.0 million secured,
partially-amortising notes. The notes attracted a fixed-rate coupon
of 4.17% on the unamortised principal amount, the balance of which
was repaid in November 2022. The notes were secured by legal
charges over GBP137.1 million of the Group's properties. The prior
year fair value was determined by the higher of the carrying
principal amount and the discounted future cash flows (adjusted by
excluding the margin component of the fixed interest rate(1) ) at a
discount rate derived from the market interest rate yield curve at
the date of the valuation.
1 The fixed interest rate is made up of a market interest rate
(typically a swap rate) plus a margin.
Capitalised interest
Interest capitalised within investment property capital
expenditure during the year was GBP0.5 million (2021: GBP0.1
million) at an average rate of 3.22% (2021: 3.01%).
The Group has complied with all externally imposed capital
requirements to which it was subject.
The maturity profile of the carrying amount of the Group's
borrowings was as follows:
Secured Secured
bank loans notes Total
At 31 December 2022 GBPm GBPm GBPm
------------------------------ ----------- ------- -------
Maturing in:
Within one year or on demand 175.1 - 175.1
------------------------------ ----------- ------- -------
One to two years 350.1 - 350.1
------------------------------ ----------- ------- -------
Two to five years 314.4 - 314.4
------------------------------ ----------- ------- -------
More than five years 271.6 - 271.6
------------------------------ ----------- ------- -------
1,111.2 - 1,111.2
------------------------------ ----------- ------- -------
Unamortised issue costs (5.3) - (5.3)
------------------------------ ----------- ------- -------
Borrowings 1,105.9 - 1,105.9
------------------------------ ----------- ------- -------
Due within one year (173.4) - (173.4)
------------------------------ ----------- ------- -------
Due after one year 932.5 - 932.5
------------------------------ ----------- ------- -------
Secured Secured
bank loans notes Total
At 31 December 2021 GBPm GBPm GBPm
------------------------------ ----------- ------- -------
Maturing in:
Within one year or on demand 124.3 46.5 170.8
------------------------------ ----------- ------- -------
One to two years 111.3 - 111.3
------------------------------ ----------- ------- -------
Two to five years 432.7 - 432.7
------------------------------ ----------- ------- -------
More than five years 322.7 - 322.7
------------------------------ ----------- ------- -------
991.0 46.5 1,037.5
------------------------------ ----------- ------- -------
Unamortised issue costs (5.8) (0.1) (5.9)
------------------------------ ----------- ------- -------
Borrowings 985.2 46.4 1,031.6
------------------------------ ----------- ------- -------
Due within one year (122.7) (46.4) (169.1)
------------------------------ ----------- ------- -------
Due after one year 862.5 - 862.5
------------------------------ ----------- ------- -------
The carrying amounts of the Group's borrowings are denominated
in the following currencies:
At 31 December 2022 At 31 December 2021
----------------------------------------------- ------------------------ ------------------------
Sterling Euro Total Sterling Euro Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- -------- ----- ------- -------- ----- -------
Fixed rate financial liabilities 241.3 445.8 687.1 290.0 450.8 740.8
----------------------------------------------- -------- ----- ------- -------- ----- -------
Floating rate financial liabilities - hedged 117.4 - 117.4 140.9 - 140.9
----------------------------------------------- -------- ----- ------- -------- ----- -------
Total fixed rate 358.7 445.8 804.5 430.9 450.8 881.7
----------------------------------------------- -------- ----- ------- -------- ----- -------
Floating rate financial liabilities - capped - 42.6 42.6 - 47.3 47.3
----------------------------------------------- -------- ----- ------- -------- ----- -------
Floating rate financial liabilities - unhedged 162.2 101.9 264.1 94.3 14.2 108.5
----------------------------------------------- -------- ----- ------- -------- ----- -------
Total floating rate 162.2 144.5 306.7 94.3 61.5 155.8
----------------------------------------------- -------- ----- ------- -------- ----- -------
520.9 590.3 1,111.2 525.2 512.3 1,037.5
----------------------------------------------- -------- ----- ------- -------- ----- -------
Unamortised issue costs (3.5) (1.8) (5.3) (3.9) (2.0) (5.9)
----------------------------------------------- -------- ----- ------- -------- ----- -------
Borrowings 517.4 588.5 1,105.9 521.3 510.3 1,031.6
----------------------------------------------- -------- ----- ------- -------- ----- -------
Of the Group's total borrowings, 72% (2021: 85%) are considered
fixed rate borrowings.
