.
11 March 2010
CLS Holdings plc
("CLS", the "Company" or the "Group")
Audited Financial Results for the year ended 31 December 2009
Financial highlights:
- Adjusted net assets per share: up 18.6% to 767.5 pence (2008: 647.2 pence)
- Adjusted earnings per share: up to 48.2 pence (2008: loss per share of 65.6
pence)
- Proposed tender offer buy-back: 1 in 42 shares at 525 pence, equivalent to
12.5 pence per share, and increasing pro forma adjusted net assets per share
to 771.7 pence
- Profit before tax: up to £18.5 million (2008: loss £142.1 million)
- Profit after tax: up to £17.4 million (2008: loss of £78.0 million)
- Core Profit: up to £23.7 million (2008: £2.8 million)
- Portfolio value: £813.0 million (2008: £798.8 million) - underlying
valuation movement up 7.5% in UK, down 5.6% in Europe, down 0.6% overall
- Aggregate cash, corporate bonds and other investments: £144.2 million
- Recurring interest cover: up at 2.1 times (2008: 1.1 times)
- Weighted average cost of debt: down to 4.0% (2008: 5.8%)
- Corporate bond portfolio: return on capital employed of 54.2%
- Distributions through tender offer buy-back: 77.8 pence per share (£48.0
million)
- Total Shareholder Return: for the year ended 31 December 2009 52.7%
- Occupancy rate: consistently high at 95.5% (2008: 95.7%)
- Proportion of rent roll let to Government tenants: 40% for the Group and 54%
in the UK
Commenting on the results, Sten Mortstedt, Executive Chairman, said:
"The property portfolio has performed well in difficult market conditions,
reflecting the defensive benefits of well-let properties, and net assets per
share are 18.6% higher than a year ago, a good result in the light of the
adverse 36 pence impact of sterling strengthening during the period".
"The fundamentals of our business remain sound. We have the resources
available to take advantage of opportunities as they arise and I am delighted
to report that we face the challenges ahead from a position of strength and
confidence."
For further information, please contact:
Sten Mortstedt, Executive Chairman, CLS Holdings plc +44 (0)20 7582 7766
Henry Klotz, Chief Executive Officer, CLS Holdings plc +44 (0)20 7582 7766
John Whiteley, Chief Financial Officer, CLS Holdings plc +44 (0)20 7582 7766
Jonathan Gray, Kinmont Advisory Limited +44 (0)20 7087 9100
Adam Reynolds, Hansard Communications +44 (0)20 7245 1100
The annual financial report can be found on www.clsholdings.com
CHAIRMAN'S STATEMENT 2009
Investment Philosophy
CLS has an investment philosophy and a strategy to seek out and
exploit imperfections in the market.
By this I mean that today's prices and values will always be
different in the future and CLS, therefore, tries to predict price movements
and then position itself to benefit from them.
In order to achieve higher returns and minimise the associated
higher risks, diversification is key; CLS's main investment is in properties,
but we have also invested in a portfolio of corporate bonds. Both asset
classes cover a number of countries and currencies, and have exposure to
different sectors. This diversification ensures that if some of the
investments are unsuccessful the total return should still remain very good.
Imperfections Exploited
- In 2006, we anticipated significant falls in property values
across Europe and embarked on a strategy to dispose of a number of properties.
By the end of 2008 we had raised through sales almost £750 million, repaid
associated debts, returned £72 million to investors and retained £150 million
for subsequent investment. Consequently, whilst the UK listed property sector
was repairing its collective balance sheet with right issues of over £6
billion, CLS was returning cash to shareholders.
- During the most critical period of the financial crisis we became
uncomfortable with the outlook for the banking industry. In order to gain
absolute protection for a large part of our liquid assets, we reduced our
exposure to bank deposits and invested in government bonds.
- At the end of 2008, when we were convinced that the banking
system would survive, we placed large cash deposits of 12 months' duration at
interest rates of 6.15% (sterling) and 4.9% (euro), expecting rates to fall.
Within four to five months interest rates were virtually zero.
- Also in the autumn of 2008 we began to invest for the long term
in a portfolio of liquid corporate bonds as we believed the prevailing market
prices to be too low. In 2009 the bond portfolio provided a total return of
£18.0 million, adding 37 pence per share to net asset value, and at 31
December 2009 the portfolio of £70.0 million was yielding over 8.1%. The
increase in value of the bonds has not been included in profit before tax due
to the long-term characteristics of this new investment.
- We broke several interest rate swaps in July 2009 as we were of
the opinion that the yield curve was too steep and, therefore, the swaps were
undervalued, which proved to be correct. In addition, we sought to increase
the extent to which our interest rate risk was mitigated by caps rather than
swaps, thereby allowing us to take advantage of the prevailing low interest
rate environment whilst restricting our exposure to interest rate rises. At 31
December 2009, our weighted average cost of borrowing was 4.0% and 50% of our
debt was at floating rates.
We believe CLS has served investors well; in the ten years since
2000, our total shareholder return has been 297%. Over the same period, using
tender buy-backs and market purchases of shares, we have returned in aggregate
£266 million to shareholders; in January 2000 CLS's market capitalisation was
£159 million. We believe that for the past ten years, CLS has been one of the
three best performing property companies listed on the London Stock Exchange.
The Portfolio
In 2009, the property portfolio which we retained has performed
well in difficult market conditions, a reflection of the strength of our rent
roll and our team's active management. 40% of the Group's rental income is
derived from governmental or quasi-governmental tenants, our weighted average
lease length is 8.5 years, and our vacancy rate remains low at 4.5% by rental
value. Further, our traditional focus on debt collection has consistently seen
collection rates exceed 90% within a few days of the due date during the year.
