Annual Financial Report

RNS Number : 2713S

CLS Holdings PLC

08 March 2023

 

CLS HOLDINGS PLC

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

ANNOUNCES ITS UNAUDITED ANNUAL RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2022

The best offices in our locations

CLS is a leading FTSE250 office space specialist and a supportive, progressive and sustainably focused commercial landlord, with a c.£2.35 billion portfolio in the UK, Germany and France, offering geographical diversification with local presence and knowledge. For the year ended 31 December 2022, the Group has delivered the following results:

UNAUDITED		31 December			Change (%)
	2022		2021
EPRA Net Tangible Assets ("NTA") per share (pence) ¹	329.6		350.5	(6.0)
Statutory NAV per share (pence)¹	307.3		326.6	(5.9)
Contracted rents (£'million)	110.2		107.6	2.4
(Loss)/profit before tax (£'million)	(82.0)		91.5	NM 2
EPRA Earnings per share ("EPS") (pence) ¹	11.6		11.3	2.7
Statutory EPS from continuing operations (pence) ¹	(20.2)		29.3	NM 2
Dividend per share (pence)	7.95		7.70	3.2

Notes: ¹ A reconciliation of statutory to alternative performance measures is set out in Note 6 to the financial statements  ² Not Meaningful

Fredrik Widlund, Chief Executive Officer of CLS, commented:

"Against the backdrop of a challenging economy and uncertain property market, CLS has delivered solid and resilient results ahead of market expectations with lower relative valuation and NTA declines, reflecting the quality and locations of our properties and higher EPRA earnings.

"Over the last year, we have continued to invest in our properties to make them sustainable and attractive to tenants and ensure that we have the best offices in our locations. With the economic outlook and monetary policy conditions across our markets remaining uncertain, our focus in 2023 is to optimise our planned refinancings and leverage our in-house asset management capabilities to reduce vacancy rates, which will position the company well for the future."

FINANCIAL HIGHLIGHTS

· EPRA NTA down 6.0% primarily as a result of property valuation declines of 2.6% in Group currency (5.3% in local currencies), partially offset by increased EPRA earnings

· Portfolio valuation down 5.3%% in local currencies, better than the declines in the market reflecting the quality of our portfolio and indexed-linked leases. Yield expansion resulted in valuation decreases of 6.7% in the UK, 3.5% in Germany and 5.3% in France

· Loss before tax of £82.0 million (2021: £91.5 million profit) principally due to valuation declines on investment properties of £136.5 million (2021: £28.5 million gain)

· EPRA EPS up 2.7% to 11.6 pence per share from higher profits from our hotel and student operations and tax savings following conversion to a REIT in the UK, partly offset by lower net rental income from our offices given higher vacancy. Statutory EPS of (20.2) pence per share reflecting the valuation declines

· A proposed final dividend maintained at 5.35 pence per share to be paid on 2 May 2023, resulting in a total 2022 dividend of 7.95 pence per share, an increase of 3.2% (2021: 7.70 pence per share)

· Total accounting return for the year of -3.7% (2021: 3.7%)

· We anticipate increased financing costs in 2023 given higher interest rates but are focussed on reducing vacancy from our refurbished schemes and other vacant space

OPERATIONAL HIGHLIGHTS

· Net rental income stable at £107.8 million (2021: £108.0 million) due to disposals, redevelopment and leasing expiries resulting in higher vacancy offset by contributions from net acquisitions, higher student and hotel income, and the benefits of indexation

· Properties with contractual rental indexation increased to 55.5% (2021: 50.1%) of the Group portfolio

· Acquired two properties in Germany for £76.9 million, which completed in April and July respectively.  These properties were bought for their asset management opportunities at a combined net initial yield of 5.1% and a reversionary yield of 5.6%

· Disposed of six properties for £57.9 million (5.4% net initial yield) at 2.5% above 2021 book values

· Completed 106 lease events securing £8.2 million of annual rent at 4.8% above 31 December 2021 estimated rental values

· Vacancy rate increased to 7.4% (2021: 5.8%) with most of this increase due to the completion of developments currently being marketed to prospective tenants as well as some net lease expiries

· Rent collection has continued to remain strong with 99% collected (2021: 99%)

Financing

· Weighted average cost of debt at 31 December 2022 up 47 basis points to 2.69% (2021: 2.22%) resulting from the impact of central bank interest rate increases

· Loan-to-value at 42.2% (2021: 37.1%) reflecting valuation declines and net acquisitions during the year.  Gross debt of £1,105.9 million (2021: £1,031.6 million) with cash of £113.9 million (2021: £167.4 million) and £50 million (2021: £50 million) of undrawn facilities

· Weighted average debt maturity of 3.8 years (2021: 4.4 years)

· Financed or refinanced £229.9 million of debt in 2022 at an average of 3.24%, including £58.4 million fixed at 3.17%, and repaid £166.6 million of debt

· The loan portfolio as at 31 December 2022 had 72% at fixed rates and 4% subject to interest rate caps (31 December 2021: 85% fixed and 5% caps)

· Well advanced with 2023 and 2024 refinancing activity with £237 million out of £505 million executed or with credit approval secured, leaving £94 million to refinance in 2023 which we are confident will be completed successfully

ENVIRONMENTAL, SOCIAL AND Governance

· GRESB score remained good at 85 (2021: 85) and 4 green stars, with 86% (2021: 83%) of the managed portfolio achieving at least a 'Good' BREEAM In-Use rating

· 99.9% (2021: 92%) of Group electricity is now carbon-free, our rooftop solar PV energy output increased by 51% by installing a further 347kWp of new solar arrays in the UK and 43 electric vehicle charging points installed at 12 of our buildings in the UK

