CLS Holdings Regulatory News (CLI)

CLS HOLDINGS PLC

("CLS", THE "COMPANY" OR THE "GROUP")

ANNOUNCES ITS FULL YEAR FINANCIAL REPORT

 FOR THE 12 MONTHS TO 31 DECEMBER 2016

strong results in an uncertain market

CLS is a FTSE 250 property investment company with a £1.57bn portfolio in the UK, Germany and France offering geographical diversification with local presence and knowledge.

FINANCIAL HIGHLIGHTS

· EPRA net assets per share: up 17.9% to 2,456 pence (2015: 2,083 pence)

· Basic NAV per share increased by 18.8% to 2,151 pence (2015: 1,810 pence)

· EPRA earnings per share up 45.2% to 123.0 pence (2015: 84.7 pence)

· Net rents rose by 8.2% for the year to £107.1 million (2015: £99.0 million)

· Profit after tax of £97.8 million (2015: £129.9 million) included a property revaluation uplift of £36.1 million (2015: £98.0 million)

· Increase in distributions to shareholders of 23% for the full year, with a proposed final dividend of 40 pence per share which will be paid on 28 April 2017 to shareholders on the register at 17 March 2017

OPERATIONAL HIGHLIGHTS

Investment Property Portfolio:

· 634,349 sq ft (58,933 sqm) of new lettings and lease renewals and 639,225 sq ft (59,386 sqm) of expiries

· Vacancy rate reduced to lowest ever of 2.9% (2015: 3.1%)

· 4 properties acquired for £45.7 million at an average net initial yield of 6.9%

· 4 properties sold for £85.5 million at an average net initial yield of 5.6%

· 5 further acquisitions since the year end for £31.4 million and at a net initial field of 8.0%

Developments:

· Obtained enhanced planning consent on Vauxhall Square, SW8, and began demolition of Wendle Court

· Began development of Phase 2 of Spring Mews, SE11 and progressed Ateliers Victoires in Paris

Financing:

· 14 new loans or refinancings completed with a value of £177 million and at an average all-in annual rate of 1.90%

· Repositioned the loan portfolio to 63% at fixed rates (2015: 51%)

· Reduced the weighted average cost of debt by 49 bps to 2.91%, our lowest ever (2015: 3.40%), 270 bps below our net initial yield of 5.6%

Henry Klotz, Executive Chairman of CLS, commented:

"Our record results illustrate the benefits of our diversified business: investing in high-yielding properties in major cities across our core markets, with a broad tenant base and diversified sources of funding.

"In changing to paying a progressive dividend, we intend to offer a more attractive investment proposition for shareholders, to improve liquidity in the Group's shares and broaden our shareholder base.

"With our proven and successful business model, a strong balance sheet and ample liquid resources, we are well positioned to benefit from any challenges and opportunities which lie ahead."

-ENDS-

For further information, please contact:

CLS Holdings plc +44 (0)20 7582 7766

www.clsholdings.com

Henry Klotz, Executive Chairman

Fredrik Widlund, Chief Executive Officer

John Whiteley, Chief Financial Officer

Sten Mortstedt, Executive Director

Liberum Capital Limited +44 (0)20 3100 2222

Richard Crawley

Jamie Richards

Panmure Gordon (UK) Limited +44 (0)20 7886 2500

Dominic Morley

Andrew Potts

Elm Square Advisers Limited +44 (0)20 7823 3695

Jonathan Gray

Smithfield Consultants (Financial PR) +44 (0)20 7360 4900

Alex Simmons

CLS will be presenting to analysts at 9.00am on Wednesday, 8 March 2017, at Smithfield Consultants, 10 Aldersgate Street, London, EC1A 4HJ.

Conference call dial in numbers as follows:

Participant telephone number +44(0)20 3427 1905

Confirmation code 4959351

Please dial in at least 5 minutes prior to the start of the meeting and quote the above confirmation code when prompted.

An interview with Fredrik Widlund, CEO, looking at CLS's performance and strategy can be found here:

Chairman's Statement

Our results show the benefits of a diverse business investing in high-yielding offices in major cities across three markets with a broad tenant base and diversified sources of funding

Overview

Our 2016 results reflected a successful year for the Group in which we passed several milestones. While EPRA earnings per share and EPRA NAV rose to their highest ever levels, the vacancy rate and cost of debt fell to record lows.

The rise in EPRA NAV was driven by underlying earnings, foreign exchange gains and property valuation uplifts across London and Europe, and the strong cash flow from operations underpinned the increase in distributions to our shareholders. To make the Group more comparable with other listed companies, and following feedback from our shareholders, we have decided to change our method of distribution and in April we will pay the final distribution for 2016 by way of a dividend.

In the year we made acquisitions and selective disposals across the Group as we continued to reposition our investment property portfolio to further improve returns, and we gained an enhanced planning consent on our Vauxhall Square development scheme in London which increased the office space.

In the second half of the year the UK investment market demonstrated resilience to the prospect of the UK leaving the EU, while the rise in the relative value of the euro further emphasised the benefits of the Group's geographical diversity.

The Group is strongly cash-generative. Our portfolio produces a net initial yield of 5.6%, which will rise to 5.9% on the expiry of rent-frees, and is financed by debt with a weighted average cost of 2.91%. In 2016 our Group revenue rose 8.1% to £128.5 million (2015: £118.9 million), and our net cash flow from operating activities was £40.1 million (2015: £48.9 million).

