CLS Holdings Regulatory News (CLI)

Release date: 7 March 2019

CLS Holdings plc("CLS", the "Company" or the "Group")announces its UNAUDITED Annual Resultsfor the year ended 31 December 2018

Delivering robust and disciplined growth

CLS is a FTSE 250 property investment company with a £1.9bn portfolio in the UK, Germany and France offering geographical diversification with local presence and knowledge. For the year ended 31 December 2018, the Group has delivered the following results:

FINANCIAL HIGHLIGHTS

· EPRA net asset value: up 8.5% to 309.8 pence (31 December 2017: 285.6 pence1)

· Basic net asset value: up 9.3% to 275.5 pence (31 December 2017: 252.0 pence)

· EPRA earnings per share up 4.0% to 13.1 pence (2017: 12.6 pence1)

· Basic earnings per share of 30.5 pence (2017: 38.7 pence including profit on sale of Vauxhall Square)

· Profit before tax from continuing operations of £144.9 million (2017: £190.5 million, including profit on sale of Vauxhall Square)

· Contracted rents rose by 5.6% to £109.6 million (31 December 2017: £103.8 million)

· A proposed final dividend of 4.7 pence per share to be paid on 29 April 2019, contributing to a total of 6.9 pence per share for the year, an uplift of 8.7% (2017: 6.35 pence per share)

OPERATIONAL HIGHLIGHTS

Investment Property Portfolio:

· Rental income increased by 9.9% to £103.0 million (2017: £93.7 million)

· Vacancy rate reduced to 3.8% (31 December 2017: 5.8%)

· Completed 176 lease events securing rental income of £16.2 million

· 57% of contracted rent is from Governments and major corporations

· Valuation gains up 4.4% (3.7% in local currency), reflecting increases in all three countries

· Disposal proceeds of £48.5 million from 11 properties: 8 properties in the UK, 2 in Germany and 1 in France

· Acquired properties for £70.0 million in the UK and France with an average net initial yield of 6.4%

· Significant acquisitions made after period end of 9 Prescot Street, London E1 and Les Reflets, Lille for £64 million in aggregate

Developments:

· Completed the refurbishment of Ateliers Victoires in central Paris, and the development of 16 Tinworth Street, SE11 - both fully let

· Invested a total of £18 million in developments and refurbishments, part of a rolling programme to maintain and upgrade the portfolio

Financing:

· Balance sheet loan to value 36.7% (31 December 2017: 36.9%)

· Further reduced the weighted average cost of debt at 31 December 2018 to 2.43% (31 December 2017: 2.51%)

· Financed or refinanced £137.7 million of debt at 2.16%, including £92.0m fixed at 2.20%

· Repaid debt of £158.6 million with an average interest rate of 3.26%, including a £65 million 5.5% retail bond 17 months early

· The loan portfolio as at 31 December 2018 had 79% at fixed rates (31 December 2017: 74%)

Governance

· Malcolm Cooper, who joined the Board in May 2009 and is Senior Independent Director and Chairman of the Audit Committee, has expressed a wish to stand down from the Board in 2019, but to continue in post to assist in the handover to his successor

· Mrs Anna Seeley, Non-Executive Vice Chairman, will become Chairman of the Nominations Committee with immediate effect; Mr Sten Mortstedt will remain as a member of the Nominations Committee

· As previously announced, John Whiteley, Chief Financial Officer, will retire from the Board on 30 June 2019

1 Restated to exclude discontinued operations of First Camp.

Henry Klotz, Executive Chairman of CLS, commented:

"I am delighted to report a robust set of results in 2018 which once again endorses CLS's strategy of geographical diversity as a long-term investor in the three largest economies in Europe.

 "We shall continue to follow our medium-term strategy and long-term vision. Our balance sheet is strong, our business well-placed, and we remain focused on continuing to deliver value to our shareholders."

-ends-

For further information, please contact:

CLS Holdings plc

(LEI: 213800A357TKB2TD9U78)

www.clsholdings.com

Henry Klotz, Executive Chairman

Fredrik Widlund, Chief Executive Officer

John Whiteley, Chief Financial Officer

Sten Mortstedt, Executive Director and Founding Shareholder

+44 (0)20 7582 7766

Liberum Capital Limited

Richard Crawley

Jamie Richards

+44 (0)20 3100 2222

Whitman Howard

Hugh Rich

+44 (0)20 7659 1261

Elm Square Advisers Limited

Jonathan Gray

+44 (0)20 7823 3695

Smithfield Consultants (Financial PR)Alex Simmons

Rob Yates

+44 (0)20 3047 2546

CLS will be presenting to analysts at 9.30am on Thursday, 7 March 2019, at Liberum Capital, Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY.

Participant1. In the 10 minutes prior to call start time, call the appropriate Participant Dial-In Number listed in the Conference Dial-In Number section below.2. Provide the Operator with the Conference ID Number.

Conference ID 4569809

United Kingdom 08445 718892

Std International Dial-In +44 (0) 2071 928000

United States, New York 1631 510 7495

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.

Dividend Timetable

Further to this announcement, in which the Board recommended a final dividend of 4.7 pence per ordinary share, the Company confirmed its dividend timetable as follows:

Chairman's StatementStrength in diversity

Performance

I am delighted to be able to report another robust set of results which once again are an endorsement of CLS's strategy of focusing on geographical diversity as a long-term investor in the three largest economies in Europe: the UK, Germany and France. During the year, EPRA NAV rose by 8.5% to 309.8 pence per share (31 December 2017: 285.6 pence).

As a result of this diversity, we are ready to face the prospect of Brexit-related macro uncertainty with great confidence in the underlying strength of the business.