The interest rate risk profile of the Group's borrowings was as
follows:
Weighted average interest rate (1) Weighted average life
----------------------------------------------- -------------------------------------- -------------------------
Sterling Euro Total Sterling Euro Total
At 31 December 2022 % % % Years Years Years
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Fixed rate financial liabilities 2.7 1.6 2.0 8.4 3.0 4.9
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - hedged 3.2 - 3.2 1.4 - 1.4
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
2.9 1.6 2.2 6.1 3.0 4.4
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - capped - 2.5 2.5 - 4.8 4.8
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - unhedged 4.8 3.5 4.3 1.4 2.5 1.8
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
4.8 3.2 4.1 1.4 3.1 2.2
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Gross borrowings 3.5 2.0 2.7 4.6 3.0 3.8
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Weighted average interest rate (1) Weighted average life
----------------------------------------------- -------------------------------------- -------------------------
Sterling Euro Total Sterling Euro Total
At 31 December 2021 % % % Years Years Years
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Fixed rate financial liabilities 2.9 1.4 2.0 8.0 3.2 5.1
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - hedged 3.4 - 3.4 2.2 - 2.2
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
3.1 1.4 2.2 6.1 3.2 4.6
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - capped - 1.3 1.3 - 5.1 5.1
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Floating rate financial liabilities - unhedged 2.9 1.2 2.7 2.5 2.0 2.4
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
2.9 1.3 2.2 2.5 4.4 3.3
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
Gross borrowings 3.1 1.4 2.2 5.5 3.3 4.4
----------------------------------------------- ---------------- -------- ---------- --------- ------ ------
1 The weighted average interest rate are based on the nominal value of the debt facilities.
The carrying amounts and fair values of the Group's borrowings
are as follows:
Carrying amounts Fair values
----------------------- ------------------ ----------------
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
----------------------- -------- -------- ------- -------
Current borrowings 173.4 169.1 173.4 169.1
----------------------- -------- -------- ------- -------
Non-current borrowings 932.5 862.5 845.3 866.7
----------------------- -------- -------- ------- -------
1,105.9 1,031.6 1,018.7 1,035.8
----------------------- -------- -------- ------- -------
The valuation methods used to measure the fair values of the
Group's fixed rate borrowings were derived from inputs which were
either observable as prices or derived from prices (Level 2).
The fair value of non-current borrowings represents the amount
at which a financial instrument could be exchanged in an arm's
length transaction between informed and willing parties, discounted
at the prevailing market rate, and excludes accrued interest.
The Group had the following undrawn committed facilities
available at 31 December:
2022 2021
GBPm GBPm
----------------------------- ----- -----
Floating rate:
----------------------------- ----- -----
- expiring within one year 30.0 -
----------------------------- ----- -----
- expiring after one year - 30.0
----------------------------- ----- -----
30.0 30.0
----------------------------- ----- -----
In addition to the above committed facility, the Group has GBP20
million of uncommitted facilities available (2021: GBP20
million).
Contractual undiscounted cash outflows
The tables below show the contractual undiscounted cash outflows
arising from the Group's gross debt.
Less than 1 to 2 2 to 3 3 to 4 4 to 5 Over
1 year years years years years 5 years Total
At 31 December 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Secured bank loans 175.1 350.1 121.6 54.9 137.9 271.6 1,111.2
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Secured notes - - - - - - -
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Total on maturity 175.1 350.1 121.6 54.9 137.9 271.6 1,111.2
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Interest payments on borrowings (1) 35.3 26.5 14.3 11.3 9.4 25.2 122.1
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Effect of interest rate swaps (3.9) (2.6) - - - - (6.5)
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Gross loan commitments 206.5 374.0 135.9 66.2 147.3 296.8 1,226.7
------------------------------------ --------- ------ ------ ------ ------ -------- -------
Less than 1 to 2 2 to 3 3 to 4 4 to 5 Over
1 year years years years years 5 years Total
At 31 December 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Secured bank loans 124.3 111.3 265.9 116.2 50.6 322.7 991.0
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Secured notes 46.5 - - - - - 46.5
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Total on maturity 170.8 111.3 265.9 116.2 50.6 322.7 1,037.5
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Interest payments on borrowings(1) 21.1 18.4 14.6 9.7 7.6 30.0 101.4
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Effect of interest rate swaps 1.1 - 0.1 - - - 1.2
----------------------------------- --------- ------ ------ ------ ------ -------- -------
Gross loan commitments 193.0 129.7 280.6 125.9 58.2 352.7 1,140.1
----------------------------------- --------- ------ ------ ------ ------ -------- -------
1 Interest payments on borrowings are calculated without taking
into account future events. Floating rate interest is estimated
using a future interest rate curve as at 31 December.