· Progress continues with implementing our ambitious, but achievable, long-term sustainability targets including our 2030 Net Zero Carbon Pathway at a total cost of £65 million. We completed 57 carbon reduction projects this year with spend on track with the plan  which will save an estimated 612 tonnes CO2e per annum and we were in-line with our Scope 1 & 2 target for 2022

· We are fully compliant with 2023 minimum EPC regulations in the UK and reduced our EPC D rated buildings by nearly 20% through a combination of refurbishments and disposals

· Continued action on social challenges including 562 employee volunteering hours given to community and charitable organisations, new diversity, equity & inclusion plan created and committed to Living Wage Foundation accreditation in the UK

Dividend Timetable

Further to this announcement, in which the Board recommended a final dividend of 5.35 pence per ordinary share, the Company confirmed its dividend timetable as follows:

Announcement date	8 March 2023
Ex-Dividend date	23 March 2023
Record date	24 March 2023
Payment date	2 May 2023

- ends -

Results presentation

A presentation for analysts and investors will be held in-person at Liberum Capital, by webcast and by conference call on Wednesday 8 March 2023 at 8:30am followed by Q&A. Questions can be submitted either online via the webcast or to the operator on the conference call.

· Liberum Capital: Ropemaker Place, 25 Ropemaker Street, London EC2Y 9L

· Webcast: The live webcast will be available here: https://secure.emincote.com/client/cls/cls006

· Conference call: In order to dial in to the presentation via phone, please register at the following link and you will be provided with dial-in details and a unique access code https://secure.emincote.com/client/cls/cls006/vip_connect

For further information, please contact:

CLS Holdings plc

(LEI: 213800A357TKB2TD9U78)

www.clsholdings.com

Fredrik Widlund, Chief Executive Officer

Andrew Kirkman, Chief Financial Officer

[phone]

Liberum Capital

Richard Crawley

Jamie Richards

[phone]

Panmure Gordon

Hugh Rich

[phone]

Berenberg

Matthew Armitt

Richard Bootle

[phone]

Edelman Smithfield (Financial PR)

Alex Simmons [phone]

Hastings Tarrant [phone]

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

" One of CLS' big attractions and differentiators is its open, positive culture, reflected in our Pan-European presence, which ensures the continued success of the Company"

Dear Shareholder

In 2022 the evolution of offices continued with the bifurcation of the market becoming more pronounced between high quality, attractive properties and those of a more secondary nature. Responding to these trends, CLS is continuing to invest significant amounts to ensure that we supply the best offices in our locations to meet the changing demands of tenants. There is much more on this theme throughout this report.

Performance and our property portfolio

In 2022, CLS delivered a resilient and solid performance with relative valuation outperformance compared to the market and higher earnings from a solid letting performance, improved operations from our one student and hotel operation and the benefits from the UK REIT conversion. Our balance sheet remains well capitalised and our diversified but focused approach continues to deliver.

EPRA NTA per share decreased by 6.0% to 329.6 pence per share (2021: 350.5 pence per share) and total accounting return, including the dividends paid in the year, was -3.7% (2021: 3.7%). The value of our property portfolio rose by 0.9% to £2.4 billion (2021: £2.3 billion) with the property portfolio now split 46% in the UK, 42% in Germany and 12% in France. The movement in the property portfolio was as a result of: £58.3 million capital expenditure; £26.9 million of net acquisitions (£83.4 million acquisitions less £56.5 million disposals); and an increase of £63.4 million as a result of the weakening of sterling by 5.0%, offset by £127.0 million from net valuation decreases of 5.3% in local currencies.

"Since CLS was established 30 years ago in 1992, the Company has successfully weathered several difficult periods. This current period is no different and our resilient strategy, quality offices and dedicated team are continuing to deliver, which leaves CLS well placed for future growth."

Environmental, Social and Governance

In a year that has again seen extreme events linked to climate change, it is even more important for companies like ours to lead the transition to a carbon-free future. As highlighted in this report, I am pleased that we are seeing positive results from implementing our Net Zero Carbon Pathway underlining our aim to reduce carbon emissions and energy intensity, whilst providing modern, sustainable office space that meets the needs of our tenants including reducing the overall cost of office occupation. Our commitment to the communities in which we invest remains a central part of our culture and this will be strengthened with the implementation of our Social Value Framework. This work is underpinned by our strong governance oversight; establishing our new Sustainability Committee further demonstrates our vision of being a leading sustainably-focused commercial landlord.

Strategic outlook

CLS has pursued a highly successful, focused strategy over the last 30 years with a commitment to delivering shareholder value through our long-term approach, which has been demonstrated in our track record. Our strategy and business model remain unchanged through the investment in, and active asset management of, well located, high quality offices in Europe's three largest economies. However, during this uncertain economic period, we will: be more cautious in considering acquisitions and only make disposals at the right values; execute our planned refinancings; and deliver lettings of our quality refurbishments, to drive growth.

Against the rising interest rate backdrop, CLS' treasury team continues to seek to match our borrowing with our properties' characteristics as set out in the later case study. In addition, CLS also has considerable rental upside within the existing portfolio which would more than offset the expected financing cost increase.

Dividends

Reflecting the more difficult economy currently, the Board has decided to propose a flat final 2022 dividend which, together with the 10.6% increase in the interim dividend, results in an increase of 3.2% in the full year dividend, which is 1.47x covered by EPRA earnings. The full-year dividend is in-line with our revised policy of having the dividend covered by EPRA earnings 1.2x-1.6x and in-line with the guidance given in May 2022 that 2022's dividend would be in the middle of the range.

Our staff and our culture

I was pleased to attend, and speak at, our first staff conference for three years and to experience first-hand the enthusiasm, positivity and resilience of our staff. As commented upon before, CLS' open, inclusive and supportive culture is a key differentiator and it is great to see that it continues to flourish with our dedicated team well-prepared and motivated to deal with all the ongoing challenges and opportunities.

