Cls Holdings Usa Inc

Good morning and welcome to this live presentation of CLS Holdings PLC's full year results 2021. I'm Fredrik Vedlund, Chief Executive and I'm here with Andrew Kirkman, our CFO. The world is changing and as a scene setter, I would like to start with the words at the front of this presentation, location, quality, flexibility. You might have expected location, location, location, but let me explain. The locations we invest in is still the most important success factor and we will continue to invest in and near large cities with great transportation links. What has changed is the need to ensure that offices are of a high quality both from a customer perspective and a sustainability perspective. And this means that the lot size is increasing to justify the increasing investments required. CLAS has always been flexible when it comes to lease length, breaks, or distributions to fit-outs, and this is now becoming the norm in the market. Different customers also need different things, and in addition to more traditional leases, which will still be the vast majority, we're also continuing the expansion of our plug-and-play flexible office under the Brace brand. We will present you with the full year results, but also what we see going forward and in the markets. So let me start with an overview of the year. We had a year of two halves and the second half was much stronger. We did 40% of full year leases in the fourth quarter and vacancy fell from 7.7% to 5.8% in the second half. Valuation was up in all three countries. It's now 2.3 billion sterling, as can be seen on the right. EPRA NTA was up 1.5% and NAV was up 4.7%. EPRA EPS was down from 12.2 pence to 11.3 pence from higher vacancy and FX, despite some offset from cost reductions. We launched our fully-costed Net Zero 2030 pathway. And with inflation and interest rates increasing, we are very pleased that 85% of our debt is fixed and over 50% of rents are indexed linked. Dividend was up 2% to 7.7p per share and the policy will be reviewed following the conversion of our UK business into a REIT. We also have excellent opportunities in the existing portfolio, which we will talk about shortly. So on the next slide, I would like to talk in more detail about evaluations. Overall, the portfolio was up 1.6% in 2021, and on a like-for-like basis, it was up 1.9%. In the UK, valuations were up 0.7% for the year, with a strong recovery in the second half. The first half was down 0.6%. Key drivers here were government leases and development opportunities in central London. In Germany, valuations were up 3.1% for the year, 0.7% in the first half, and a strong second half from significant letting activity. In France, valuations were up 0.3% for the year. They were flat in the first half and mainly driven by vacancy reduction in the second half. ERV was up in the UK and Germany with 1.3% and 0.6% respectively, while France was down 1.6%. We saw some minor yield compression in all our three countries. Next, acquisitions and sales. We had a busy year with 14 transactions in 2021 and we have so far in 2022 exchanged or completed on a further four transactions. We're continuing to improve the portfolio and as you can see from the numbers, we're selling smaller assets and buying bigger and better. Starting with acquisitions, we acquired one property in the UK in Watford with over 50% of government income, but also with some good asset management opportunities. In Germany, we acquired five properties, three in a portfolio and two individual properties. We deliberately targeted properties with some vacancy and the reversionary yield from the acquisition was over 6%. In 2022, we have also exchanged on a further two properties in Germany for 76 million pounds. On the disposal side, we sold eight properties which were smaller or had a higher alternative value. Three of them were in the UK, two was in Germany and three in France. Overall in 2021, we acquired for circa 165 million pounds and sold for 37 million. And we do expect to continue to be a net acquirer in 2022 as well. I'll hand you over now to Andrew for a bit more details around the numbers.