22. Derivative financial instruments
2022 2022 2021 2021
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
----------------------------------- ------- ------------ ------- ------------
Non-current:
----------------------------------- ------- ------------ ------- ------------
Interest rate caps and swaps 8.5 - 0.4 (0.1)
----------------------------------- ------- ------------ ------- ------------
Current:
----------------------------------- ------- ------------ ------- ------------
Forward foreign exchange contracts - - - (0.7)
----------------------------------- ------- ------------ ------- ------------
8.5 - 0.4 (0.8)
----------------------------------- ------- ------------ ------- ------------
The valuation methods used to measure the fair value of all
derivative financial instruments were derived from inputs which
were either observable as prices or derived from prices (Level
2).
There were no derivative financial instruments accounted for as
hedging instruments.
Interest rate caps
The aggregate notional principal of interest rate caps at 31
December 2022 was GBPnil (2021: GBPnil). The average period to
maturity of these interest rate caps was 3.7 years (2021: 4.2
years).
Interest rate swaps
The aggregate notional principal of interest rate swap contracts
at 31 December 2022 was GBP117.4 million (2021: GBP159.4 million).
The average period to maturity of these interest rate swaps was 1.4
years (2021: 1.9 years).
Forward foreign exchange contracts
The Group uses forward foreign exchange contracts from time to
time to add certainty to, and to minimise the impact of foreign
exchange movements on, committed cash flows. At 31 December 2022
and 31 December 2021 the Group had no outstanding foreign exchange
contracts.
Derivative financial instruments cash flows
The following table provides an analysis of the anticipated
contractual cash flows for the derivative financial instruments
using undiscounted cash flows. These amounts represent the gross
cash flows of the derivative financial instruments and are settled
as either a net payment or receipt.
2022 2022 2021 2021
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
----------------- ------- ------------ ------- ------------
Maturing in:
----------------- ------- ------------ ------- ------------
Less than 1 year 4.3 - - (1.1)
----------------- ------- ------------ ------- ------------
1 to 2 years 3.5 - - (0.1)
----------------- ------- ------------ ------- ------------
2 to 3 years 0.8 - 0.1 (0.1)
----------------- ------- ------------ ------- ------------
3 to 4 years 0.6 - - -
----------------- ------- ------------ ------- ------------
4 to 5 years 0.1 - - -
----------------- ------- ------------ ------- ------------
Over 5 years - - - -
----------------- ------- ------------ ------- ------------
9.3 - 0.1 (1.3)
----------------- ------- ------------ ------- ------------
23. Financial instruments
Categories of financial instruments
Financial assets of the Group comprise: interest rate caps;
foreign currency forward contracts; financial assets at fair value
through other comprehensive income or fair value through profit and
loss; trade and other receivables; and cash and cash
equivalents.
Financial liabilities of the Group comprise: interest rate
swaps; forward foreign currency contracts; bank loans; secured
notes; and trade and other payables.
The fair values of financial assets and liabilities are
determined as follows:
(a) Interest rate swaps and caps are measured at the present
value of future cash flows based on applicable yield curves derived
from quoted interest rates;
(b) Foreign currency options and forward contracts are measured
using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts;
(c) The fair values of non-derivative financial assets and
liabilities with standard terms and conditions and traded on active
liquid markets are determined with reference to quoted market
prices. Financial assets in this category include financial assets
at fair value through other comprehensive income or fair value
through profit and loss such as equity investments;
(d) In more illiquid conditions, non-derivative financial assets
are valued using multiple quotes obtained from market makers and
from pricing specialists. Where the spread of prices is tightly
clustered the consensus price is deemed to be fair value. Where
prices become more dispersed or there is a lack of available quoted
data, further procedures are undertaken such as evidence from the
last non-forced trade; and
(e) The fair values of other non-derivative financial assets and
financial liabilities are determined in accordance with generally
accepted pricing models based on discounted cash flow analysis,
using prices from observable current market transactions and dealer
quotes for similar instruments.