Finally, I would like to thank our shareholders for their ongoing support as the Board continues to deliver long-term value for all stakeholders.

Lennart Sten

Non-Executive Chairman

8 March 2023

Maintaining the right culture

Maintaining a healthy culture

We continue to promote an open, collaborative culture within our workforce, with an efficient decision making structure which facilitates ownership and enables a hands-on operating process.

CLS' culture and the role of the Board

The Board recognises the need to establish the correct culture, values and ethics to ensure good standards of behaviour are maintained throughout the Group.

We engage with our employees in a number of ways, such as through the Workforce Advisory Panel, staff surveys, Board visits and property tours, and informal meetings, to ensure the voice of the workforce is prominent in our decision-making process.

The Board also receives information on human resourcing matters such as employee turnover and diversity statistics at each meeting. These feedback mechanisms allow the Board to understand how the culture of the Group evolves and, through the Chief Executive Officer, facilitates changes to ensure the Group maintains its Purpose, Vision and Values which underpin our culture.

How the Board assesses and monitors culture

The Board is able to assess and monitor Group culture through a range of key sources. The Board understands that these key sources of data are crucial in maintaining good communication with the employees who are integral in ensuring the success of the Company.

Five culture priorities are used to embed culture within our business activities and Board oversight:

· Promoting integrity and openness

· Valuing diversity

· Being responsive to the views of stakeholders

· Culture aligned to purpose and values

· Culture aligned to strategy

Chief Executive's review

" CLS continues to stay close to tenants and respond to their changing office demands. We are investing in our existing properties to improve their quality through well-being, amenity, flexibility, sustainability and digital enhancements to deliver the best offices in our locations."

Delivering on our strategy

Delivering on our strategy

2022 was very much a year of two halves, somewhat apt in a World Cup year, with the first half seeing a fairly stable market before the second half saw significant market deterioration in response to rising interest rates and a worsening economic outlook. Against this backdrop, CLS has, and is, very much focused on operational performance. To that end, we have included two larger case studies on investment into our properties to meet the greater quality demands and on our financing activity to ensure that we maintain sufficient liquidity and flexibility to allow us to deal with challenges and opportunities.

We have also included a longer piece on the office of the future in which we highlight that whilst hybrid working is likely to lead to lower demand for some offices, sustainability requirements are expected to reduce supply which will act as an offset. However, I think it is also worth reiterating why offices work for employees and employers, and why the attractions and necessities are being increasingly recognised again.

It is easy to confuse flexibility with working from home which are two very different things. Flexibility, alongside empowering employees, promotes a good work-life balance and helps employees achieve both personal and professional goals. As has become increasingly clear, working from home, more than a day or two, has been shown to simply not work very well for many roles and teams.

Fundamentally human beings are social creatures and the work benefits of this sociability such as collaboration, spontaneity, creativity, learning and mentoring are only effective when people meet. To encourage and help employees meet their objectives, the offices of the future must be flexible, inclusive and attractive. They must also provide both individual workspace as well as meeting rooms, video conferencing, chill-out areas, cafés and canteens amongst other amenities whilst being well-located to transport and urban facilities.

Ultimately, this might seem to be an unsurprising message from an owner of offices but we believe that deep down most people and organisations know this to be true. This belief is fundamental to our conviction of remaining a long-term office investor. To that end, we were a net acquirer in 2022, making two acquisitions for £76.9 million and six disposals for £57.9 million, resulting in net additions of £19.0 million. Given greater uncertainty in the market and focus, we expect to be a net disposer in 2023 although we do expect that there will be attractive acquisition opportunities emerging towards the end of the year.

In 2022, we completed on two properties in Dortmund and Dusseldorf for £76.9 million, which had exchanged in the first quarter of the year. Kanzlerstrasse, Dusseldorf completed at the end of April 2022 for £20.9 million and had a WAULT of c.8 years, an initial yield of 5.1% and a reversionary yield of 5.7%. The Yellow, Dortmund completed at the start of July 2022 for £56.0 million and had a WAULT of 5.2 years, an initial yield of 5.1% and a reversionary yield of 5.6%. We are actively asset managing the properties to secure market rents and lease the small amount of vacant space. More detail on these buildings is given in the country sections.

We continue to recycle capital on a selective basis, making disposals when: the business plan has been completed and there are limited opportunities to add value/drive returns; a more economic alternative use exists; or we are offered a compelling price. Additionally, we are seeking to increase the average size of our properties by disposing of smaller properties which usually consume a disproportionate amount of management time and are less economic to equip with the best amenities. To that end we sold six smaller properties (five in the UK and one in France), most for alternative uses, at a net initial yield of 5.4% for consideration of £57.9 million which was 2.5% above 31 December 2021 valuations.

In order to deliver the higher quality offices demanded by tenants, as discussed above and in the investing in our portfolio case study, we are investing greater amounts in our portfolio. We spent capital expenditure of £58.3 million in 2022 and would expect to spend similar amounts in 2023 as we are refurbishing more offices, from single floors to whole buildings, than at any time in our history. A description of our four largest developments and refurbishments across all three countries is set out in the case study about investing in our properties, which also highlights the considerable rental upside to be delivered. We are forecasting capital expenditure to fall for 2024 onwards from the heightened levels of 2022 and 2023 to a more normalised level of £20 to £30 million per annum including our 2030 Net Zero Carbon pathway spend.

Asset and property management

For CLS, active management is one of the five parts of our business model and "our tenants, our focus" is one of our four values. In a period of higher interest rates, the importance of being adept at asset management as a means of driving long-term value from a property portfolio has greatly increased and plays to CLS' strengths. Pre-pandemic, during the pandemic and now we are hopefully post-pandemic, CLS' rent collection has remained in excess of 99% as a result of building strong tenant relationships. On the whole, our properties are multi-let with over 700 tenants, of which 26% are government agencies, 39% are large corporations (with Group turnover over £36 million) and 13% are medium-sized corporations (with Group turnover between £10 and £36 million).

