CLS : 2021 Half Year Results

PRESS RELEASE

Release date:	11 August 2021
Embargoed until:	07:00
	CLS HOLDINGS PLC
	("CLS", the "Company" or the "Group")
	ANNOUNCES ITS HALF-YEARLY FINANCIAL REPORT
	FOR THE 6 MONTHS TO 30 JUNE 2021
	Well placed to grow through delivering operational improvements

CLS is a leading FTSE 250 office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a £2.3 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the half year ended 30 June 2021, the Group has delivered the following results:

	30 June 2021	31 December 2020	Change (%)
EPRA NTA per share (pence)1	337.2	345.2	(2.3)
EPRA NAV per share (pence)1	343.4	350.1	(1.9)
Statutory NAV per share (pence)1	303.0	311.9	(2.9)
Contracted rents (£'million)	109.9	107.9	1.9

	30 June 2021	30 June 2020	Change (%)
Profit before tax (£'million)	24.7	31.5	(21.6)
EPRA Earnings per share ('EPS') (pence)1	5.4	7.0	(22.9)
Statutory EPS from continuing operations (pence)1	2.2	5.3	(58.5)
Dividend per share (pence)	2.35	2.35	-

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

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"Over the course of 2019 and 2020, we undertook a significant reshaping of the portfolio, disposing of non-core assets while making acquisitions in strategic growth markets, particularly Germany, with the opportunity for active asset management. Equally significant, today we announce our new sustainability strategy which includes an ambitious set of long-term targets, including becoming net zero carbon by 2030. This fully costed plan is a critical aspect of how we will deliver space which meets our tenants' requirements including the increasing emphasis placed on environmental sustainability.

"Our first half 2021 performance has naturally been shaped by the pandemic with higher vacancy and stable property valuations. This was compounded by a strengthening of sterling which has resulted in lower NTA and earnings. We are hopeful we will see some improvements in the second half of the year as people continue to return to the office and our recent increased level of enquiries translates into letting deals. Our focus remains on delivering our value enhancement opportunities to ensure continued growth over the long-term."

FINANCIAL HIGHLIGHTS

• EPRA NTA down 2.3% and EPRA NAV down 1.9% primarily as a result of foreign exchange reductions from strengthening sterling with the portfolio valuation flat in local currency
• Like-for-likeportfolio valuation up 0.2% in local currency with an increase in Germany of 1.5%, offset by declines in France of 0.1% and the UK of 0.5%
• Profit before tax down 21.6% to £24.7 million (30 June 2020: £31.5 million) from investment property
  valuation decline of £2.8 million (30 June 2020: £2.7 million uplift) and FX reductions of £1.9 million (30 June
  2020: £3.1 million gain) partly offset by cost savings
• EPRA EPS down 22.9% from foreign exchange reductions, lower income from our hotel and student operations and lower dilapidations income. Statutory EPS down 58.5% due to increased deferred tax liabilities following the enactment of the change in future UK corporation tax rate from 19% to 25%
• Interim dividend maintained at 2.35 pence per share (30 June 2020: 2.35 pence per share) to be paid on 24 September 2021.
• Total accounting return of (0.8)% (30 June 2020: 4.6%)

OPERATIONAL HIGHLIGHTS

• Rent collection remained high with 99% of first half rent collected and 97% of third quarter contracted rent due collected to date. Continued high rent collection has led to a slight reduction in bad debt provisions
• Net rental income decreased by 7.4% to £52.3 million (30 June 2020: £56.5 million) as a result of foreign exchange reductions, lower income from our hotel and student operations and lower dilapidations income
• Acquired six properties for £164.8 million, three of which had exchanged in 2020. The five properties in Germany and one in the UK were bought for their asset management opportunities at a combined net initial yield of 3.9% and a reversionary yield of 6.1%
• Completed the disposal of four properties for £15.5 million, two of which had exchanged in 2020. Exchanged on a further two disposals for £10.9 million which have both completed following the period end
• Completed 53 lease events (30 June 2020: 52) securing £5.2 million (30 June 2020: £7.8 million) of annual rent. Excluding the Veolia lease in France, the lettings were at 1.2% above 31 December 2020 Estimated Rental Value
• Vacancy rate increased to 7.7% (31 December 2020: 5.1%). Most of this increase was due to the vacancy acquired with the recent German acquisitions with some increase from expiries running ahead of lettings