Except for investments in associates and fixed rate loans, the
carrying amounts of financial assets and liabilities recorded at
amortised cost approximate to their fair value.
Capital risk management
The Group manages its capital to ensure that entities within the
Group will be able to continue as going concerns while maximising
the return to stakeholders through the optimisation of debt and
equity balances. The capital structure of the Group consists of
debt, cash and cash equivalents, other investments and equity
attributable to the owners of the parent, comprising issued
capital, reserves and retained earnings. Management perform "stress
tests" of the Group's business model to ensure that the Group's
objectives can be met and these objectives were met during 2022 and
2021.
The Directors review the capital structure on a quarterly basis
to ensure that key strategic goals are being achieved. As part of
this review they consider the cost of capital and the risks
associated with each class of capital.
The gearing ratio at the year end was as follows:
2022 2021
Notes GBPm GBPm
------------------------------- ----- ------- -------
Debt 21 1,111.2 1,037.5
------------------------------- ----- ------- -------
Liquid resources 18 (113.9) (167.4)
------------------------------- ----- ------- -------
Net debt (A) 997.3 870.1
------------------------------- ----- ------- -------
Equity (B) 1,220.8 1,330.7
------------------------------- ----- ------- -------
Net debt to equity ratio (A/B) 81.7% 65.4%
------------------------------- ----- ------- -------
Debt is defined as long-term and short-term borrowings before
unamortised issue costs as detailed in note 21. Liquid resources
are cash and short-term deposits. Equity includes all capital and
reserves of the Group attributable to the owners of the
Company.
Externally imposed capital requirement
The Group was subject to externally imposed capital requirements
to the extent that debt covenants may require Group companies to
maintain ratios such as debt to equity (or similar) below certain
levels.
Risk management objectives
The Group's activities expose it to a variety of financial
risks, which can be grouped as:
-- market risk;
-- credit risk; and
-- liquidity risk.
The Group's overall risk management approach seeks to minimise
potential adverse effects on the Group's financial performance
whilst maintaining flexibility.
Risk management is carried out by the Group's treasury
department in close co-operation with the Group's operating units
and with guidance from the Board of Directors. The Board regularly
assesses and reviews the financial risks and exposures of the
Group.
(a) Market risk
The Group's activities expose it primarily to the financial
risks of changes in interest rates and foreign currency exchange
rates, and to a lesser extent other price risk such as inflation.
The Group enters into a variety of derivative financial instruments
to manage its exposure to interest rate and foreign currency risk
and also uses natural hedging strategies such as matching the
duration, interest payments and currency of assets and liabilities.
There has been no change to the Group's exposure to market risks or
the manner in which these risks are managed and measured.
(I) Interest rate risk
The Group's most significant interest rate risk arises from its
long-term variable rate borrowings. Interest rate risk is regularly
monitored by the treasury department and by the Board on both a
country and a Group basis. The Board's policy is to mitigate
variable interest rate exposure whilst maintaining the flexibility
to borrow at the best rates and with consideration to potential
penalties on termination of fixed rate loans. To manage its
exposure the Group uses interest rate swaps, interest rate caps and
natural hedging from cash held on deposit.
In assessing risk, a range of scenarios is taken into
consideration such as refinancing, renewal of existing positions
and alternative financing and hedging. Under these scenarios, the
Group calculates the impact on the income statement for a defined
movement in the underlying interest rate. The impact of a
reasonably likely movement in interest rates, based on historic
trends, is set out below:
2022 2021
Income statement Income statement
Scenario GBPm GBPm
---------------------------------------------------------------- ----------------- -----------------
Cash +50 basis points 0.6 0.8
---------------------------------------------------------------- ----------------- -----------------
Variable borrowings (including swaps and caps) +50 basis points (0.9) (1.0)
---------------------------------------------------------------- ----------------- -----------------
Cash -50 basis points (0.6) (0.8)
---------------------------------------------------------------- ----------------- -----------------
Variable borrowings (including swaps and caps) -50 basis points 1.5 0.5
---------------------------------------------------------------- ----------------- -----------------
(II) Foreign exchange risk
The Group does not have any regular transactional foreign
exchange exposure. However, it has operations in Europe which
transact business denominated in Euros and, to a minimal extent, in
Swedish krona. Consequently, there is currency exposure caused by
translating into sterling the local trading performance and net
assets for each financial period and balance sheet,
respectively.