Property portfolio

In 2018, our property portfolio rose in value by 3.7% in local currencies, with an outstanding performance in Germany which saw an uplift of 9.3%. At 31 December 2018, the portfolio was valued at just over £1.9 billion, of which 51% was in the UK, 33% in Germany and 16% in France. For many years, we have benefited from our established presence in these markets. In each we operate the same core strategy: a focus on office buildings in high quality, predominantly non-prime locations in larger cities and managed by our own staff. Having our in-house management well-established in each local market remains key to our success as it allows us to establish strong relationships with our customers, gain a deep knowledge of their changing requirements, and ultimately improve the service we provide, to our mutual benefit. It is also hugely important for new business opportunities to be fully integrated in the local property networks.

In 2018, we invested £70.0 million in acquisitions, primarily in London, where our confidence in the longer-term future provided opportunities to acquire at attractive prices.

Culture

We continue to promote an open, entrepreneurial culture for our workforce, with an efficient decision-making structure which engenders responsibility and enables a hands-on operating process.

We enhanced the communication within the organisation to engage our employees; in 2018, we introduced an in-house social media initiative. In order to attract and retain high-quality talent, we have to understand and respect the different business cultures in which we operate and to dovetail our Group culture with that of local markets.

The high levels of engagement within our team, levels of professionalism and expert knowledge all make a tangible contribution to the strength of our organisation. On behalf of the Board, I would like to thank all of our employees for their continued hard work and commitment to the success of CLS.

Sustainability

Our aim is to be a leading sustainable business, and in 2018 we have taken every opportunity to invest in renewable technology, such as additional photovoltaic panels and thermodynamic heat pumps. Our committed in-house team is dedicated to environmental issues across all our markets both within CLS and in our local communities, and we are working hard to implement best practice in all areas. Our corporate, social and environmental responsibility report contains details of our work on sustainability and can be found on page 30 of the 2018 Annual Report and Accounts.

Shareholder engagement

Around 60% of the shares in the Company are held by representatives of the Board, and by engaging with external shareholders we typically are able to meet at least once a year with around 90% of our shareholder base, and others wishing to join it. This is important; we meet most shareholders every six months, and we consult with them on an ad hoc basis on specific topics, such as directors' remuneration. In this way we are able to run the business with a mindset very much in step with shareholders' views.

Board changes

John Whiteley, our Chief Financial Officer, who has been with us for almost ten years, has chosen to retire later this year and the process to find his successor is well advanced. I would like to thank John for his hard work and contribution to CLS over the years and to wish him well in his new status as a young pensioner.

Malcolm Cooper, who joined the Board in May 2007 and is our Senior Independent Director and Chairman of the Audit Committee, has expressed a wish to stand down in 2019, but to continue in post to assist in the handover to his successor and to the new CFO.

As Chairman, it is one of my primary responsibilities to ensure that the Board is effective in running the Company, and that succession plans are in place for all directors. The composition of our Board does not currently comply with the provisions of the Code in that it does not have a majority of independent non-executive directors; indeed, this has always been the case, but this is exacerbated when non-executives have been with us for more than nine years. A key focus of mine in 2018 has been to hold discussions with the Board with a view to refreshing the composition of the non-executives in the short to medium term and broadening the experience they bring to the Board, and I expect to be able to announce progress on this in due course.

Dividend

In line with our strategy that the dividend should be progressive and well-covered by EPRA earnings, the Board is pleased to propose a final dividend for 2018 of 4.7 pence per share, making the total for the year of 6.9 pence, being 1.9 times covered by EPRA earnings and an increase over last year of 8.7%.

Outlook

In the UK there has been a trend for new market entrants in the property sector to provide very flexible leases although, with a question remaining over the sustainability of their business models, this may now be slowing down. We embrace these changes, which have had a positive impact on the way in which people work due to the way some UK offices are designed. For many years, the tradition in Germany and France has been to have more flexible leases than in the UK, but our tenant base in the UK has long enjoyed such flexibility, and we expect this to continue.

The key for us is to have a close relationship to our customers in order to be well informed about and understand the evolving requirements for their businesses. The main risk that I see is if the demand for our premises in the UK were to decrease significantly, but as we have a strong focus on keeping the vacancy below 5%, and 43% of our UK rental income is derived from the UK Government, I believe the risk is manageable.

The economic and political environment is as challenging to interpret as I have known for some time. The impact of Brexit on our business is, of course, difficult to predict, but the spread of our operations across the three strongest European economies places CLS at a competitive advantage.

We shall continue to follow our medium-term strategy and long-term vision, whilst constantly challenging both to ensure they remain robust. Our balance sheet is strong, our business well-placed, and we remain focused on continuing to deliver value to our shareholders.

Henry Klotz

Executive Chairman

Chief Executive's reviewDriving growth through active management and portfolio repositioning

Overview

During the year we made significant progress in working the property portfolio through active, hands-on asset management, reducing the vacancy rate from 5.8% to 3.8%. We also continued to reposition the portfolio with selective disposals and value-add acquisitions. As a result, we have reported an 8.5% increase in EPRA net asset value, a total accounting return of 10.8%, pre-tax profits from continuing operations of £144.9 million and an 8.7% increase in our dividend. The Company has a well-diversified office portfolio of over 120 properties in the largest cities in the UK, Germany and France and we take a long-term view on the prospects of our markets.

Repositioning the property portfolio

We have continued to reposition the portfolio and have enhanced both our investment team and the local German team to reflect our ambitions and accommodate our growing portfolio in the country.

In 2018, we saw good value in selective opportunities in Germany, but the competition in the investment market strengthened during the year, and despite coming close on a couple of significant potential acquisitions we did not buy any new properties. However, in the UK we were able to recycle capital with a focus on properties where we could add value, with the acquisitions of Harman House, Uxbridge for £51.4 million and 401 King Street, Hammersmith for £16.1 million. Both are close to major rail and road networks. Since the year end, we have exchanged contracts to acquire two properties: in London, a 96,948 sq ft (9,007 sqm) multi-let office property with significant refurbishment potential, 9 Prescot Street, Aldgate, E1 for £53.9 million; and in France, a 44,756 sq ft (4,158 sqm) multi-let office building, Les Reflets, in Lille for £10.2 million, further enhancing our scale in that city.