The portfolio's valuation at 31 December 2009 reflected the
defensive benefits of well-let properties. In the UK, our portfolio began to
rise in value in the first half of the year, and over the twelve months showed
a gain of 7.5%. In recent years the French market has been less volatile than
the UK, rising neither as quickly nor as far, and falling more slowly. In 2009
our French portfolio declined in value by 6.2% in local currency and the
German portfolio by 5.7%.
Financials
Net assets per share at 31 December 2009, adjusted to exclude
deferred tax, were 767.5 pence, 18.6% higher than a year earlier, and 4.8%
above the pro forma equivalent of 732.0 pence, after the effect of the large
tender offer in January 2009. This is a good result in the light of the
adverse 36.0 pence impact of sterling strengthening during the period.
Property Investment
In the prevailing economic climate, we have been rigorous in
assessing investment opportunities in 2009, restricting our acquisitions to
the £29.2 million 7 Rue Eugène et Armand Peugeot, Rueil-Malmaison, to the west
of Paris, a transaction which was completed at the end of December. Our only
disposal in the year was 2 Deanery Street, London W1 for £2.2 million.
The UK market is now characterised by a far greater demand for
property investment than supply and banking conditions remain relatively
unfavourable. We see greater value and better conditions in both France and
Germany and we will seek to take advantage of opportunities in these markets
in the short to medium term.
Cash Management
During a year of uncertain property and financial markets,
effective cash management has been key. With poor returns available from bank
deposits, the Board sought to manage the Group's cash resources by exploiting
opportunities which arose in the corporate bond market as explained above. The
corporate bond portfolio is a part of the Company's long-term investment
strategy.
A further initiative successfully executed in 2009 was the
avoidance of potential breaches of covenants of bank loans with an aggregate
value of £176.4 million, by repaying or placing on deposit new cash of £14.3
million. The fact that this was achieved at a time of significant banking
turmoil is testament to the good relationships we enjoy with our principal
lenders.
With the reduction in the appetite of banks to lend, it is
encouraging that very little of our borrowing matures over the next two years.
Efficiency
We successfully implemented a cost-cutting programme before the
financial crisis began. In May 2008 we moved to cheaper premises in one of our
own buildings and slimmed down the organisation, successfully reducing our
administration costs from £16.1 million in 2008 to £12.2 million in 2009.
We believe that environmentally safe and energy-efficient buildings
are both commercially beneficial and socially desirable. For this reason we
incorporate environmentally effective features in our developments and convert
or modify as many properties as possible. This provides an advantage in
letting the buildings, creating benefits to tenants, who enjoy higher quality
buildings, lower running costs and a healthier environment, and it provides
cost savings for the Group and added investment value. At Solna Business Park
in Sweden we developed buildings with geothermal heating and cooling systems,
which cut running costs significantly, and met high specifications for air
quality, sound proofing and illumination. Both of our recent developments in
Germany, at Landshut and Bochum, were designed to comply with the ENEV
requirements on energy saving, and at Landshut ground water is used in the
cooling system for the office space. We intend to extend this programme of
energy efficiency across the portfolio.
Distributions
Following the substantial returns of cash to shareholders in late
2008 and early 2009, and with the share price at a discount of over 40% to
adjusted net assets per share, we believe this is an appropriate time to
restore our distribution policy. Accordingly, we propose to recommend a tender
offer buy-back of 1 in 42 shares at 525 pence per share, and a general meeting
to consider this will be convened for early April.
Appointments
In November we welcomed John Whiteley to the Board as Chief
Financial Officer, and Thomas Lundqvist succeeded Tom Thomson as Vice
Chairman. In addition, David Fuller was appointed Company Secretary. I would
like to thank my Board colleagues and our staff for their fortitude during
demanding times, and our shareholders, lenders, customers and suppliers for
their continued support.
The Future
We operate in difficult markets, with banks seeking to reduce their
exposure to the real estate sector. Good property deals, such as our recent
French acquisition, are scarce. The fundamentals of our business remain sound.
We have resources available to take advantage of opportunities as they arise
and I am delighted to report that we face the challenges ahead from a position
of strength and confidence.
Sten Mortstedt
Executive Chairman
11 March 2010
BUSINESS REVIEW 2009
The Group's business is divided into two operating divisions:
investment properties and other investments. The investment property division
is sub-divided for management purposes between the United Kingdom, France,
Germany and Sweden. Other investments comprise investments in corporate bonds,
in property groups Catena AB and Bulgarian Land Development plc, and in
website media company Wyatt Media Group AB and other small corporate
investments. At 31 December 2009, the investment property portfolio was valued
at £813.0 million, and the other investments had a book value of £114.8
million.
Investment Property
Overview At 31 December 2009, the investment property portfolio was
valued at £813.0 million, a fall in the year of 4.3%, of which 3.7% was due to
the strength of sterling against assets held in euros and Swedish kronor. In
local currency, the UK portfolio rose in value by 7.5%, France fell by 6.2%,
Germany by 5.7% and Sweden by 2.0%. The property investment markets did not
provide many opportunities to invest at value in the year, but towards the end
of December we acquired Frères Peugeot in Paris for £29.2 million. Disposals
in the year were restricted to 2 Deanery Street, London for £2.2 million. At
31 December 2009, the weighted average lease length across the Group was 8.5
years.
United Kingdom
At 31 December 2009, the UK accounted for 42.7% of
the investment portfolio at a value of £346.8 million, 7.5% higher than twelve
months earlier on a like-for-like basis. By contrast, Investment Property
Databank recorded a fall in office values across the UK of 5.9% in the year.
Our valuation gain reflected a fall in yields for long-term, secure income
caused by an excess of demand from investors over the available supply. The UK
portfolio has a strong tenant profile with over 50% by rental value let to
government tenants, and longevity of income with a weighted average lease term
of over 10 years.