The policy of the Group is to match the currency of investments
with the related borrowing, which reduces foreign exchange risk on
property investments. A portion of the remaining operations,
equating to the net assets of the foreign property operations, is
not hedged except in exceptional circumstances. Where foreign
exchange risk arises from future commercial transactions, the Group
will hedge the future committed commercial transaction using
foreign exchange swaps or forward foreign exchange contracts.
The Group's principal currency exposure is in respect of the
Euro. If the value of sterling were to increase or decrease in
strength the Group's net assets and profit for the year would be
affected. The impact of a reasonably likely movement in exchange
rates, is set out below:
2022 2022 2021 2021
Net Profit Net Profit
assets before tax assets before tax
Scenario GBPm GBPm GBPm GBPm
-------------------------------------------------- ------- ----------- ------- -----------
1% increase in value of sterling against the Euro (6.0) 0.3 (6.2) (0.4)
-------------------------------------------------- ------- ----------- ------- -----------
1% fall in value of sterling against the Euro 6.1 (0.3) 6.3 0.4
-------------------------------------------------- ------- ----------- ------- -----------
(b) Credit risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Group. Credit risk arises from the ability of customers to meet
outstanding receivables and future lease commitments, and from
financial institutions with which the Group places cash and cash
equivalents, and enters into derivative financial instruments. The
maximum exposure to credit risk is partly represented by the
carrying amounts of the financial assets which are carried in the
balance sheet, including derivatives with positive fair values.
For credit exposure other than to occupiers, the Directors
believe that counterparty risk is minimised to the fullest extent
possible as the Group has policies which limit the amount of credit
exposure to any individual financial institution.
The Group has policies in place to ensure that rental contracts
are made with customers with an appropriate credit history. Credit
risk to customers is assessed by a process of internal and external
credit review, and is reduced by obtaining bank guarantees from the
customer or its parent, and cash rental deposits. At 31 December
2022, the Group held GBP10.3 million in rent deposits (2021:
GBP10.1 million) against GBP5.3 million of trade receivables (2021:
GBP8.8 million). The overall credit risk in relation to customers
is monitored on an ongoing basis. Moreover, a significant
proportion of the Group portfolio is let to Government occupiers
which can be considered financially secure.
Credit risk also arises from cash and cash equivalents and
deposits with banks and financial institutions. For banks and
financial institutions, only independently rated parties with a
minimum rating of investment grade are accepted.
At 31 December 2022 the Group held GBP8.5 million (2021: GBP0.4
million) of financial assets at fair value through profit and loss.
Management considers the credit risk associated with individual
transactions and monitors the risk on a continuing basis.
Information is gathered from external credit rating agencies and
other market sources to allow management to react to any perceived
change in the underlying credit risk of the instruments in which
the Group invests. This allows the Group to minimise its credit
exposure to such items and at the same time to maximise returns for
shareholders.
(c) Liquidity risk
Liquidity risk management requires maintaining sufficient cash,
other liquid assets and the availability of funding to meet short,
medium and long-term requirements. The Group maintains adequate
levels of liquid assets to fund operations and to allow the Group
to react quickly to potential risks and opportunities. Management
monitors rolling forecasts of the Group's liquidity on the basis of
expected cash flows so that future requirements can be managed
effectively.
The majority of the Group's debt is arranged on an
asset-specific, non-recourse basis (mortgage type loans in SPVs).
This allows the Group a higher degree of flexibility in dealing
with potential covenant defaults than if the debt was arranged
under a Group-wide borrowing facility. Portfolio loans secured by
multiple properties are also used when circumstances require it or
to obtain better conditions.
Banking covenants vary according to each loan agreement, but
typically include loan-to-value and income related covenants. In
addition, the Group has two "green" loans, each of which have a
10-basis point incentive for contain certain sustainability
targets. The Group targets a loan-to-value in the range of 35% to
45%. Balance sheet loan-to-value at 31 December 2022 was 42.2%
(2021: 37.1%).
Loan covenant compliance is closely monitored by the treasury
department. Potential covenant breaches can ordinarily be avoided
by placing additional security or a cash deposit with the lender,
or by partial repayment to cure an event of default.
The Group's loan facilities and other borrowings are spread
across a range of 25 banks and financial institutions so as to
minimise any potential concentration of risk.