Thank you, Frederick, and how great to see some of you in person again. So good morning both to those in the room and to everyone tuning in. This morning I'm going to run you through our robust financial results for 2021, the considerable letting progress made during the year through our active asset management approach, and the resilience of our rental income in these uncertain times. My first slide sets out several of the key financial metrics for the business. In 2021, Serling strengthened by over 6% against the Euro, which impacted a number of these metrics and is a key theme of these results. I'll run through the key metrics in detail over the next few slides, but here I wanted to concentrate on the graphs on the right hand side, which show our consistent track record of delivery. I will touch on EPRA EPS on the next slides, which has remained stable whilst we have refocused the portfolio on long-term, high-quality growth opportunities. However, for Statutory EPS, as shown by the red bars, during this period we have continued to deliver valuation growth and profits on disposal to drive increases in net asset value. In 2021, we again delivered valuation growth, but our balance sheet was also boosted by the release of deferred tax liabilities from the conversion of our UK operations to a REIT. In 2021, we also managed to achieve another record low cost of debt at 2.22%, one of the lowest in the sector. And finally, we've maintained our long-term record of growing the dividend, with 2% growth in 2021's full-year dividend. The waterfall chart on the next page sets out the main components of the movement in EPRONET tangible assets. NTA increased by 1.5%. This was due to the increases shown in the purple bars of... EPRA earnings of 11.3 pence, more of which on the next slide. Valuation increases in all three countries as highlighted by Frederick, which added 8.4 pence. And the extinguishment of deferred tax and capital allowance liabilities of 43.7 million, of which 18 million were timing differences impacting NTA, hence the 4.5 pence increase. These increases were offset by the 9.7 pence foreign exchange reduction from the 6.3% strengthening of sterling and the payment of 7.55 pence of dividends. As noted, NTA increased by 1.5%, but if the sterling euro exchange rate remained flat, it would have increased by 4.3%. The total accounting return, which includes dividend paid, was 3.7%. Turning to the next slide, we've set out the movement in EPRA earnings per share, which fell by 7.4%. As is clearly demonstrated, the biggest impact of 1.1 pence per share was from the strengthening of sterling. While sterling strengthened further in the second half, occupancy and letting activity also improved, giving real momentum into the start of 2022. The other principal movements which are highlighted in the graph are a 0.4 pence per share reduction in net rental income, mainly as a result of two things. Firstly, reduced income from lease expires and an increase in our refurbishment programme to improve quality and drive ERV. And secondly, reduced dilapidations income. Our one student accommodation and one hotel operation are now back to pre-COVID levels of occupancy. This rental income was though more than offset by a one pence per share reduction in expenses due to lower staff costs following restructuring and lower provisions including bad debt costs reflecting our very strong ongoing rent collection. We would expect about a third of this to be reflected in our lower cost base going forwards. And a 0.4 pence per share increase in net finance expense and tax was largely a result of higher debt and lower cash balances given net acquisitions. On the next slide, I've set out the movement in CLS's liquid resources during 2021. Our cash position remained strong with nearly 170 million of cash and 50 million of undrawn resources. Whilst at the same time, we were able to carry out considerable acquisition activity. Cash from operations of 73.1 million pounds, less interest in tax of 28.9 million, gave net cash from operations of 44.2 million, which was almost the same as EPRA earnings. This net cash from operations also covered the dividend paid one and a half times in line with our dividend policy. Overall in the year, cash went down by 67.3 million pounds as a result of our investment in the business to meet tenant demands for well-located quality and flexible buildings. The six acquisitions that we made plus capital expenditure invested into the business totaled over 200 million pounds. The graph here shows the growth in our property portfolio during 2021, which was largely driven by those net acquisitions of £142.4 million. And demonstrating our ability to buy well, these acquisitions