Last year was very much a tale of two markets with the investment market being sluggish at best whereas the letting market remained mostly favourable, particularly for higher-quality, sustainable offices. In 2022, the overall Group EPRA vacancy rate increased to 7.4% (2021: 5.8%) which is above our long-term target of 5% due to the impact of refurbishments and expiries. We are expecting the vacancy rate to remain elevated in the medium-term until we let our pipeline of refurbishments.

The vacancy position was mixed across the Group with considerable differences between countries. In France, the vacancy rate has fallen to 2.6% (2021: 3.0%) as a result of higher demand for smaller units (below 1,000 sqm) which fits with CLS' France space offering and we would expect vacancy to remain low in 2023. In Germany, the vacancy rate fell from 7.4% in 2021 to 6.1% in 2022 as we made further progress with letting the vacancy that was deliberately acquired for its asset management upside in 2021, and we are confident to see further reductions in German vacancy in 2023. In the UK, there is a much more difficult letting market and hence we are putting in considerable investment to upgrade the quality of our portfolio. The UK vacancy rate increased to 10.0% (2021: 5.4%) as a result of refurbished space being completed and lease expiries in excess of lettings. The vacancy rate may well increase in 2023 for the same reasons if lettings continue to take longer.

At 31 December 2022, the value of the portfolio was marginally up (by 0.9%) as a result of our investment in the portfolio, foreign exchange gains and net acquisitions largely offset by revaluation declines of 5.3% in local currencies. There were decreases in all countries with Germany down 3.5%, France down 5.3% and the UK down 6.7% in local currencies. Across all countries, the increase in interest rates and the risk-off nature of investors impacted valuations but there were also some regional and property specific differences.

In the UK, our government, Central London offices, developments, student and hotel performed well whilst other London and Southeast offices were in-line with the market, with equivalent yields increasing by 25 basis points to 5.61% (2021: 5.36%), ERVs decreasing by 0.3% and vacancy increasing.

In Germany, values in most of the cities where we have our properties fell by about 3% to 4% with equivalent yields expanding by 36 basis points to 4.75% (2021: 4.39%) with partial offset from ERVs increasing by 1.4% as well as benefits from reducing vacancy and significant indexation.

In France, values in Paris dropped 7.4% whilst valuations in Lyon and Lille were down 2.1% as overall equivalent yields increased by 9 basis points to 5.13% (2021: 5.04%) with some offset from ERVs increasing by 4.9% as well as benefits from reducing vacancy and all leases being indexed.

In aggregate, fair value declines reduced property values by £127.0 million including £7.8 million lease incentive debtor adjustments.

Financial results

We delivered resilient and solid results in 2022 against a challenging economic backdrop. Property valuations were down but outperformed relative to the market and EPRA earnings were ahead of last year as our student and hotel operations delivered record results and we saved tax by converting our UK business to a REIT at the start of 2022.

Loss from recurring operations was £81.9 million (2021: profit £77.3 million). Partly mirroring but outperforming the more challenging market, CLS suffered revaluation losses (with marginal gains on the sale of investment properties) in 2022 of £136.5 million (2021: £28.5 million gain) with a foreign exchange loss of £0.3 million (2021: £2.3 million). Earnings per share were a loss of 20.2p (2021: 29.3p gain) reflecting the revaluation loss.

As highlighted, EPRA earnings per share rose 2.7% from 11.3p in 2021 to 11.6p in 2022 as a result of improved hotel and student performance, the benefits of REIT conversion in the UK and lower foreign exchange losses partly offset by higher vacancy and related property costs.

EPRA NTA decreased by 6.0% (2021: 1.5% increase) to 329.6 pence per share, reflecting revaluation reductions of 5.3% in local currency and the payment of an increased dividend partly offset by EPRA earnings, a £33.6 million foreign exchange gain from the 5.0% weakening of sterling against the euro (2021: £39.5 million loss) and a 2.6 pence per share or 0.7% uplift from the September 2022 tender share buyback. The £25.5 million share buyback (1 for 40 at 250 pence per share) demonstrated our belief in the value of our portfolio.

At the year end, we had liquid resources of £113.9 million (2021: £167.4 million), reflecting net acquisitions and ongoing investment, as well as £50.0 million of undrawn credit facilities (£2021: £50.0 million). We are well progressed with our 2023 and 2024 financing, more of which in the 'financing at CLS' section.

In 2022, we generated £43.0 million net cash from operating activities (2021: £44.2 million) compared with EPRA earnings of £47.0 million (2021: £45.9 million) showing the continued strong cash generation of our business model. Of this cash, £32.4 million (2021: £30.8 million) was paid as a dividend to shareholders. Overall, we balance the use of the cash generated between dividends and reinvestment in the business to drive the total accounting return to shareholders, which was -3.7% in 2022 (2021: 3.7%) due to negative property revaluations.

Purpose, people and planet

Retaining the carbon value of existing real estate is being increasingly recognised as an important component of a low carbon future and this reinforces the long-term viability of our purpose and portfolio.

We recognise the importance of future proofing our assets in the face of ever tightening regulations across the UK and Europe. To this end, I am exceptionally proud of our progress against our sustainability strategy. We continue to improve the energy efficiency of our buildings as we refurbish them and, in line with our Net Zero Carbon pathway, this has resulted in the completion of 57 projects saving an estimated 612 tonnes of CO2e, equivalent to taking over 130 cars off our roads (https://www.epa.gov/greenvehicles/greenhouse-gas-emissions-typical-passenger-vehicle). We have yet again increased the amount of electricity we generate from on-site photovoltaic arrays, which is used for the benefit of our tenants and ultimately reduces their cost of office occupation, and totalled 706,787 kWh, enough to power 244 homes (https://www.ofgem.gov.uk/).