Property Portfolio

The increase in EPRA net assets per share was driven by a rise in values across virtually all of our regions. The Group's property portfolio grew to £1.57 billion, due predominantly to revaluation uplifts and foreign exchange gains. The investment property portfolio rose by 2.7% in local currencies, with strong contributions from France (+4.8%), Germany (+3.8%) and London (+2.5%). The only part of our portfolio to see a decline in value was the rest of the UK, representing 6% of the total portfolio, lower by 6.1% as it approached several lease events in March 2018, but which are already under negotiation.

At the year end the contracted rent roll was £91.2 million (2015: £89.0 million), of which 67% came from governments and major corporations and 50% was index-linked. Overall, the vacancy rate at 31 December 2016 was only 2.9% (2015: 3.1%); whilst 59,386 sqm of space was vacated in the year, 4,026 sqm was taken to development stock and 58,933 sqm was let or renewed.

Our development schemes in Vauxhall have progressed in line with expectations. As previously reported, at Vauxhall Square, SW8, in February 2016 we gained an amendment to the overall planning consent, replacing a four-star hotel with offices, increasing the office element of the entire scheme to 353,300 sq ft (32,823 sqm). In September, we began the demolition of Wendle Court in preparation for the construction of a new hostel and at the end of 2016 we gained vacant possession of 95 Wandsworth Road. The Board is considering several options for Vauxhall Square and I look forward to informing our shareholders of those discussions when they have been concluded.

At Spring Mews, SE11, in July we began the development of the next phase of the site, adjacent to the hotel, student and office scheme which completed in 2014. Phase 2 comprises a £8.6 million, 7-storey development of 9,181 sq ft (853 sqm) of office accommodation and nine residential apartments, expected to reach practical completion by the end of this year.

We acquired four properties in Düsseldorf, Hamburg and Leatherhead during the year at an aggregate cost of £45.7 million, generating a net initial yield of 6.9%. The largest, Parsevalstrasse 11, Düsseldorf, comprised 239,496 sq ft (22,701 sqm) of high quality, mixed-use space, and was acquired for €43.6 million at a net initial yield of 7.1% and financed for 7 years at a fixed rate of 0.92%.

Since the year end we have bought a portfolio of five buildings in the UK comprising 107,000 sq ft (9,940 sqm) of offices in Reigate, Teddington, Sidcup, Maidenhead and Birmingham for £31.4 million generating a net initial yield of 8.0%, and providing excellent short to medium-term asset management opportunities.

We also continued to dispose of peripheral assets which did not fit within the Group's strategy. We sold Vänerparken, our only remaining investment property in Sweden, for SEK590 million, and we disposed of our only properties in Luxembourg and Antibes. In London, we sold Chancel House, Neasden at 39% above its book value. In total, disposals produced proceeds of £85.5 million, generating an aggregate profit on disposal of £9.1 million, and a release of tax of a further £6.6 million.

Results

In 2016 EPRA net assets per share rose by 17.9% to 2,456 pence (2015: 2,083 pence), and basic NAV increased by 18.8% to 2,151 pence (2015: 1,810 pence). Profit after tax of £97.8 million (2015: £129.9 million) included a property revaluation uplift of £36.1 million (2015: £98.0 million) and, excluding such revaluations, EPRA earnings per share rose by 45.2% to 123.0 pence (2015: 84.7 pence); basic earnings per share were 236.3 pence (2015: 305.7 pence).

The 373 pence increase in EPRA net assets per share to 2,456 pence largely comprised underlying earnings (131 pence), foreign exchange gains (119 pence) and property valuation uplifts (97 pence). Shareholders' funds rose by 14.9% to £876.4 million, after distributions to shareholders of £24.8 million, and the balance sheet continued to be strong, with cash and liquid resources of £164.1 million.

Recurring interest cover remained robust at 3.4 times (2015: 3.2 times), as the Group continued to enjoy a very low weighted average cost of debt and at 31 December 2016 the weighted average loan to value of our secured debt was 49.8% (2015: 48.1%).

Financing

The Group's strategy is to have diversity of financing from banks and other debt providers and to ring-fence debt on individual properties where appropriate. During the year, £177 million was financed in 14 new loans at a weighted average rate of 1.90%, and our weighted average cost of debt was reduced to 2.91%. Diversity of financing is important to reduce risk and we enjoy active lending relationships with 24 debt providers. Medium-term interest rate swaps have remained attractively low, and by taking advantage of these we have increased the proportion of loans at fixed rate to 63% (2015: 51%), with a further 5% protected against rising rates with interest rate caps. 32% of our debt remains unhedged.

The Group's corporate bond portfolio has continued to be a valuable part of our cash management strategy. The portfolio outperformed the bond market during the year, delivering a total return of £10.5 million, or 18.6% in local currencies on invested capital. At the year end the portfolio consisted of 31 bonds valued at £65.1 million with a running yield of 7.8% on market value, and a weighted average duration of 12.6 years.

People

Our skilled and motivated workforce, drawn from 15 nationalities and split evenly between men and women, is key to the Group's success. In order to continue to understand the needs and requirements of our employees, we conducted an anonymous Group-wide staff survey during the year, from which we received positive and constructive feedback and have begun to implement several of the suggestions, with a timetable to address those which remain.

Sustainability

We have continued to implement our sustainability strategy across the Group, with technological improvements in the way we are able to monitor energy usage and to work with our customers to reduce costs. We maintain our involvement in the communities in which we invest, and have increased staff involvement in community and charitable events. I am very pleased that we have been able to reduce our carbon emissions for the fifth consecutive year, which will continue with the installation of further photovoltaic arrays during 2017. Further details of these initiatives are set out in the Corporate Social Responsibility Report on page 30 of the 2016 Annual Report and Accounts.