increased in value by 4.5% in 2021 as part of the £36.7 million valuation increase. We are also increasing our investment into the portfolio, both in selected developments and refurbishments, to improve the quality and ERV of the portfolio, more of which from Frederick shortly. CapEx in 2021 of £36 million was more than double the amount spent in 2020 and we intend to spend between £50 and £70 million per annum over the next two years, to upgrade the portfolio, including improving its sustainability credentials as part of our net zero carbon pathway. The next slide shows it was another busy year for financing activity. The key metrics for us are that debt maturity remained stable at 4.4 years, closely matching our waltz of 4.6 years, cost of debt was reduced further to 2.22%, and interest cover remained healthy at 3.2 times. The key metrics are also shown in the table at the bottom right. This table also shows that our loan-to-value increased to 37.1% as a result of net acquisitions in the year. We are comfortable gearing in the range 35 to 40%. We could even be comfortable at a higher level, provided that we maintain the protections of significant covenant headroom and substantial cash and or undrawn facilities. In the year, we financed 196.7 million at 1.62%, which contributed to reducing our cost of debt. As the vast majority of these financings were at fixed rates, they also contributed to keeping our proportion of fixed rate debt very high at 85%, which clearly adds certainty in this period of rising interest rates. Finally, as shown in the chart at the top right, the highlight of the year was another long-term green financing, this time with Scottish Widows. The £61.7 million financing expiring in 2033, which includes a 10 basis point margin sustainability incentive, means that over 20% of our loan portfolio is now green, well on our way to our 2030 target of at least 50%. Turning to the next slide, I summarise here our letting activity in 2021. The graphs on the right-hand side both show the movement in vacancy during the year, as there were a number of moving parts. In essence, vacancy increased through the first nine months of the year from lease expires, but equally from deliberately acquired vacancy in Germany. The final quarter saw significant letting activity with 40% of all of our deals done, which brought down vacancy for both the acquired portfolio, but also the rest of the portfolio. The number of letting deals done whilst up year on year was still down on the usual pre-COVID level, but we are starting to see occupiers committing to more new leases rather than simply rolling over existing leases with a balance split roughly equally. Although as shown in the bottom left box, the walls have reduced slightly as tenants are seeking and CLS is happy to offer greater flexibility in lease terms. We secured the deals at 0.4% above ERV. However, we executed a deal with Veolia somewhat below ERV, both to secure a high quality tenant as well as to protect against the increasing vacancy in the Western Crescent in Paris. excluding the lease with Veolia to fill up our building at Inside in Paris that deals with 2.4% above ERV. Rent collection continued to be excellent at 99%, albeit this new normal is really the old normal. My penultimate side sets out our high-quality diversified tenant base, which explains our continued excellent rent collection. The left-hand side of this slide sets out the hip parade of our top 15 tenants. As a result of our acquisition of the bricks in Essen, Siemens is now a new entrant to the chart at number four, with our building serving as a regional headquarters for the industrial powerhouse. The right-hand side shows the industry breakdown of our tenants. We favor multi-let buildings and have approximately eight tenants per building, with over 50% of our tenants from government agencies and major corporations. We are seeking to increase our government exposure and recently signed two large leases with government agencies in Hamburg and Cologne in Germany. Finally, this slide summarises the resilience of our rental income with over 50% of rent index linked. Although the positions vary slightly in each country as follows. Most UK leases are not index linked but benefit from upward only rent reviews. Spring Gardens, the biggest asset in the portfolio, will see a rent increase of 8% in 2022. In Germany, 64% of our leases are CPI-linked. In addition, over 15% of our German leases have built-in stepped increases. And lastly, in France, all leases are index-linked, but unlike the UK or Germany, these can go down as well as up. And with that, I'll hand back to Frederick to run through the considerable upside potential within the portfolio.

Thank you, Andrew. As you heard earlier, location is and will always be the most important success factor and our proven location criteria is still very much the bedrock for our success and that will not change. What has changed is the requirement to invest in the properties to ensure we offer the quality and flexibility that occupiers are asking for. In addition, there are also significant changes in sustainability and legislation that is required. All this means larger lot sizes and acceptance that increased capex is required going forward. High quality in modern space are key, both in terms of amenities and technology, and we have over 30 refurbishment projects ongoing or planned for 2022. And as you can see on the right hand side, those are some of the examples of what we're putting into some of the new properties that we are developing. Flexibility, also hugely important, and landlords need to offer different leasing solutions for different needs and occupiers. You also need to be close to your occupiers, and our teams meet with them on a very regular basis, but also do more structured surveys, which gives some of the results that you have seen being highlighted here that we're very proud of. Next, I would like to talk about some of the larger projects that we have in the portfolio. We have presented the projects in London before, so this is an update, but we also have one new project at Park Avenue in Lyon. Firstly, at Vauxhall Walk, we are making good progress on our 28,500 square feet new office building, which as you can see is now at the fourth floor of the concrete frame. Delivery is Q1 2023, and we have had our first potential tenant visit earlier this month, which is very encouraging. At number nine Prescott Street in London, we're now investing 29 million to completely overhaul the entire building. Often an opportunity materialized for us to extend the project from the original plan of refurbishing four out of the six floors in the building. PC is in Q2 2023, and here we have also had our first potential tenant visiting. In Lyon, a city with an office market that's doing very well, we're on site with the refurbishment of the entire building, as well as creating additional space. PC is due at the end of 2022, and we're already in discussions about a pre-let for the available space. I'm also very happy and pleased to again report the progress we're making on sustainability. The major progress in 2021 was the launch of our new sustainability strategy, including our net zero carbon pathway to 2030. This was a substantial project on a property by property basis, which has resulted in a fully costed plan, 58 million pounds, to ensure that our portfolio will meet long term sustainability goals. This is now an integral part of all capital projects that we undertake. We also increased our PV capacity over 100% and completed on our largest projects to date at Pacific House in Reading outside London. In addition, we're also proceeding with a number of smaller and medium sized projects to improve energy efficiency across the portfolio. And all this work was also reflected in our increased Grespi rating from 72 to 85 out of 100. On this slide, I would like to talk more about existing ratings of the CLS portfolio. On the right hand side, you can see the current ratings by country and also overall BREEAM rating for the portfolio. The new sustainability strategy also addresses that all our UK properties will have an EPC rating of B or better by 2030, and that we meet similar targets in France, although here we only have two properties not already meeting the 2030 targets. The UK requirement by 2023 to have nothing below E is already achieved. In Germany, the regulatory landscape is changing, but this is the most modern portfolio we have, and we are confident that it will meet any future requirement that will be announced. We've also completed BREEAM in use assessments with the majority of our properties in the good or very good category. A bit more about the three markets that we operate in. So starting with the UK, where we have seen more confidence in the real estate markets, and also the UK occupiers are now fully recognising the importance of the office, which we have always believed is the case, but it's always good to hear that as well from our customers directly. There's also a lack of quality stock for Southeast offices at the moment, certainly compared to historical figures, but we do think with some more positive letting momentum, we expect this to improve as we go through 2022. In Germany, resilient economy, strong office fundamentals, still with a very low vacancy and supply in the larger cities, we see very supportive and positive demand dynamics. The German energy dependency on Russia and potential cost inflation is something to be monitored, but with over 80% our leases either indexed or having stepped rents, we are in a pretty good position in our German portfolio. Leasing has been strong with both local and central governments, very active, something we have experienced in many of the recent deals that we have done in the second half, and you heard earlier Andrew describing the two big ones we've done in Hamburg and in Cologne. In France, we have a little bit more of a mixed picture, with central Paris and Lyon performing well, while there are some continuing supply challenges in the suburban Paris markets. Demand for smaller space below 1,000 square meters has been good, and our vacancy in France is now 3%, the lowest in the group. We like the diversification that all three countries offer, and we will continue to invest in our French portfolio. In terms of the opportunity within the existing portfolio, a few things to go through. We had a very strong second half momentum. You heard that the leasing activities was 40% in the last quarter of the full year. That has continued into 2022. The significant growth opportunities, both from filling up the vacancy, from reversions in the portfolio, and also from the net acquisitions that we have undertaken. In addition to that, we also have indexation that is driven or driving further upside on the rents. What I would like to do here is go through the walk that you can see at the bottom, and this shows the ERV potential in the portfolio. So starting on the left-hand side, you can see that our contracted rent are 107.6 million. We then have the vacancy in the current portfolio. We do acknowledge that we will never get down to 0% vacancy, and neither would we want that. But there's certainly potential to close out and get closer to our long-term target. We have the net reversions that will come through as 5.4 million. Those two together takes us closer to 120 million of rental income. In addition to that, we have circa 3.5 million coming from the net acquisitions that we have already completed to date this year. And then there's a further 9 million to come from the refurbishment that I mentioned earlier. We have over 30 projects in the portfolio. Among the bigger ones is Prescott Street. You have the Park Avenue in Lyon, et cetera. Vauxhall Walk, which you saw earlier as well, is now on the fourth story. That adds another 1.5 million months that is fully let. So that would take the portfolio of ERV to 134 million. We then have other developments further on that we're not yet committed to, which adds another 5 million. So what I hope this illustrates is that there's a lot of opportunity and potential in the existing portfolio, and any acquisitions would just be on top of that. But there's a lot of things for us to do in the next two, three years to drive growth in the CLS portfolio. Finally, I would like to leave you with a few key takeaways from today's presentation. So, robust 2021 financial delivery from our resilient strategy and business model. Valuation was up in all three countries, on a group basis 1.6%, on a like-for-like basis 1.9%. Earnings in 2021 were impacted by vacancy and FX. However, we do maintain a healthy margin between our net initial yield and cost of debt, which drives cash flow, as can be seen on the right hand side here. We did launch our new sustainability strategy in August, including our fully costed net zero carbon pathway to 2030. There's significant upside from vacancy reductions, reversions and indexations, and we have over 30 refurbishment that will drive rent going forward. In addition to the 165 million acquired last year, we will complete on a further 76 million of acquisitions in April this year. And finally, our type of properties, quality and locations are very well positioned for future working patterns, and it is what tenants are looking for. So with that, I'd like to conclude today's presentations. Thank you all for attending, and we will now open up for questions.

Morning. Kieran Lee from Birenberg. Just a few questions from me, if that's all right. You talk to the sort of potential increase in waiting toward government tenants. Do they differ from the private sector in their building requirements, what the return to work and building occupation looks like? Are you changing your refurbishment plans for that? Secondly, there are some of these long-term development projects like spring gardens. I know the lease expires in 2026. When should we be thinking about potential sort of catalysts from planning or other gains to come from there? And then lastly, are you able to comment a little bit more on dividend plans following your reconversion that you touched on at the beginning?

Right. Thank you, Kiran. Why don't I start with the first two and then hand over to Andrew for the dividend question. When it comes to government tenants, I would say that these days they are not very different from a private tenant. In the past, government tenants might have asked for slightly less specification, but I think as everyone is now competing to have the best staff employed, including government, they are asking for very similar specs for us when we do this. When it comes to Their requirement, clearly they are a very good credit risk and they normally go for fairly long leases, which means that sometimes you have to give them a little bit more contribution than you would perhaps do for a shorter lease that a private tenant might ask for.

Do you want to jump in and take the dividend question? You probably saw all the good questions, Ciaran, so I think everyone probably wanted the dividend question. I put in my CFO review that, probably being a bit prudent, the 3 million that we are going to save at the bottom end of the range is probably what comes through EPRA earnings, and then the amount above that will depend on what we sell in the year. Of that 3 million, Very simply, if we maintained our 1.5 times dividend cover ratio at the moment, then that's an extra 2 million to shareholders. So therefore, we will get growth in the dividend over and above what you would normally get in a normal year. But as we have highlighted, we will very much be looking at dividend policy going forwards and whether that 1.5 to 2 times cover ratio remains appropriate or whether we might lower that cover ratio. I think it is going to depend on the views of all stakeholders, both our board, and it'll be interesting to see where investors and analysts are. So I'm sure you'll have a view.

Thank you, Andrew. Going back to spring gardens, as you pointed out, the lease does not expire until early 2026, so it's still a little bit early to know exactly what is going to happen with that. We are in ongoing discussion with them, and I would expect that we will know a little bit more about their long-term intentions towards the end of this year. And that is when it's time to start planning for different routes for that building. But it's a great opportunity. It's a big site in Vauxhall. And yeah, there's a lot of different opportunities to work on for spring gardens.

Morning, it's James Carswell from Pilhans. Asked a bit more about the dividend because you kind of prompted me. Just on, you're obviously going to review the payout ratio. I mean, is that a direct kind of repercussion of becoming a REIT because the payout ratio means you have to, or is it more a broader kind of review in terms of what, as you say, your stakeholders are thinking?

Yeah, good question, James. No, it's absolutely not a requirement. I mean, making this overly simplistic, but if half of our profits come from the UK and we've got to pay out 90% of those, effectively 45%, therefore, is the minimum payout. It obviously gets slightly tweaked by capital allowances and the PID rules around that. So, if we were currently paying out half to two-thirds, you can see then we would top it up with the French and German divvies to get to that ratio or range. I think it's probably just something to look at because unwittingly we are becoming a high-income stock at the moment, and maybe that will be something that will encourage more investors.

And then maybe just one, I know you gave a bit more information about some of the index-linked leases, and I probably should know more about the structure of the leases in France and Germany, but can you just talk a little bit about the lease length in France and Germany, and I guess also how at the end of the lease, presumably, potentially they reset back to the market rents. So I'm just thinking, obviously in the UK, Lovely next link to our 15, 20 years. I think I'm right saying it's shorter in Europe. Is that the case?

Yeah. Why don't I start, and Frederick will jump in when I get it wrong. So France, and to an extent Germany, typically are sort of three-, six-, nine-year leases. If you look at Germany, Germany in terms of indexation, if you get to 5% increases in CPI since the start of the lease, then it kicks in and then it kicks in again at the next 5%, etc. With Germany, they often have the opportunity to prolong the lease. at the existing ERV plus that indexation. And so for us, and Fredrik touched on it, actually vacancy is often a good thing, sometimes to reposition the asset, sometimes to refurbish it. But also, actually, because of the end of that lease, allows us to then reset back to ERV. So there are a number of buildings in Germany where there's a very significant ERV jump that we're expecting at the end of that lease.

And just to be clear, there's no caps, is that right, in terms of the French and German?

In general, no. I mean, it is a free market. There will be some leases that would have a cap and collar on them, but the majority of them will have no caps. Thanks.

Any other questions?

We have just one question on the webcast from Richard Pearson. Will you be taking powers to buy in your own stock given the significant discount at net asset value? Such purchases were given immediate return of over 75%.

Again, why not start on that one? We do already have existing powers to buy our shares. It's something that we will look to review as we do at the AGM. It is something that we keep under review. Actually, we have looked at some of the metrics around it, and it is actually moot depending on how well we deal with acquisitions as to which is the better use of capital. But clearly, it's something that we will keep under review.

Just one from me, Charlotte Apamior. Just in the 50 to 70 million capex that you're planning on spending, so does that include kind of the net zero spend and also the kind of minor refurbishment projects that you're just kind of doing to uplift, as you were saying, the 30 projects ongoing and the major projects as well?

Yeah, thank you. Yeah, so... In the past we have spent 20 to 25 million a year excluding any large one-off development projects. That is definitely increasing. Last year we spent 36 million and that's the amount that we think will go up closer to 50 million a year. It does include the 58 million pounds over the next nine years to meet net zero carbon targets. That is now very integrated in all projects that we do. So it's a little bit difficult to single out exactly how much is pure sustainability versus normal refurbishment. But it covers everything of what you mentioned. It does not cover things like the Stuttgart development that we have not committed to yet. So if we do decide to go ahead with some of those developments, that would be in addition to what we talked about.

Just a reminder, if you'd like to ask a telephone question, please press star followed by one on your telephone keypad. We have the first telephone question is from the line of Marcus Fairmudge from BMO Global Assist Management. Please go ahead.

Good morning, gents, ladies. Hope you can hear me okay. I just want to pick up, if I may, on two comments. First, Andy's comment about, I think he said, unwittingly becoming a high-yielding stock, which would imply that it's not a core focus. So if you could comment on that. And then secondly, just to pick up, I think you rather... glibly brushed aside the comment that the question from the web around the discount. I think stock sadly has the ignominy of now being on a wider discount than Some heavily, overly indebted retail companies are owners of retail property, which is obviously still undergoing structural issues. And quite simply, this is a request. The board needs to have a proper root and branch review of the strategy. The reason you don't want to buy back stock is purely because the family own more than 50 percent. And so essentially the family to understand that in order to invite, to encourage institutional investors, they're going to have to buy back in line with, with, with the company to allow themselves to stay at 50-odd percent. So really, this is a complete plea that we cannot have the company sitting on a 50 discount when you produce a perfectly good set of results. It's disincentivizing for everybody involved, management, shareholders, staff, etc.,

Fine, why don't I start on that one. There wasn't so much of a glib about the word unwittingly. I mean, we have a dividend payout compared to our balance sheet of just over 2%. As I said, we retain cash in the business to reinvest. As you highlight with the discount, we are now at more like a 4% to getting to 5% yield on the dividend, which is not what we would want to seek to do. So, yes, clearly, share price appreciation, which we all would want to see, would lower that dividend yield.

Yeah, and Marcus, maybe to comment just a little bit on the NAV discount. I mean, if you look back at the CLS shares over the last 25 years since it was listed, it has always fluctuated, which is true for other companies as well. I mean, clearly at the moment, it's not satisfactory to trade at a very large discount, but we always believe that if you continue to deliver on your numbers, that will sort itself out over time. I can assure you though that the board is definitely discussing this and that is something that's very high on the agenda for the board going forward. Thank you all for attending. Thank you all for the questions. And we will there conclude today's presentation and Q&A. Thank you.