24. Financial assets and liabilities
Total
Amortised carrying
Fair value through profit and loss cost value
GBPm GBPm GBPm
--------------------------------- ---------------------------------- --------- ---------
Financial assets:
--------------------------------- ---------------------------------- --------- ---------
Cash and cash equivalents - 113.9 113.9
--------------------------------- ---------------------------------- --------- ---------
Derivative financial assets 8.5 - 8.5
--------------------------------- ---------------------------------- --------- ---------
Other assets - non-current (1) - - -
--------------------------------- ---------------------------------- --------- ---------
Other assets - current (1) - 13.0 13.0
--------------------------------- ---------------------------------- --------- ---------
8.5 126.9 135.4
--------------------------------- ---------------------------------- --------- ---------
Financial liabilities:
--------------------------------- ---------------------------------- --------- ---------
Secured bank loans - (1,105.9) (1,105.9)
--------------------------------- ---------------------------------- --------- ---------
Secured notes - - -
--------------------------------- ---------------------------------- --------- ---------
Derivative financial liabilities - - -
--------------------------------- ---------------------------------- --------- ---------
Other liabilities - current (2) - (43.3) (43.3)
--------------------------------- ---------------------------------- --------- ---------
- (1,149.2) (1,149.2)
--------------------------------- ---------------------------------- --------- ---------
At 31 December 2022 8.5 (1,022.3) (1,013.8)
--------------------------------- ---------------------------------- --------- ---------
Total
Amortised carrying
Fair value through profit and loss cost value
GBPm GBPm GBPm
--------------------------------- ---------------------------------- --------- ---------
Financial assets
--------------------------------- ---------------------------------- --------- ---------
Cash and cash equivalents - 167.4 167.4
--------------------------------- ---------------------------------- --------- ---------
Derivative financial assets 0.4 - 0.4
--------------------------------- ---------------------------------- --------- ---------
Other assets - non-current(1) - 7.7 7.7
--------------------------------- ---------------------------------- --------- ---------
Other assets - current(1) - 15.7 15.7
--------------------------------- ---------------------------------- --------- ---------
0.4 190.8 191.2
--------------------------------- ---------------------------------- --------- ---------
Financial liabilities
--------------------------------- ---------------------------------- --------- ---------
Secured bank loans - (985.5) (985.5)
--------------------------------- ---------------------------------- --------- ---------
Secured notes - (46.4) (46.4)
--------------------------------- ---------------------------------- --------- ---------
Derivative financial liabilities (0.8) - (0.8)
--------------------------------- ---------------------------------- --------- ---------
Other liabilities - current(2) - (35.9) (35.9)
--------------------------------- ---------------------------------- --------- ---------
(0.8) (1,067.8) (1,068.6)
--------------------------------- ---------------------------------- --------- ---------
At 31 December 2021 (0.4) (877.0) (877.4)
--------------------------------- ---------------------------------- --------- ---------
1 Other assets included all amounts shown as trade and other
receivables in note 17 except prepayments of GBP2.7 million (2021:
GBP2.4 million). All current amounts are non-interest bearing and
receivable within one year.
2 Other liabilities included all amounts shown as trade and
other payables in note 19 except deferred income and sales and
social security taxes of GBP15.1 million (2021: GBP21.7 million).
All amounts are non-interest bearing and are due within one
year.
Reconciliation of net financial assets and liabilities to
borrowings and derivative financial instruments
2022 2021
GBPm GBPm
------------------------------------------------ ------- -------
Net financial assets and liabilities: 1,013.8 877.4
------------------------------------------------ ------- -------
Other assets - non-current - 7.7
------------------------------------------------ ------- -------
Other assets - current 13.0 15.7
------------------------------------------------ ------- -------
Other liabilities - current (43.3) (35.9)
------------------------------------------------ ------- -------
Cash and cash equivalents 113.9 167.4
------------------------------------------------ ------- -------
Borrowings and derivative financial instruments 1,097.4 1,032.3
------------------------------------------------ ------- -------
25. Share capital
Number of shares authorised, issued and fully
paid
------------------ --------------------------------------------- ---------------- --------------- ----------------
Ordinary Total Ordinary shares Total
shares in Treasury ordinary in circulation Treasury shares ordinary shares
circulation shares shares GBPm GBPm GBPm
------------------ ----------------- ------------ ------------ ---------------- --------------- ----------------
At 1 January 2021,
31 December 2021
and 1 January
2022 407,395,760 31,382,020 438,777,780 10.2 0.8 11.0
------------------ ----------------- ------------ ------------ ---------------- --------------- ----------------
Purchase of own
shares (market
purchase) (10,184,894) 10,184,894 - (0.3) 0.3 -
------------------ ----------------- ------------ ------------ ---------------- --------------- ----------------
At 31 December
2022 397,210,866 41,566,914 438,777,780 9.9 1.1 11.0
------------------ ----------------- ------------ ------------ ---------------- --------------- ----------------
The Board is authorised, by shareholder resolution, to allot
shares or grant such subscription rights (as are contemplated by
sections 551(1) (a) and (b) respectively of the Companies Act 2006)
up to a maximum aggregate nominal value of GBP3,310,090
representing one-third of the issued share capital of the Company
excluding treasury shares.