Distributions to Shareholders

In 2016, the Group distributed through tender offer buy-backs £13.4 million in April, equivalent to 31.8 pence per share, and £7.2 million in September, equivalent to 17.5 pence per share. In addition, £4.1 million was spent pursuant to market purchases on acquiring 255,099 shares which were placed in treasury.

The Board intends to make future distributions by way of a progressive dividend paid twice-yearly. Accordingly, the Board is proposing a final dividend of 40 pence per share, bringing the total distribution for the year to 57.5 pence per share, or £23.5 million. In addition, the Board is proposing a share sub-division of the existing ordinary shares of 25 pence each into 10 ordinary shares of 2.5 pence each.

Outlook

Our record results illustrate the benefits of our diversified business: investing in high-yielding properties in secondary areas of major cities, across three markets, with a broad tenant base and diversified sources of funding.

Looking ahead, 2017 is set to be an eventful year, with the UK due to start the process of leaving the European Union and several important elections taking place in Europe. With our proven and successful business model, a strong balance sheet and ample liquid resources, and our highly skilled and committed staff, we are well positioned to benefit from any challenges and opportunities which lie ahead.

With our proven opportunistic business approach we will continue to focus on cash flow, selling low yielding assets with no immediate prospect of value-adding initiatives, and redeploying our capital elsewhere with our customary discipline. I remain confident that the Group is well positioned to continue to deliver value to our shareholders.

Henry Klotz

Executive Chairman

8 March 2017.

Investors

DISTRIBUTIONS TO SHAREHOLDERS

The Board intends to make future distributions by way of twice-yearly dividends and to sub-divide the ordinary shares

Tender Buy-Backs

For many years the Company has made distributions to shareholders twice a year through tender offer buy-backs. The last of these was in September 2016, being £7.2 million with which the Company bought back 1 in 100 shares at 1,750 pence per share.

Dividends

On 8 February 2017, the Company announced that future distributions would be by dividend, beginning in April 2017 when we propose to distribute £16.3 million (40 pence per share), making a total of £23.5 million for the year. This is an increase of 23.0% on distributions last year and 47.6% above the level of two years ago.

Share Split

At the annual general meeting we will ask shareholders to approve a sub-division of each of the Company's ordinary shares of 25 pence into 10 shares of 2.5 pence each.

Why Change?

We believe that changing the distribution method to one of dividends and splitting the shares will make CLS more easily comparable with other listed property companies and a more attractive investment proposition for new shareholders. Our aim is to improve liquidity in the Group's shares and broaden the shareholder base.

Dividend Policy

The Company expects sufficient cash flow to be able to meet the growth requirements of the business, maintain an appropriate level of debt and provide cash returns to shareholders via a dividend. It is our intention to pay a progressive dividend fully covered by EPRA earnings. Approximately one-third of the annual dividend will be made as an interim in September, with the balance paid as a final dividend in April.

Market Purchases

Between 13 May and 31 May 2016, the Company engaged in a share buy-back programme, acquiring 255,099 shares in the market at an aggregate cost of £4.1 million and at an average price of 1,595 pence per share, which added 3 pence per share to NAV.

business review

The main activity of the Group is the investment in commercial real estate across four European regions - London, the rest of the United Kingdom, Germany and France - with a focus on providing well-managed, cost-effective offices in key European cities.

INVESTMENT PROPERTIES

Overview

At 31 December 2016, the directly held investment property portfolio was independently valued at £1,536.6 million (31 December 2015: £1,366.8 million). The increase of £169.8 million comprised new acquisitions of £45.7 million and other capital expenditure of £20.7 million, a £38.5 million valuation uplift, £77.2 million of positive exchange rate variances, and £9.2 million transferred from properties held for sale; the cumulative effect of these was mitigated by disposals of £21.5 million. In local currencies, the portfolio rose by 2.7%, after acquisitions and development expenditure. The drivers were the French (+4.8%), German (+3.8%) and London (+2.5%) portfolios; the rest of the UK fell by 6.1%.

At the beginning of the year the last Swedish investment property, Vänerparken, was held in the balance sheet as a property held for sale, and was duly sold in 2016.

Of the £45.7 million spent on acquisitions in the year, £39.3 million related to two properties in Germany, and £6.4 million to two in London. Our only properties in Sweden, Luxembourg and Antibes were sold, and a London property was sold to a special purchaser. Contracted rent rose by 0.7% on a like-for-like basis. The increase in capital values was driven by a fall in yields: the EPRA net initial yield of the overall investment property portfolio (excluding developments) at 31 December 2016 fell to 5.6% (2015: 5.9%) and the topped-up EPRA net initial yield to 5.9% (2015: 6.2%). The average rent across the Group remained very affordable at £16 per sq ft (£172 per sqm), and the average capital value was also low at just £268 per sq ft (£2,883 per sqm). This was very close to replacement cost, meaning that the land element of our investments in key European cities was minimal. This also highlights how successful the Group can be in attracting occupiers with cost-effective rents.

The bedrock of the Group's rental income is strong, with 36% being paid by government occupiers and 31% from major corporations, and 50% of our rents are subject to indexation. The weighted average lease length at 31 December 2016 increased to 6.2 years, or 4.7 years to first break, and the portfolio was let at a net £5.1 million below current market rents.

The overall vacancy rate remained very low at just 2.9% (2015: 3.1%), which is testament to the benefit of active in-house asset management and property management, and of maintaining strong links with our customers to ensure we understand and respond to their needs.

The benefits of the Group's geographical diversification remain self-evident: the threat of Brexit undermined the London investment market for a time in 2016, but it also weakened sterling, adding to the sterling value of our euro-denominated assets, whilst we saw good growth in values in Germany and France, and Germany continues to provide good investment opportunities and readily available debt.