FINANCING

• Weighted average cost of debt at 30 June 2021 down six basis points to 2.22% (31 December 2020: 2.28%)
• Loan-to-valueat 38.1% (31 December 2020: 33.7%) reflecting net acquisitions in the period. Gross debt of
  £1,058.7 million (31 December 2020: £977.0 million) with cash of £168.7 million (31 December 2020: £235.7
  million) and £50.0 million (31 December 2020: £50.0 million) of undrawn facilities
• Second long-term, 'green' loan secured for £61.7 million with Scottish Widows at 2.65% fixed interest rate for 12 years - c.20% of CLS' loan portfolio is now 'green'. Weighted average debt maturity of 4.6 years (31 December 2020: 4.6 years)
• In the first half of 2021, financing of c.£145 million at 1.76% for 6.9 years secured across five German SPV loans and one UK portfolio loan. Discussions advanced for the remaining £52.4 million financing due in 2021
• The loan portfolio as at 30 June 2021 had 86% at fixed rates (31 December 2020: 84%)

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

• Today published a new sustainability strategy and calibrated a set of ambitious but achievable long-term targets following asset level reviews. These carbon reduction targets, which include our Net Zero Carbon Pathway and CLS' commitment to become Net Zero Carbon by 2030, have been verified by the Science Based Targets Initiative
• Increased CLS' solar electricity generation capacity by 48% through the installation of a new UK solar array. Completed asset-level climate change risk assessments for all our French assets with the UK and Germany to be completed shortly. On course to achieve margin reduction targets for Aviva and Scottish Widows' loans
• Worked in partnership with the Social Value Portal to calibrate a Social Value Framework that CLS will adopt to start measuring the social value we produce as a business beyond shareholder value

Interim Dividend Timetable

Further to this announcement, in which the Board declared an interim dividend of 2.35 pence per ordinary share, the Company confirmed its dividend timetable as follows:

Announcement date

11 August 2021

Ex-Dividend date	19	August 2021
Record date	20	August 2021
Payment date	24	September 2021

-ends-

Results presentation

A presentation for analysts and investors will be held by webcast and conference call on Wednesday 11 August 2021 at 9.00am followed by Q&A. Questions can be submitted either online via the webcast or to the operator on the conference call.

Webcast: The live webcast will be available here: https://secure.emincote.com/client/cls/cls003

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/cls003/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 [phone]

Liberum Capital Limited

Richard Crawley

Jamie Richards

[phone]

Panmure Gordon

Hugh Rich

[phone]

Elm Square Advisers Limited

Jonathan Gray

[phone]

Smithfield Consultants (Financial PR)

Alex Simmons

Rob Yates

[phone]

Forward-looking statements

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

Chief Executive's statement

Well placed to grow through delivering operational improvements

OVERVIEW

CLS continues to perform well in a market that remains challenging due to the ongoing impacts of Covid-19. Investment, and especially letting, markets have yet to return to pre-pandemic levels although we are seeing increasing levels of activity. Our focus on our tenants remains absolute and that investment in relationships is reaping rewards.

As with 2020, rent collection remained high with 99% of first half rent and 97% of third quarter contracted rent due collected as of the date of this report. Of the 785 tenants across our three countries, approximately 23.7% of rents are paid by governments and 26.5% by major corporations with 50.2% of rents subject to indexation. The benefits of a diverse tenant base with strong credit ratings and a limited exposure to those sectors that have been most affected by the pandemic is reflected in the strong rent collection performance.

Over the six months, EPRA NTA decreased by 2.3% to 337.2p per share (31 December 2020: 345.2p) mainly as a result of foreign exchange movements due to sterling strengthening whilst property valuations were flat with continued growth in Germany offset by weakness in the UK. Total accounting return for the six months was (0.8)% (2020: 4.6%).

The first few months were busy with six acquisitions completed for £164.8 million before costs and four small disposals for £15.5 million. We delivered 347,355 sq. ft (32,270 sqm) of lettings and renewals and the financing of c.£145 million of bank loans. This activity together with a greater focus on operational activity leaves CLS well-placed.

Our portfolio also remains well-placed in terms of: great locations; the potential to capture the reversionary uplifts from vacancy, under renting and selected refurbishment and development; and the ability to provide tenants with modern, flexible, high-quality space. Come the autumn as workers return, the attractions of the office will again be proved.

RESULTS AND FINANCING

Profit after tax for the six months to 30 June 2021 was £8.8 million (2020: £21.6 million), equivalent to earnings

per share of 2.2p (2020: 5.3p). The reduction was as a result of a property valuation decline of £2.8 million (30

June 2020: £2.7 million uplift), FX reductions of £1.9 million (30 June 2020: £3.1 million gain) and increased deferred tax of £10.2 million from the enactment of the 2023 UK corporation tax rise from 19% to 25% partly offset by cost savings. EPRA earnings per share were 5.4p (2020: 7.0p), 22.9% down on last year.

Shareholders' funds fell in the six months by 2.8% to £1,234.6 million reflecting the strengthening of sterling and the payment of the final dividend in April.