During the year, 2 Deanery Street, a Grade II listed building
extending to 197 sq m of office accommodation, was sold with vacant possession
for £2.2 million, generating a profit of £0.3 million over its 2008 valuation
and representing the final disposal of properties considered to offer limited
future prospects for growth. At 31 December 2009, the UK portfolio comprised
26 properties with an aggregate lettable area of 116,700 sq m.
We saw few opportunities for acquisitions offering good long-term
value, with pricing generally reflecting excessive demand from overseas buyers
and institutions. Nevertheless, we remain vigilant for opportunistic
acquisitions. As a long-term holder of properties we have continued to carry
out renovation and improvement works to a number of buildings in the UK
portfolio, comprising £1.3 million in aggregate in the year, and including
works at Chancel House and the installation of a new substation and
refurbishment works at Cambridge House. At Westminster Tower, the electrical
supply to each of the floors was replaced whilst the building remained fully
occupied. At Great West House, a further floor was refurbished for the letting
to Medical Professional Personnel.
Within the context of an economy in recession, the UK vacancy rate
remained low at 4.5% by rental income compared to 4.4% in December 2008.
Despite the difficult market conditions, lettings were achieved at
Great West House to Medical Professional Personnel and National Aviation
Company of India, for 473 sq m and 299 sq m respectively, and an existing
tenant at Great West House, Global Refund, acquired further space. At
Quayside, 147 sq m was let to Knowledge to Action and at Ingram House 178 sq m
was contracted with Ash Associates Communications. Further lettings were
achieved at Spring Gardens Court, 16 Tinworth Street, 2/10 Tinworth Street and
107 Wandsworth Road.
Significant rental increases were achieved on the rent reviews at
CI Tower: the annual rent from Hays Specialist Recruitment rose by 15%, and
rent from Lafarge Cement UK increased by the same degree. Further rent reviews
were settled at Spring Gardens, Westminster Tower and Cambridge House.
Through our close relationships with tenants we have again achieved
excellent levels of debt recovery with no tenant company failures to report
across the UK portfolio during the year. On average we received 94% of rent
and service charge within 14 days of the due dates.
In the medium term, we plan to capitalise on the improvement of the
Vauxhall area, following the recent substantial residential development of St
George's Wharf, the relocation of the New Covent Garden Market, and the
announcement of the new location of the United States embassy which is to open
in 2016. We are pursuing development options on two sites in Vauxhall which
are important projects in an improving area offering strong potential for
adding value to substantial sites.
France
At the end of 2009, the French portfolio was valued at
£222.8 million, or 27.4% of the total CLS portfolio, and had fallen by 6.2% in
the year in local currency on a like-for-like basis. This compares favourably
to a 2009 average fall of 16% in the French market.
Throughout 2009 we were prepared to wait for the right deal. Having
appraised many opportunities in the year, on 29 December we acquired 7 rue
Eugène et Armand Peugeot in Rueil-Malmaison for £29.2 million. This was a
7,350 sq m multi-let office building to the west of Paris yielding 8.3% and
providing a return on equity of 16.1%. There were no disposals from the French
portfolio in the year, which at the year end comprised 25 properties of 85,800
sq m with 180 tenants. Most tenancies were of the traditional French 3:6:9
year duration, and the weighted average lease length at 31 December 2009 was
5.9 years.
The French portfolio suffered no major tenancy changes in the year,
but 7,200 sq m of space was relet and 8,700 sq m renewed, resulting in a year
end vacancy rate of 4.2% by rental value. Among the deals closed in the year
were two lettings to existing tenants in Lyon: 3,909 sq m let to Deloitte in
Park Avenue; and 1,050 sq m to Deloitte's parent, Inuem, at Front de Parc. In
Paris, at Le Quatuor, Montrouge, Pôle Emploi took 999 sq m, and in 96 Rue
Nationale, Lille, Medef signed a lease renewal and extension on 936 sq m.
Renewals and lease extensions were also completed in Paris with Micro
Application on 1,315 sq m in 20/22 Rue des Petits Hôtels, with Citadines on
1,264 sq m in 120 Rue Jean Jaurès, with Camfil on 1,228 sq m in Le Debussy,
and with Cesap on 606 sq m in new nine year leases.
£2.3 million was incurred in 2009 maintaining the fabric of the
portfolio, in particular in Paris at Le Debussy, la Garenne-Colombes with the
renovation of common parts and the replacement of the heating and cooling
system at the building. Other renovation work took place in Lyon at Rhône
Alpes, and in Paris at Le Quatuor, Montrouge, 95/97 Bis Rue de Bellevue,
Boulogne, and 120 Rue Jean-Jaures, Levallois Perret, and in Luxembourg.
The total French investment market turnover in 2009 was #8 billion,
down from #12.5 billion in 2008 and #27 billion in 2007, and the letting
market was 25% down on 2008 at 1.8 million sq m. We expect the French property
market to recover slowly in 2010 in line with the French economy, but with
well-located assets performing the better.
Germany
The German portfolio, 23.6% of the total portfolio, was
valued at £192.1 million at 31 December 2009, a fall of 5.7% in local currency
on a like-for-like basis, caused by a marginal increase in yield of typically
0.125 to 0.25%. There were no purchases or sales in the year.
During 2009 capital expenditure in Germany comprised £17.7 million
in total. The second and third phases of the Landshut development, of 7,032 sq
m in aggregate, were completed on time and on budget. The entire scheme was
pre-let to E.ON Bayern AG for 15 years with no breaks, and added #957,000 per
annum to the rent roll. In addition, the 23,800 sq m redevelopment of the
Rathaus Center in Bochum was completed and handed over to the City in December
2009 under a 30 year pre-letting to the local municipality at #2,285,000 per
annum.