The Group maintains its strong commitment to sustainability, which has benefited both occupiers and the Group. The Corporate, Social and Environmental Responsibility Statement on page 30 of the 2016 Annual Report and Accounts provides more detail.

LONDON

Market during the year:

· The UK economy performed better than expected with GDP growth of 2% and unemployment remains low at 4.8%

· The Bank of England has revised its growth forecasts upwards to 2% for 2017

· PMI of business confidence remains above 50

· Investment volumes rebounded in Q4 2016 with the level of transactions across the UK being worth £12.1bn almost in line with the 5 year average

· Rents across the UK grew marginally although the office sector is currently lagging behind industrial property in terms of growth

Outlook:

The decision to leave the EU created uncertainty in the London commercial property market, especially in the City where the demand for space from the financial services sector is likely to decline in the medium term. In the assets in which CLS invests, which are outside the City and prime West End, tenant demand remains robust. A negative impact on the broader economy could affect CLS more tangibly, but the supply of commercial space in London remains constrained and by managing all of our assets in-house we are in a strong position to withstand such an impact.

In 2016 the supply of, and demand for, investment opportunities in London were constrained by the prospect of the EU referendum and by its outcome. Consequently, in January we made our only acquisition in Greater London in the year, comprising Cassini Court and Pascal Place, Randalls Research Park, Leatherhead for £6.4 million, including costs. These adjacent buildings provided 28,122 sq ft (2,613 sqm) of offices and, with a net initial yield of 6.0% and around 10,580 sq ft of vacant space, presented the opportunity to undertake a modernisation programme, which is now under way.

Since the end of the year we have acquired a portfolio of five properties comprising 107,000 sq ft (9,940 sqm) of offices in Reigate, Teddington, Sidcup and Maidenhead (which will be managed within the London portfolio) and Birmingham (Rest of UK) for £31.4 million generating a net initial yield of 8.0% from 10 tenants, and providing excellent short to medium-term asset management opportunities.

In October, Chancel House, Neasden Lane NW10 was sold to the Education Funding Agency for £18.7 million, 39% above its valuation at 31 December 2015. It comprised 74,700 sq ft (7,081 sqm) of office space; 56% of the building was income-producing from the Department of Works and Pensions until March 2018 and, with 44% of the property vacant, the sales price represented a net initial yield of 3.3%.

The London occupancy market in which we operate maintained its strength in 2016, largely ignoring the impact Brexit might have, and with a lack of new developments to satisfy this demand, rental values rose. On average, new lettings were achieved at 5.4% above their estimated rental values (ervs) of 31 December 2015. During 2016, ervs of the London portfolio rose by 2.6%, and at 31 December 2016 the London portfolio was net reversionary. Those leases which were reversionary were £9.0 million or 21.7% under-rented; of the £1.1 million (2.6%) of over-renting in London, £0.7 million was on leases which expire in 2026. The vacancy rate for London remained low at just 4.0% (2015: 3.6%), excluding development stock. During 2016, 142,374 sq ft (13,227 sqm) became vacant, of which 43,335 sq ft (4,026 sqm) was taken into development stock, and we let or renewed leases on 106,573 sq ft (9,901 sqm).

At Vauxhall Square, SW8, our 1.6 million sq ft (151,700 sqm) major development opportunity adjacent to Vauxhall's transport hub, construction is well advanced on the 454 bed, 30 storey student tower by Urbanest, to whom we sold this adjacent site in 2015. This represents just one of a number of tower developments under way in the immediate vicinity of our main development site. In February 2016 we gained an amendment to the overall planning consent, replacing a four-star hotel with 108,586 sq ft (10,088 sqm) of Grade A offices, increasing the office element of the entire scheme to 353,300 sq ft (32,823 sqm). In September, we began the demolition of Wendle Court to the south of the scheme at 131/137 Wandsworth Road, in preparation for the construction of a new hostel to replace the one on the main site. As previously indicated, at the end of 2016 we were able to gain vacant possession from Cap Gemini of 95 Wandsworth Road, the largest existing building on the main site. We are considering several options on the future of the main scheme.

At Spring Mews, SE11, in July we began the development of the next phase of the site, adjacent to the hotel, student and office scheme which completed in 2014. Phase 2 comprises a £8.6 million, 7-storey development of 9,181 sq ft (853 sqm) of office accommodation and nine residential apartments expected to reach practical completion by the end of this year.

The London portfolio rose in value by 2.5% in the year, dampened by the 1% increase in stamp duty land tax, and reflected a 30 bps fall in yield and a 1.6% growth like-for-like in contracted rents.

REST OF UK

Market during the year:

· Lower transactional volumes post Brexit, with South East office market trading volumes falling by 30% to £2.6bn

· Trading activity resumed to relatively normal levels in Q3

· Decrease in value of sterling brought about an influx of overseas investors

· Demand remained stable in regional cities

Outlook:

The key to the Rest of UK portfolio is the impact of the lease events in March 2018.

The Rest of UK portfolio is predominantly let to government departments. In 2016 there were no acquisitions or disposals; during the year we exchanged contracts to sell Atholl House, 84/88 Guild Street, Aberdeen, with vacant possession but the purchaser did not complete the contract, and a non-refundable deposit of £1.5 million was taken to Other Property Income in the income statement.

Since the year end, the acquisition in Birmingham referred to above has been added to the rest of UK portfolio.

In 2016, the only lease to expire was of 7,664 sq ft (712 sqm) and was renewed to the existing tenant.

There are 11 leases with the Department of Work and Pensions (Job Centres) which have tenant breaks or expiries in March 2018 and we are in discussions with the tenant's advisers to extend most of these.