Our disposal criteria remained threefold: assets which were low yielding with limited potential; investments on which the risk/reward ratio was unfavourably balanced; and properties which were too small to have a meaningful impact on the Group. In aggregate we sold a further eleven assets in 2018 which met these criteria, generating net proceeds of £48.5 million and a profit of 5.3% over book value. Eight of these smaller assets were in the UK, two were in Germany and one in France. In late December, we exchanged contracts on the disposal of a further small property in Germany, purchased within the Metropolis portfolio in 2017, the sale of which for £3.5 million will complete in the first half of 2019.

We completed the developments of 16 Tinworth Street, SE11 and Ateliers Victoires in central Paris. The former is now our Group headquarters above which are nine student apartments which extend our Spring Mews student accommodation development, and the latter was pre-let in its entirety to a leading corporate communications consultancy. Two significant refurbishments were completed towards the end of the year, in New Malden and Brentford, and in total £18.0 million was spent on capital expenditure as part of our upgrading of the portfolio. We have a rolling refurbishment programme and intend to keep investing in our properties to ensure that they continue to meet the needs of our customers now and in the future, and to offer an attractive environment for our occupiers and their employees.

Towards the end of the year, we agreed terms to exit our 58.02% ownership in Swedish vacation site owner and operator, First Camp, with completion expected this month. Under accounting rules, First Camp has been classified as a discontinued operation in 2018 and 2017, and its results have been excluded from our profit after tax, making the income statement a cleaner reflection of our investment property business.

Investing in asset management opportunities

The diversified nature of the portfolio and the strong cash flow it generates allow us to make investments when we see opportunities where others might see short-term, macro-related challenges. In 2018, this was especially true in the UK, where Brexit concerns created openings for contrarian acquisitions which had strong individual property fundamentals over the medium to long term.

We have continued to buy properties with vacancy or with shorter lease lengths if they meet our fundamental criteria of location and connectivity. The validity of these criteria has also manifested itself in the high proportion of tenants which chose to remain in situ at break or lease expiry.

Active asset management

We strongly believe that we get a more efficient and committed performance from our own employees than if their roles were outsourced, and so we perform all our asset and property management, and financial functions in-house. This is also key to ensuring a close and long-term relationship with our customers.

Having bought properties in 2017 with significant vacancies, in 2018 our team set about filling them, and reduced our vacancy rate from 5.8% to 3.8% in twelve months. To achieve this, we signed 641,500 sq ft (59,600 sqm) in 164 new lettings and renewals at an average of 2.2% above their December 2017 ERVs, whilst only 512,600 sq ft (47,600 sqm) of space vacated or expired. This evidenced the solid demand for non-prime office space in our chosen markets. The major contributors to this result were lettings of 37,243 sq ft (3,460 sqm) and 32,668 sq ft (3,035 sqm) at East Gate, Munich, 12,594 sq ft (1,170 sqm) in Adlershofer Tor in Berlin, and 24,700 sq ft (2,295 sqm) in Bromley.

Two other asset management initiatives are worthy of note. First, excluded from the above numbers because they were reported last year, with effect from 31 March 2018 in properties across the UK we renewed all 15 leases with the Secretary of State for Housing, Communities and Local Government which were due to expire or break on that date, securing annual rental income of £6.6 million for an average of over 5 years. Secondly, and included in this year's numbers, we agreed an annual uplift of over £0.7 million from the Secretary of State for Work and Pensions at New Printing House Square, Gray's Inn Road, WC1 which was backdated to June 2015 and so contributed an additional £2.5 million to rental income in 2018.

Value uplifts across the portfolio

At 31 December 2018, there were uplifts in valuations across the entire Group, with a 3.7% increase in values in local currencies (4.4% in sterling). In the UK, the portfolio rose by 0.5%, Germany added 9.3% in local currency, driven by rental growth and reduced vacancy, and the French portfolio rose by 3.8%, of which two-thirds came from the completed development at Ateliers Victoires. In aggregate, the fair value uplifts of the property portfolio added 15.6 pence to EPRA NAV in the year.

The reduction in vacancies in the UK to 4.0% (31 December 2017: 5.5%) drove up the UK's net initial yield, whilst the lower rents from the 15 leases with the Secretary of State reduced it, such that overall the net initial yield based on contracted rents remained broadly unchanged in the UK at 5.6% (31 December 2017: 5.6%). In Germany, the net initial yield was unchanged at 5.4% (31 December 2017: 5.4%); like-for-like contracted rent rose by 4.7% and the vacancy rate reduced to 4.2% (31 December 2017: 7.1%), which drove the valuation uplift in the year. In France, the reduction in vacancies to 2.3% (31 December 2017: 4.4%) was reflected in the 2.1% increase in like-for-like contracted rent, which contributed, with the completion of the development of Ateliers Victoires, to the increase in values in local currency.

Results

EPRA earnings of 13.1 pence (2017: 12.6 pence) reflected a strengthening of the underlying business, with EPRA operating profit growing by £3.1 million, and I look forward to further growth in underlying earnings from our strategy to reposition the portfolio towards more growth opportunities. Profit before tax from continuing operations of £144.9 million (2017: £190.5 million) did not have a one-off significant capital profit such as from the sale of Vauxhall Square last year, but did have a gain on revaluation of equities of £22.2 million which is shown in the income statement this year for the first time under a change in accounting standards. It was also driven by the uplift in the fair value of the property portfolio of £62.8 million (2017: £94.2 million) and the profit on sale of properties of £2.3 million (2017: £43.7 million).

Long-term capital growth

CLS has a business focused on cash flow, a principle to which we adhere strictly for existing properties and acquisitions alike. By maintaining close contact with our customers, we are able to keep the vacancy rate low, and so the difference between our net initial yield of 5.5% and our cost of debt of 2.43% becomes the main driver of cash flow. In 2018, net cash from operating activities was £48.0 million (2017: £48.8 million) and EPRA earnings were £53.5 million (2017: £51.5 million). Of this, £28.1 million (2017: £25.9 million) will be distributed to shareholders, with the balance available to reinvest in the business, together with proceeds of disposals. The results of such reinvestment are evident in the growth in EPRA NAV of 144% in the past five years.