For the first time we are now reporting against our social value framework, measuring all aspects of our contributions to the societies and communities in which we invest. We have undertaken 41% more volunteering hours during 2022 than in 2021 and, along with all other areas measured, our Social Value is equivalent to £191,916, and I commend our teams for their efforts. We have committed to further enhancing the measurement of our social value contribution in the coming years.

We know we have an important part to play across our three strategic pillars and we are well placed to achieve our aims.

In 2022 we also recognised the impact of cost of living pressures on our employees. We introduced differentiated pay increases, rewarding our lower paid employees more given the greater impact of higher inflation upon them. Our employees are one of CLS' best assets and we remain committed to helping them thrive.

2.7%

Increase in EPRA earnings

99%

Rental collection

Looking to the future

We included our rent progression waterfall chart in last year's annual report and an updated version is included this year as securing these increases is critical to drive rental growth over and above rising financing costs. Set out below is an updated chart which shows:

· c ontracted rent at the end of 2022 of 110.2 million;

· the current potential Estimated Rental Value ("ERV") of the portfolio of £121.4 million if all vacant space (£9.0 million increase) and net reversionary potential (£2.2 million increase) were captured. We do though benefit from some vacancy/churn within the portfolio to capture reversion more quickly and/or to allow the refurbishment of older properties. It is therefore recognised that not all of this vacancy upside should or will be captured;

· the potential increase to ERV over 2023 and 2024 to £136 million from refurbishments and committed developments (£14.5 million); and

· the potential increase to ERV between 2024 and 2026 to £139 million from uncommitted development opportunities in the portfolio (£3.0 million increase)

In addition to these increases up to 2026, there is further potential from indexation, with over half the portfolio having contractual increases, and market movements as well as executing transactions, both acquisitions and disposals, to focus the portfolio on faster growing properties. Post 2026, we have significant development, redevelopment or rental increase opportunities at Spring Gardens and New Printing House Square, both of which are in Zone 1 in London.

We expect 2023 to be in many ways the reverse of 2022 with the first six months being challenging whilst inflation and interest rates are forecast to peak before the economy and property market improve in the second half. Our strategy and our focus on the three largest countries in Europe remains unchanged but as usual with slightly different priorities as we expect to be a net seller in 2023 and thus will place even greater emphasis on operational improvements. Ultimately, we are confident that CLS will remain successful by responding to tenant and market needs by having the best properties in our locations.

Fredrik Widlund

Chief Executive Officer

8 March 2023

Chief Financial Officer's review

" in 2022 CLS delivered solid results with lower valuation falls relative to the market and we have made significant progress with the planned refinancing activity for 2023 and 2024."

Summary

EPRA net tangible assets ('NTA') per share, fell by 6.0% to 329.6 pence (2021: 350.5 pence) and basic net assets per share by 5.9% to 307.3 pence (2021: 326.6 pence). Loss after tax of £81.9 million (2021: £119.5 million profit) generated basic earnings per share of (20.2) pence (2021: 29.3 pence) but EPRA earnings per share of 11.6 pence (2021: 11.3 pence). EPRA EPS provided 1.47x cover of the full year dividend of 7.95 pence per share.

On 1 January 2022, we converted our UK operations to a REIT which has resulted in a saving of at least £3 million per annum in tax. In May 2022, in response to becoming a REIT, CLS also updated its dividend policy as described below. The other notable event was the 1 for 40 share buyback tender offer executed in September 2022 to demonstrate our belief in the value of our portfolio.

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 6 gives a full description and reconciliation of our APMs.

Income statement

Net rental income in 2022 of £107.8 million, was little changed from 2021 (£108.0 million). The increases arose from acquisitions (£4.1 million) made in 2021 and the start of 2022, and indexation gains of £1.5 million as the majority of our properties have index-linked rent. As a result of a post pandemic bounce, we recorded record results from our hotel and student operations with rental increases of £2.2 million and £2.1 million respectively. Disposals reduced rental income by £3.4 million and the movement of properties into refurbishments lowered rental income by £1.9 million. Higher vacancy, mainly in the UK, resulted in higher net service expenses of £2.2 million and net lease expiries of £1.8 million. Other, including FX, lowered rents by £0.8 million.

The strength of CLS' tenant relationships and the quality and diversity of our tenant base has continued to be reflected in our rent collection. CLS collected over 99% of rent before Covid-19, over 99% during the pandemic and over 99% in 2022. Rent collection for the first quarter of 2023 is over 95% as is usual at this point in time.

Overall administration and property expenses increased by £2.5 million to £31.9 million (2021: £29.4 million) primarily as a result of: higher student and hotel expenses of £1.2 million given higher occupancy; a one-off release of bad debt provisions in 2021 of £0.3 million with a more normal charge of £0.6 million in 2022; and an increase in operating costs of £0.4 million given higher vacancy. The proportion of index-linked rent increased to 55.5% (2021: 50.1%) of the total contracted rent of the portfolio. This high level of indexation continues to be a significant benefit in a time of higher inflation and increasing interest rates.

Due to the higher level of costs, CLS' administration cost ratio increased to 14.5% (2021: 14.1%) and the EPRA cost ratio rose to 25.8% (2021: 22.6%).

Given market weakness from higher interest rates and economic uncertainty, the valuation of CLS' properties fell, although the reduction was lower than wider market movements. The reduction in the value of investment properties, excluding lease incentive movements, was £136.5 million (2021: £28.5 million gain) with falls in the UK of 6.7%, Germany 3.5% and France 5.3% in local currencies.