The Rest of UK portfolio fell in value by 6.1% in the year, including the effect of the rise in stamp duty land tax. Excluding the impact of stamp duty and Atholl House, the remaining 25 properties in the portfolio fell by less than 1.5% as the March 2018 lease events approached.

GERMANY

Market during the year:

· GDP growth stable at 1.9% further growth predicted in 2017

· Unemployment continued to fall to 5.8%

· Real estate markets remained buoyant; still well above the 10 year average. Investment transactions surpassed €50 million for third consecutive year

· Office lettings grew by 12%, primarily in Frankfurt and Stuttgart

· Prime sector yields fell to 3.3% in Munich

· Further yield compression in secondary locations now between 5.25% and 6.25%

Outlook:

Vacancies are falling, rental growth in larger cities has been over 5% per annum and the economy grew by 1.9% in 2016. Further strong economic growth is expected in 2017 which, underpinned by a widely-diversified economic structure, will benefit our tenants. The general election will inevitably create some uncertainty, but the economy is strong enough to withstand it. We intend to grow our portfolio in a German economy which provides attractive investment and financing opportunities in non-prime offices.

We continue to see good investment value in German commercial real estate, supported by favourable financing conditions. In September, we acquired Parsevalstrasse 11, Düsseldorf, comprising 239,496 sq ft (22,700 sqm) of high quality, mixed-use space close to the airport. The cost of €43.6 million provided a net initial yield of 7.1% and we financed the acquisition for 7 years at a fixed rate of 0.92%. In August, we bought Harburger Ring 35, Hamburg, adjacent to our existing holding of Harburger Ring 33, for €5.7 million, which comprised 36,028 sq ft (3,415 sqm) of office space.

During 2016, 213,093 sq ft (19,797 sqm) vacated or expired in the German portfolio, but 232,789 sq ft (21,627 sqm) was relet or renewed and, consequently, the vacancy rate fell to 1.7% (2015: 2.5%). New leases and renewals were achieved at 6.1% above their ervs at the end of 2015.

The valuation of the German portfolio rose by 3.8% in local currency, or by 18.4% in sterling. The uplift was driven by a 5 bps fall in yields, whilst ervs were up 0.3% on a like-for-like basis in the year.

FRANCE

Market during the year:

· Unemployment rate declined for the second consecutive year, now at 10%

· Government deficit cut from 7.2% of GDP to 3.4%

· 2.4 million sq m office space let, representing a 7% increase

· Office supply fell to 3.5 million sqm for fifth consecutive quarter

· Paris region vacancy rates reduced by 11% during the year to 6.5%

· Prime rents remained stable at €780 per sqm and yields at 3%

Outlook:

The French economy remains challenging, with GDP growth in 2016 of only 1.1% and unemployment at 10%, and uncertainty surrounds both the outcome of the 2017 presidential election and its economic consequences. But 2016 proved the strength of the Paris office letting market, and a continuing fall in supply bodes well for rents. Robust valuations reflect a market dominated by domestic investors and a lack of supply. Overall, we remain cautious of further investment in France until signs of recovery and political stability have returned.

In a highly competitive market, no acquisitions were made in France during the year, but we took the opportunity to dispose of peripheral assets which did not fit within the Group's strategy of investing in Greater London and the larger cities of Germany and France. We disposed of our only property investment in Luxembourg, at 16 Rue Eugene Ruppert, for €10.2 million, marginally ahead of the 2015 valuation for this empty property. Later in the year we sold Le Chorus, 2203 Chemin de St Claude, Antibes a 46,640 sq ft (4,421 sqm) office building at a price of €9.4 million, 2.4% above its valuation at 31 December 2015.

Our in-house French team managed to reduce still further our vacancy rate in France to only 2.9% (2015: 3.9%). Whilst a significantly large 276,094 sq ft (25,650 sqm) of space vacated or expired during the year, 287,321 sq ft (26,693 sqm) was let. This was achieved at a weighted average rent 1.9% above ervs at 31 December 2015.

The French portfolio valuation rose by 4.8% in the year in local currency, and by 21.6% in sterling. Contracted rent on a like-for-like basis fell by 1.5%, but yields fell by 8 bps, which accounted for most of the rise in the value of the properties.

OTHER INVESTMENTS

Financial Investments

At 31 December 2016 the Group held financial investments in the shares of two companies listed on Nasdaq Stockholm. The Group's main financial investment was an 11.2% interest in the share capital of Catena AB, a property company which specialises in logistics warehouses in Sweden, from which we received a dividend of £1.0 million during the year. NP3 Fastigheter AB is an investor in commercial real estate in northern Sweden which produced good capital growth during the Group's ownership, and was sold in full in February 2017.

The Group's other significant financial investment is in corporate bonds, which are held as an alternative to cash as a cash management tool. The average capital invested in corporate bonds in the year was £56.4 million, which generated a total return in local currencies of 18.6%. At the year end the Group owned bonds from 31 issuers with an aggregate value of £65.1 million.

Property, Plant and Equipment

The Staybridge Suites London - Vauxhall hotel is part of our Spring Mews development completed in 2014, and is operated under a franchise agreement with Intercontinental Hotels Group. It increased its revenue by 21.6% in 2016, contributing £4.3 million (2015: 3.5 million) to other property income.

The assets of First Camp Sverige Holding AB, predominantly vacation sites in Sweden, were valued at £66.8 million at 31 December 2016, and accounted for the majority of additions in property, plant and equipment in 2016 as the company consolidated its share of the Swedish market. The Group's share in the net assets of First Camp at the year end was £14.1 million.