Our balance sheet liquidity remains strong with £168.7 million (31 December 2020: £235.7 million) of cash and

£50.0 million (31 December 2020: £50.0 million) of undrawn facilities. We were pleased to execute our second 'green' loan with Scottish Widows with the remaining financing activity for 2021 well advanced. Our weighted average cost of debt fell to 2.22% (31 December 2020 2.28%) reflecting the increased proportion of lower cost Euro-dominated debt. Net debt excluding leasehold liabilities rose to £882.1 million (31 December 2020: £735.0 million) and loan-to-value rose to 38.1% (31 December 2020: 33.7%) reflecting net acquisitions in the period. Interest cover remained high at 3.2 times (30 June 2020: 3.5 times) demonstrating the Group's ongoing ability to generate cash.

PROPERTY PORTFOLIO

At 30 June 2021, the value of the property portfolio, including those within property, plant and equipment and properties held for sale, was £2,317.6 million, £134.6 million higher than six months earlier, driven by acquisitions of £177.2 million including costs and capital expenditure of £18.9 million offset by foreign exchange reductions of £45.6 million, disposals of £15.1 million and a small revaluation loss of £0.8 million.

As previously highlighted, it was a busy start to the year in terms of acquisition activity, and the associated financing, with the completion of the six acquisitions, five in Germany and one in the UK, which had exchanged at the turn of the year, for c.£165 million. The acquisitions were bought for their asset management opportunities at a net initial yield of 3.9% and a reversionary yield of 6.1%. We are already starting to execute new lettings to capture this reversionary potential through rent increases and vacancy reduction.

Selective disposal activity is also taking place targeting smaller properties with higher alternative use values and/or less growth potential. Four properties, two in the UK, one in Germany and one in France, were sold for £15.5 million, two of which had exchanged in 2020. In the first half we also exchanged on a further two disposals for £10.9 million (one in Hounslow, UK and one in Wiesbaden, Germany) which completed following the period end. In total, the six properties were sold for a net initial yield of 4.4%.

In the second-half, we expect to continue with selective disposals of smaller properties to drive higher growth from the portfolio. All of this transactional activity is part of a repositioning of the portfolio to allow us to deliver value through active asset management.

In the six months to June, the like-for-like valuation of the property portfolio, which excludes acquisitions, rose by 0.2% in local currency with a continued strong performance in Germany up 1.5% offsetting a decline in the UK of 0.5% and a virtually flat performance in France at (0.1)%. Including acquisition costs, the portfolio valuation was flat. At 30 June 2021, the net initial yield of the portfolio was 4.3% (31 December 2020: 4.6%), 206 basis points above the Group's cost of debt, underpinning the Group's ability to generate cash.

The EPRA vacancy rate as at 30 June 2021 was 7.7% (31 December 2020: 5.1%) primarily driven by the vacancy acquired with the German acquisitions and, to a lesser extent, by lease expiries being ahead of lettings as pandemic restrictions limited tenant viewing opportunities. We expect letting activity to pick up in the second- half, particularly in Germany, as we are seeing increased tenant enquiries following the lifting of lockdown.

DIVIDENDS

In September, the Group will pay an interim dividend for 2021 of 2.35 pence per share, which is at the same level as the 2020 interim dividend.

ENVIRONMENT, SOCIAL AND GOVERNANCE

With the importance of sustainability reporting growing and the introduction of TCFD this year, we have decided to replace our annual sustainability report with an enhanced sustainability section within our annual company report and accounts starting with the 2021 report. Today we are publishing our new sustainability strategy and Net Zero Carbon Pathway, which outlines our plan for CLS to navigate a decade that will be defined by the impacts of climate change.

Our biggest sustainability achievement so far in 2021 has been the completion of our Net Zero Carbon Pathway, for which we took an evidence-based approach through undertaking a program of asset-level energy audits to obtain the technical and cost data for each property to achieve energy and carbon savings. We also employed a specialist consultant to compile our Scope 3 emissions baseline to ensure we had a full picture of the carbon footprint of our business. Our technical assessments have provided us with an estimated total capital expenditure spend of up to £58 million until 2030 to deliver the full programme. We are currently in the process of refining our model to scrutinise the technical and commercial feasibility of each opportunity, and determine the optimal time to deliver each project over the coming years. This will confirm the year-on-year capital expenditure investment and estimated carbon performance split between the amounts which will be recoverable through service charges, which are part of our normal annual capital expenditure programmes of c.£20 million and which amounts are additional.

Incorporated within our Net Zero Carbon model are the regulatory criteria relating to energy efficiency and/or carbon reductions for office properties as relevant to the UK, France and Germany by 2030. These include the new EPC-B requirements in the UK, the Decret Tertiaire energy efficiency targets in France, and the new energy efficiency targets and carbon costs recently announced in Germany. By incorporating these details into our