CLS Holdings Regulatory News (CLI)

CLS HOLDINGS PLC

("CLS", the "Company" or the "Group")

ANNOUNCES ITS ANNUAL RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2019

Well-positioned for continued growth from active portfolio management

CLS is a leading FTSE250 office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a £2.0 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the year ended 31 December 2019, the Group has delivered the following results:

Note: A reconciliation of statutory to alternative performance measures is set out in Note 5 to the Financial Statements

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"In 2019 we completed the refocusing of the Group on our core activities through the disposal of our stake in Catena and our Regional UK assets. The sale of £187 million of properties with limited asset management potential was more than outweighed by £257 million of high yielding acquisitions. Our profit before tax of £159 million, up 9.7% in the year, demonstrates our active and consistent portfolio approach and delivery.

Our strategy remains to be a long-term investor in multi-let, non-prime offices in the UK, Germany and France. Our property portfolio is now well positioned in the larger cities to capture future rental growth, utilising our in-house management and focus on sustainability. We started 2020 with a well-capitalised balance sheet which allows us to continue to capture attractive acquisition opportunities and deliver long-term, responsible growth for our stakeholders."

FINANCIAL HIGHLIGHTS

· EPRA NAV up 6.3%, primarily through portfolio valuation gains of £57.4 million (2018: £62.8 million) and the profit on disposal of our shareholding in Catena of £38.7 million after foreign exchange movements (2018: £22.2 million fair value gain)

· Profit before tax up 9.7% due to portfolio valuation gains, the profit on the disposals of Catena and properties in Germany and France, as well as an increase in net rental income from acquisitions

· Basic EPS up 9.1% from the above valuation increases and operational performance increases. EPRA EPS was down 8.4%, as profitability increases from net rental income were offset by unfavourable foreign exchange movements and lower interest income

· A proposed final dividend of 5.05 pence per share to be paid on 29 April 2020, resulting in a total 2019 dividend of 7.4 pence per share, an increase of 7.2% (2018: 6.9 pence per share) and total accounting return for the year of 8.6%

OPERATIONAL HIGHLIGHTS

· Net rental income increased by 3.1% to £110.6 million (31 December 2018: £107.3 million), driven by acquisitions and rental growth, with estimated rental values growing 2.5%

· Portfolio valuation uplift of 3.0% in local currency driven by Germany and France up 8.4% and 3.8% respectively with the UK down 0.3%

· Acquired thirteen properties for £257.2 million in the UK, Germany and France (5.8% Net Initial Yield). Two of the acquisitions completed at the start of 2020 for £32.8 million

· Disposed of twenty-eight properties across our three countries for £187.2 million (5.4% Net Initial Yield, excluding UK regional portfolio sale the NIY was 3.6%), four of which completed at the start of 2020 for £9.1 million

· Completed 158 lease deals securing £14.7 million of annual rent at 3.3% above 31 December 2018 Estimated Rental Value

· Vacancy rate stable at 4.0% (31 December 2018: 3.8%)

Financing

· Weighted average cost of debt at 31 December 2019 down 1 basis point to 2.42% (31 December 2018: 2.43%). Gross debt of £897.2 million (2018: £842.3 million) and cash of £259.4 million (2018: £208.1 million including corporate bonds and Catena shares)

· Financed or refinanced £292.4 million of debt at an average of 2.65%, including £177.9 million fixed at 2.50%

· The loan portfolio as at 31 December 2019 had 77% at fixed rates (31 December 2018: 79%)

· Balance sheet Loan to Value at 31.4% (31 December 2018: 36.7%) following the 2019 disposals of: First Camp in March for £28.7 million; our 10.5% stake in Catena in September for c.£113 million after costs; and the disposal of the remainder of our corporate bond portfolio in November for £34.5 million

Governance

· On 15 August 2019, Lennart Sten became the Group's first independent Non-Executive Chairman

· Denise Jagger and Bill Holland appointed as independent Non-Executive Directors and members of the Audit and Remuneration committees. From 6 March 2020, Bill succeeds Malcolm Cooper as Chairman of the Audit Committee and Malcolm also steps down from the Committee. Denise will succeed Christopher Jarvis as Chair of the Remuneration Committee and he will also step down from the Committee following the Group's Annual General Meeting in April 2020. Chris will also step down from the Audit Committee from 5 March 2020. Malcolm will not stand for re-election at the AGM on 23 April 2020. 

Dividend Timetable

Further to this announcement, in which the Board recommended a final dividend of 5.05 pence per ordinary share, the Company confirmed its dividend timetable as follows:

-ends-

CLS will be presenting to analysts at 9.00am on Thursday, 5 March 2020, 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 4868311

For further information, please contact:

CLS Holdings plc 

(LEI: 213800A357TKB2TD9U78)

www.clsholdings.com

Fredrik Widlund, Chief Executive Officer

Andrew Kirkman, Chief Financial Officer

+44 (0)20 7582 7766

Liberum Capital 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

Forward-looking statements

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

Chairman's statement

Delivering value for our stakeholders

Reflections on becoming Chairman

This is my first statement as Chairman of CLS and it is with gratitude and respect I take on this new challenge and opportunity. As an independent non-executive director, I have been part of the company for the last five years and I am proud of what we as a Board and a Group have achieved. I look forward, together with my colleagues, to continuing to drive the business forward over the coming years. Our team focus will be on maximising long-term shareholder value, whilst recognising our wider responsibilities and commitments to our stakeholders.

During the last five years, CLS has grown significantly and whilst the Company of today is larger it is also in a stronger position from a financial standpoint, the composition of the portfolio and with an experienced and proven management team.

With this background, CLS can use its unique position to take advantage of any opportunities that arise from current economic and political uncertainty.

I have been fortunate to have gained skills and experience from carrying out leading roles in real estate across most of Europe in different companies and across different asset classes. I look forward to being able to continue to contribute this experience to the success of CLS.

CLS has a distinguished heritage as a property company with a long-term approach to our investments. Our strategy remains clear, with a focus on ownership of non-prime offices in the three largest economies of Europe; the UK, Germany and France. We will also stay focused on cash flow and active asset management.

Performance and our property portfolio

2019 saw another strong year of financial and operational performance. EPRA NAV per share increased by 6.3% to 329.2 pence per share (2018: 309.8 pence) and total accounting return, including the dividends paid in the year, was 8.6% (2018: 10.8%). The value of our property portfolio rose as a result of £71.5 million of acquisitions net of disposals but more importantly from the increase in value of 3.0% in local currencies with Germany again delivering an outstanding performance with an uplift of 8.4%. This performance demonstrates the benefits of our diversified property portfolio, which is now worth over £2.0 billion, of which 53% is in the UK, 33% in Germany and 14% in France.

Sustainability

In the last year, the importance of sustainability across business, and especially in real estate, has gained real traction. Sustained and high-profile lobbying has led to governments, cities and industries revisiting their impacts on climate change. This has stimulated discussion across the real estate sector regarding more ambitious targets, protection against climate risk and our impact on the communities in which we invest.

For over a decade, CLS has had a long-term focus on sustainability as a key part of our strategy and through the active management of our assets. We have already made significant progress and at the beginning of the year, we launched our enhanced sustainability strategy. The key enhancements were: a widening of the scope we monitor and target; and the simplification of our approach towards a more embedded sustainable culture based on true values, knowledge and real results.