26. Dividend
Dividend
Payment per share 2022 2021
date p GBPm GBPm
------------------------------------------------------------------ ------------------ ---------- ----- -----
Current year
------------------------------------------------------------------ ------------------ ---------- ----- -----
2022 final dividend(1) 02 May 2023 5.35 - -
------------------------------------------------------------------ ------------------- ---------- ----- -----
2022 interim dividend 03 October 2022 2.60 10.6 -
------------------------------------------------------------------ ------------------- ---------- ----- -----
Distribution of current year profit 10.6 -
--------------------------------------------------------------------------------------- ---------- ----- -----
Prior year
------------------------------------------------------------------ ------------------ ---------- ----- -----
2021 final dividend 29 April 2022 5.35 21.8 -
------------------------------------------------------------------ ------------------- ---------- ----- -----
2021 interim dividend 24 September 2021 2.35 - 9.6
------------------------------------------------------------------ ------------------- ---------- ----- -----
Distribution of prior year profit 7.70 21.8 9.6
--------------------------------------------------------------------------------------- ---------- ----- -----
2020 final dividend 29 April 2021 5.20 - 21.2
------------------------------------------------------------------ ------------------- ---------- ----- -----
Dividends as reported in the Group statement of changes in equity 32.4 30.8
--------------------------------------------------------------------------------------- ---------- ----- -----
1 Subject to shareholder approval at the AGM on 27 April 2023.
Total cost of proposed final dividend is GBP21.3 million.
27. Other reserves
Capital Cumulative
redemption translation Fair value Share-based Other
reserve reserve reserve payment reserve reserves Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
At 1 January 2022 22.7 31.2 5.0 1.7 28.1 88.7
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
Exchange rate
variances - 28.5 - - - 28.5
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
Property, plant and
equipment:
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
- net fair value
gains in the
year 15 - - 1.9 - - 1.9
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
- deferred tax
thereon 20 - - (0.4) - - (0.4)
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
-
reclassification
of student
accommodation (3.5) (3.5)
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
Share-based payment
credit - - - 0.2 - 0.2
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
At 31 December 2022 22.7 59.7 3.0 1.9 28.1 115.4
------------------- ----- ----------------- ---------------- ----------------- ---------------- --------- -----
Capital Cumulative
redemption translation Fair value Share-based Other
reserve reserve reserve payment reserve reserves Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
At 1 January 2021 22.7 64.0 0.5 2.0 28.1 117.3
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
Exchange rate
variances - (32.8) - - - (32.8)
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
Property, plant
and equipment:
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
- net fair
value deficits
in the year 15 - - 5.5 - - 5.5
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
- deferred tax
thereon 20 - - (1.0) - - (1.0)
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
Share-based
payment charge - - - (0.3) - (0.3)
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
At 31 December
2021 22.7 31.2 5.0 1.7 28.1 88.7
----------------- ----- ----------------- ---------------- ----------------- ----------------- --------- ------
The cumulative translation reserve comprises the aggregate
effect of translating net assets of overseas subsidiaries into
sterling since acquisition.
The fair value reserve comprises the aggregate movement in the
value of financial assets classified as fair value through
comprehensive income, owner-occupied property and hotel since
acquisition, net of deferred tax.
The amount classified as other reserves was created prior to
listing in 1994 on a Group reconstruction and is considered to be
non -- distributable.