CLS has small shareholdings in two listed non-core Swedish companies. CLS now directly holds 2.92% of Fragbite Group AB and indirectly 8.9% of Vo2 Cap Holding AB, both of which are classified as investments given that CLS has no control over their affairs. The share prices of both companies fell in 2022 resulting in a loss of £3.8 million (2021: £7.5 million profit including a part disposal).

Six properties were sold in 2022 for an aggregate consideration of £57.9 million. This was 2.5% above book value which, after costs, resulted in a profit on sale of properties before tax of £0.5 million (2021: £0.1 million loss).

Finance income of £10.1 million (2021: £5.9 million) included unrealised gains on derivative financial instruments of £8.8 million (2021: £5.2 million) from higher interest rates.

Excluding the derivative financial instruments, finance income increased by £0.6 million as interest received increased to £1.3 million (2021: £0.5 million) given higher interest rates on cash deposits and dividends receivable fell by £0.2 million (2021: 0.2 million).

Finance costs increased to £26.8 million (2021: £25.4 million) due to the increase in the amount of borrowings and cost, given wider market interest rate increases.

Approximately 49% of the Group's sales are conducted in the reporting currency of sterling and 51% in euros. Whilst the average sterling rate against the Euro strengthened marginally by 0.8%, there were far fewer transactions in 2022 compared to 2021 and consequently FX losses were at a much lower level. In 2022, foreign exchange losses were £0.3 million in the income statement (2021: £2.3 million).

Exchange rates to the £	EUR
At 31 December 2020	1.1185
2021 average rate	1.1634
At 31 December 2021	1.1893
2022 average rate	1.1732
At 31 December 2022	1.1295

The effective tax rate of 0.0% (2021: -30.6%) was below the weighted average rate of the countries in which we operate principally as a result of the conversion of CLS' UK operations to a REIT and thus minimal tax is now paid in the UK.

Overall, EPRA earnings were higher than last year at £47.0 million (2021: £45.9 million) and generated EPRA earnings per share of 11.6 pence (2021: 11.3 pence). The increase of 0.3 pence in EPRA EPS was primarily due to: the strong performance of the hotel and student operation; tax savings following the conversion of CLS' UK operations to a REIT; and relative improvement in FX losses, partly offset by: increased vacancy in the UK leading to lower revenue and higher costs; and higher interest costs.

EPRA net tangible assets and gearing

At 31 December 2022, EPRA net tangible assets per share were 329.6 pence (2021: 350.5 pence), a fall of 6.0%, or 20.9 pence per share. The main reasons for the decrease were: property valuation decreases of 5.3% or 33.9 pence per share; dividends of 7.95 pence per share paid in the year; and other movements of 1.5 pence per share, partly offset by: EPRA earnings per share of 11.6 pence per share; foreign exchange gains on our European business of 8.6 pence per share; and a 2.6 pence per share benefit from the share buyback.

Balance sheet loan-to-value (net debt to property assets) at 31 December 2022 increased to 42.2% (2021: 37.1%) as a result of net acquisitions and capital expenditure, and property valuation reductions. The loan-to-value of secured loans by reference to the value of properties secured against them was 49.2% (2021: 46.3%). The value of properties not secured against debt increased to £105.1 million (2021: £100.8 million). In 2023, CLS is expected to be a net disposer of property and thus, in the absence of significant property valuation falls, LTV is expected to reduce.

Cash flow and net debt

As at 31 December 2022, the Group's cash balance had fallen to £113.9 million (2021: £167.4 million). Net cash flow from operating activities generated £43.0 million, a reduction of £1.2 million from 2021. £32.4 million was distributed as dividends and £27.5 million paid out for financing costs and tax, with the remainder reinvested in the business to grow net tangible assets. Acquisitions of £83.8 million and capital expenditure of £57.2 million were partly funded by proceeds after tax from property disposals of £53.0 million and the net drawdown of loans of £51.3 million. The net result of property and financing transactions, and after the share buyback cost of £25.8 million and other of £1.6 million, being the investment of £53.5 million in our property portfolio.

Gross debt increased by £74.3 million to £1,105.9 million (2021: £1,031.6 million) due to: the net drawdown of loans of £43.6 million, amortisation of loan issue costs of £1.9 million and the increase of £28.8 million due to the weakening of sterling against the euro. In the year, £144.1 million (£143.0 million net of capitalised fees) of new or replacement loans were taken out, loans of £80.9 million were repaid and £18.5m of contractual periodic or partial repayments were made. Year-end net debt rose to £992.0 million (2021: £864.2 million). At the year end, CLS' additional facilities remained unchanged comprising undrawn bank facilities of £50.0 million, of which £30.0 million was committed.

The weighted average cost of debt at 31 December 2022 was 2.69%, 47 basis points ('bps') higher than 12 months earlier. The movement was as a result of: an increase in the reference rates on floating rate loans (28 bps increase); new higher cost debt drawn for acquisitions and various refinancings completed (29 bps increase), partly offset by: the expiration of legacy interest rate swaps (6 bps reduction); repayments of higher cost debt on disposals (3 bps reduction); and the strengthening of the euro against the pound (1 bps reduction). In 2022, interest cover remained at a healthy level of 3.0 times (2021: 3.2 times).

Financing strategy and covenants

A larger section on the Group's financing strategy is included in this report but a few of the key points are worth repeating here. Significant progress has been made with the refinancing activity for 2023 but also for 2024 when a greater proportion of the Group's debt falls due. The Group's financing priorities remain to keep the cost of debt low whilst maintaining an appropriate LTV, maintaining a high proportion of fixed debt, increasing the amount of green loans and seeking to match the Group's weighted average debt maturity against the Group's WAULT.