Our in-house sustainability team monitors changes in the external landscape and associated risks, evolving our strategy and its execution accordingly to continue to drive the long-term profitability of the business. Details of our work on sustainability are set out in the corporate, social and environmental responsibility section in our 2019 Annual Report and Accounts and more detail will be given in our sustainability report which will be published in spring 2020.

People and culture

We recognise that our people are fundamental to our success. We take seriously our responsibilities (which are now stated in the new UK Corporate Governance Code) to assess and monitor our culture to ensure that it aligns with our purpose, values and strategy. From our property visits with operational teams and Board meetings where we meet employees at all levels, to our social events that I and members of the Board have attended, I believe that we have a motivated and happy workforce that promotes a strong, open, entrepreneurial culture which is a key contributing factor to our success.

As part of our employee engagement, we have established a Workforce Advisory Panel which is chaired by Elizabeth Edwards, one of our experienced non-executive directors. I was pleased to see so many employees wanting to contribute to the Panel, which comprises employees from across the business and countries. Feedback from the Panel has been overwhelmingly positive but, as with any business, it has highlighted some areas where we could improve, and we will take these forward.

The other significant change in the year was the execution of a workstream around the purpose, vision and values of CLS. Essentially this work was codifying how we already operate as a business. Through the process, which involved consulting with all employees, a greater level of support from the workforce was achieved. I believe this shows how passionate our employees are about making CLS into one of the leading office space specialists and a supportive, progressive and sustainability focussed landlord.

Governance and stakeholder engagement

As I have highlighted in the Corporate Governance section of this report, CLS believes that good governance is essential to deliver strong performance. CLS takes its responsibilities very seriously and has always been cognisant of promoting the long-term success of the Company for all our stakeholders. This year, to ensure that we are clearly documenting these processes, we have more formally recorded these considerations in approving Board decisions.

As highlighted within the Remuneration section of this report, we have consulted with shareholders regarding the implementation of a proposed new incentive plan. In response to previous feedback from some shareholders, we are proposing to introduce a revised long-term incentive plan as well as align, where necessary, the policy with the new Code and shareholder body guidelines. The new remuneration policy will be put to a vote at this year's AGM.

Board changes

John Whiteley retired as Chief Financial Officer on 30 June 2019 and was succeeded by Andrew Kirkman from 1 July. John left with CLS on a firm financial footing and we all wish him well in his retirement. We are equally delighted to welcome Andrew to CLS and the Board is pleased with the strong start he has made.

As highlighted in Henry Klotz's statement last year, the Board was mindful that some non-executives had served over nine years and that the composition of the Board should be refreshed. We initiated an independent search and, reflecting the strength and reputation of CLS, we were able to recruit strong candidates. I am delighted to have welcomed Denise Jagger and Bill Holland to the Board as independent non-executive directors.

Denise is a member of both the Remuneration and Audit Committees and will replace Chris Jarvis as Remuneration Committee Chairman immediately after the AGM in April. Chris will also step down as Audit Committee member on 5 March 2020. Given his current experience and knowledge of the German real estate market, which we consider will continue be beneficial in executing our strategy, he will remain a non-executive director but will no longer be considered to be independent by the Board.

Malcolm Cooper steps down Audit Committee Chairman on 5 March 2020 and will be succeeded from 6 March 2020 as Audit Committee Chair by Bill. Malcolm, who will not be standing for re-election at the forthcoming AGM in April, has provided excellent advice and support during his term and I would like to thank him for all his hard work and contribution to the Group.

Finally, I want to thank Henry for his many years of service to the Group. Henry is an outstanding real estate professional and colleague. It is to his credit that, alongside management, he leaves CLS in such a favourable position.

Dividend

Reflecting our progressive dividend strategy, the Board is pleased to propose a final dividend of 5.05 pence per share resulting in a total dividend for the year of 7.4 pence per share. The 2019 dividend is an increase of 7.2% from last year which compares to the 2019 increase in EPRA NAV of 6.3%. The dividend is 1.6 times covered by EPRA earnings.

Looking to the future

There remains considerable uncertainty across global markets with continued low interest rates and, closer to home, the full extent of Brexit has yet to be clarified and implemented. However, real estate as an asset class remains attractive and we expect that capital allocation weightings from institutional investors will continue to increase. CLS is in a strong financial position with a clear strategy and a long-term perspective which I believe will allow us to withstand any challenges but also allow us to take advantage of the opportunities this may present.

Thank you

CLS places great emphasis on our collaborative team approach, our focus on tenants and our positive, supportive culture which all contribute to our success. On behalf of the Board, I want to thank everyone who has contributed to making 2019 another successful year.

Lennart Sten

Non-Executive Chairman

Chief Executive's review

A refocused portfolio from which to drive long-term earnings growth

Overview

This year was one of the busiest in CLS' history with a record level of property transactions and a heightened focus on our core activities. This active portfolio management resulted in £257.2 million of property acquisitions and £187.2 million of disposals as well as the disposal of our stakes in Catena and First Camp, and the remainder of our corporate bond portfolio. This active approach delivered a 6.3% increase in EPRA net asset value, a total accounting return of 8.6% and EPRA earnings of 12.0p, resulting in the Board proposing a 7.2% increase in our dividend.

An active year

2019 marked the completion of a two-year programme of refocusing the Group by selling non-core activities and those properties which no longer met our return criteria. We also continued to invest in all three of our geographic markets and see good opportunities in these countries for further growth going forward.

Our refocusing of the Group included the sales: in September of our 10.5% shareholding in Catena for £113.1 million after costs; and in November of our remaining corporate bond portfolio for £34.5 million, having reduced this holding over recent years. And, in March, we completed the sale of our 58% shareholding in First Camp for £28.7 million. All of these transactions helped achieve our objective of refocusing the Group to concentrate on our core property activities.

We committed more capital to acquisitions than in any other year, successfully finding opportunities in all of our countries. In total, we spent £257.2 million on 13 acquisitions (two of which completed at the start of 2020 for £32.8 million and one of which completed in 2019 for £9.8 million but had exchanged in 2018) with a weighted average net initial yield of 5.8%. Almost all the acquisitions shared similar characteristics with the potential for rental growth from lease re-gears to ERV, filling vacancy or refurbishment to increase rental levels. Whilst we are pleased with all our acquisitions, I thought it worth highlighting one in each country as a demonstration of our successful acquisition approach.

In the UK, we have started to see more acquisition opportunities offering good value particularly as institutional buyers have been less active. We exchanged on two buildings in a single transaction in October, acquiring Clockwork in Hammersmith and 6 Lloyds Avenue in the City of London for £66.7 million. The net initial yield of 6.2% was attractive and the buildings provide long-term asset management opportunities. We believe that the German market is attractive but, given increased competition, we have had to be resolute with our pricing discipline. In April, we exchanged on the acquisition of Puro in Ismaning, Munich for €32.0 million. The property is about 20% under-rented and we have plans for a €3 million refurbishment to upgrade and expand the building. The French market has presented fewer acquisition opportunities for us in recent years, but we remain positive on the markets in Paris, Lyon and Lille. In December, we completed the acquisition of two additional floors at Park Avenue in Lyon for €3.5 million, taking our ownership of the building to 86%. Whilst a relatively small transaction, it remains a strategic goal to own buildings fully where the economics stack up.