28. Notes to the cash flow
2022 2021
Cash generated from operations GBPm GBPm
-------------------------------------------------------- ------ ------
Operating (loss)/profit (63.9) 111.9
-------------------------------------------------------- ------ ------
Adjustments for:
-------------------------------------------------------- ------ ------
Net movements on revaluation of investment properties 136.5 (28.5)
-------------------------------------------------------- ------ ------
Net movements on revaluation of equity investments 3.8 (6.1)
-------------------------------------------------------- ------ ------
Depreciation and amortisation 0.6 1.1
-------------------------------------------------------- ------ ------
(Loss)/profit on sale of investment property (0.5) 0.1
-------------------------------------------------------- ------ ------
Lease incentive debtor adjustments (7.8) (2.7)
-------------------------------------------------------- ------ ------
Share-based payment charge 0.2 (0.3)
-------------------------------------------------------- ------ ------
Changes in working capital:
-------------------------------------------------------- ------ ------
Decrease/(increase) in receivables 2.3 (3.7)
-------------------------------------------------------- ------ ------
(Decrease)/increase in payables (0.7) 1.3
-------------------------------------------------------- ------ ------
Cash generated from operations 70.5 73.1
-------------------------------------------------------- ------ ------
Non-cash movements
2022
------------- ----- ------------- ------------ ---------------------------------------------------- -------------
Changes in
liabilities Amortisation
arising from 1 January Financing of loan Fair value Foreign 31 December
financing 2022 cash flows issue costs adjustments New leases exchange 2022
activities Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Borrowings 21 1,031.6 43.6 1.8 - - 28.9 1,105.9
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Interest rate
swaps 22 0.4 - - (6.0) - - (5.6)
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Interest rate
caps 22 - - - (2.8) - (0.1) (2.9)
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Lease
liabilities 3.4 - - - - 0.2 3.6
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
1,035.4 43.6 1.8 (8.8) - 29.2 1,101.0
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Non-cash movements
2021
------------- ----- ------------- ------------ ---------------------------------------------------- -------------
Changes in
liabilities Amortisation
arising from 1 January Financing of loan Fair value Foreign 31 December
financing 2021 cash flows issue costs adjustments New leases exchange 2021
activities Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Borrowings 21 970.7 88.1 2.0 - - (29.2) 1,031.6
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Interest rate
swaps 22 5.6 - - (5.2) - - 0.4
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Interest rate
caps 22 - - - - - - -
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
Lease
liabilities - - - - 3.4 - 3.4
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
976.3 88.1 2.0 (5.2) 3.4 (29.2) 1,035.4
------------- ----- ------------- ------------ ------------ ------------ ---------- ------------ -------------
29. Contingencies
At 31 December 2022 and 31 December 2021 CLS Holdings plc had
guaranteed certain liabilities of Group companies. These were
primarily in relation to Group borrowings and covered interest and
amortisation payments. Principal amounts of loans secured from
external lenders by two Group companies totalling GBP29.9 million
at 31 December 2022 are also covered by guarantees provided by CLS
Holdings plc (GBP30.2 million at 31 December 2021).
30. Commitments
At the balance sheet date the Group had contracted with
customers under non-cancellable operating leases for the following
minimum lease payments:
2022 2021
Operating lease commitments - where the Group is lessor GBPm GBPm
-------------------------------------------------------- ----- -----
Within one year 100.4 99.9
-------------------------------------------------------- ----- -----
Between one and two years 85.7 88.7
-------------------------------------------------------- ----- -----
Between two and three years 71.4 73.3
-------------------------------------------------------- ----- -----
Between three and four years 50.3 59.2
-------------------------------------------------------- ----- -----
Between four and five years 38.8 38.9
-------------------------------------------------------- ----- -----
More than five years 135.0 133.4
-------------------------------------------------------- ----- -----
481.6 493.4
-------------------------------------------------------- ----- -----
Operating leases where the Group is the lessor are typically
negotiated on a customer-by-customer basis and include break
clauses and indexation provisions.
Other commitments
At 31 December 2022 the Group had contracted capital expenditure
of GBP16.7 million (2021: GBP25.1 million). At the balance sheet
date, the Group had not exchanged contracts to acquire any
investment properties (2021: GBPnil). There were no authorised
financial commitments which were yet to be contracted with third
parties (2021: GBPnil).
31. Post balance sheet events
On 2 February 2023, the Group exchanged on the disposal of a
property in France for GBP9.8m. Completion is scheduled for 14
April 2023 and the sale will be paid in 2 instalments, 50% on
completion and 50% on 20 December 2023.
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