RESULTS FOR THE YEAR

Headlines

Profit after tax attributable to the owners of the Company of £97.8 million (2015: £129.9 million) generated EPRA earnings per share of 123.0 pence (2015: 84.7 pence), and basic earnings per share of 236.3 pence (2015: 305.7 pence). Investment properties at 31 December 2016 were £1,536.6 million (2015: £1,366.8 million), EPRA net assets per share were 17.9% higher at 2,456 pence (2015: 2,083 pence), and basic net assets per share rose by 18.8% to 2,151 pence (2015: 1,810 pence).

Approximately 55% of the Group's business is conducted in the reporting currency of sterling, 32% in euros, with the balance in Swedish kronor. Compared to last year, sterling weakened against the euro by 11.1% and against the krona by 10.1%, increasing profits accordingly. Likewise, at 31 December 2016 the euro was 15.1% stronger and the krona 10.3% stronger against sterling than twelve months previously, increasing the sterling equivalent value of non-sterling net assets.

Exchange rates to the £

Income Statement

In 2016, rental income of £91.3 million was £6.0 million higher than in 2015. Acquisitions added £3.7 million, completed developments contributed £1.8 million for the first time, general letting activity added £1.0 million and the weakness of sterling added £4.3 million; these were offset by £4.8 million of income lost through disposals. Other property income of £21.4 million included income from First Camp of £12.5 million (2015: £14.0 million), hotel revenue from Spring Mews of £4.3 million (2015: £3.5 million) and one-off receipts of £1.5 million on the aborted disposal of Atholl House and £1.0 million from a rights of light settlement. In aggregate net rental income rose by 8.2% to £107.1 million (2015: £99.0 million).

We monitor the administration expenses incurred in running the property portfolio by reference to the income derived from it, which we call the administration cost ratio, and this is a key performance indicator of the Group. In 2016, the one-off cost of closing the Lyon office and of moving the Paris office to larger premises to accommodate the entire French team was part of the increase in administration expenses of the property segment of the Group to £14.1 million (2015: £13.5 million). But net rental income rose more steeply, and the administration cost ratio fell to 14.9% (2015: 15.9%), well within our KPI target for the year of 16.5%.

The net surplus on revaluation of investment properties of £36.1 million was predominantly generated by the London portfolio, which rose in value by £18.3 million, Germany rose by £12.4 million and France by £11.6 million.

The disposals in Neasden, Luxembourg, Antibes and Vänerparken together raised proceeds of £85.5 million realising a gain of £9.1 million after costs over their aggregate valuation at 31 December 2015. In addition, tax liabilities of £6.6 million were extinguished for the Group by selling the corporate vehicles which contained the properties (and their associated tax liabilities).

Finance income of £13.6 million (2015: £10.0 million) included interest income of £4.1 million (2015: £4.9 million) from our corporate bond portfolio, and also foreign exchange gains on non-sterling monetary net assets at the year end, dividends from Catena and interest on the deferred consideration on the sale of Vänerparken. The average balance of corporate bond investments in the year was lower than in previous years, but they remained an important cash management tool of the Group.

Finance costs of £32.7 million (2015: £27.5 million) were higher than last year, but the underlying cost, excluding the fair value movements of derivative financial instruments and atypical losses on buying back the remaining balance of a zero coupon note, fell to £26.3 million (2015: £26.6 million), after capitalising interest of £0.7 million (2015: £0.4 million) on developments. Interest costs before such capitalisation were in line with last year at £27.0 million (2015: £27.0 million) reflecting a higher level of borrowings in the year at a lower average cost.

The tax charge of 1.8% was significantly below the weighted average rate of the countries in which we do business (22.2%), primarily due to the change in the tax rate on existing liabilities, and the release of liabilities on the disposal of properties by selling the corporate vehicles which owned them. The tax rate in France fell from 33.3% to 28.0%, and in the UK from 18.0% to 17.0%, the collective effect of which was a one-off reduction of the tax charge of £10.3 million. Without this and the effect of the property disposals the effective tax rate would have been 18.7%.

Overall, profit attributable to the owners of the Company was £97.8 million (2015: 129.9 million). EPRA earnings, which excludes items which are non-recurring in nature, such as profits on sales of investment properties, or which have no impact to earnings over their life, such as movements on the revaluation of investment properties, were £50.9 million (2015: 36.0 million), and generated EPRA earnings per share up 45.2% at 123.0 pence (2015: 84.7 pence).

EPRA Net Asset Value

At 31 December 2016, EPRA net assets per share (a diluted measure which highlights the fair value of the business on a long-term basis) were 2,456 pence (2015: 2,083 pence), a rise of 17.9%, or 373 pence per share. The main reasons for the increase were underlying profit after tax of 131 pence, foreign exchange gains from the weakness of sterling (119 pence), and the benefit of the uplift in the valuation of the investment property portfolio (97 pence). Smaller gains were made from buying back shares at a discount to NAV (11 pence) and the revaluation of bonds and equities (15 pence).

Cash Flow, Net Debt and Gearing

Net cash flow from operating activities generated £40.1 million, of which £24.8 million was distributed to shareholders through tender buy-backs or market purchases of shares; a further £39.4 million was raised from disposals of investment properties, and £24.7 million from net sales of corporate bonds and equity investments. The main cash outflows were £45.7 million spent on the four acquisitions in the year, and £41.8 million on other capital expenditure. At 31 December 2016, the Group's cash balances were £99.0 million, virtually unchanged from twelve months previously, and were supplemented by £65.1 million of corporate bonds and undrawn bank facilities of £105 million.