As noted, CLS' objective remains to keep a high proportion of fixed rate debt. However, in 2022 more floating rate loans than usual were executed given that: some properties are to be sold and thus wanting to avoid break costs; some loans were extended whilst the letting profile was improved in advance of securing a longer term fixed rate loan; and a belief that interest rates were temporarily higher given the quickened pace of interest rate increases and greater market volatility.

In 2022, the Group financed, refinanced or extended 12 loans to a value of £229.9 million for a weighted average duration of 2.8 years and at a weighted average all-in rate of 3.24%, and of these £58.4 million were fixed at a weighted average all-in rate of 3.17%. Consequently, at 31 December 2022, 72.4% of the Group's borrowings were at fixed rates or subject to interest rate swaps, 3.8% were subject to caps and 23.8% of loans were unhedged. The fixed rate debt had a weighted average maturity of 4.4 years and the floating rate 2.2 years. The overall weighted average unexpired term of the Group's debt was 3.8 years (2021: 4.4 years).

The Group's financial derivatives, predominantly interest rate swaps, are marked to market at each balance sheet date. At 31 December 2022 they represented a net asset of £8.5 million (2021: £0.4 million liability).

At 31 December 2022, the Group had 46 loans (36 SPVs, eight portfolios and two facilities) from 25 lenders. The loans vary in terms of the number of covenants with the three main covenants being ratios relating to loan-to-value, interest cover and debt service cover. However, some loans only have one or two of these covenants, some have other covenants and some have none. The loans also vary in terms of the level of these covenants and the headroom to these covenants.

On average across the 46 loans, CLS has between 25% and 35% headroom for these three main covenants. In the event of an actual or forecast covenant breach, all of the loans have equity cure mechanisms to repair the breach which allow CLS to either repay part of the loan, substitute property or deposit cash for the period the loan is in breach, after which the cash can be released.

Distributions to shareholders and total accounting return

In May 2022, following the conversion of CLS' UK business to a REIT, the Group announced an updated dividend policy for the 2022 financial year onwards. CLS announced that it would maintain a progressive dividend policy, with a dividend cover of 1.2 to 1.6 times EPRA earnings (previously 1.5 to 2.0 times) which equates to a pay out range of 63% to 83% of EPRA earnings. It was also announced that it was expected that FY 2022 dividend cover would be around the middle of the new range.

The proposed final dividend for 2021 of 5.35 pence per share (£21.8 million) was paid in April 2022. In October 2022, following the completion of the share buyback tender offer, CLS paid an interim dividend of 2.60 pence per share (£10.6 million), an increase of 10.6% compared to 2021 interim dividend of 2.35 pence per share.

Given ongoing uncertainty, the proposed final dividend for 2022 is maintained at 5.35 pence per share (£21.4 million), the same level as 2021. This would result in a full year distribution of 7.95 pence per share (£32.0 million), covered 1.47 times by EPRA earnings per share. The 2022 dividend is an increase of 3.2% over the prior year and the total accounting return, being the reduction in EPRA NTA plus the dividends paid in the year, was -3.7% (2021: 3.7%).

As a result of the conversion of our UK operations to a REIT, shareholders receive dividends comprising two elements. The dividends comprise a Property Income Distribution ('PID') from the UK REIT operations and a second element from CLS' remaining operations. For the interim dividend of 2.60 pence per share, the PID was 1.20 pence per share and for the proposed final dividend of 5.35 pence per share, the PID will be 1.36 pence per share giving a full year dividend of 7.95 pence per share of which 2.56 pence per share is the PID. The split between the PID and the dividend from our remaining operations is likely to fluctuate over time, and will depend on the level of capital allowances and inter-company interest, amongst other things.

Andrew Kirkman

Chief Financial Officer

8 March 2022

United Kingdom

£1,170.6m

Value of property portfolio

46%

Percentage of Group's property interests

39

Number of properties

204

Number of tenants

10.0%

EPRA vacancy rate

1.8m sq. ft

Lettable space

78%

Government and large companies

3.7 years

Weighted average lease length to end

33.0%

Leases subject to indexation

Portfolio movement and valuation summary

The value of the UK portfolio decreased by £90.3 million as a result of: net disposals of £12.9 million (capital expenditure of £36.7 million partly offset by five disposals for £49.6 million); a valuation decline of £77.3 million or 6.7%; and depreciation of £0.1 million. The 6.7% valuation decline was as a result of equivalent yields increasing by 27 basis points on a like-for-like basis and ERVs decreasing by 0.3%. However, this does not give the full picture with some strong segment performance offsetting area weakness.

CLS' UK portfolio valuation movements most logically split as:

· Government, Central London offices, Artesian and the Coade, student and hotel operations (56% of the portfolio) delivered relative outperformance against the market with a 1.4% decrease in valuation with yield expansion of 36 basis points partially offset by ERV growth of 1.1%. The relative outperformance is due to the attractiveness of government income with its higher proportion of indexation, stronger covenant and some lease regears alongside the stronger performance of the hotel and student with some offset from our major developments until they are let;

· Other London offices (31% of the portfolio) which were more in-line with wider office market movements being down 10.3% with yield expansion of 25 basis points and ERV reduction of 2.5% on a like-for-like basis; and

· Southeast offices (13% of the portfolio) were reflective of the Southeast market generally as values fell 18.0% with yield expansion of 59 basis points and a decrease in ERV of 1.5% on a like-for-like basis.

"The UK is our most challenging occupational market currently - we are responding by carrying out our largest number of refurbishments and this is already leading to an increase in enquiries."

Developments and refurbishments

Construction of "The Coade", our 28,400 sq. ft (2,638 sqm) new office development at Vauxhall Walk, London, is almost complete. We have had several viewings and are confident to secure our first tenant shortly. "Artesian", our development at 9 Prescot Street, London, is also progressing well. The 92,500 sq. ft (8,594 sqm) development, is expected to complete in Q2/Q3 2023. More details are available on both developments in the 'investing in our portfolio' section.