At 31 December 2009, the German portfolio comprised 16 properties
with 140,400 sq m of lettable space. During the year tenants vacated 9,611 sq
m, and lettings were achieved on 5,021 sq m, resulting in an increase in our
void rate to 5.8% by rental value, well below the national rate. Notable
amongst the lettings, at Frohbösestrasse 12 in Hamburg, laboratory equipment
manufacturer Scope Life Sciences leased 1,595 sq m, and also in Hamburg three
tenants took 1,100 sq m in aggregate at Jarrestrasse 8/10. At 31 December 2009
the portfolio housed 80 tenants on a weighted average lease term of 9.3 years.
Germany's GDP fell by 5.1% in 2009, the largest decrease in 50
years; an increase of 1.5% is expected in 2010. It is within this context that
activity in the German commercial investment property market fell to #10.3
billion in 2009, down from #19.6 billion in 2008 and #75.0 billion in 2007.
The market was dominated by open-ended funds looking for safe core
investments, in which there was a small fall in yields which is expected to
continue in 2010. We were prepared not to enter the investment market in 2009
except for the right opportunity, and we will continue to be circumspect in
2010.
The office letting market was depressed in 2009, with an overall
fall in activity of 28% against the previous year, which in some cities such
as Munich and Düsseldorf reached around 40%. Letting activity is unlikely to
increase in 2010, but there remains very limited development activity to bring
further supply to the market. The national average vacancy rate increased from
8.9% in 2008 to 9.9% in 2009, and is expected to increase in 2010. Our void
rate of only 5.8% is a creditable result in the prevailing economic climate.
Sweden
Our Swedish portfolio comprises adjacent buildings located
in Vänersborg, near Gothenburg, which we treat collectively as one asset of
45,500 sq m called Vänerparken. At 31 December 2009 it was valued at £51.3
million, reflecting a fall of 2.0% on a like-for-like basis, and representing
6.3% of the Group portfolio.
Since mid-2008, the local university has vacated approximately
12,500 sq m and has been replaced as a tenant by the local municipality. The
City of Vänersborg has leased the entire space for 20 years, with 10 years
term certain. Should the local authority exercise its break in 2019 it would
be subject to a break cost of one year's rent. We now have a secure income
stream of 97% of our total Swedish income from governmental tenants until
mid-2015, and subject to annual indexation.
With the new letting to the City of Vänersborg, the vacancy rate at
Vänerparken has fallen to 1.9% by rental value.
Investment market activity in Sweden was not immune from global
sentiment, and fell in 2009 by 75% against the year before.
Other Investments
Other investments at 31 December 2009 comprised investments in
corporate bonds, in property groups Catena AB and Bulgarian Land Development
Plc, and in website media company Wyatt Media Group AB and other small
corporate investments, and represented a book value of £114.8 million in
aggregate.
The corporate bond portfolio was acquired as part of the Group's
long-term investment strategy in parallel with the ownership of long-term
investment properties and had a value of £70.0 million at the year end against
an historical cost of £58.4 million. The valuation uplift, together with
interest income from the portfolio and gains on disposals, produced a total
return on capital employed in the year of 54.2%.
Catena AB is a Swedish listed property investment company with a
Scandinavian property portfolio valued at approximately one-quarter the size
of that of CLS. During the year, the Group increased its interest in the
issued share capital of Catena marginally to 29.8%, taking the aggregate cost
to £28.6 million.
Bulgarian Land Development Plc is an AIM-listed developer of
predominantly residential buildings in Bulgaria. CLS owns 47.7% of the
company, acquired at a cost of £13.4 million.
Results for the Year
Changes in presentation
In the year ended 31 December 2009, a number of International Financial Reporting
Standards have been applied for the first time, as explained in Note 2 to the
financial statements, although none has materially affected the results for the year.
In applying IFRS8 -Operating Segments this year for the first time we are also
required under the newly issued IAS 1 (revised) Presentation of financial statements,
to provide three balance sheets instead of the usual two and several pages of
accompanying notes, even though in applying IFRS8 the balance sheets are
unaffected. Also under IAS 1 (revised) this year a Statement of Comprehensive
Income is presented for the first time, comprising the traditional Income
Statement and other reserve movements.
Headlines
Profit after tax attributable to the owners of the
Company of £17.5 million (2008: loss of £78.1 million) generated basic
earnings per share of 36.4 pence (2008: loss per share of 120.6 pence). After
excluding the effect of deferred tax and the movement on the revaluation of
investment properties, adjusted earnings per share were 48.2 pence (2008: loss
per share of 65.6 pence). Gross property assets at 31 December 2009 rose to
£813.0 million (2008: £798.8 million), net assets per share were 643.3 pence
(2008: 548.4 pence) and adjusted net assets per share, which exclude deferred
tax, were 18.6% higher than the previous year at 767.5 pence (2008: 647.2
pence).
Approximately 40% of the Group's business is conducted in the
reporting currency of sterling, and 8% is in Swedish kronor, the exchange rate
for which remained largely unchanged against sterling between 2008 and 2009.
However, half of the Group's business is conducted in euros, the average rate
of which strengthened by around 10% against sterling in 2009 compared to the
previous year, adding to the profits reported in the Statement of
Comprehensive Income. Towards the end of 2008 the euro strengthened
significantly, reaching almost parity at the year end, but by 31 December 2009
sterling had strengthened by 7.8%, reducing the relative value of euro-based
net assets. So, perversely, when compared to the previous year the Statement
of Comprehensive Income benefited from the euro's strength in 2009, but the
Balance Sheet at 31 December 2009 suffered from its weakness.