In 2018, we continued to reduce our cost of debt, which reached its lowest ever year end level of 2.43% (31 December 2017: 2.51%), mainly due to the early redemption of our £65 million 5.5% unsecured bonds due 2019. Our financing is largely insulated from any economic downturn; 79% of our debt is now at fixed rates and for an average duration of 3.8 years.

A culture built on relevance and sustainability

Office occupation is changing, with customer requirements and, arguably even more so, employees' preferences becoming more demanding. This is a trend which is likely to continue, and one which we embrace and encourage. We work closely with our customers to ensure the space which we provide is to their needs and specifications, whilst fitting to a cost-conscious mindset. Likewise, we listen to our employees and design their work experience accordingly. In 2018 we relocated into new offices owned by the Group in London and Hamburg so that now all of our offices are in newly-built or refurbished premises which incorporate recommendations and suggestions from our latest employee survey, and represent best practice in office accommodation.

We have a rolling programme to make our buildings more sustainable, and we work closely with tenants to ensure the best standards of recycling and environmental welfare are followed. Full details of our work on sustainability is set out in the corporate, social and environmental responsibility report on page 30 of the 2018 Annual Report and Accounts.

The future

The Group continues to benefit from its geographical diversification with both Germany and France likely to offset future challenges in the UK from Brexit. However, despite recent uncertainty, our UK portfolio continues to deliver a resilient performance due to its lower exposure to the prime locations which are likely to be more affected by Brexit. We are strong believers in the long-term prospects for Greater London, and with increased infrastructure spending and clarity on Brexit, we believe the current market sentiment will turn to a more balanced view. Economic growth has slowed globally but the resilience of the German economy and the lack of new office space supply in both Germany and France are creating good opportunities over time.

At 31 December 2018, the United Kingdom accounted for 51% of the portfolio, Germany 33% and France 16%. Our investment strategy remains geographically flexible and based on the characteristics of individual assets. We will continue to investigate opportunities in each of our three core countries, and to dispose of properties with limited potential and reinvest the proceeds in better prospects. 2018 was a year of uncertainty from which we were able to prosper, and with the existing pipeline of new opportunities, we face the future with confidence. 

Fredrik Widlund

Chief Executive

Chief Financial Officer's reviewA strong underlying business supported by a low cost of debt

Restatement of comparatives

In the 2018 Annual Report and Accounts, the Group's 58.02% interest in First Camp Sverige Holding AB has been disclosed as a discontinued operation for the first time (see note 21), and all comparatives have been restated accordingly.

Headlines

Profit after tax from continuing operations and attributable to the owners of the Company of £132.8 million (2017: £157.0 million) generated basic earnings per share of 32.6 pence (2017: 38.5 pence) and EPRA earnings per share of 13.1 pence (2017: 12.6 pence). The loss after tax from discontinued operations and attributable to the owners of the Company of £8.5 million (2017: profit of £0.7 million) generated a basic loss per share of 2.1 pence (2017: earnings of 0.2 pence). EPRA net assets per share rose by 8.5% to 309.8 pence (2017: 285.6 pence), and basic net assets per share by 9.3% to 275.5 pence (2017: 252.0 pence).

Approximately 51% of the Group's business is conducted in the reporting currency of sterling and 49% in euros. Compared to last year, relative movements of sterling against the euro did not have a material impact on the Group's results for the year or on its state of affairs: sterling's average rate weakened against the euro by 1.0% and at 31 December 2018 sterling was 1.2% weaker against the euro than twelve months previously.

Exchange rates to the £

Income statement

In 2018, rental income of £103.0 million was £9.3 million higher than in 2017. Acquisitions added £11.4 million and a back-dated rent review at New Printing House Square a further £1.8 million, whilst disposals accounted for a fall of £4.6 million. Other general letting activity produced a like-for-like increase of 1% in rental income over last year's.

Other property income of £6.9 million (2017: £8.3 million) included hotel revenue from Spring Mews of £4.4 million (2017: £4.4 million) and dilapidations and other one-off receipts of £2.5 million (2017: £3.9 million). In aggregate net rental income rose by 7.3% to £107.3 million (2017: £100.0 million).

We monitor the administration expenses incurred in running the property portfolio by reference to the net rental income derived from it, which we call the administration cost ratio, and this is a key performance indicator of the Group (see note 3). Personnel costs account for 70% of administration expenses, and in 2018 we expanded the team in Germany to accommodate the recent increase in the German portfolio and further expansion still to come. Consequently, the administration cost ratio rose to 16.0% (2017: 14.2%), which was well within our KPI target for the year of 16.5%.

The net surplus on revaluation of investment properties of £62.8 million (2017: £94.2 million) reflected contributions from each country: in local currencies, Germany had the strongest year with a 9.3% rise in values, France rose by 3.8%, and the UK contributed 0.5%.

Our interest in Catena AB, an equity security listed in Stockholm, is carried in the balance sheet at its fair value. Under IFRS 9 Financial Instruments, the movement in its fair value is recognised in the income statement in 2018 for the first time. The Catena share price rose by 39.7% in the year, generating a fair value gain of £22.2 million.

The profit on sale of properties of £2.3 million (2017: £43.7 million) represented a 5.3% excess of net proceeds over book values of the eleven properties sold in the year. The large profit in 2017 was predominantly £41.4 million on the disposal of Vauxhall Square.

Finance income of £6.1 million (2017: £10.0 million) comprised interest income of £4.2 million (2017: £4.4 million) from our corporate bond portfolio, dividends from Catena of £1.7 million (2017: £1.4 million), other interest of £0.2 million (2017: £2.4 million), and foreign exchange variances of £nil (2017: £1.8 million).