In 2019, we agreed the disposal of 28 properties across all three countries for £187.2 million, four of which completed at the start of 2020 for £9.2 million. Our disposal criteria remained unchanged: assets which were low yielding with limited asset management potential; investments for which the risk/reward ratio was unfavourably balanced, or the alternative use value is higher; and properties which were too small to have a meaningful impact. The most significant disposal was the sale of our UK regional portfolio of 19 assets for £65.0 million in December; executing on our strategy to focus on London and the South East. A case study on the total return from this investment is included later in this report. Excluding this disposal, the remaining properties were sold for a profit of £15.3 million, being 18% above book value, and a weighted average net initial yield of 3.6%.

We are currently progressing several significant developments and refurbishments, two of which have been submitted for planning permission. The submitted developments are a 10-floor office of 29,000 sq. ft (2,694 sqm) next to our Spring Mews property in Vauxhall, UK and in Germany we are looking to replace an existing office building in Fasanenhof, Stuttgart, with a new 141,000 sq. ft (13,099 sqm) office building over 6 floors. The developments are working their way through the planning system and we expect decisions in the first half of 2020 but recognise the possibility for delays outside of our control. We will also submit an application later in 2020 for a 6-floor office of c.43,000 sq. ft (3,995 sqm) in Maidenhead, UK. In addition, as part of our portfolio management, we have identified opportunities to expand the office capacity at two properties in Germany, as well as an ongoing refurbishment programme across the portfolio to drive further rental growth.

Active asset management

The value that our in-house teams create, and the closeness and interaction with our tenants, are some of the most important foundations for our long-term success. We have seen investors come and go in our markets, often motivated by short term trends or the type of properties that are in vogue at present. We do not believe in that approach. Our clear focus on offices, our tenants and the environment in our buildings builds long-term relationships that encourage retention and keep vacancy low. To that end, in 2019 we strengthened our property management teams in Germany and the UK with several new hires to continue to give the right level of service to our tenants.

At 31 December 2019, the value of the portfolio had increased by 3.0% in local currencies as a result of revaluation uplifts. The performance in Germany was again particularly strong with an increase of 8.4% driven by rental growth with ERVs growing 5.1% and hardening of capital rates. In the UK, like for like values increased by 0.3% driven by rental growth with ERVs growing 1.3%. However, when acquisition costs of c.6.8% on the £155.3 million acquisitions completed in the year are taken into account, overall UK values fell by 0.3%. France increased by 3.8% due to ERV growth of 2.5% while capital rates stayed relatively flat. In aggregate, the fair value uplifts of the portfolio added 14.1 pence per share to EPRA NAV (£57.4 million).

The overall Group vacancy rate in 2019 increased marginally to 4.0% (2018: 3.8%) but remains below our target of 5%. We believe this 5% target gives an appropriate balance between capturing income and cash flow, as well as giving sufficient opportunity to capture rental growth through new lettings.

In Germany, the net initial yield fell to 5.0% (31 December 2018: 5.4%) and the vacancy rate increased to 4.3% (31 December 2018: 4.2%). In the UK, the net initial yield fell to 5.4% (31 December 2018: 5.6%) following the sale of the regional portfolio and the vacancy rate increased to 4.1% (31 December 2018: 4.0%). In France, the net initial yield fell to 5.2% (31 December 2018: 5.3%) while vacancies rose to 3.1% (31 December 2018: 2.3%) due to the sale of the fully let Atelier Victoires.

Financial results

Profit before tax from continuing operations of £159.0 million exceeded last year (2018: £144.9 million) with similar revaluation gains and profit on disposal of properties at £66.0 million (2018: £65.1 million). However, the profit on the disposal of our stake in Catena and the sale of the bond portfolio of £40.4 million was higher than the gain last year (2018: £23.9 million).

EPRA earnings fell in 2019 to 12.0 pence per share (2018: 13.1 pence) through a combination of several factors including: strengthening of sterling; and lower finance income from a comparatively smaller bond portfolio.

At EPRA NAV level, the higher profit before tax was offset by higher exchange variances of £31.4 million (2018: £4.3 million gain) as Sterling appreciated 6.3% against the Euro. At the year-end, we had liquid resources of £259.4 million (2018: £130.6 million) in addition to £50.0 million of undrawn credit facilities to deploy into acquisition opportunities.

In 2019, we generated £48.9 million net cash from operating activities (2018: £48.0 million) with EPRA earnings of £48.9 million (2018: £53.5 million). Of this cash, £28.7 million (2018: £26.5 million) was paid as a dividend to shareholders. We balance the use of the cash generated between dividends and reinvestment in the business to drive the total accounting return to shareholders.

Sustainability

During 2019, one of the key areas for our sustainability activities was focused on embedding our approach to sustainability and social engagement across all our activities. This has resulted in a further reduction in carbon emissions at a property level which can be seen in the corporate, social and environmental responsibility section in our 2019 Annual Report and Accounts.

At the corporate level, we have focused on our stakeholder engagement, data transparency and knowledge sharing to enhance everyone's understanding of the impact they have and how they can make a difference. This approach was carried out through internal workshops on key subjects, such as fit-out standards and embodied carbon. We also conducted workshop days with our contractors and supply chain looking at what they can do to ensure they match our ambition.

Other improvements in the last year saw us expand our environmental clauses in our generic leases to foster better collaboration and data sharing with our occupiers. We also improved our sustainability due diligence checks on all new acquisitions and are continuing our rollout of smart metering across our existing assets to give us greater visibility of our impact on the environment. We are very pleased to have continued to increase our sustainability scoring in 2019 under both the CDP and GRESB metrics.

Overall, 2019 has been a year of good progress but we are even more excited for 2020 as we are implementing some significant projects to increase our sustainability performance including targeting to achieve BREEAM certifications on all managed assets. We will be setting out more detail about our results and plans with the publication of our 5th Sustainability Report in spring 2020.

Vision and values

CLS takes pride in our workforce, our culture, and our overall way of engaging with our employees and our other stakeholders. Our employee surveys have shown consistently high scores and we will be carrying out another survey this year to ensure that we remain close to our employees. The introduction of the Workforce Advisory Panel is another welcome forum to ensure a greater level of engagement.

As highlighted throughout this report, we carried out a significant piece of work to codify and clarify our Purpose, Vision and Values. Whilst much of what we have described has been inherent in the way we have conducted business, the engagement with all the employees throughout this work has been valuable to increase everyone's alignment with CLS' ambitions.

Outlook

This year was the end of a period of repositioning the property portfolio and increasing the focus of the business. This transactional activity has built the foundations for long-term sustainable earnings growth and reflects our ethos as a long-term responsible investor with a successful and consistent track-record. We finished the year in a strong financial position with significant liquid resources albeit we expect lower earnings growth in the short term as we now invest these funds into new, high yielding property acquisitions. Overall, we have a much stronger platform for long-term future growth.

We remain committed to the three countries in which we are invested and see good potential for further opportunities and growth. The UK portfolio is now concentrated on London and the surrounding commuter towns in the South East. This area remains a strong, liquid and long-term property market. The German market continues to present opportunities with its resilient economy, positive property fundamentals and a greater diversification of major cities. In France, we believe that the limited supply of offices particularly in Paris and Lyon will drive falling vacancy and rental growth.

The Group is well positioned and we are seeing attractive acquisition opportunities, particularly as the UK political situation has somewhat stabilised. I look forward to 2020 with confidence and to continuing our focus on delivering long-term, responsible growth and value for all our stakeholders.

Fredrik Widlund

Chief Executive Officer

Chief Financial Officer's review

Continued strong performance underpinned by low cost financing

I am pleased to present my first financial review as the CFO of CLS. I'm delighted to have joined a company with such a clear strategy, experienced management and a fantastic track-record, and which has delivered an excellent performancein 2019.

Summary

EPRA net assets per share rose by 6.3% to 329.2 pence (2018: 309.8 pence) and basic net assets per share by 7.1% to 295.1 pence (2018: 275.5 pence). Profit after tax from continuing operations of £135.2 million (2018: £132.8 million) generated basic earnings per share of 33.3 pence (2018: 30.5 pence) and EPRA earnings per share of 12.0 pence (2018: 13.1 pence).

CLS uses a number of Alternative Performance Measures ("APMs") alongside statutory figures. We believe that these assist in providing stakeholders with additional useful information on the underlying trends, performance and position of the Group. Note 3 to the Financial Statements gives a full description and reconciliation of our APMs.

Exchange Rates

Approximately 53% of the Group's business is conducted in the reporting currency of sterling and 47% in euros. Compared to last year, relative movements of sterling against the euro had a notable impact on the translation of our balance sheet and monetary assets recognised in the income statement: sterling's average rate strengthened against the euro by just 0.9% but at 31 December 2019 sterling was 6.3% stronger against the euro than twelve months previously.

Exchange rates to the £

Income statement

Rental income in 2019 of £107.7 million was £4.7 million higher than in 2018. Acquisitions and developments added £6.3 million whilst disposals led to a reduction of £1.3 million. Other lettings activity was flat with foreign exchange movements leading to a £0.4 million reduction. 

Other property income of £6.7 million (2018: £6.9 million) included hotel revenue from Spring Mews of £4.7 million (2018: £4.4 million) and dilapidations, surrender premiums and other one-off receipts of £2.0 million (2018: £2.5 million). In aggregate net rental income rose by 3.1% to £110.6 million (2018: £107.3 million).

We monitor the costs of running the business closely and the administration cost ratio (administration costs as a percentage of net rental income) is a Group key performance indicator. In 2019, the administration cost ratio was expected to increase, as personnel costs comprise the majority of these costs and there were a notable number of personnel changes across the business, including the Board. The administration cost ratio therefore rose to 17.7% (2018: 16.0%).

The net surplus on revaluation of investment properties of £57.4 million (2018: £62.8 million) demonstrated the benefit of our diversified approach with Germany again the strongest with an 8.4% rise in values and France rose by 3.8% (both in local currencies) whilst the UK fell by 0.3%.

We completed the disposal of twenty-four properties in the year for £178.1 million (a further four were exchanged for £9.2 million and completed in 2020) resulting in a profit of £8.6 million after costs and before tax (2018: £2.3 million).

At the start of September, CLS sold its entire 10.5% shareholding in Catena realising a profit on sale of £38.7 million (2018: £22.2 million fair value gain). During November, CLS sold its entire bond portfolio realising proceeds of £34.5 million and a profit on sale of £1.7 million. These disposals helped deliver our strategy of increasing the focus of the Group and provided resources to continue to capture opportunities in our core markets.

Finance income of £5.0 million (2018: £6.1 million) comprised: interest income of £2.1 million (2018: £4.2 million) from our comparatively smaller corporate bond portfolio; dividends from Catena of £2.2 million (2018: £1.7 million); and other interest of £0.7 million (2018: £0.2 million).

Finance costs of £29.4 million (2018: £26.5 million) included foreign exchange variances of £3.6 million (2018: £0.6 million) and fair value movements of derivative financial instruments of £0.5 million (2018: income £2.3 million), whilst 2018 was impacted by the loss on the early redemption of debt (£3.7 million). On a like for like basis, excluding: this loss; foreign exchange variances; fair value movements of derivative financial instruments, finance costs were £25.3 million (2018: £24.5 million) reflecting slightly increased interest costs as a result of the timing of acquisitions and disposals during the year.

The tax charge of 14.9% was below the weighted average rate of the countries in which we operate (19.8%), primarily due to the profit on disposal of our shareholding in Catena, which was not subject to tax.

Of the loss from discontinued operations of £0.5 million (2018: £14.9 million), £0.3 million profit (2018: £8.5 million loss) is attributable to the owners of the Company. This related to the disposal of First Camp for the period until sale on 7 March 2019.

Overall, EPRA earnings were 8.6% lower than last year at £48.9 million (2018: £53.5 million) and generated EPRA earnings per share of 12.0 pence (2018: 13.1 pence). The decline was primarily due to foreign exchange losses due to the strengthening of sterling and lower interest income.

Cash flow and net debt

As at 31 December 2019, the Group's cash balance had increased to £259.4 million (2018: £100.3 million cash and £30.3 million bonds as well as £77.5 million Catena shareholding). Net cash flow from operating activities generated £48.9 million, of which £28.7 million was distributed as dividends. Acquisitions of £237.2 million and capital expenditure of £16.7 million were partly funded by proceeds after tax from property disposals of £165.0 million. Moreover, the cash position increased as a result of the net drawdown of loans for £79.3 million, the sale of the Group's shareholding in Catena for £113.1 million and the disposal of the bond portfolio for £34.5 million.

Gross debt increased by £54.9 million to £897.2 million (2018: £842.3 million) due to the net drawdown of loans and movements in issue costs totalling £82.7 million offset by a fall of £27.8 million due to foreign exchange rate movements. Loans of £209.5 million were repaid in the year and £292.4 million of new or replacement loans were taken out. Year-end net debt fell to £632.3 million (2018: £706.3 million). In addition, CLS had undrawn bank facilities of £50.0 million, of which £30.0 million was committed. At 31 December 2019, the weighted average unexpired term of the Group's debt was 3.5 years (2018: 3.5 years).

The weighted average cost of debt at 31 December 2019 was 2.42%, 1 basis point ("bps") lower than 12 months earlier and a new all-time low for CLS. The repayment of more expensive debt accounted for a fall of 11 bps but this was partly offset by: a greater amount of more expensive sterling refinancing compared to a lower amount of cheaper euro refinancing accounting for an increase of 7 bps; and the weakening of the euro reduced the weighted average contribution of euro denominated debt albeit there was some benefit from lower interest rates resulting in a net 3 bps increase. In 2019, interest cover remained at a healthy level of 3.4 times (2018: 3.8 times).

EPRA net asset value and gearing

At 31 December 2019, EPRA net assets per share were 329.2 pence (2018: 309.8 pence), a rise of 6.3%, or 19.4 pence per share. The main reasons for the increase were investment property valuation gains of 14.1 pence per share, EPRA earnings per share of 12.0 pence, the profit realised on the sale of our stake in Catena of 8.8 pence per share, less dividends of 7.1 pence per share, foreign exchange movements of 7.7 pence per share and other movements of 0.7 pence per share.

Balance sheet loan-to-value (net debt to property assets) at 31 December 2019 was 31.4% (2018: 36.7%) and the loan-to-value of secured loans by reference to the value of properties secured against them was 48.0% (2018: 51.0%). The value of properties not secured against debt fell to £143.6 million (2018: £283.6 million).

Financing strategy

The Group's financing strategy remains to hold a significant proportion of its investment properties in single-purpose vehicles ("SPVs") financed primarily by non-recourse bank debt in the currency used to purchase the asset.

In this way: credit and liquidity risk can be managed easily; around 47% of the Group's exposure to foreign currency is naturally hedged; and an efficient use can be made of the Group's assets. In addition, the Group has a number of portfolio loans or secured notes which have tended to arise where a portfolio is acquired, such as the German properties in 2017, and each is financed by a single loan.

The advantage of these portfolio loans is that they can be structured to afford the Group greater flexibility such that properties, with the appropriate attributes, can be substituted into and out of such portfolios. Currently all of the Group's borrowing is on a secured basis. However, we are going to explore the use of more portfolio lending on a secured or unsecured basis to give the Group increased flexibility, more diverse sources of financing and/or longer maturity. Hence, a number of recent acquisitions in the UK have not yet been encumbered. At 31 December 2019, the Group had 49 loans (40 SPVs, 7 portfolios and 2 facilities) from 27 banks.

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 Group chose to take advantage of the conditions, fixing most of the medium-term debt taken out during the year. In 2019, the Group financed or refinanced 9 loans to a value of £292.4 million at a weighted average duration of 5.2 years and at a weighted average all-in rate of 2.65%, and of these £177.9 million were fixed at a weighted average all-in rate of 2.50%. Consequently, at 31 December 2019, 77% of the Group's borrowings were at fixed rates or subject to interest rate swaps, 1% were subject to caps and 22% of debt costs were unhedged; the fixed rate debt had a weighted average maturity of 3.6 years, and the floating rate 3.0 years.

The Group's financial derivatives, predominantly interest rate swaps, are marked to market at each balance sheet date. At 31 December 2019 they represented a net liability of only £4.1 million (2018: £5.1 million).

Distributions and total return to shareholders

In April 2019, a final dividend for 2018 of 4.7 pence per share (£19.1 million) was paid. In September, an interim dividend for 2019 of 2.35 pence per share (£9.6 million) was paid. The proposed final dividend for 2019 is 5.05 pence per share (£20.6 million). This represents a full year distribution of 7.4 pence per share (£30.1 million) which was covered 1.6 times by EPRA earnings per share.

The 2019 dividend is an increase of 7.2% over the prior year and the total accounting return to shareholders, being the increase in EPRA NAV plus the dividends paid in the year, was 8.6% (2018: 10.8%).

Andrew Kirkman

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.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 2019

In 2019, our target Total Shareholder Return (absolute) was between 12% and 16%.

Progress

In 2019, the Total Shareholder Return of 47.1% reflected the rise in the share price in the year which was an outperformance compared with the median of the sector which recorded a TSR of 38.5%.

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 26 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 2019

In 2019, our target Total Shareholder Return (relative) was between the median and upper quartile.

Progress

In 2019, the TSR was 47.1%, making CLS the 10th ranked share of the FTSE 350 Real Estate Super Sector Index of 27 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 2019

In 2019, our target Total Accounting Return was between 6% and 9%.

Progress

In 2019, the Total Accounting Return was 8.6%.

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 2019

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 2019, the vacancy rate was 4.0%, or 4.1% 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.

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 2019

In 2019, our target administration cost ratio was between 16.5% and 14.5%.

Progress

In 2019, the administration cost ratio was 17.7% (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 2019, the cost of debt (2.42%) was 251 bps below the net initial yield (4.93%).

· 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 2019, we achieved a 3.1% reduction (2018: 15.9%).

· Customer retention - through our active asset management we seek to retain more than 50% of our tenants by value. In 2019, 57.2% of our leasing transactions were lease renewals (2018: 52%).

· 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 2019, the national rate was 930 per 100,000 people; CLS's was 105. This rate is calculated by dividing the number of accidents reported in the year by the number of people occupying our buildings.

Risk management

Our approach to risk

Overview

For CLS, effective risk management is key to creating sustainable, long term value in a responsible manner. Whilst the ultimate responsibility for risk management sits with the Board, the effective day-to-day operational management of risk lies with the Executive Committee.

This operational risk management is essential to: enable the business to exploit profitable business opportunities in a disciplined way; avoid or mitigate risks that can cause loss, reputational damage or business failure; and enhance resilience to external events.

The Board acknowledges that the Directors are responsible for the Group's systems of internal control and risk management, and has established procedures which are designed to provide reasonable assurance against material misstatement or loss.

Our risk management structure is illustrated below:

Board

· Overall responsibility for risk management and internal controls

· Monitors the long term viability of the business

· Sets strategic objectives and considers risk as part of this process

· Determines the level of risk appetite

· Sets Executive Committee delegated authority limits

Audit Committee

· Key oversight and assurance function on risk management, internal controls and viability

· Reports to the Board on the effectiveness of risk management processes

Executive Committee

· Day to day operational oversight of risk management

· Consideration of business wide decisions and their impact on risk appetite

Senior Operations Board

· Oversight function of business activities and risk considerations

· Identifies strategic objectives and assesses risk

Risk Management Framework

The risks, being both principal and emerging, which the Group faces are reviewed and monitored in Senior Operations Board meetings throughout the year and presented to the Board and Audit Committee at least every six months for further discussion and oversight. The Senior Operations Board comprises the CEO and CFO, a representative from each regional business as well as core Group functions such as HR and IT.

In addition, major business wide decisions such as property acquisitions, disposals and significant strategy changes are discussed at the Executive Committee Meetings and reviewed by the Board before implementation, subject to authorisation limits. The Executive Committee meets weekly and comprises the CEO, CFO and Head of Group Property.

Risk management processes, which also include health and safety, human resources and sustainability risk management, are employed within the business and updates are reported to the Board at each meeting. Each business area operates a process to ensure that key risks are identified, evaluated, managed and reviewed appropriately. For example:

· a monthly asset management portfolio review is prepared and circulated to the Board which outlines key business risks, developments and opportunities; and

· the development team convenes risk and opportunity workshops with the design team at the feasibility stage of development projects. Regular reviews are then part of the design development to ensure the continuous identification and management of risks throughout the development process.

An update on risks and the control environment is presented at each Audit Committee meeting, including the results of internal control review procedures undertaken in the period.

The potential risks associated with loss of life or injury to members of the public, customers, contractors or employees arising from operational activities are continually monitored. Competency checks are undertaken for the consultants and contractors we engage and regular safety tours of our assets are undertaken by the property management team.

In addition, the wellbeing of our employees is a key value for the Group and various activities are supported by the Board including the delivery of annual mental health workshops and company-funded employee contributions to promote healthy lifestyle initiatives such as gym memberships. In this way some of the people risks are somewhat mitigated.

Risk appetite

The Board recognises its overall responsibility for undertaking a robust risk assessment and for establishing the extent to which it is willing to accept some level of risk to deliver its strategic priorities.

Our risk appetite is reviewed at least annually and assessed with reference to changes both that have occurred, or trends that are beginning in the external environment, and changes in the Principal risks and their mitigation. These will guide the actions we take in executing our strategy. Whilst our appetite to risk will vary over time, in general we maintain a balanced approach to risk. The Group allocates its risk appetite into five categories:

Very Low: Avoid risk and uncertainty

Low: Keep risk as low as reasonably practical with very limited, if any, reward

Medium: Consider options and accept a mix of low and medium risk options with moderate rewards

High: Accept a mix of medium and high risk options with better rewards

Very High: Choose high risk options with potential for high returns

The Board has assessed its risk appetite and current status for each of the Group's Principal Risks as follows:

The Board's risk appetite in relation to the Group's principal risks is broadly aligned. As shown in the table above, there is divergence of risk appetite and risk status in relation to business interruption and political and economic principal risks. The Board accept there are factors in relation to these principal risks that are outside of the Group's control and are likely to change over time. Mitigating actions have been put in place to ensure these risks are adequately managed and monitored to reduce the potential impact on the Group. The Board also recognise that not all risk can be fully mitigated and that they need to be balanced alongside commercial returns for shareholders.

Principal risks

We do not consider there has been any material change to the nature of the Group's Principal Risks over the last 12 months however several risks have had a change in risk profile as a result of internal or external forces, or a combination of both. The principal risks, the Board's appetite for risk in these areas in the context of executing our strategy and the focus of our risk mitigation actions are set out below.

KPI Link key:

· TSR(A) - Total Shareholder Return Absolute

· TSR(R) - Total Shareholder Return Relative

· TAR - Total Accounting Return

· VR - Vacancy Rate

· ACR - Administration Cost Ratio

Business Model Link key:

· P - We acquire the right properties

· F - we secure the right finance

· AM - we deliver value through active management and cost control

· HS - we continually assess whether to hold or sell properties

Emerging risks

We define emerging risks to be those that may either materialise or impact over a longer timeframe. They may be a new risk, a changing risk or a combination of risks for which the broad impacts, likelihoods and costs are not yet well understood, and which could have a material effect on CLS' business strategy.

Emerging risks may also be superseded by other risks or cease to be relevant as the internal and external environment in which we operate evolves. The Senior Operations Board, which has representatives from each area of the business, is tasked with identifying emerging risks for the business and discussing what impact these risks may have on the business and what steps we should be taking to mitigate these risks. The Board reviews these assessments on an annual basis.

A non-exhaustive list of some of the current emerging risks relevant to the Group and time when they may have a material effect on the business are set out below:

Viability Statement

In accordance with provision 31 of the Code, the Board has assessed the prospects of the Group over a longer period than the twelve months that has in practice been the focus of the Going Concern statement.

The Board concluded that the Viability Statement should correspond with the way in which the Group models its forecasts. The Group produces a budget for the current year and forecasts over a further three years reflecting the Group's business model, strategy, and risk appetite, including the potential impact of Brexit. The Board considers this period to be the most appropriate as it provides a detailed and realistic forecast. The forecast is built up from a tenant level and considers the Group's weighted average lease length of 4.7 years (2018: 5.3 years) and the maturity profile of the Group's debt of 3.5 years (2018: 3.5 years).

The forecasts provide a comprehensive view of the Group's entire operation, covering:

· cash flows;

· financial resources;

· long-term funding;

· capital expenditure commitments; and

· administration costs;

Cash flow forecasts are updated weekly and reviewed by the executive directors. The budget and three year forecasts are set in November and updated in May and August to take into account changes to assumptions and are reviewed by the Board.

As explained in the Audit Committee report, the forecasts are also stress-tested to reflect our principal risks, ensuring the Group has sufficient resources in severe cases, such as a steep property downturn, the loss of key tenants and significant rises in the costs of medium-term funding.

The Committee remained of the view that the statement should correspond with the way in which the Group models its forecasts, being the current year plus a further three years. The way in which the model was stress tested for changes in the Group's operating environment were considered appropriate and clearly supported the statement.

As a result, the Directors can confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.

Going concern

The current macro-economic conditions have created a number of uncertainties. The Group's business activities, and the factors likely to affect its future development and performance, are set out in the Strategic Report within the 2019 Annual Report and Accounts. The financial position of the Group, its liquidity position and borrowing facilities are described in the Strategic Report within the 2019 Annual Report and 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 and covenants 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 further details of this analysis are set out in the Viability Statement above. Therefore, the Directors continue to adopt the going concern basis in preparing the annual report and accounts.

Business review: United Kingdom

Repositioning for long-term growth

Value of investmentproperties

£1,059.8m

Percentage of Group'sproperty interests

53%

Numberof properties

45

Numberof tenants

253

Vacancyrate

4.1%

Lettable space

2.2m sq ft

Government andmajor corporates

57.0%

Weighted average lease length to end

4.8 years

Market overview

The UK economy held up well in 2019, with GDP growth of 1.4%. For much of the year the property market was influenced by Brexit and other economic uncertainty which led to less movement of tenants and significantly lower investment volumes (2019: c.£55 billion, 2018: c.£65 billion). However, CLS outperformed this trend with greater letting activity than in 2018 and also found more acquisition opportunities as a result of less active institutional buyers. Going forward we see further opportunities with London and the South East remaining attractive given supportive long-term fundamentals.

Acquisitions

As highlighted, the UK market remains attractive with CLS exchanging on 9 acquisitions in and around London for £188.1 million at an average net initial yield of 5.8%. Two of the acquisitions for £32.8 million completed at the start of 2020. On the whole, the acquisitions presented active asset management opportunities in terms of lease re-gears, vacancy reduction and/or refurbishment to capture higher rents.

Disposals

In 2019, we exchanged on the disposal of 23 properties for £94.1 million with three of these properties, for £8.4 million, completing at the start of 2020. The most significant transaction was the disposal of the UK regional portfolio of 19 properties for £65.0 million. Following major lease re-gears, the properties had less active asset management potential and the sale of the portfolio is in line with our strategy of actively recycling our capital and focusing the UK portfolio on London and the South East. The average net initial yield of all the disposals was 6.9% but this is distorted by the strategic decision to exit the regions with the net initial yield on the other disposals being 2.9%.

Asset management

The vacancy rate in the UK slightly increased to 4.1% at 31 December 2019 (2018: 4.0%) largely driven by the acquisition of some vacancy and the disposal of the fully-let UK regional portfolio. In 2019, we let or renewed leases on 261,133 sq. ft (24,260 sqm) and lost 303,327 sq. ft (28,180 sqm) of space from expiries or new vacancies. Excluding those arising from contractual indexation uplifts, 67 rent reviews, lease extensions and new leases added £6.8 million of rent at an average of 2.2% above 31 December 2018 ERVs. The portfolio was 9.2% reversionary at the year end.

Developments and refurbishments

In 2019, a planning permission application was submitted for a new 29,000 sq. ft (2,694 sqm) 10-floor, office development at Vauxhall Walk next to our Spring Mews property and we expect a decision in the first half of 2020. During 2020 we will submit an application for a 6-floor (43,000 sq. ft (3,995 sqm)) office development in Maidenhead.

A number of refurbishments to capture rental increases are ongoing with the most significant: at Apex Tower, as highlighted above; and about to start at Prescot Street. Smaller schemes are taking place at CI Tower and Great West House as well as a rolling programme at Chancery House.

Valuation

The UK portfolio was valued at £1,059.8 million at the year end, which reflects a 0.3% year on year valuation decrease. The like for like valuation increase was 0.3% but the valuation fell after taking acquisition costs into account. The yield fell to 5.4% (2018: 5.6%) reflecting the sale of the UK regional portfolio. Like for like contracted rents rose by 1.3% whilst ERVs increased by 1.3%.

Business review: Germany

Actively looking to invest in larger cities

Value of investmentproperties

£667.0m

Percentage of Group'sproperty interests

33%

Numberof properties

30

Numberof tenants

349

Vacancyrate

4.3%

Lettable space

3.2m sq ft

Government andmajor corporates

30.7%

Weighted average leaselength to end

4.6 years

Market overview

The German economy, which is heavily export-led, slowed somewhat in 2019 but still grew by 0.6% given robust consumer and service sectors. Despite some manufacturing job losses, overall employment stood at record levels. In the office market, vacancy levels were at record lows and investment volumes were at record highs (2019: c.€70 billion, 2018: c.€60 billion). These two factors drove growth in capital values and rents. Market sentiment for 2020 remains positive with investors viewing Germany as a "safe-haven" given its diversified economy, which is forecast to grow in 2020 and low interest rates. Whilst the supply pipeline has increased, more than half of the supply under construction is pre-let. The continued demographic shift to the larger cities also reinforces our strategic focus in Germany.

Acquisitions

In 2019, despite strong competition, we acquired two well-located, multi-let offices in Germany for a combined total of €62.5 million. PURO in Munich, comprising 140,717 sq. ft (13,073 sqm), was acquired for a net initial yield of 5.1% and a reversionary yield of c.6.4%. Office Connect in Cologne, comprising 140,491 sq. ft (13,052 sqm), was also acquired for a net initial yield of 5.1% with a reversionary yield estimated to be over 6%. Further details are given in our 2019 Annual Report and Accounts. In total, we submitted offers for properties worth over €1 billion but we were not willing to comprise on price and/or due diligence. We will maintain this discipline going forward but continue to look for acquisition opportunities, particularly those with reversionary potential or the ability to increase the lettable space.

Disposals

We continued, on a selective basis, to sell properties where we have driven value through active asset management but which now have a less favourable long-term risk/return profile. In July, we exchanged on two disposals, for a combined €57.2 million at a net initial yield of 4.1%, which completed before the end of September. As highlighted above, East Gate in Munich was sold for €45.3m. The property, which was refurbished and then re-let, achieved a profit on sale of €2.5m. Schanzenstrasse in Düsseldorf was sold for €11.9 million, 76% above the 31 December 2018 valuation. The office property, which was close to obsolescence, was sold to a local residential developer.

Asset management

The vacancy rate in Germany increased to 4.3% (2018: 4.2%) due to letting activity. We let or renewed leases on 316,468 sq. ft (29,401 sqm) and lost 340,255 sq. ft (31,611 sqm) of space from expiries or new vacancies. Excluding those arising from contractual indexation uplifts, 60 rent reviews, lease extensions and new leases added €7.0 million of rent at an average of 6.6% above 31 December 2018 ERVs. On a like-for-like basis, ERVs rose by 5.1% in the year and at the end of 2019 the portfolio was 12.6% net reversionary. As a result of increasing local ERVs, we expect further rental growth to be captured in 2020 through letting vacant or existing space.

Developments and refurbishments

Our existing portfolio offers a number of development and refurbishment opportunities. The most significant development, which we are currently pursuing, is for our Vor dem Lauch building in Stuttgart. Planning for a new office development with c.141,000 sq. ft (13,099 sqm) lettable space, over 50% larger than the current building, was submitted in August 2019 with a planning decision expected in spring 2020. In addition, we are progressing extension opportunities for: c.2,000 sqm at Bochum for our existing tenant with a planning decision expected in spring 2020; and c.3,500 sqm at Adlershofer Tor in Berlin with a planning application submission expected in the first quarter of 2020.

Valuation

The German portfolio was valued at €785.9 million at the year end, which reflects an 8.4% year on year valuation increase in local currency and a net initial yield of 5.0% (2018: 5.4%). The main drivers have been the increase in ERVs especially in Berlin and Munich plus the ongoing yield compression in all markets in which CLS is invested. Like-for-like ERVs increased by 5.1% and like-for-like contracted rent by 1.2% as we have actively sought to capture rental growth.

Business review: France

Delivering value from existing assets

Value of investmentproperties

£285.3m

Percentage of Group'sproperty interests

14%

Numberof properties

22

Number of tenants

177

Vacancyrate

3.1%

Lettable space

0.9m sq ft

Government andmajor corporates

54.5%

Weighted average lease length to end

5.0 years

Market overview

The French economy proved resilient in 2019 with GDP growing by 1.2%. Whilst, growth forecasts have been downgraded across much of the world due to uncertainty, trade wars and a perceived global slowdown, France's economic performance offered a degree of stability which was viewed positively by property investors. Property investment volumes in France in 2019 were substantially higher at c.€36 billion (2018: c.€33 billion) as a result of this economic stability and a lack of new supply.

Acquisitions

In March 2019 we completed the acquisition of Les Reflets in Lille, which had exchanged in December 2018, for €11.4 million reflecting a net initial yield of 6.6%. Les Reflects is a 44,756 sq. ft (4,158 sqm) multi-let office building with annual rent of €0.7 million. In December 2019, in-line with our strategy to control fully our co-owned offices, we acquired two additional floors at Park Avenue in Lyon-Villeurbanne. The acquisition for €3.5 million was of 12,486 sq. ft (1,160 sqm) of offices which are single let on a long-term lease with a net initial yield of 6.2%. As a result of this purchase, we now own 86% of the building.

Disposals

In July 2019, CLS sold Ateliers Victoires 21,500 sq. ft (2,028 sqm) in Paris for €42.0 million. The disposal price reflected a net initial yield of 3.03% and a net profit of €6.9 million. A case study highlighting the substantial refurbishment and successful letting of the building before its eventual sale is detailed in our 2019 Annual Report and Accounts. Continuing our policy of disposing of properties too small to have a meaningful impact on the group, in December we unconditionally exchanged on the sale of Foch in la Garenne-Colombes in Paris. The 1,948 sq. ft (181 sqm) building was sold for €0.9 million at a net initial yield of 5.5%. The sale completed in February 2020.

Asset management

The vacancy rate in France increased to 3.1% (2018: 2.3%) mainly because of the sale of the fully let Atelier Victoires. In 2019, we let or renewed leases on 71,475 sq. ft (6,647 sqm) and lost 88,722 sq. ft (8,251 sqm) of space from expiries or new vacancies. Excluding those arising from contractual indexation uplifts, 31 rent reviews, lease extensions and new leases added €1.7 million of rent at 31 December 2018 ERVs. On a like-for-like basis, ERVs rose 2.5%, and at the end of 2019 the portfolio was broadly rack-rented.

Developments and refurbishments

Due to the strategic location of CLS' Quatuor building in Montrouge in front of the future Grand Paris train station, we have appraised an outline scheme design for a 10,000 sqm new office building. Further work will be performed in 2020 around land assembly option agreements as well as progressing a planning permit. In addition, a series of refurbishments will take place in 2020 to upgrade our buildings, in particular enhancing their environmental sustainability.

Valuation

The French portfolio was valued at €337.3 million at the year end, which reflects a 3.8% year on year valuation increase in local currency and a net initial yield of 5.2% (2018: 5.2%). The property valuation increase was in addition to the €6.9 million profit on the disposal of Atelier Victoires, which sale also resulted in the slight increase in net initial yield.

Property portfolio by value

The below charts show the value of the property portfolio which comprises investment property, properties held for sale and hotel.

1 The above tables comprise data of the investment properties and properties held for sale. They exclude owner occupied, land and hotel.

Directors' responsibility statement

Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with 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 judgements and accounting estimates that are reasonable and prudent;

· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:

· properly select and apply accounting policies;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

· make an assessment of the Group's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

· the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

This statement of responsibilities was approved by the Board on 4 March 2020.

Approved and authorised on behalf of the Board

David Fuller BA FCIS

Company Secretary5 March 2020

Group income statement

for the year ended 31 December 2019

Group statement of comprehensive income

for the year ended 31 December 2019

Group balance sheet

at 31 December 2019

The financial statements of CLS Holdings plc (registered number: 02714781) were approved by the Board of Directors and authorised for issue on 5 March 2020 and were signed on its behalf by:

Mr F Widlund Mr A Kirkman

Chief Executive Officer Chief Financial Officer

Group statement of changes in equity

for the year ended 31 December 2019

Group statement of cash flows

for the year ended 31 December 2019

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. The Group's principal operations are carried out in the United Kingdom, Germany and France.

The Company is registered and incorporated in the UK, registration number 02714781, 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 2019 Annual Report and Accounts will be posted to shareholders on 23 March 2020 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 2019. 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. 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. Those accounts give a balanced, true and fair view of the assets, liabilities, financial position and profit and loss of the Group and the undertakings included in the consolidation taken as a whole.

The financial information set out in this announcement does not constitute the Group's financial statements for the year ended 31 December 2019 or 31 December 2018 as defined by Section 434 of the Companies Act 2006. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting.

The auditors, Deloitte LLP, have reported on those accounts and their reports on both the 2019 and 2018 accounts 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.

Going Concern

The Group's business activities, and the factors likely to affect its future development and performance are set out in the Strategic Report within the 2019 Annual Report and Accounts. The financial position of the Group, its liquidity position and borrowing facilities are described in the Strategic Report within the 2019 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 and covenants 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, the Directors 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 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

The Group's results for the year ended 31 December 2019 by operating segment were as follows: 

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

Other segment information

3. Alternative Performance Measures ("APMs")

APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

Introduction

The Group has applied the October 2015 European Securities and Markets Authority ("ESMA") guidelines on APMs and the November 2017 Financial Reporting Council ("FRC") corporate thematic review of APMs in these results, whilst noting ESMA's December 2019 report on the use of APMs. An APM is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS.

Overview of our use of APMs

The Directors believe that APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs assist our stakeholder users of the accounts, particularly equity and debt investors, through the comparability of information. APMs are used by the Directors and management, both internally and externally, for performance analysis, strategic planning, reporting and incentive-setting purposes.

APMs are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including peers in the real estate industry. There are essentially two sets of APMs which we utilise, and which are reconciled where possible to statutory measures below:

1. Existing EPRA APMs and similar CLS APMs

CLS monitors the Group's financial performance using APMs which are European Public Real Estate Association ("EPRA") measures as these are a set of standard disclosures for the property industry and thus aid comparability for our stakeholder users. The two key APMs for CLS, which are in accordance with the November 2016 EPRA guidelines, are:

· EPRA Net Asset Value which excludes certain items not expected to crystallise in a long-term investment property business model, such as CLS'; and

· EPRA Earnings which gives relevant information to investors on the long-term performance of the Group's underlying property investment business and an indication of the extent to which current dividend payments are supported by earnings.

Whilst CLS primarily uses these two measures, we have also disclosed other EPRA metrics as well as disclosing the measures that CLS prefers for certain categories. New EPRA Net Asset Value metrics were published by EPRA in October 2019 which come into force from 1 January 2020, at which point CLS will start using them. From 2020 CLS will start utilising EPRA Net Replacement Value ("NRV") instead of EPRA NAV as a key APM as we believe that this will continue to reflect the long-term nature of our property investments most accurately.

2. Other APMs

CLS uses a number of other APMs, many of which are commonly used by other industry peers, for example Loan to Value, and these APMs are reconciled below.

Changes to APMs

There have been no changes to the Group's APMs in the year with the same APMs utilised by the business being defined, calculated and used on a consistent basis.

Reconciliation of APMs

Set out below is a reconciliation of the APMs used in these results to the statutory measures.

1. Existing EPRA APMs and similar CLS APMs

i) Earnings - EPRA Earnings

ii) Net asset value - EPRA NAV and EPRA NNNAV

iii) Yield

EPRA Net Initial Yield ("NIY")

EPRA NIY is calculated as the annualised rental income based on the cash rents passing at the balance sheet date less non-recoverable property operating expenses, divided by the gross market value of the property (excluding those that are under development, held as PPE or occupied by CLS).

EPRA "Topped-up" NIY

EPRA "topped-up" NIY is calculated by making an adjustment to EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents).

iv) Vacancy

CLS Vacancy

CLS has historically opted to use our own KPI regarding vacancy as we believe that this provides a more accurate reflection of occupancy levels in our portfolio and provides a more prudent KPI as a large proportion of our portfolio is under rented.

v) Cost ratios

CLS Administration Cost Ratio

CLS' administration cost ratio represents the cost of running the property portfolio relative to its net income. CLS uses this measure to monitor the efficiency of the business as it focuses on the administrative cost of active asset management across three countries. We recognise that the cost ratio is higher than some other UK listed property companies given the additional costs for our in-house model and diversified approach. We would expect both cost ratios to improve in the future as there were several one-off costs in 2019 and as the scale of CLS increases. 

2. Other APMs

i) Total Accounting Return

ii) Net borrowings and gearing

iii) Balance sheet loan to value

iv) Dividend cover

iv) Interest cover

4. Profit for the year

Profit for the year has been arrived at after charging:


Other services provided to the Group by the Company's auditor consisted of the 2019 interim review of £37,000 (2018: £32,000) and tax services of £nil (2018: £20,000).

5. Finance income

6. Finance costs

7. Taxation

A deferred tax charge of £0.4 million (2018: credit £0.6 million) was recognised directly in equity (note 16).

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 19.8% (2018: 19.5%) was derived by applying to their relevant profits and losses the rates in the jurisdictions in which the Group operated.

The standard UK rate of corporation tax applied to profits is 19.0% (2018: 19.0%).

8. Earnings per share

9. Net assets per share

10. Investment properties

The investment properties, properties held for sale and the hotel and landholding detailed in note 11 were revalued at 31 December 2019 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 independent, professionally qualified valuers, Cushman and Wakefield. The total fees, including the fees for this assignment, earned by Cushman and Wakefield from the Group is less than 5% of their total revenues in each jurisdiction.

Property valuations are complex and require a degree of judgement and are based on data which is not publicly available. 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 £99.3 million whilst a 25 basis point increase would reduce the fair value by £109.2 million. A decrease in the ERV by 5% would result in a decrease in the fair value of the Group's investment property by £84.4 million whilst an increase in the ERV by 5% would result in an increase in the fair value of the Group's investment property by £65.1 million.

Investment properties included leasehold properties with a carrying amount of £57.8 million (2018: £73.3 million).

Interest capitalised within capital expenditure in the year amounted to £nil (2018: £nil).

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 92% of investment properties (and the hotel detailed in note 11) are secured against debt.

11. Property, plant and equipment

The 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. Other financial investments

1. The adoption of IFRS9 from 1 January 2018 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.

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

13. 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 (2018: nil). No trade and other receivables were interest-bearing.

Management have concluded that there is no material difference between the expected credit loss model as prescribed by IFRS 9 and the previously used provisioning method based on past evidence of default.

14. Cash and cash equivalents

At 31 December 2019, Group cash at bank and in hand included £12.9 million (2018: £21.8 million) which was restricted by a third-party charge.

15. Trade and other payables

16. 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 16.5% (2018: 18.2%), 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 2019 the Group did not recognise deferred tax assets of £1.4 million (2018: £1.1 million) in respect of losses amounting to £8.3 million (2018: £6.0 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 in 2018 to corporate bonds carried at below cost. Losses recognised as deferred tax assets can be carried forward without restriction.

17. Borrowings