Gross debt rose by £54.5 million to £854.5 million, of which £49.6 million was due to foreign exchange rate movements. £191.6 million of loans and a net £8.6 million of overdrafts were drawn, replacing £199.6 million of loan repayments. At 31 December 2016, the weighted average unexpired term of the Group's debt was 4.0 years, excluding overdrafts.

Balance sheet loan to value (net debt to gross assets less cash) fell to 41.1% (2015: 42.5%), and the weighted average loan-to-value on borrowings secured against properties was a comfortable 49.8% (2015: 48.1%). Adjusted solidity was 52.1% (2015: 50.4%).

The weighted average cost of debt at 31 December 2016 was 2.91%, 49 basis points lower than 12 months earlier. The fall was largely due to taking out new debt of £177 million at a weighted average cost of 1.90%, and was further helped by the weakness in sterling (our cheapest debt is in euros) and by buying back early the zero coupon note taken out in 1992 at 11.2%.

In 2016, our low cost of debt led to strong recurring interest cover of 3.4 times (2015: 3.2 times).

Financing Strategy

The Group's strategy is to hold its investment properties predominantly in single-purpose vehicles financed primarily by non-recourse bank debt in the currency used to purchase the asset. In this way credit and liquidity risk can most easily be managed, around 50% of the Group's exposure to foreign currency is naturally hedged, and the most efficient use can be made of the Group's assets. Bank debt ordinarily attracts covenants on loan-to-value and on interest and debt service cover. None of the Group's debt was in breach of covenants at 31 December 2016. The Group had 55 loans across the portfolio from 24 banks, plus a debenture, secured notes and an unsecured bond.

To the extent that Group borrowings are not at fixed rates, the Group's exposure to interest rate risk is mitigated by the use of financial derivatives, particularly interest rate caps and swaps. Since 2015, medium-term interest swap rates have been close to short-term rates, and the Board chose to take advantage of these conditions, fixing medium-term debt taken out during the year predominantly with co-terminus interest rate swaps. During the year the Group financed or refinanced 14 loans to a value of £177 million at a weighted average all-in rate of 1.90%, and of these £119 million was fixed at a weighted average all-in rate of 1.75%. Consequently, at 31 December 2016, 63% of the Group's borrowings were at fixed rates or subject to interest rate swaps, 5% were subject to caps and 32% of debt costs were unhedged.

The Group's financial derivatives - predominantly interest rate caps and interest rate swaps - are marked to market at each balance sheet date. At 31 December 2016 they were a net liability of £9.3 million (2015: £5.3 million).

Distributions to Shareholders

In April 2016, £13.4 million was distributed as a final distribution to shareholders for 2015 by means of a tender offer buy-back of 1 in 57 shares at 1,810 pence per share. In September, £7.2 million was distributed as an interim distribution to shareholders for 2016 by means of a tender offer buy-back of 1 in 100 shares at 1,750 pence per share. The Board has decided to change the nature of distributions to shareholders and the proposed final distribution for 2016, which will be put to shareholders at the Annual General Meeting in April 2017, is to be a dividend of 40 pence per share, representing £16.3 million. Accordingly, distributions for 2016 will comprise £23.5 million in aggregate, an increase of 23.0% over last year.

Share Capital

At 1 January 2016, there were 45,028,684 shares in issue, of which 2,888,103 were held as treasury shares. Shares were cancelled during the year under the distribution policy of tender offer buy-backs: in April, 739,396 shares, and in September, 411,510 shares, were cancelled. Also during the year, 255,099 shares were acquired in the market at an average cost of 1,595 pence per share and were placed in treasury, and 5,000 shares were issued from treasury shares to a Director in compensation for incentives forfeited on cessation of his previous employment.

Consequently, at 31 December 2016, 40,739,576 shares were listed on the London Stock Exchange, and 3,138,202 shares remained held in Treasury.

TOTAL RETURNS TO SHAREHOLDERS

The prospect of the possible fallout from Brexit adversely affected the share prices of much of the property sector, including that of CLS, and so for the first time in ten years the share price ended the year below the level at which it started it, and consequently total shareholder return in 2016 was a negative 16.0%. Nevertheless, in the five years to 31 December 2016, our total shareholder return of 159.1%, which represented a compound annual return of 21.0%, was one of the best performances in the listed real estate sector.

Since the Company listed on the London Stock Exchange, it has outperformed the FTSE Real Estate and FTSE All Share indices, as set out in the graph on page 11 of the 2016 Annual Report and Accounts.

KEY PERFORMANCE INDICATORS

Our performance against our key performance indicators is set out on page 4 of the 2016 Annual Report and Accounts.

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause the results to differ materially from expected or historical results; the management and mitigation of these risks are the responsibility of the Board

Property Portfolio

Rental data

Valuation data

Lease Data

Note:

Property portfolio data comprises investment properties; it excludes the hotel, owner-occupied property, landholdings and First Camp land and buildings

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 2017.

On behalf of the Board

David Fuller BA FCIS

Company Secretary

8 March 2017

group income statement

for the year ended 31 December 2016

Group Statement of Comprehensive Income

for the year ended 31 December 2016

Group Balance Sheet

at 31 December 2016

The financial statements of CLS Holdings plc (registered number: 2714781) were approved by the Board of Directors and authorised for issue on 8 March 2017 and were signed on its behalf by:

Group Statement of Changes in Equity

for the year ended 31 December 2016

Group Statement of Cash Flows

for the year ended 31 December 2016

Notes to the group financial statements

31 December 2016

1 General Information

CLS Holdings plc (the "Company") and its subsidiaries (together "CLS Holdings" or the "Group") is an investment property group which is principally involved in the investment, management and development of commercial properties, and in other investments. The Group's principal operations are carried out in the United Kingdom, Germany and France.