Finance costs of £26.5 million (2017: £32.4 million) included a loss of £3.7 million (2017: £9.7 million) on the early redemption of £65 million 5.5% unsecured bonds due 2019, 17 months early, which reduced the average cost of borrowing by 21 bps. Excluding this, foreign exchange variances, gains on the fair value movements of derivative financial instruments and capitalised interest, interest costs were £24.5 million (2017: £26.1 million) reflecting a lower level of borrowings in the year at a lower average cost.

The tax charge of 8.4% was significantly below the weighted average rate of the countries in which we do business (19.5%), primarily due to two factors: first, a fall in the future rate of tax in France which has been applied to the deferred tax on the cumulative revaluation surplus of the French portfolio; and, secondly, the fair value gain of the equity investment in Catena, which was not subject to tax.

The loss from discontinued operations primarily reflected a write down of the net assets of First Camp to the expected proceeds. Of the loss of £14.9 million, £8.5 million was attributable to the owners of the Company. The disposal of our interest in First Camp has further rationalised the Group and has taken away the distortion which accounting for 100% of the assets, liabilities and income statement line items of a non-core business in which the Group owned 58% had on our corporate metrics, such as interest cover and gearing.

Overall, EPRA earnings were 4.0% higher than last year at £53.5 million (2017: £51.5 million), and generated EPRA earnings per share of 13.1 pence (2017: 12.6 pence).

EPRA net asset value

At 31 December 2018, EPRA net assets per share were 309.8 pence (2017: 285.6 pence), a rise of 8.5%, or 24.2 pence per share. The main reasons for the increase were EPRA earnings per share of 13.1 pence and the benefit of the uplift in the valuation of the investment property portfolio of 15.6 pence, less dividends of 6.5 pence per share.

Cash flow, net debt and gearing

Net cash flow from operating activities generated £48.0 million, of which £26.5 million was distributed as dividends. Proceeds after tax from property disposals of £40.9 million were redeployed in acquisitions of £70.9 million and capital expenditure of £15.8 million. Net repayments of debt were £45.8 million, and by 31 December 2018, the Group's cash balances had been reduced by £40.2 million to £100.3 million. These were supplemented by £30.3 million of corporate bonds and undrawn bank facilities of £63.2 million, of which £37.7 million was committed.

Gross debt fell by £34.4 million to £842.3 million, notwithstanding a rise of £4.8 million due to foreign exchange rate movements. £158.6 million were repaid in the year and £137.7 million of new or replacement loans were taken out. At 31 December 2018, the weighted average unexpired term of the Group's debt was 3.5 years (2017: 3.6 years).

Balance sheet loan-to-value (net debt to property assets) at 31 December 2018 was 36.7% (2017: 36.9%) and the value of properties not secured against debt rose to £283.6 million (2017: £246.7 million).

The weighted average cost of debt at 31 December 2018 was 2.43%, 8 bps lower than 12 months earlier and the lowest year end rate in the Group's history. The early redemption of the unsecured bonds accounted for 21 bps of that fall, net new bank loans increased the average cost by 4 bps, and margin step-ups and an increase in LIBOR added 9 bps.
In 2018, our low cost of debt led to recurring interest cover of 3.8 times (2017: 3.9 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 49 % of the Group's exposure to foreign currency is naturally hedged, and the most efficient use can be made of the Group's assets. An exception is where a portfolio is acquired, such as the Metropolis properties in 2017, and is financed by a single loan. At 31 December 2018, the Group had 50 loans across the portfolio from 26 lenders, plus some secured notes.

To the extent that Group borrowings are not at fixed rates, the Group's exposure to interest rate risk is mitigated by financial derivatives, mainly interest rate swaps. In the recent medium-term low interest rate environment, the Board chose to take advantage of the conditions, fixing most of the medium-term debt taken out during the year. In 2018, the Group financed or refinanced 10 loans to a value of £137.7 million for a weighted average duration of 5.8 years and at a weighted average all-in rate of 2.16%, and of these £92.0 million were fixed at a weighted average all-in rate of 2.20%. Consequently, at 31 December 2018, 79% of the Group's borrowings were at fixed rates or subject to interest rate swaps, 3% were subject to caps and 18% of debt costs were unhedged; the fixed rate debt had a weighted average maturity of 3.8 years, and the floating rate 2.2 years.

The Group's financial derivatives - predominantly interest rate swaps - are marked to market at each balance sheet date. At 31 December 2018 they represented a net liability of only £5.1 million (2017: £6.2 million).

Distributions to shareholders

In April 2018, a final dividend for 2017 of 4.3 pence per share was paid totalling £17.5 million. In September, an interim dividend for 2018 of 2.2 pence per share was paid at a cost of £9.0 million. The final dividend for 2018 is proposed to be 4.7 pence per share, totalling £19.1 million. This represents a full year distribution of 6.9 pence per share, an increase of 8.7% over the prior year, and which was covered 1.9 times by EPRA earnings per share. 

John Whiteley

Chief Financial Officer

Key Performance IndicatorsMeasuring the tangible performance of our strategy

Total Shareholder Return - Absolute (%)

Definition

The annual growth in capital in purchasing a share in CLS, assuming dividends are reinvested in the shares when paid.1

Why this is important to CLS

This KPI measures the increase in the wealth of a CLS shareholder over the year.

Our target for 2018

In 2018, our target Total Shareholder Return (absolute) was between 12% and 16%.

Progress

In 2018, the Total Shareholder Return of -12.3% reflected the fall in the share price in the year, particularly in the final quarter when the share prices of most of the FTSE 350 Real Estate Super Sector fell, which was reflected in the average of the sector recording a TSR of -14.4%.

1 For the purposes of calculating this KPI for executive remuneration, the market price is calculated as the average closing share price in December, not the closing share price at the end of December, to avoid bonuses being paid based on distorting fluctuations around the year end.

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 other 25 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 for 2018

In 2018, our target Total Shareholder Return (relative) was between the median and upper quartile.

Progress

In 2018, the TSR was -12.3%, making CLS the 15th ranked share of the FTSE 350 Real Estate Super Sector Index of 26 companies.

Total accounting return (%)

Definition

The aggregate of the change in EPRA NAV plus dividends paid, as a percentage of the opening EPRA NAV, which is also known as Total Accounting Return.

Why this is important to CLS

This KPI measures the increase in EPRA net assets per share of the Company before the payment of dividends, and so represents the value added to the Company in the year.

Our target for 2018

In, 2018 our target Total Accounting Return was between 6% and 9%.

Progress

In 2018, the Total Accounting Return was 10.8%.

Vacancy Rate (%)

Definition

The ERV of vacant lettable space, divided by the aggregate of the contracted rent of let space and the ERV of vacant lettable space.

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 for 2018

We target a vacancy rate of between 3% and 5%; if the rate exceeds 5%, other than through recent acquisitions, we may be setting our rental aspirations too high above the current market; if it is below 3% we may be letting space too cheaply.

Progress

At 31 December 2018, the vacancy rate was 3.8%, or 4.0% on a like-for-like basis.

Administration Cost Ratio (%)

Definition

The administration costs of the Group, excluding those of the Other Investments segment, divided by the net rental income of the Group, excluding the net income of First Camp.

Why this is important to CLS

This KPI measures 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.

Our target for 2018

In 2018, our target administration cost ratio was between 16.5% and 14.5%.

Progress

In 2018, the administration cost ratio was 16.0% (see note 3).

Other Performance Indicators

In addition to the key performance indicators of the Group, which are all tied to executive remuneration, the Group also has other performance indicators by which it measures its progress, and these include:

· 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 2018, the cost of debt (2.43%) was 307 bps below the net initial yield (5.5%).

· Sustainability - we seek to minimise our impact on the environment by targeting a 5% reduction in carbon emissions each year in our like-for-like managed portfolio. In 2018, we achieved a 15.9% reduction (2017: 9.3%).

· Customer retention - through our active asset management we seek to retain more than 50% of our tenants by value. In 2018, 52% of our leasing transactions were lease renewals (2017: 66%).

· Health & Safety - we work hard to ensure that the health and safety of our employees, customers, advisors, contractors and the general public is not compromised and pride ourselves on remaining below the UK National Accident Frequency rate. For 2018, the national rate was 930 per 100,000 people; CLS's was 124. This rate is calculated by dividing the number of accidents reported in the year by the number of people occupying our buildings.

Principal Risks and Uncertainties

Risks spread through diversity

Business review: United KingdomRepositioning for long-term income growth

Value of investment properties£954.1m

Lettable space2.6m sq ft

Number of tenants214

Percentage of Group's property interests51%

Vacancy rate4.0%

Government and major corporates68.3%

Value of investment properties in London£877.2m

UK overview

The UK economic outlook continues to be dominated by uncertainty over Brexit, but the office investment markets have shown resilience. In 2018, the investment market experienced its second largest level of activity in ten years, and occupational markets have been noticeable for their pragmatism, with landlords focusing more on occupancy than rental growth. Any forecasting is very difficult in the current environment for obvious reasons but with the delivery of large infrastructure projects and solid fundamentals for non-prime offices, we believe the current market sentiment, especially in Greater London, will continue to offer an attractive investment case.

Acquisitions

Our UK acquisition activity in 2018 focused on London properties with strong potential. In March, we acquired Harman House, Uxbridge for £51.4 million, representing a net initial yield of 6.9%. This 129,060 sq ft (11,990 sqm) multi-let office building, which was extensively refurbished in 2014, is fully-let to 10 tenants on an average unexpired lease term of 7.9 years and has a reversionary rent profile with an estimated yield of 7.8%. In April, we bought 401 King Street, Hammersmith for £16.1 million. This 24,566 sq ft (2,282 sqm) office is expected to generate 5.9% when all leases revert to market rents, and significantly more after a refurbishment planned for the third floor.

Disposals

In 2018 we continued to reposition the UK portfolio with the sale of eight properties for an aggregate £38.6 million at 5.2% above their values at 31 December 2017. Seven, in Chertsey, Datchet, Plymouth, St Asaph, Birmingham and two in Peterborough, were in line with our policy of disposing of properties which were too small to have a meaningful impact on the Group, and the eighth, Buspace in Notting Hill, which was sold for £13.5 million, was low yielding and had limited office potential.

Asset management

The vacancy rate in the UK fell to 4.0% at 31 December 2018 (2017: 5.5%) predominantly because we let or renewed leases on 201,759 sq ft (18,744 sqm) whilst only 171,598 sq ft (15,942 sqm) of space either expired or became vacant. Excluding those arising from contractual indexation uplifts, 56 rent reviews, lease extensions and new leases added £5.7 million of rent, at 2.1% above ERVs from 31 December 2017. On a like-for-like basis, ERVs fell marginally in the UK, mainly in London, but the portfolio remained 3.8% net reversionary, including 5.1% in London.

Developments

In the summer, we completed the development of 16 Tinworth Street, SE11, an £8.6 million, 7-storey development of 9,181 sq ft (853 sqm) of office and residential accommodation, which now houses the Group's headquarters and nine student apartments.

In January, we secured a resolution to grant planning permission for a new 10-storey residential and office development at Quayside Lodge, Fulham SW6 to replace a 30,000 sq ft office building. The 160,000 sq ft (14,865 sqm) development will provide 11,500 sq ft of office space, 110 residential units, of which 35% will be affordable, 200 cycle spaces and electric car charging points.

Valuation

The UK portfolio was revalued upwards by 0.5% in the year. Like-for-like contracted rents rose by 2.8%, dampened by the Secretary of State renewals in March, whilst like-for like ERVs fell by 0.6%. The yield in the UK was unchanged at 5.6%.

Business review: GermanyActively looking to invest in larger cities

Value of investment properties£629.4m

Lettable space3.2m sq ft

Number of tenants314

Percentage of Group's property interests33%

Vacancy rate4.2%

Government and major corporates40.8%

Germany overview

The growth of the German economy slowed in the second half of 2018 from the impact on German exports of a global slowdown. Notwithstanding the overall economic position, unemployment is expected to remain below 5% and there is a shortage of skilled labour in many industries. The property investment market in Germany recorded its highest ever annual volume of transactions in 2018. Vacancy levels for offices in the big seven cities have been at record low levels, and a limited supply of new offices drove rental growth and capital growth in 2018. The supply of the office market is unlikely to increase materially in the near-term with over half of offices under construction having been pre-let.

Acquisitions

Following the very successful acquisition programme of £187.7 million in 2017, we continued actively to pursue further asset purchases in Germany in 2018. We submitted offers on over £500 million of investment opportunities, but we were not prepared to compromise our process of due diligence, nor to overpay for investments, and in the event we did not acquire any properties in Germany in the year. The German market, and the German economy, remain attractive to us, we continue to see good value in selective opportunities, and we expect to invest further in Germany in 2019.

Disposals

We continued to apply our disposal criteria to the existing portfolio and sold two properties in Germany in the year, one a fully let building on which the risk/reward was unfavourably balanced, and the other one of two small properties earmarked for sale at the time they were acquired within the Metropolis portfolio in 2017.

Merkurring 33/35 in Hamburg was sold for £6.2 million. The property, which comprised 60,321 sq ft (5,604 sqm) of industrial and office space, was peripheral to the Group's activities, and relied too heavily on its main tenant. Within the Metropolis portfolio of 12 properties acquired in 2017, Marler Stern was a 5% interest in a shopping centre, and was sold at its book value of £1.3 million.

In December we exchanged contracts to sell the second small property from the Metropolis portfolio, Marktstrasse 2, Witten for £3.5 million.

Asset management

The vacancy rate in Germany fell to 4.2% at 31 December 2018 (2017: 7.1%) predominantly because whilst 271,220 sq ft (25,197 sqm) of space either expired or became vacant, we let or renewed leases on 329,199 sq ft (30,584 sqm). Excluding those arising from contractual indexation uplifts, 64 lease extensions and new leases added £7.2 million of rent, at 2.3% above ERVs from 31 December 2017. On a like-for-like basis, ERVs rose by 5.0% in the year, and at 31 December 2018, the German portfolio was 5.8% net reversionary.

Developments

In addition to planned capital expenditure of €5 million per annum, we are examining the development potential at Vor Dem Lauch 14 in Stuttgart, acquired with the Metropolis portfolio in 2017.

Valuation

The German portfolio rose by a valuation uplift of 9.3% in local currency, driven by a 4.7% increase in like-for-like contracted rent and a 5.0% increase in like-for-like ERVs. Vacancies fell from 7.1% to 4.2%, and the net initial yield was unchanged at 5.4%.

Business review: FranceDelivering value from existing assets

Value of investment properties£308.1m

Lettable space0.9m sq ft

Number of tenants161

Percentage of Group's property interests16%

Vacancy rate2.3%

Government and major corporates49.4%

France Overview

Whilst the growth prospects of the French economy have suffered from the impact of street protests, consumer spending and political measures announced during 2018 are forecast to have a positive impact on growth in 2019. The office investment market in 2018 has been buoyant, across both Paris and the regions, and property yields outside Paris have fallen. The occupational market has remained strong, with a vacancy rate in the Greater Paris area around 5%, in part reflecting historically low levels of supply and high numbers of pre-lettings for new schemes.

Acquisitions

In December 2018 we exchanged contracts to acquire Les Reflets, 15 Rue Jean Walter in Lille; completion is anticipated early in 2019. This four-year-old multi-let office building comprises 44,756 sq ft (4,158 sqm) of fully-let offices, and its cost of £10.2 million reflects a net initial yield of 6.6%. Our other acquisitions in France in 2018 were restricted to enhancing our existing portfolio, acquiring a further floor in a multi-owned building in Lyon and a car park in Paris.

Disposals

In line with our policy of disposing of properties too small to have a meaningful impact on the Group, in December we sold 18 Rue Stephenson in Paris for £2.5 million, over 8% above its value at December 2017.

Asset management

The vacancy rate in France fell to 2.3% at 31 December 2018 (2017: 4.4%) mainly because we let or renewed leases on 110,578 sq ft (10,273 sqm), and lost only 69,782 sq ft (6,483 sqm) of space from expiries or new vacancies. Excluding those arising from contractual indexation uplifts, 44 rent reviews, lease extensions and new leases added £3.3 million of rent, at an average of 1.9% above ERVs of 31 December 2017. On a like-for-like basis there was no change in ERVs in the French portfolio over the 12 months, and at the end of 2018 the portfolio was broadly rack-rented.

Developments

Ateliers Victoires is a 21,500 sq ft (2,000 sqm) prime office refurbishment in central Paris close to the Louvre. This boutique-style office building has a rooftop garden terrace with panoramic views across the city and we pre-let the entire building to a single tenant prior to practical completion.

Valuation

The French portfolio valuation rose by 3.8% in local currency, of which the completed pre-let development of Ateliers Victoires accounted for two-thirds; of the remainder, contracted rent on a like-for-like basis rose by 2.1%, and the net initial yield was unchanged at 5.2%.

Property Portfolio

Rental data

Valuation data

Lease data

Director's 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 International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation, 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 judgments 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 7 March 2019.

On behalf of the Board

David Fuller BA FCIS

Company Secretary

7 March 2019

Group income statement

for the year ended 31 December 2018

2017 has been restated to separate the individual line items of discontinued operations from those of continuing operations, see note 21. 

Group statement of comprehensive income

for the year ended 31 December 2018

2017 has been restated to separate items that are attributable to discontinued operations

Group balance sheet

at 31 December 2018

The financial statements of CLS Holdings plc (registered number: 2714781) were approved by the Board of Directors and authorised for issue on 7 March 2019 and were signed on its behalf by:

Mr E H Klotz

Executive Chairman

2017 has been restated to separate the assets and liabilities of discontinued operations from those of continuing operations, see note 21.

Group statement of changes in equity

for the year ended 31 December 2018

Group statement of cash flows

for the year ended 31 December 2018

Income tax paid on the sale of properties has been disclosed within cash flows from investing activities as it is a direct cost associated with property sales. Previously income tax paid on sale of properties was included within income tax paid on operating activities.

Notes to the Group Financial Statements

31 December 2018

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 16 Tinworth Street, London SE11 5AL. 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 2018 Annual Report and Accounts will be posted to shareholders on 22 March 2019 and will also be available on the Company's website.

The preliminary results for the Company and its subsidiaries (the "Group") for the year ended 31 December 2018 are unaudited. The financial information set out in this announcement does not constitute the Group's financial statements for the year ended 31 December 2018 or 31 December 2017 as defined by Section 434 of the Companies Act 2006.

This financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRS IC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and therefore complies with Article 4 of the EU IAS regulations.

The financial information for the year ended 31 December 2017 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors, Deloitte LLP, reported on those accounts 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 statutory accounts for the year ended 31 December 2018 will be finalised on the basis of the financial information presented by the Directors in these preliminary results and will be delivered to the Registrar of Companies following the Annual General Meeting of CLS Holdings plc.

The same accounting policies and methods of computation are followed as in the latest published audited accounts for the year ended 31 December 2017, which are available on the Group's website at www.clsholdings.com, except for the application of IFRS 9, listed equity securities are now classified as financial assets at fair value through profit and loss and fair value movements are recognised directly in the income statement.

Going Concern

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 2018 Annual Report and Accounts. The financial position of the Group, its liquidity position and borrowing facilities are described in the Strategic Report within the 2018 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 three operating divisions - Investment Property Other Investments and Central Administration. Other Investments comprise the hotel at Spring Mews, corporate bonds, shares in Catena AB and other small corporate investments. The Group manages the Investment Property division on a geographical basis due to its size and geographical diversity. Consequently, the Group's principal operating segments are:

Other Investments

Central Administration

The Group's results for the year ended 31 December 2018 by operating segment were as follows:

The Group's results for the year ended 31 December 2017 by operating segment were as follows:

Other segment information:

3 Administration cost ratio

The administration cost ratio is a key performance indicator of the Group. It represents the cost of running the property portfolio relative to its net income, and is calculated as follows:

4 Profit for the year

Profit for the year has been arrived at after charging:


5 Finance income

6 Finance costs

7 Taxation

A deferred tax credit of £0.6 million (2017: £0.5 million) was recognised directly in equity (note 17).

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 19.5% (2017: 20.7%) 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 28% to 25% and in Sweden from 22% to 20.6%, the combined effect of which is a £7.8m reduction in the tax charge for the year. 

8 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.

9 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.

10 Investment properties

The investment properties, properties held for sale and the hotel and landholding detailed in note 11 were revalued at 31 December 2018 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:

United Kingdom: Cushman and WakefieldGermany: Cushman and WakefieldFrance: Jones Lang LaSalle

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 Fair Value Measurement. Inputs into the valuations include equivalent yields and rental income and are 'unobservable' under the definition in IFRS 13. These inputs are analysed by segment in the property portfolio information on the inside front cover. All other factors remaining constant, an increase in rental income would increase valuations, whilst an increase in the true equivalent yield would result in a fall in value, and vice versa.

Key inputs to the valuation

A decrease in the true equivalent yield by 25 basis points would result in an increase in the fair value of the Group's investment property by £101.1 million, whilst a 25 basis point increase would reduce the fair value by £101.6 million.

Investment properties included leasehold properties with a carrying amount of £73.3 million (2017: £73.1 million).

Interest capitalised within capital expenditure in the year amounted to £nil (2017: £0.5 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.

Around 85% of investment properties (and the hotel detailed in note 11) are secured against debt.

11 Property, plant and equipment

A hotel and a landholding were revalued at each balance sheet date based on the external valuation performed by Cushman and Wakefield and L Fällström AB, respectively.

12 Investments in associates

A convertible loan to Nyheter 24 Media Network AB was converted into equity on 26 November 2017 at the option of the borrower.

13 Other financial investments

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

1 The adoption of IFRS9 from 1 January 2018 has resulted in Other Financial Investments previously disclosed as Available for Sale Financial Assets being reclassified to either carried at fair value through other comprehensive income or carried at fair value through profit and loss.

2 Unlisted equity shares are valued using multiples from comparable listed organisations.

Corporate Bond Portfolio

At 31 December 2018

14 Trade and other receivables

There was no concentration of credit risk with respect to trade receivables as the Group had a large number of customers spread across the countries in which it operated.

There were no material trade and other receivables classified as past due but not impaired (2017: nil). No trade and other receivables were interest-bearing.

15 Cash and cash equivalents

At 31 December 2018, Group cash at bank and in hand included £21.8 million (2017: £17.6 million) which was restricted by a third-party charge.

At 31 December 2017 the Group held, on behalf of a third party, cash which was paid to the third party in January 2018. As the Group held no beneficial interest in this cash at 31 December 2017 it was excluded from the group cash flow statement and all other cash and gearing metrics.

16 Trade and other payables

17 Deferred tax

The movement in deferred tax was as follows:

The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, was as follows:

Deferred tax has been calculated at a weighted average across the Group of 18.2% (2017: 19.6%), and has been based on the rates applicable under legislation substantively enacted at the balance sheet date.

Deferred tax assets are recognised in respect of tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. At 31 December 2018 the Group did not recognise deferred tax assets of £1.1 million (2017: £8.2 million) in respect of losses amounting to £6.0 million (2017: £30.4 million) which can be carried forward against future taxable income or gains. The majority of deferred tax assets recognised within the "other" category relate either to deferred tax on swaps with a negative book value or to corporate bonds carried at below cost. Losses recognised as deferred tax assets can be carried forward without restriction.

18 Borrowings