Exchange rates to the £
EUR SEK
At 31 December 2007 1.3571 12.7896
2008 average rate 1.2575 12.0861
At 31 December 2008 1.0461 11.4474
2009 average rate 1.1233 11.9290
At 31 December 2009 1.1275 11.5689
Statement of Comprehensive Income Rental: income for 2009 was £60.6
million, 3.9% lower than in 2008. Rents in the UK were £25.0 million, 41% of
the total Group, and £1.2 million lower than 2008, virtually entirely due to
disposals made in 2008. At £4.9 million, rents in Sweden were in line with
last year. In Germany and France, a full year of loss of rent from disposals
made in 2008 reduced rental income by £6.4 million in 2009, whilst rents from
completed developments and termination payments on expiries added £2.1
million. Underlying rental income from the remaining portfolios in Germany and
France rose by 1.0% in local currency but translated to a 13.1% rise due to
the strength of the euro.
Following the rationalisation of the property portfolio, we
embarked upon a process to address the cost base of the Group, slimming down
the organisation and reducing administration costs from £19.0 million in 2007
(excluding £8.7 million relating to the investment in London Bridge Quarter
which was sold at the end of that year), to £16.1 million in 2008, and £12.2
million in 2009.
The net deficit on revaluation of investment properties at 31
December 2009 was £6.7 million (2008: deficit of £103.3 million). The uplift
in the UK of £24.1 million reflected a 7.5% underlying gain. In Germany and
France, the underlying deficit in local currency of around 6% was doubled by
the relative strength of sterling at the year end, causing a deficit of £13.5
million and £15.9 million, respectively. The deficit on revaluation of
investment properties is excluded in arriving at adjusted earnings per share.
The impairment of intangible fixed assets and goodwill of £22.0
million significantly reduced adjusted earnings per share in 2008. There was
no such impairment in 2009.
Net finance costs in 2009 were £25.5 million (2008: £43.0 million).
Within this number, interest payable of £28.5 million (2008: £42.6 million)
was lower than the previous year due to the reduction in loans which
accompanied the disposals in 2008, and also due to the decision to reduce
exposure to fixed rate interest rate swaps in favour of interest rate cap
contracts, which enabled the Group to benefit from the prevailing low interest
rate environment. The fall in interest income to £6.4 million (2008: £8.7
million) was largely due to cash balances being reduced by the £48.0 million
distributed through the tender offer buy-back in January 2009. Foreign
exchange variances created a loss of £9.7 million (2008: gain of £11.9
million), and the effect of marking derivatives to market at the year end
produced a net gain of £6.3 million (2008: loss of £21.0 million).
Within the Other Investments division, in addition to the return of
54.2% from corporate bonds, Wyatt Media Group contributed £0.1 million (2008:
loss of £2.8 million) to operating profit on turnover of £3.6 million (2008:
£3.6 million), and the Group's share of Catena AB's profit after tax was £3.0
million. Bulgarian Land Development plc contributed a loss after tax of £3.3
million, which was partially offset by negative goodwill of £2.8 million
occasioned when the Group bought a further 11.9% of the shares in BLD at a
price below that company's net asset value.
Once again this year the current tax charge was significantly below
the weighted average rate of the countries in which we do business. Our French
operation was the only part of the Group which paid tax. Elsewhere in the
Group, through judicious planning, tax losses absorbed taxable profits made in
the year. Future profits will erode such tax losses and, thereby, the Group's
ability to mitigate future tax liabilities. The tax charge also contains a
deferred tax credit of £1.0 million (2008: tax credit of £67.7 million), which
typically largely contains an adjustment required under IFRS for the potential
tax occasioned by valuation movements on investment properties. In practice
this tax is unlikely to be paid, so deferred tax is excluded from the
calculations of adjusted earnings per share and adjusted net asset value.
Adjusted net asset value: Adjusted net assets fell by 7.7% to £368.6
million (2008: £399.6 million), but adjusted net assets per share rose because
the number of shares in issue was reduced by 2 in 9, or 22%, through the
tender offer buy-back.
At 31 December 2009, adjusted net assets per share, which exclude
deferred tax, were 767.5 pence (2008: 647.2 pence), a rise of 18.6%. On 7
January 2009, a tender offer of 2 in 9 shares in issue took place at 350 pence
per share, which had the effect of increasing adjusted net assets per share to
732.0 pence. Profit after tax added a further 34.3 pence, and fair value
movements contributed 28.2 pence. Against this, exchange rate variances
reduced adjusted net assets per share by 27.0 pence.
Cash flow, net debt and gearing: At 31 December 2009, the Group's
cash balances of £70.3 million were £125.0 million lower than twelve months
previously, mainly due to the distribution of £48.0 million by way of the
tender offer buy-back in January, property acquisitions and other capital
expenditure of £52.0 million, and the net investment in corporate bonds of
£45.9 million.
During the year gross debt reduced from £601.7 million to £592.8
million. £19.2 million was raised to finance the acquisition of Frères Peugeot
in Paris, £21.1 million to finance developments in Germany, and £29.4 million
for sundry working capital requirements. £57.4 million was repaid during the
normal course of business, and the effect of translating euro-denominated
loans into sterling at an exchange rate 7.8% different from twelve months
earlier reduced the sterling value of overseas loans by £21.1 million.
Adjusted net gearing, which excludes the effect of deferred tax,
was 101.7% at 31 December 2008, but rose to a pro forma 129.2% with the tender
offer buy-back on 7 January. At 31 December 2009 it was 141.7%, and the
weighted average loan-to-value on borrowings against properties was 66.9%.
Adjusted solidity was 36.4% (2008: 37.6%).
During the year a number of fixed interest rate swap contracts were
cancelled in favour of interest rate caps to take advantage of the prevailing
low interest rate environment. This had the effect of reducing the weighted
average cost of debt to 4.0% (2008: 5.8%), and increasing the proportion of
floating rate loans to 50% of total borrowings (2008: 42.5%). In 2009
recurring interest cover rose to a comfortable 2.1 times (2008: 1.1 times).