The Company is registered in the UK, registration number 2714781, with its registered address at 86 Bondway, London, SW8 1SF. The Company is listed on the London Stock Exchange.

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 2016 Annual Report and Accounts will be posted to shareholders on 23 March 2016 and will also be available on the Company's website.

The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the statutory accounts for the year ended 31 December 2016. Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The financial information does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015, but is derived from those accounts. Those accounts give a balanced, true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts and the auditors' reports on both the 2015 and 2016 accounts were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under s498(2) or (3) Companies Act 2006 or preceding legislation.

The Group's business activities, and the factors likely to affect its future development, performance and position are set out in the Strategic Report within the 2016 Annual Report and Accounts. The financial position of the Group, its liquidity position and borrowing facilities are described in the Strategic Report within the 2016 Annual Report and Accounts and in the notes to the accounts.

The Directors regularly stress-test the business model to ensure that the Group has adequate working capital and have reviewed the current and projected financial positions of the Group, taking into account the repayment profile of the Group's loan portfolio, and making reasonable assumptions about future trading performance. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and, therefore, they continue to adopt the going concern basis in preparing the annual report and accounts.

2 Segment information

The Group has two operating segments - Investment Property and Other Investments. Other Investments comprise the hotel at Spring Mews, corporate bonds, shares in Catena AB and First Camp Sverige Holding AB, and other small corporate investments. The Group manages the Investment Property segment on a geographical basis due to its size and geographical diversity. Consequently, the Group's principal operating segments are:

Other Investments

There are no transactions between the operating segments.

The Group's results for the year ended 31 December 2016 by operating segment were as follows:

The Group's results for the year ended 31 December 2015 by operating segment were as follows:

Other segment information:

Included within the assets of other investments are investments in associates of £0.2 million (2015: £1.5 million).

The majority of the assets in Sweden at 31 December 2016 was an amount due on the disposal of an investment property.

3 FINANCE INCOME

4 FINANCE COSTS

5 taxation

A deferred tax charge of £3.8 million (2015: credit of £0.5 million) was recognised directly in equity (note 15).

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:

The weighted average applicable tax rate of 22.2% (2015: 21.1%) was derived by applying to their relevant profits and losses the rates in the jurisdictions in which the Group operated.

The tax rate in France fell from 33.3% to 28.0% and in the UK from 18.0% to 17.0%, the collective effect of which was a reduction of the tax charge in 2016 of £10.3 million.

6 EARNINGS PER SHARE

Management has chosen to disclose the European Public Real Estate Association (EPRA) measure of earnings per share which has been provided to give relevant information to investors on the long-term performance of the Group's underlying property investment business. The EPRA measure excludes items which are non-recurring in nature such as profits (net of related tax) on sale of investment properties and of other non-current investments, and items which have no impact to earnings over their life, such as the change in fair value of derivative financial instruments and the net movement on revaluation of investment properties, and the related deferred taxation on these items.

7 NET ASSETS PER SHARE

Management has chosen to disclose the two European Public Real Estate Association (EPRA) measures of net assets per share: EPRA net assets per share and EPRA triple net assets per share. The EPRA net assets per share measure highlights the fair value of equity on a long-term basis, and so excludes items which have no impact on the Group in the long term, such as fair value movements of derivative financial instruments and deferred tax on the fair value of investment properties. The EPRA triple net assets per share measure discloses net assets per share on a true fair value basis: all balance sheet items are included at their fair value in arriving at this measure, including deferred tax, fixed rate loan liabilities and any other balance sheet items not reported at fair value.

8 Investment properties

The investment properties (and the hotel, landholding and owner-occupied property detailed in note 9) were revalued at 31 December 2016 to their fair value. Valuations were based on current prices in an active market for all properties. The property valuations were carried out by external, professionally qualified valuers as follows:

London: Cushman and Wakefield; Knight Frank

Rest of UK: Cushman and Wakefield

Germany: Cushman and Wakefield

France: Jones Lang LaSalle

Sweden: L Fällström AB

Property valuations are complex and require a degree of judgement and are based on data which is not publicly available. Consistent with EPRA guidance, we have classified the valuations of our property portfolio as level 3 as defined by IFRS 13. Inputs into the valuations include equivalent yields and rental income and are described as 'unobservable' as per IFRS 13. These inputs are analysed by segment in the property portfolio information on the inside front cover of the 2016 Annual Report and Accounts. All other factors remaining constant, an increase in rental income would increase valuations, whilst an increase in equivalent nominal yield would result in a fall in value and vice versa.

Investment properties included leasehold properties with a carrying amount of £48.1 million (2015: £38.7 million).

Interest capitalised within capital expenditure in the year amounted to £0.7 million (2015: £0.4 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 either the current or the comparative year.

Substantially all investment properties (and the hotel and owner-occupied property detailed in note 9) are secured against debt.

In 2010 the Group purchased a property in London for £1.8 million. Under the terms of the purchase agreement, should the site be developed additional consideration may become due to the vendor. The maximum liability in respect of this is estimated to be £0.5 million. At the balance sheet date the fair value of the liability was £nil (2015: £nil).

9 Property, plant and equipment

A hotel, an owner-occupied property and a landholding were revalued at each balance sheet date based on the external valuation performed by Cushman and Wakefield, Knight Frank and L Fällström AB, respectively, as detailed in note 8.

The other land and buildings were revalued based on an external valuation performed by Forum Fastighetsekonomi AB.

10 Investments in associates

11 Other Financial investments

The movement of other financial investments, analysed based on the methods used to measure their fair value, was as follows: