CLS Holdings Regulatory News (CLI)

CLS HOLDINGS PLC

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

ANNOUNCES ITS ANNUAL RESULTS

 FOR THE YEAR ENDED 31 DECEMBER 2017

strong results in a TRANSFORMATIONAL YEAR

CLS is a FTSE 250 property investment company with a £1.8bn portfolio in the UK, Germany and France offering geographical diversification with local presence and knowledge.

FINANCIAL HIGHLIGHTS

· EPRA net asset value: up 16.5% to 286.0 pence (31 December 2016: 245.6 pence)

· Basic NAV per share increased by 17.2% to 252.0 pence (31 December 2016: 215.1 pence)

· Profit before tax increased by 91.2% to £191.4 million (2016: £100.1 million)

· EPRA earnings per share up 4.1% to 12.8 pence (2016: 12.3 pence)

· Basic earnings per share up 64.0% to 38.7 pence (2016: 23.6 pence)

· Contracted rents rose by 13.8% for the year to £103.8 million (2016: £91.2 million)

· A proposed final dividend of 4.30 pence per share to be paid on 27 April 2018, contributing to a total of 6.35 pence for the year, equating to £25.9 million, an uplift of 10.1%

OPERATIONAL HIGHLIGHTS

Investment Property Portfolio:

· Completed the sale of the Vauxhall Square development for £144.1 million

· Proceeds of £170 million on disposal of properties in the UK, £25 million in Germany and £7 million in France, at an average net initial yield of 3.3%

· Acquired properties for £188 million in Germany and £50 million in the UK at an average net initial yield of 6.5%

· Completed the extensions of 15 leases with the Department for Work and Pensions, securing annual rentals of £6.6 million and enhancing the aggregate value of the properties by £21 million

· Completed a further 158 lease events securing annual rentals of £12.8 million

· Vacancy rate of 5.8% (2016: 2.9%) including acquisitions and disposals (0.7%) and recent refurbishments (1.5%)

Developments:

· Close to completing the developments of 16 Tinworth Street, London SW8 and Ateliers Victoires, Paris

· Invested a further £16 million of property refurbishment expenditure

Financing:

· Reduced the weighted average cost of debt by 40 bps to 2.51%, our lowest ever (2016: 2.91%), 269 bps below our net initial yield of 5.2%

· Financed or refinanced £222.1 million of debt, and repaid an amortising bond which had a coupon of 10.765%

· Repositioned the loan portfolio to 74% at fixed rates (31 December 2016: 63%)

Henry Klotz, Executive Chairman of CLS, commented:

"For CLS, 2017 was a transformational year, which saw the Group realise the value that had been built up in Vauxhall Square, whilst making significant acquisitions in Germany, and introducing dividends as a means of distributing cash to shareholders.

"With this strong set of results, we are delivering on our promise to create sustainable, long-term shareholder value through owning and actively managing high-yielding office properties in key European cities.

"With our proven and successful business model, robust balance sheet and significant liquid resources, we are well positioned to enhance our business by investing in the right properties in our core markets, whilst continuing to maximise value-adding opportunities in our existing portfolio."

-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 and Founding Shareholder

Liberum Capital Limited +44 (0)20 3100 2222

Richard Crawley

Jamie Richards

Whitman Howard +44 (0)20 7659 1234

Hugh Rich

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

Jonathan Gray

Smithfield Consultants (Financial PR) +44 (0)20 3047 2541

Alex Simmons

Sam Moodie

CLS will be presenting to analysts at 9.00am on Wednesday, 7 March 2018, at Liberum Capital, Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY

Conference call dial in numbers as follows:

Participant telephone number +44 (0)330 336 9105

Confirmation code 8380612

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.

Dividend Timetable

Further to this announcement, in which the Board recommended a final dividend of 4.30 pence per ordinary share, the Company confirms its dividend timetable as follows:

Ex-Dividend Date: 29 March 2018

Record Date: 3 April 2018

AGM Date: 25 April 2018

Payment Date: 27 April 2018

Chairman's statement

An exceptional and transformational year

Performance 

The Group's well-established strategy of long-term investment in commercial properties in the three main markets of Europe has been reflected once more in the excellent results for 2017 and the strong financial position of the Group at the year end. The year was both exceptional and transformational for CLS in many ways, with the disposal of our large development site in Vauxhall, substantial acquisitions in Germany, and the introduction of dividends as a means of distributing cash to shareholders. These initiatives drove both a market-leading TSR of 67.1% and our financial results for the year. Our focus on multi-let office properties, with a geographical diversification and strong cash flows, delivered an excellent uplift in EPRA NAV of 16.5%, and a profit before tax of £191.4 million (2016: £100.1 million).

Property portfolio

We continuously review each property in our portfolio to ensure that each asset is aligned with our medium to long-term strategy to achieve the best return for our shareholders. We focus on cash flow and return on equity as the core components of stable growth, supported by the regeneration of our portfolio, which enables us to continue to generate value.

In the year we disposed of properties valued at £158.9 million and acquired assets for £238.5 million in aggregate, which will lead to a significant increase in our future underlying core profit. Disposals generated proceeds of £241.9 million, and an aggregate gain of £43.7 million, primarily due to the disposal of Vauxhall Square for £144.1 million, which had virtually no impact on rental income as the site was prepared for development and had few remaining tenants.

The properties we subsequently acquired in Germany for £187.7 million offer us multiple opportunities for asset management to drive further growth in the business.

You will find further information about our property portfolio in the Business Review.

People and Culture

The Board understands that as the Group grows, our culture must also evolve. We have a diverse workforce from many nationalities whose hard work and dedication is at the heart of our success. I am very pleased to report that as part of our commitment to our employees we have implemented key initiatives brought about by our recent staff survey, including the introduction of a flexible and "smart" working policy and the implementation of a Share Incentive Plan, both of which I expect will contribute greatly to our open, professional and entrepreneurial culture and further align the interest of employees and shareholders.

Sustainability

Where opportunities present themselves, we invest across the Group in on-site renewable and low-carbon technology, such as photovoltaic panels, ground source systems and combined heat and power plants. We have a commitment to improving the built environment through our operational management, and our impact on climate change is minimised and controlled through life-cycle awareness. The advantage of operating in different countries is that we have a wider base from which to learn. We have a committed in-house team dedicated to environmental issues across all our core markets and we are working hard to implement best practice in all areas.

Board changes

In March, Bengt Mortstedt, a co-founder of the Company and holder of 6.89% of its shares, was reappointed to the Board as a non-executive director in place of Philip Mortstedt. In May, Joe Crawley stepped down as a non-executive director after nine years on the Board, and in December Thomas Lundqvist also retired as non-executive director. Thomas had been on the Board for 23 years and served both as a non-executive director and in the early days as a member of the executive team.

On behalf of the Board, I would like to thank Thomas, Joe and Philip for their commitment and contribution to the Company, and to welcome back Bengt to the Board.

Dividend

In May, we subdivided each ordinary share of 25 pence into ten ordinary shares of 2.5 pence each. We also restored dividend payments as our distribution method, replacing tender offer buy-backs, and these will be paid twice-yearly. In line with the increased core profit, excellent cash flow and a strong balance sheet, the Board is pleased to propose a final dividend for 2017 of 4.30 pence per share, making a total for the year of 6.35 pence, an increase over last year of 10.1%.

Outlook

Last year, I said that I felt confident that the Group was well positioned to deliver long-term value to our shareholders, and our 2017 results have supported this view.

The future of our industry and how we work is rapidly evolving, with increased urbanisation and changing requirements from customers, and we have seen new market entrants offering alternatives to traditional leases. The CLS Group is comfortable with shorter leases and tenant breaks if required, and will continue to offer value for money to our occupiers.

The growth of major cities is advantageous to our locations as office-based corporate workforces expect to be in convenient locations with good transport links. As the office environment is changing, it is key that we adapt our designs and layouts to ensure that spaces such as receptions, coffee shops and common areas are attractive and modern. We are increasing our investment in information technology, conducting customer surveys, and investing in smart meters and energy management, all to address the changing needs of our customers and thereby enhancing our properties for the future.

We have seen some uncertainties in occupier demand and investors' decisions in the UK following the referendum on Brexit. However, the German economy is performing strongly, and we are seeing attractive investment opportunities despite increased competition. In France, market sentiment has improved during the year.

In summary, I sense that the long-term view for our markets is perhaps more positive now than a year ago given the economic growth in evidence around the world. I remain convinced that it is a strength for our portfolio to be spread across the largest cities in the UK, Germany and France as, fundamentally, the demand for office space is driven by a solid economy and the location of the asset. Further expansion in Germany remains one of our priorities and I expect that the Group's portfolio here will continue to grow. 

Our balance sheet is robust and we have significant liquid resources to enhance our business by investing in the right properties in our core markets, whilst continuing to maximise value-adding opportunities in our existing portfolio. Our strategy is clear and I am confident we will continue to deliver value for our shareholders in 2018 and beyond.

Henry Klotz

Executive Chairman

Chief Executive's review

Our strategy is delivering real results

Overview

2017 was an important year for CLS. We made great progress in our strategy of repositioning part of the property portfolio, created opportunities for active asset management to add further value, and significantly reduced short-term letting risks and longer-term financing risks. In addition, we generated a 16.5% increase in EPRA net asset value, a total accounting return of 18.9% and pre-tax profits of £191.4 million, and we introduced dividends as our distribution method to shareholders.

Repositioning the property portfolio

In 2017, the Board's medium-term strategy to reposition part of the property portfolio gained momentum. Our disposal criteria were threefold: first, assets which were low yielding with limited potential; secondly, investments on which the risk/reward ratio was unfavourably balanced; and thirdly, properties which were too small to have a meaningful impact on the Group. By contrast, we invested predominantly in Europe's strongest economy, Germany, and in assets with higher yields, vacancies and active management opportunities. We targeted larger, multi-let properties. 

In aggregate we sold assets with a book value of £158.9 million, representing some 10% of the portfolio. By far the most significant disposal was Vauxhall Square in London, which had been valued at £100 million at 31 December 2016, and for which we received net proceeds of £144.1 million. This time last year, we explained that the scheme's bias towards residential towers did not suit our skill set or risk appetite, and the sale clarified our future strategy whilst adding 7p pence to NAV. We also sold a further six properties in Germany, France and the United Kingdom which met our disposal criteria. Since the year end we have sold a further two properties, one each in Germany and the UK, for an aggregate of £11.5 million, and I expect further similar disposals over the next 24 months.

We successfully redeployed the proceeds into Germany (£187.7 million) and the UK (£49.9 million). The largest acquisition was the Metropolis portfolio of 12 properties across major cities in Germany for £140.1 million, yielding 6.3%, and, attractively for us, with around 11% of the portfolio vacant.

We progressed the developments of 16 Tinworth Street, SE11 and Ateliers Victoires in central Paris, both of which are close to practical completion, with the former due to become our Group headquarters. On the latter terms have been agreed for a conditional pre-let of the entire building. Three significant refurbishments were completed towards the end of the year, in Bromley, Leatherhead and Birmingham, and in total £22.9 million was spent on capital expenditure. We have a rolling refurbishment programme and intend to keep investing in the portfolio to ensure that our properties continue to meet the needs of our customers both now and in the future. 

Investing in asset management opportunities

Buying properties with vacancies is an investment in future rental growth, but it has a short-term cost. For many years, one of our KPIs has been to maintain the Group's vacancy rate at below 5.0%. At the end of 2016, the vacancy rate was 2.9%; at 31 December 2017, it had risen to 5.8%. Inherent in the acquisition strategy has been the purchase of properties with vacancies to which we can turn our asset management attention. The average vacancy rate within the acquisitions in the year was 9.0%, whilst the average vacancy rate at 1 January 2017 of disposals made in 2017 was 3.0%. Excluding the effects of these acquisitions and disposals, the like-for-like vacancy rate at the end of 2017 was 5.1%. Included within this figure are three recently-completed major refurbishments which added 1.5% to the rate; without these coming on stream together, our core vacancy rate would have been 3.6%. We look forward to reducing the rate through hands-on management in 2018.

Another impact of the rise in vacancies was a fall in the net initial yield of the portfolio to 5.2% (31 December 2016: 5.6%). Lettings in 2018 should increase the yield, whilst further acquisitions with vacant space will temporarily reduce it and increase the vacancy rate.

Active asset management

At CLS we 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 of our asset management in-house. This is also key in ensuring a close and long-term relationship with our customers. As predicted last year, the most significant deal in 2017 was the renewal of all 15 leases with the Secretary of State for Communities and Local Government which were due to expire or break on 31 March 2018. The impact of these re-lettings was an uplift in the value of those properties of £21 million at 31 December 2017.

We have also been busy integrating new properties into the organisation and getting to know our new customers, in addition to managing the existing portfolio. By the end of 2017 we had 712 tenants (2016: 525 tenants) within 129 properties (2016: 115 properties). We have always targeted multi-let properties, to avoid overreliance on single relationships, and the acquisitions in 2017 have enhanced this further. In aggregate across the Group, 1.2 million sq ft (113,113 sqm) of space expired or was vacated, and 1.0 million sq ft (90,900 sqm) was renewed or was let. 169,000 sq ft (15,700 sqm) were vacant within the new acquisitions, and 80,000 sq ft (7,389 sqm) of refurbished space became available for letting towards the end of the year.

Value uplifts across the board

At 31 December 2017, there were uplifts in valuations across the entire Group, with a 5.8% increase in values in local currencies (7.7% in sterling). In the UK, the portfolio rose by 4.7%, Germany added 6.6% in local currency, partly through rental growth and partly through a fall in yields, and the French portfolio rose by 8.2%, entirely from yield compression in a very competitive market. In aggregate, the fair value uplifts of the property portfolio added 22.8 pence to EPRA NAV in the year.

Results

Profit before tax of £191.4 million (2016: £100.1 million) was driven by the uplift in the fair value of the property portfolio of £94.2 million (2016: £36.1 million) and the profit on sale of properties of £43.7 million (2016: £9.1 million). EPRA earnings of 12.8 pence (2016: 12.3 pence) were dampened by a favourable movement in foreign exchange rates in 2016 which had a 1.1 pence per share impact. The underlying business strengthened, with contracted rents growing 13.8%, and I look forward to further growth in underlying earnings from our strategy to reposition the portfolio towards more growth opportunities.

Long-term capital growth

CLS has a business based fundamentally 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 5.2% and our cost of debt of 2.51% becomes the chief driver of cash flow. In 2017, net cash from operating activities was £43.2 million (2016: £40.1 million) and EPRA earnings were £52.2 million (2016: £50.9 million). Of this, £25.9 million (2016: 23.5 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 125% in the past four years.

In 2017, our cost of debt fell to its lowest ever level of 2.51% (31 December 2016: 2.91%), mainly due to our redeeming the last expensive legacy debt in the balance sheet, which had been taken out in 1992 at a fixed rate of 10.765%. Our financing is largely insulated to any economic softening; 74% of our debt is now at fixed rates and for an average duration of 4.2 years.

A culture built on relevance and sustainability

The world is changing. Occupiers' requirements and employees' preferences are becoming more demanding. This is a trend which is likely to continue, and one which we embrace. We work closely with our customers to ensure the space which we provide is to their needs and specifications, and fitting to a cost-conscious mindset. Likewise, we listen to our employees and design their work experience accordingly. When our employees in London and Hamburg move into new premises this spring, all of our offices will be in newly-built or refurbished premises which incorporate recommendations and suggestions from our latest employee survey.

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 32 of the 2017 Annual Report and Accounts.

The future

With the uncertainty of the Brexit negotiations and the strength suggested by the economic forecasts of the two largest economies in continental Europe, the benefits of the Group's geographical diversification are self-evident. At 31 December 2017, the United Kingdom comprised 52% of the portfolio (2016: 61%), Germany 32% (2016: 23%), and France 16% (2016: 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. 2017 was the year in which the repositioning of CLS accelerated, and I envisage further progress in the year ahead.

Fredrik Widlund

Chief Executive

Chief Financial Officer's review

Outperformance supported by a strong underlying business

On 8 May 2017, the Company subdivided each of its existing ordinary shares of 25 pence each into ten new ordinary shares of 2.5 pence each. Consequently, all metrics in this report which are given per share are based on the new number of shares in issue, and comparatives have been restated accordingly.

Headlines

Profit after tax attributable to the owners of the Company of £157.7 million (2016: £97.8 million) generated basic earnings per share of 38.7 pence (2016: 23.6 pence) and EPRA earnings per share of 12.8 pence (2016: 12.3 pence). EPRA net assets per share were 16.5% higher at 286.0 pence (2016: 245.6 pence), and basic net assets per share rose by 17.1% to 252.0 pence (2016: 215.1 pence).

Approximately 52% of the Group's business is conducted in the reporting currency of sterling and 36% in euros, with the balance in Swedish kronor. Compared to last year, sterling's average rate weakened against the euro by 7.2% and against the krona by 5.3%, thereby increasing profits. Likewise, at 31 December 2017 the euro was 4.2% stronger and the krona 2.1% stronger against sterling than twelve months previously, increasing the sterling equivalent value of non-sterling net assets.

Income statement

In 2017, rental income of £93.7 million was £2.4 million higher than in 2016. Acquisitions added £8.0 million and the weakness in sterling £2.6 million; disposals accounted for a fall of £6.7 million, and a large expiry in Germany a further £1.5 million. Other general letting activity produced a similar level of rental income as last year.

Other property income of £21.4 million (2016: £21.4 million) included income from First Camp of £13.1 million (2016: £12.5 million), hotel revenue from Spring Mews of £4.4 million (2016: £4.3 million) and dilapidations and other one-off receipts of £3.9 million (2016: £4.6 million). In aggregate net rental income rose by 5.6% to £113.1 million (2016: £107.1 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 2017, we were able to maintain the level of administration expenses at £14.2 million (2016: £14.1 million), and so the administration cost ratio fell to 14.2% (2016: 14.9%), well within our KPI target for the year of 16.5%.

The net surplus on revaluation of investment properties of £94.2 million (2016: £36.1 million) reflected contributions from each country: in local currencies, the UK portfolio rose by 4.7%, Germany by 6.6%, and France by 8.2%.

Of the gain on sale of properties in 2017 of £43.7 million (2016: £9.1 million), which comprised the excess of net proceeds over book value, Vauxhall Square accounted for £41.4 million.

Finance income of £10.1 million (2016: £13.6 million) included interest income of £4.4 million (2016: £4.1 million) from our corporate bond portfolio, together with dividends from Catena and interest on the deferred consideration on the sale of Vänerparken, and foreign exchange variances of £1.8 million (2016: £4.8 million).

Finance costs of £34.0 million (2016: £32.7 million) included a £9.7 million loss on the early redemption of a long-term debenture loan taken out in 1992 at a coupon of 10.765%. Excluding this, and a gain on the fair value movements of derivative financial instruments, interest costs were £27.2 million (2016: £26.3 million), after capitalising interest of £0.5 million (2016: £0.7 million) on developments. Interest costs before such capitalisation were £27.7 million (2016: £27.0 million) reflecting a higher level of borrowings in the year at a lower average cost.

The tax charge of 17.5% was marginally below the weighted average rate of the countries in which we do business (20.7%), primarily due to the increase in indexation on the base cost of properties in the UK. Such indexation has been frozen at 31 December 2017 under recent legislation, so the tax charge for future years will no longer benefit in this way, and is likely to increase in future years, mitigated only by the falls, if any, in the rates of corporation tax in the jurisdictions in which the Group operates.

Overall, following the transformational activity in the year, EPRA earnings were 2.6% higher than last year at £52.2 million (2016: £50.9 million), and generated EPRA earnings per share of 12.8 pence (2016: 12.3 pence). The increase was driven by increases in rental income and other net income, and reductions in net finance costs and tax, less foreign exchange gains, of which there were fewer this year than last. 

EPRA net asset value

At 31 December 2017, EPRA net assets per share were 286.0 pence (2016: 245.6 pence), a rise of 16.5%, or 40.4 pence per share. The main reasons for the increase were EPRA earnings per share of 12.8 pence, the benefit of the uplift in the valuation of the investment property portfolio of 22.8 pence, and profit on sale of properties of 6.6 pence, less dividends of 6.1 pence per share. 

Cash flow, net debt and gearing

Net cash flow from operating activities generated £43.2 million, of which £24.7 million was distributed as dividends. Proceeds from property disposals of £241.9 million were redeployed in acquisitions of £230.8 million and capital expenditure of £24.2 million. Net new debt of £32.2 million was raised, and by 31 December 2017, the Group's cash balances had risen by £42.2 million to £141.2 million. These were supplemented by £65.5 million of corporate bonds and undrawn bank facilities of £72.9 million, of which £30.0 million was committed.

Gross debt rose by £59.9 million to £914.3 million, of which £15.5 million was due to foreign exchange rate movements. £211.6 million of loans were drawn, and £126.6 million were repaid, as were £40.6 million of overdrafts. At 31 December 2017, the weighted average unexpired term of the Group's debt was 3.6 years.

Balance sheet loan-to-value (net debt to property assets) fell to 36.7% (2016: 43.7%), and the loan-to-value of secured loans by reference to the value of properties secured against them was 51.8% (2016: 49.8%). The value of properties not secured against debt rose to £246.7 million (2016: £135.6 million).

The weighted average cost of debt at 31 December 2017 was 2.51%, 40 bps lower than 12 months earlier. The redemption of the high-coupon debenture loan accounted for 25 bps of that fall, net new bank loans reduced the average cost by 10 bps, and sterling's relative weakness to the euro caused a 5 bps fall.

In 2017, our low cost of debt led to recurring interest cover of 3.7 times (2016: 3.4 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 48% 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 Metropolis, and is financed by a single loan. At 31 December 2017, the Group had 52 loans across the portfolio from 21 banks, plus 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 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 2017, the Group financed or refinanced 15 loans to a value of £222.1 million at a weighted average all-in rate of 1.63%, and of these £174.0 million was fixed at a weighted average all-in rate of 1.54%. Consequently, at 31 December 2017, 74% of the Group's borrowings were at fixed rates or subject to interest rate swaps, 5% were subject to caps and 21% of debt costs were unhedged; the fixed rate debt had a weighted average maturity of 4.2 years.

The Group's financial derivatives - predominantly interest rate swaps - are marked to market at each balance sheet date. At 31 December 2017 they represented a net liability of £6.2 million (2016: £9.3 million).

Share capital

At 1 January 2017, there were 43,877,778 shares in issue, of which 3,138,202 were held as treasury shares. Following the share subdivision, at 31 December 2017, 407,395,760 shares were listed on the London Stock Exchange, and 31,382,020 shares remained held in Treasury.

Distributions to shareholders

In April 2017, a final dividend for 2016 of 40 pence per ordinary share of 25 pence was paid totalling £16.3 million. In September, an interim dividend for 2017 of 2.05 pence per ordinary share of 2.5 pence was paid at a cost of £8.4 million. The final dividend for 2017 is proposed to be 4.30 pence per ordinary share of 2.5 pence, totalling £17.5 million. This represents a full year distribution of 6.35 pence per ordinary share of 2.5 pence, an increase of 10.1% over the prior year, and which was covered 2.07 times by EPRA earnings per share.

John Whiteley

Chief Financial Officer

Key Performance Indicators

Measuring 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.*

Why this is important to CLS

This KPI measures the increase in the wealth of a CLS shareholder over the year. In 2017 our target Total Shareholder Return (absolute) was between 12% and 16%.

Progress

In 2017, the total shareholder return was 67.1%.

* 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. We target Total Shareholder Return (relative) of between the median and upper quartile.

Progress

In 2017, the TSR was 67.1%, making CLS the best performing share of the FTSE 350 Real Estate Super Sector Index of 26 companies.

EPRA NAV 

(plus dividends)

Definition

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

Why this is important to CLS

This KPI measures the increase in the 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. In 2017 our target EPRA NAV growth was between 6% and 9%.

Progress

In 2017, Total Accounting Return was 18.9%.

Vacancy Rate History

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. 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 2017, the vacancy rate was 5.8%, or 5.1% 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. In 2017 our target administration cost ratio was between 16.50% and 14.50%.

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.

Progress

In 2017, the administration cost ratio was 14.2%.

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 2017, the cost of debt was 2.51% and the net initial yield 5.2%.

· 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 2017 we achieved a 7% reduction (2016: 11.4%).

· Customer retention - through our active asset management we seek to retain more than 50% of our tenants by value. In 2017, 66% of our leasing transactions were lease renewals (2016: 54%).

· 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 2017, the national rate was 910 per 100,000 people; CLS's was 119. 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

A stable risk environment

Business review: United Kingdom

Repositioning for long-term income growth

UK Overview

The UK economic outlook continues to be dominated by the potential effects of Brexit but the feared sharp slowdown has not materialised and the consensus GDP forecast for 2018 has improved following a better than expected performance in 2017. The uncertainty of the Brexit negotiations has also created some uncertainties for occupiers and investors but the UK, and London in particular, offers one of the most liquid and transparent property markets in the world and we will continue to invest in properties where we see long-term value and opportunities for hands-on asset management.

72

Number of properties

£934.0m

Value of properties

243,252 sqm

Lettable space

217

Number of tenants

52%

Percentage of Group's property interests

5.5%

Vacancy rate

66%

Government and major corporates

Acquisitions

In January, we acquired a portfolio of five properties, four in London and one in Birmingham, for £31.6 million in aggregate and at a net initial yield of 7.9%. There are opportunities for adding value to four of the properties in their existing state, and one has a medium-term development potential which we are progressing. In November, we bought Columbia, Bracknell for £14.7 million. This was 11% vacant and should produce a yield of 7.5% when fully let. More details of these acquisitions are set out on page 7 of the 2017 Annual Report and Accounts.

Disposals

The planning consent attached to Vauxhall Square, SE8 had been gained over four years. Its sale in May for net proceeds of £144.1 million generated a gain of 39% above its book value, and added 7p to the Group's net asset value. It was a site sold with planning consent for a 1.6 million sq ft mixed-use development of residential, office, hotel, retail and student accommodation, including two 52-storey residential towers. The bias towards residential towers did not suit our skill set or risk appetite, and the sale took a significant amount of potential development risk off the balance sheet.

Three other UK properties were sold in the year: Centenary Court, Bradford for £14.2 million; Benwell House, Sunbury for £9.2 million; and Chailey House, Bedford for £1.9 million. Centenary Court, a 105,200 sq ft office building, was due to fall vacant on a tenant break in 2021; Benwell House was sold with vacant possession to a purchaser for an alternative use; and Chailey House was a small asset acquired with the Neo portfolio in 2013.

Since the year end, we have sold Clifton House and 126/128 Park Road, Peterborough for £6.2 million.

Asset management

In October, we renewed leases to the Secretary of State for Communities and Local Government on 14 properties reserving £6.6 million per annum for an average of 6.8 years to the first lease break. Excluding these, on average new lettings in the year were achieved at 2.1% above their estimated rental values (ervs) at 31 December 2016, and rent reviews were settled at 1.6% above ervs. Overall, during 2017 ervs were broadly unchanged, and the UK portfolio remained net reversionary. Those leases which were reversionary were £5.7 million, or 10.6%, under-rented, of which we expect to capture over a third in 2018. Of the £4.1 million of over-renting, £2.8 million is on leases with at least five years unexpired. The vacancy rate of the UK portfolio at 31 December 2017 was 5.5% (2016: 4.0%), of which 3.5% comprised recently completed refurbishments and acquisitions. During 2017, 827,152 sq ft (76,845 sqm) became vacant, and we let or renewed leases on 698,071 sq ft (64,853 sqm). 130,092 sq ft (12,086 sqm) of vacant space was sold, predominantly at Vauxhall Square, 32,238 sq ft (2,995 sqm) of refurbishments became available, and 13,089 sq ft (1,216 sqm) of vacant space was acquired through acquisitions.

Developments

16 Tinworth Street, SE11, an £8.6 million, 7-storey development of 9,181 sq ft (853 sqm) of office and residential accommodation, will house the Group's headquarters when it reaches practical completion in the spring.

In January 2018, 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 4.7% in the year, reflecting a 3.6% increase in like-for-like rental values, and yield compression of 20 bps, largely reflecting the longer leases with the Secretary of State.

Business review: Germany

Actively looking to invest in major cities

Germany Overview

The German economy continues to perform strongly and the forecast GDP growth for 2018 was recently upgraded again. Unemployment is falling and vacancy levels for offices in the big seven cities are at record low levels. There has been limited supply of new offices and this is now driving rental growth. The underlying strength of Germany's well-diversified economy is highly reassuring. Despite increased competition, both from German and foreign investors, we consider Germany to offer one of the most attractive investment opportunities in Europe.

33

Number of properties

£578.9m

Value of investment properties

312,471 sqm

Lettable space

338

Number of tenants

32%

Percentage of Group's property interests

7.1%

Vacancy rate

37%

Government and major corporates

Acquisitions

In 2017, we spent £187.7 million on acquisitions in Germany in three transactions: a portfolio, and individual purchases in Dortmund and Munich. Project Metropolis, was a portfolio of twelve properties, comprising three in Hamburg and in Stuttgart, four in a cluster of Dortmund, Dusseldorf, Witten and Marl, and one each in Munich and Wiesbaden. At a cost of £140.1 million, the portfolio generated net annual rent of £8.9 million and a net initial yield of 6.3%. Being 11% vacant, it provides good opportunities to add value.

Gotic Haus in Dortmund was acquired in October for £33.5 million. On acquisition this multi-let office building of 239,992 sq ft (22,296 sqm) produced an annual rental income of £2.3 million and a net initial yield of 7.1%. Its vacancy rate on acquisition was 5.4%. Network Perlach in Munich, a 101,708 sq ft (9,449 sqm) multi-let office building, was acquired for £14.0 million in May, and generated a rent of £0.6 million. With a vacancy rate of 12%, the net initial yield would rise from 5.1% to 6.2% when fully let, and to 7.4% when the reversionary income has been captured.

Disposals

In addition to finding attractive investments in Germany in the year, we also applied our disposal criteria to the existing portfolio and sold two properties - one a fully let building but with limited potential, the other too small to have a meaningful impact on the Group.

The E.ON Allee office campus in Landshut, 80 km north east of Munich, was sold in May for £25.0 million, or 5.2% above the external valuation at 31 December 2016. The campus comprised four office properties, providing a total of 172,797 sq ft (16,053 sqm) of floor space and 225 parking spaces let entirely to E.ON on long leases. The asset was acquired in September 2006 and developed by CLS in stages until July 2012. Suderhadstedt was a small nursing home which was sold in August for £0.4 million.

Since the year end we have exchanged unconditional contracts to sell Merkurring 33-35 in Hamburg for £5.3 million. The property, which comprised 60,321 sq ft (5,604 sqm) of industrial and office space, was peripheral to the Group's activities. 

Asset management

The acquisitions drove the 59% rise in the value of the German portfolio during the year. It now comprises 33 properties (2016: 21 properties), containing 338 tenants (2016: 164 tenants). To accommodate this increase, we have added scale to the German team, which now has the capacity for further growth.

On average new lettings in the year in Germany were achieved at 6.2% above their ervs at 31 December 2016, whilst rent reviews and relettings were settled broadly at erv. Overall, during 2017 ervs rose by 3.3%, and the German portfolio remained net reversionary. Leases were reversionary to the tune of £3.1 million (9.1% under-rented), others were over-rented by £2.6 million (6.0%), and the erv of vacancies was £2.6 million. The vacancy rate of the German portfolio at 31 December 2017 was 7.1% (2016: 1.7%), which reflected the vacancies in the acquisitions. During the year, 237,952 sq ft (22,106 sqm) became vacant, we let or renewed leases on 175,996 sq ft (16,351 sqm), and 155,937 sq ft (14,486 sqm) of vacant space was bought through acquisitions.

Developments

An attraction of the Metropolis portfolio was the opportunity which it presented to add value both through planned capital expenditure of €5 million per annum, and medium-term developments, which are already under consideration.

Valuation

The German portfolio rose by a valuation uplift of 6.6% in local currency, reflecting a rise in ervs of 3.3%, and yield compression of 63 bps.

Business review: France

Delivering value from existing assets

France Overview

With the election of President Macron in May and the political reforms that have been or will be implemented there is a renewed optimism in France and we have seen investor sentiment strengthening during the year. With limited office developments having taken place in recent years there is also a lack of quality office space which, in combination with economic growth and falling unemployment, means the fundamentals for commercial property are solid and improving both in Paris and Lyon.

24

Number of properties

£290.0m

Value of investment properties

80,836 sqm

Lettable space

157

Number of tenants

16%

Percentage of Group's property interests

4.4%

Vacancy rate

54%

Government and major corporates

Acquisitions

In the buoyant Parisian market of 2017, we were unwilling to match the appetite of local investors to chase ever falling yields, and our acquisitions were restricted to enhancing our existing portfolio, acquiring a car park at 23/27 Rue Pierre Valette, and a further floor in a multi-owned building in Lyon. However, we continue to look in both the Paris and Lyon markets for assets which meet the return criteria which we apply to acquisitions across the Group.

Disposals

Most of the assets earmarked for disposal from our French portfolio had been sold by the end of 2016. In 2017, we sold one asset, Le Sully in Mantes-la-Jolie, 48 km to the north-west of Paris for £7.1 million.

Asset management

On average new lettings, rent reviews and lease extensions in the year in France were achieved at marginally below their ervs at 31 December 2016. Overall, during 2017 ervs remained unchanged and the French portfolio was marginally reversionary. Those leases which were reversionary were £0.4 million, or 2,8%, under-rented, and others were over-rented by 2.4%. The vacancy rate of the French portfolio at 31 December 2017 was 4.4% (2016: 2.9%). During 2017, 115,475 sq ft (10,728 sqm) became vacant and we let or renewed leases on 104,442 sq ft (9,703 sqm).

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 includes a rooftop garden terrace with panoramic views across the city, and will be ready in late spring. Terms have been agreed for a conditional pre-let of the entire building.

Valuation

The French portfolio valuation rose by 8.2% in local currency; although contracted rent on a like-for-like basis fell by 3.0%, the net initial yield (excluding developments) fell by almost 100 bps, which accounted for most of the rise in the value of the properties, and an 18% increase in Ateliers Victoires provided the rest.

Rental data

Valuation data

Lease data

Note: The above tables comprise data of the investment properties and properties held for sale; they exclude the hotel, landholding and First camp land and buildings. 

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 2018.

On behalf of the Board

David Fuller BA FCIS

Company Secretary

7 March 2018

Group income statement

for the year ended 31 December 2017

* Restated for subdivision of shares (see note 8)

Group statement of comprehensive income

for the year ended 31 December 2017

Group balance sheet

at 31 December 2017

The financial statements of CLS Holdings plc (registered number: 2714781) were approved by the Board of Directors and authorised for issue on 7 March 2018 and were signed on its behalf by:

Mr E H Klotz

Executive Chairman

Group statement of changes in equity

for the year ended 31 December 2017

Group statement of cash flows

for the year ended 31 December 2017

Notes to the Group financial statements

31 December 2017

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 2017 Annual Report and Accounts will be posted to shareholders on 23 March 2018 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 2017. 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 2017 or 2016, 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 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts and the auditors' reports on both the 2016 and 2017 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.

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 2017 Annual Report and Accounts. The financial position of the Group, its liquidity position and borrowing facilities are described in the Strategic Report within the 2017 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 divisions - 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 division 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.

Previously, the United Kingdom segment was split between London and the Rest of United Kingdom. From 2017, the management of the United Kingdom portfolio has merged and comparative data has been restated to reflect this change.

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

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

Other segment information:

* 2016 restated to reflect merger of London and Rest of United Kingdom.

Included within the assets of other investments are investments in associates of £nil (2016: £0.2 million).

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 £1.9 million (2016: charge of £3.8 million) was recognised directly in equity (note 20).

The charge for the year differs from the theoretical amount which would arise using the weighted average tax rate applicable to profits of Group companies as follows:

The weighted average applicable tax rate of 20.7% (2016: 22.2%) was derived by applying to their relevant profits and losses the rates in the jurisdictions in which the Group operated.

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.

* On 8 May 2017, the Company subdivided each of its ordinary shares of 25 pence into ten new ordinary shares of 2.5 pence each. In accordance with IAS 33 Earnings per Share, the weighted average number of ordinary shares in circulation and earnings per share have been restated as if the subdivision were effective from 1 January 2016.

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.

* On 8 May 2017, the Company subdivided each of its ordinary shares of 25 pence into ten new ordinary shares of 2.5 pence each. The number of ordinary shares in circulation and net assets per share have been restated as if the subdivision were effective from 1 January 2016.

10 Investment properties

The investment properties (and the hotel, landholding and owner-occupied property detailed in note 14) were revalued at 31 December 2017 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 Wakefield (2016: Cushman and Wakefield; Knight Frank)

Germany: Cushman and Wakefield 

France: 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. 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. 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 £41.1 million (2016: £48.1 million). 

Interest capitalised within capital expenditure in the year amounted to £0.5 million (2016: £0.7 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 detailed in note 14) 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 (2016: £nil).

11 Property, plant and equipment