Financing strategy: The Group's strategy is to hold its investments
predominantly in single-purpose vehicles financed primarily by non-recourse
bank debt in the currency used to purchase the asset. In this way credit and
liquidity risk can most easily be managed, around 75% of the Group's exposure
to foreign currency is naturally hedged, and the most efficient use can be
made of the Group's assets. Bank debt ordinarily attracts covenants on
loan-to-value and on interest and debt service cover. Following the
significant fall in property values at 31 December 2008, actual and potential
covenant breaches on loans with a value of £176.4 million were resolved
through the part-repayment of loans or the placing of cash on deposit using
less than £15 million in aggregate. None of the Group's debt was in breach of
covenants at 31 December 2009; potential breaches could be rectified on the
part-repayment of £1.9 million of principal.
To the extent that Group borrowings are not at fixed rates, the
Group's exposure to interest rate risk is mitigated by the use of financial
derivatives, particularly interest rate swaps and caps.
Share capital: At 1 January 2009, there were 66,745,471 shares in
issue, of which 5,000,000 were held as Treasury shares. On 7 January, under
the tender offer buy-back, 13,721,215 shares were cancelled in exchange for
£48.0 million distributed to shareholders. There were no other changes to
share capital in the year, and at 31 December 2009 48,024,256 shares were
listed on the London Stock Exchange, and 5,000,000 shares remained in
Treasury.
The Directors intend to put to a general meeting of the Company in
April 2010 a proposal to issue a tender offer to buy back 1 in 42 shares at
525 pence per share. If approved by shareholders this could lead to the
purchase and cancellation of 1,143,434 shares, a distribution to shareholders
of £6.0 million, and 46,880,822 shares remaining, excluding Treasury shares.
Total Returns to Shareholders
In addition to the distribution associated with the tender offer
buy-back in January 2009, shareholders benefited from a rise in the share
price in the year from 305 pence on 31 December 2008 to 498.75 pence on 31
December 2009. Accordingly, the total shareholder return in 2009 was 52.7%.
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties which could
have a material impact on the Group's performance and could cause the results
to differ materially from expected or historical results. The management and
mitigation of these risks are the responsibility of the Board.
Risk Mitigation
Property investment risks
Senior management has
Underperformance of investment detailed knowledge of core
portfolio impacting on markets and experience
gained through many market
financial performance due to: cycles. This experience is
supplemented by external
- Cyclical downturn in property advisors and financial
market models used in capital
allocation decision-making.
- Inappropriate buy/sell/hold
decisions
- Changes in supply of space and/or The Group's property
tenant demand affecting rents portfolio is diversified
and vacancies across four countries. The
weighted-average unexpired
lease term is 8.5 years and
the Group's largest tenant
concentration is with the
Government sector (40.1 per
cent).
- Poor asset management Property teams proactively
manage tenants to ensure
changing needs are met, and
review the current status
of all properties weekly.
Written reports are
submitted bi-weekly to
senior management on, inter
alia, vacancies, lease
expiry profiles and
progress on rent reviews.
Other investment risks
In assessing potential
Underperformance of corporate bond investments, the Group
portfolio Treasury department
undertakes research on the
bond and its issuer, seeks
third-party advice, and
receives legal advice on
the terms of the bond,
where appropriate. The
Group Treasury department
receives updates on bond
price movements and third
party market analysis on a
daily basis and reports on
corporate bonds to the
Board on a bi-weekly basis.
Funding risks
The Group has a dedicated
Unavailability of financing at Treasury department and
acceptable prices relationships are
maintained with
approximately 20 banks,
thus reducing credit and
liquidity risk. The
exposure on re-financing
debt is mitigated by the
lack of concentration in
maturities.
Adverse interest rate movements The Group's exposure to
changes in prevailing
market rates is largely
hedged on existing debt
through interest rate swaps
and caps, or by borrowing
at fixed rates.
Breach of borrowing covenants Financial covenants are
monitored by the Group
Treasury department and
regularly reported to the
Board.
Foreign currency exposure Property investments are
partially funded in
matching currency. The
difference between the
value of the property and
the amount of the financing
is generally unhedged and
monitored on an ongoing
basis.
Taxation risks
The Group monitors
The risk that there will be legislative proposals and
increases in tax rates or changes consults external advisors
to the basis of taxation. to understand and mitigate
the effects of any such
change.
Going concern
See note 1 to the group
The risk that given the economic financial statements.
uncertainties the Group will not
have adequate working capital to
remain a going concern for the next
12 months
PROPERTY PORTFOLIO
At 31 December 2009, the Group owned 68 properties containing 389
tenants in a total lettable area of 388,381 sq m. Contracted rent across the
Group was £64.0 million; net rent, which is contracted rent less net service
charge costs, was running at £61.9 million from properties with a book value
of £813.0 million, representing a net initial yield of 7.6%. Should the vacant
space at 31 December 2009 have been let at its estimated rental value (ERV) of
£3.1 million per annum, the yield would have been 7.9%.
The ERV of the entire portfolio was £61.3 million, of which £58.2
million related to the let portfolio which, therefore, was 9.1% over-rented.
However, around half of the over-rented element was in the UK, where the
weighted average lease length was over 10 years and £1.9 million of the
over-rented element in the UK was let to the Government for 16 years
unexpired. 67% of the Group's rent roll extended beyond five years and 27% had
over 10 years unexpired. The weighted average lease length across the Group
was 8.5 years. 40% of the rent roll was let to government tenants, and a
further 26% to major corporations.
Contracted Net Yield True
rent Net rent Book value initial when equivalent
£m £m £m yield fully let yield
UK 24.8 24.0 346.8 6.7% 7.3% 6.5%
France 18.8 18.6 222.8 8.0% 8.7% 7.7%
Germany 14.6 14.4 192.1 7.2% 7.8% 7.2%
Sweden 5.8 4.9 51.3 10.5% 9.5% 8.0%
64.0 61.9 813.0 7.6% 7.9%
Total ERV of
Vacant contracted total Weighted
Vacant @ ERV plus vacant portfolio Over-rented average
% £m £m £m £m lease length
UK 4.5% 1.3 26.1 23.3 2.8 10.4 years
France 4.2% 0.8 19.6 18.0 1.6 5.9 years
Germany 5.8% 0.9 15.5 15.1 0.4 9.3 years
Sweden 1.9% 0.1 5.9 4.9 1.0 6.4 years
4.5% 3.1 67.1 61.3 5.8 8.5 years
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RELATION TO THE ANNUAL REPORT
The Responsibility Statement has been prepared in connection with
the Company's full Annual Report for the year ended 31 December 2009. Certain
parts of the Annual Report are not included within this announcement.
We confirm to the best of our knowledge that:
- 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 of the Company and the
undertakings included in the consolidation as a whole; and
- the Business Review 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 they face.
This statement of responsibilities was approved by the Board on 10
March 2010.
By order of the Board
David Fuller BA FCIS
Company Secretary
11 March 2010
GROUP STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2009
2009 2008
Notes £m £m
Continuing operations
Group revenue 4 76.3 81.6
Costs 4 (30.3) (37.4)
46.0 44.2
Net movements on revaluation of
investment properties 10 (6.7) (103.3)
Profit on sale of investment
properties 0.3 7.0
Profit on sale of corporate bonds 1.9 -
Impairment of intangible fixed
assets and goodwill 12 - (22.0)
Loss on disposal of subsidiaries 30 - (16.2)
Operating profit/(loss) 41.5 (90.3)
Net finance costs 7 (25.5) (43.0)
Other non-recurring costs 5 - (1.3)
Share of profit/(loss) of
associates
after tax 14 2.5 (7.5)
Profit/(loss) before tax 18.5 (142.1)
Taxation 8 (1.1) 64.1
Profit/(loss) for the year 5 17.4 (78.0)
Other comprehensive income
Foreign exchange differences (9.5) 36.2
Fair value gains/(losses) on
corporate
bonds and other investments 15 13.5 (3.4)
Deferred tax on fair value gains on
corporate bonds 20 (3.2) -
Share of other comprehensive
income of associates 14 0.4 4.3
Total comprehensive income/
(loss) for the year 18.6 (40.9)
Profit/(loss) attributable to:
Owners of the Company 17.5 (78.1)
Minority interests (0.1) 0.1
Profit/(loss) for the year 17.4 (78.0)
Total comprehensive income
/(loss) attributable to:
Owners of the Company 18.7 (41.0)
Minority interests (0.1) 0.1
Total comprehensive income
/(loss) for the year 18.6 (40.9)
Earnings/(loss) per share from
continuing operations attributable
to the owners of the Company
during the year (expressed in
pence per share)
Basic 9 36.4 (120.6)
Diluted 9 36.4 (120.6)
Notes 1 to 32 are an integral part of these group financial statements.
GROUP BALANCE SHEET
At 31 December 2009
2009 2008 2007
Notes £m £m £m
Non-current assets
Investment
properties 10 813.0 798.8 1,175.3
Property, plant
and equipment 11 2.5 2.8 1.8
Intangible assets 12 1.1 1.1 19.5
Investments in
associates 14 40.9 39.3 42.3
Other investments 15 73.9 14.3 8.4
Derivative
financial
instruments 16 0.1 0.4 1.3
Deferred tax 20 12.7 12.4 2.9
944.2 869.1 1,251.5
Current assets
Trade and other
receivables 17 10.4 10.6 9.1
Derivative
financial
instruments 16 - - 1.3
Cash and cash
equivalents 18 70.3 195.3 122.0
80.7 205.9 132.4
Total assets 1,024.9 1,075.0 1,383.9
Non-current
liabilities
Deferred tax 20 (72.3) (73.4) (117.4)
Borrowings,
including finance
leases 21 (479.3) (529.1) (695.7)
(551.6) (602.5) (813.1)
Current
liabilities
Trade and other
payables 19 (30.1) (32.8) (59.7)
Current tax (5.0) (5.9) (2.7)
Derivative
financial
instruments 16 (15.7) (22.6) (2.3)
Borrowings,
including finance
leases 21 (113.5) (72.6) (103.0)
(164.3) (133.9) (167.7)
Total liabilities (715.9) (736.4 ) (980.8)
Net assets 309.0 338.6 403.1
EQUITY
Capital and
reserves
attributable to
the owners of
the Company
Share capital 23 13.3 16.7 18.7
Share premium
account 25 70.5 70.5 69.8
Other reserves 26 105.0 100.4 61.3
Retained earnings 121.5 152.2 254.4
310.3 339.8 404.2
Minority interest (1.3) (1.2) (1.1)
Total equity 309.0 338.6 403.1
Notes 1 to 32 are an integral part of these group financial statements.
GROUP STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2009
Attributable
to the
owners of
the
Company
Share Share Other Retained Minority
capital premium reserves earnings Total Interest Total
Notes £m £m £m £m £m £m £m
At 1 January 2009 16.7 70.5 100.4 152.2 339.8 (1.2) 338.6
Arising in 2009:
Total
comprehensive
income/(loss)
for the year - - 1.2 17.5 18.7 (0.1) 18.6
Purchase of
own shares 23 (3.4) - 3.4 (48.0) (48.0) - (48.0)
Expenses
thereof - - - (0.2) (0.2) - (0.2)
Total changes arising in 2009 (3.4) - 4.6 (30.7) (29.5) (0.1) (29.6)
At 31 December 2009 13.3 70.5 105.0 121.5 310.3 (1.3) 309.0
Attributable
to the
owners of
the
Company
Share Share Other Retained Minority
capital premium reserves earnings Total Interest Total
Notes £m £m £m £m £m £m £m
At 1 January 2008 18.7 69.8 61.3 254.4 404.2 (1.1) 403.1
Arising in
2008:
Total
comprehensive
income/(loss)
for the year - - 37.1 (78.1) (41.0) 0.1 (40.9)
Purchase of
own
shares 23 (1.5) - 1.5 (23.9) (23.9) - (23.9)
Expenses
thereof - - - (0.2) (0.2) - (0.2)
Employee share
option scheme 25 - 0.7 - - 0.7 - 0.7
Cancellation of
treasury shares (0.5) - 0.5 - - - -
Change in
minority
interest - - - - - (0.2) (0.2)
Total changes
arising in 2008 (2.0) 0.7 39.1 (102.2) (64.4) (0.1) (64.5)
At 31
December
2008 16.7 70.5 100.4 152.2 339.8 (1.2) 338.6
Notes 1 to 32 are an integral part of these group financial statements.
GROUP STATEMENT OF CASH FLOWS
for the year ended 31 December 2009
2009 2008
Notes £m £m
Cash flows from operating activities
Cash generated from operations 27 45.7 49.9
Interest received 4.8 8.7
Interest paid (30.1) (41.4)
Income tax paid (3.0) (0.4)
Net cash inflow from operating
activities 17.4 16.8
Cash flows from investing activities
Purchase of investment property (29.2) -
Capital expenditure on investment
property (22.8) (18.9)
Proceeds from sale of investment
property 2.2 127.5
Purchase of corporate bonds (70.8) (10.6)
Purchase of subsidiary undertakings - (2.7)
Proceeds from sale of corporate bonds 24.9 -
Proceeds from sale of equity
investments 0.7 0.3
Purchase of interests in associate (1.8) (0.9)
Dividend received from associate
undertaking 1.5 1.5
(Costs)/proceeds on foreign currency
transactions (4.2) 2.3
Amounts expended in relation to
corporate disposals in prior periods (1.0) (3.0)
Purchases of property, plant and
equipment (0.1) (0.2)
Proceeds on disposal of joint venture
net of cash sold 30 - 28.1
Proceeds on disposal of subsidiary
undertakings net of cash sold 30 - 49.2
Proceeds from sale of property,
plant and equipment - 0.4
Net cash (outflow)/inflow from
investing activities (100.6) 173.0
Cash flows from financing activities
Purchase of own shares (48.2) (24.1)
New loans 69.7 21.3
Issue costs of new loans (0.3) (2.3)
Repayment of loans (57.4) (122.9)
Purchase of financial instruments (0.1) -
Issue of shares - 0.7
Non-recurring restructuring costs - (1.3)
Net cash outflow from financing
activities (36.3) (128.6)
Net (decrease)/increase in cash
and cash equivalents (119.5) 61.2
Foreign exchange (loss)/gain (5.5) 12.1
Cash and cash equivalents at the
beginning of the year 195.3 122.0
Cash and cash equivalents at the
end of the year 18 70.3 195.3
Notes 1 to 32 are an integral part of these group financial statements.
NOTES TO THE GROUP FINANCIAL STATEMENTS
31 December 2009
1 General Information
CLS Holdings plc and its subsidiaries is an investment property group which is
principally involved in the investment, management and development of
commercial properties, and in other investments. The Group's principal
operations are carried out in the United Kingdom, France, Germany and Sweden.
The Company is registered in the UK, registration number 2714781, of
registered address: 86 Bondway, London, SW8 1SF. The Company is listed on the
London Stock Exchange.
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 2009. Whilst the financial information included in this
announcement has been computed in accordance with International Financial
Reporting Standards (IFRS), as adopted by the European Union, this
announcement does not itself contain sufficient information to comply with
IFRS. The financial information does not constitute the Company's statutory
accounts for the years ended 31 December 2009 or 2008, but is derived from
those accounts. Those accounts give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company and the
undertakings included in the consolidation taken as a whole. Statutory
accounts for 2008 have been delivered to the Registrar of Companies and those
for 2009 will be delivered following the Company's annual general meeting. The
auditors' reports on both the 2008 and 2009 accounts were unqualified; did not
draw attention to any matters by way of emphasis; and did not contain
statements under s498(2) or (3) Companies Act 2006 or preceding legislation.
Going concern
The current economic conditions have created a number of uncertainties as set
out above. The Group's business activities, together with the factors likely
to affect its future development and performance are set out in the Business
Review. The financial position of the Group, its liquidity position and
borrowing facilities are described in the Business Review and in notes 21 and
22 of the financial statements.
The Directors regularly stress-test the business model to ensure that the
Group has adequate working capital and have reviewed the current and projected
financial positions of the Group, taking into account the repayment profile of
the Group's loan portfolio, and making reasonable assumptions about future
trading performance. The Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in operational
existence for the foreseeable future and, therefore, they continue to adopt
the going concern basis in preparing the annual report and accounts.
2 Significant accounting policies
The principal accounting policies applied in the preparation of these group
financial statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
The financial statements have been prepared on a going concern basis as
explained above and have been prepared in accordance with International
Financial Reporting Standards ("IFRSs") as adopted by the European Union,
International Financial Reporting Interpretations Committee ("IFRIC")
interpretations, and the provisions of the Companies Act 2006 applicable to
companies reporting under IFRS.
New standards and interpretations
In the current year, the Group has adopted standards and guidance for the
first time, the following three of which have had a material effect on the
results for the year, or their presentation:
- Amendments to IAS 1 - Presentation of Financial Statements
- Amendments to IFRS 7 - Improving Disclosures about Financial Instruments
- IFRS 8 - Operating Segments
In accordance with IFRS 8, the reporting of the Group's operating divisions
has been restated to reflect the way in which senior management monitors the
Group. Under IAS 1, a change of comparatives, such as that occasioned by IFRS
8, requires a second comparative balance sheet to be
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