Other smaller refurbishments were carried out, including a pre-let at Reflex in Bracknell with a full CAT A refurbishment of the 5,700 sq. ft (530 sqm) suite as well as undertaking a bespoke tenant fit-out to enhance their space. Our property at 6 Lloyds Avenue in the City of London is a Grade II listed building, therefore the refurbishments, which encompass both CAT A and CAT A+ specifications, have required a sensitive approach. The resulting works created modern and attractive spaces which provide flexibility for tenants seeking either managed solutions or traditional leases.

Disposals

During the course of 2022 we continued with our strategy of disposing of some of our smaller assets or those that have a greater value for alternative uses.

In line with our strategy, we sold five assets for £50.0 million, which was 0.9% above the 31 December 2021 valuation. For more details, see the case study.

Asset management

The vacancy rate increased to 10.0% as at 31 December 2022 (2021: 5.4%) as result of a number of significant refurbishments, such as at 405 Kennington Road and Harman House in London, being completed throughout the year. There were also a few instances where tenants sought to downsize their space in response to changing working patterns amongst their staff.

In 2022, we let or renewed leases on 105,782 sq. ft (9,827 sqm) and lost 201,170 sq. ft (19,454 sqm) of space from expiries. Excluding rent reviews, 54 lease extensions and new leases secured £2.9 million of rent at an average of 2.8% above ERV. The most significant transactions were a new 10-year lease with ATS Euromaster at Aqueous II, Birmingham for 13,114 sq. ft (1,218 sqm) and a new 10-year lease with BioHorizons UK Limited for 5,700 sq. ft (529 sqm) at Reflex in Bracknell. Not included in our 54 deals was the removal of break clauses for leases with the Secretary of State for: Unicorn House, Bromley; Armstrong Road, Acton; and 62 London Road, Staines, which secured a total rent of £2.7 million p.a. for an additional five years past the previous break date of April 2023. Furthermore, the lease associated with our largest asset at Spring Gardens is subject to annual indexation and contracted rent increased by approximately £1 million as a result of the 10.5% RPIx uplift.

Our student and hotel operations continued to perform extremely well throughout the year, achieving record results. The student accommodation was fully let for the 2022/23 academic year and the hotel occupancy was at an average of 87% for 2022 (70% in 2021) with much higher average daily rates. The hotel has just undergone a limited refurbishment programme to ensure it continues to provide best in class accommodation for both short and extended stay customers.

Market overview and outlook

The UK economy has continued its recovery from the effects of the pandemic and 2022 GDP growth of 4.1% exceeded estimates made earlier in the year. This also reflects recent comments from the Bank of England that any downturn in the UK economy is due to be shorter and less severe than had been previously predicted. During 2022, to control the inflation which was close to 10%, the Bank of England increasingly raised the base rate from 0.25% in January 2022 to 4% by February 2023 and the market is expecting further rate rises in the first half of the year.

In terms of the UK property investment market, commercial volumes for the year fell to c. £41 billion, which was down by more than 20% compared with 2021, and reflects the political and economic uncertainty which occurred during last year.

Leasing transactions and activity in Central London were positive with 20% growth while the rest of the South-East office market showed a decline of a similar order with a 25% drop in leasing volumes. This illustrated the flight to quality both in terms of the buildings themselves but also location, with well-located and modern offices performing strongly irrespective of geographical location. Vacancy in London was relatively stable during the year at 8.5%.

Early evidence however suggests that activity has picked up at the start of 2023 which it is hoped will lead to a further increase in take-up.

We continually assess whether to hold or sell properties

49%

Year on year increase in UK capital expenditure

UK Disposal Programme

During the course of 2022, CLS successfully completed the disposal of five assets within the UK for a total consideration of £50.0m which was 0.9% above the book value of these properties as at 31 December 2021.

The assets were sold as part of the Group's strategy of disposing of assets which are either too small to have a meaningful impact on the Group's profitability or have greater value for alternative uses. This is with a view to re-investing the proceeds in our core portfolio through development and refurbishment or through acquisitions.

The largest transaction was the sale of Great West House. This is a prominent office building close to the M4 in West London which had been part of the Group's portfolio since 1996 and has significant potential for alternative uses, subject to planning. Other buildings, such as Kings House in Bromley and Crosspoint House in Wallington were sold with the benefit of prior approval for conversion to residential.

Sentinel House in Coulsdon was sold to an owner occupier at the end of a 10-year lease which allowed the Group to realise a capital receipt having benefited from the rent for the majority of the lease term.

Germany

£996.0m

Value of property portfolio

42%

Percentage of Group's property interests

33

Number of properties

372

Number of tenants

6.1%

EPRA vacancy rate

3.9m sq. ft

Lettable space

56%

Government and large companies

5.2 years

Weighted average lease length to end

64.5%

Leases subject to indexation

Portfolio movement and valuation summary

The value of the German portfolio increased by £108.0 million as a result of: net additions of £93.3 million (two acquisitions for £83.4 million including costs and capital expenditure of £9.9 million); and a foreign exchange gain of £49.0 million, partly offset by a valuation loss of £34.2 million or 3.5% in local currency and depreciation of £0.1 million. The like-for-like valuation decrease, which excludes the acquisition costs, was 3.3%. The 3.5% valuation decline was as a result of equivalent yields expanding by 36 basis points (30 basis points on a like-for-like basis) with partial offset from ERVs increasing by 1.4% as well as benefits from reducing vacancy and significant indexation.

Values in most of the cities where we have our properties fell by about 3% to 4%. The two exceptions were firstly Stuttgart where values were down 11.2% given both a weaker market and CLS' decision to delay the development of Vor dem Lauch given this market uncertainty and secondly, in Berlin, where valuations were down 0.8%, which was mainly driven by the valuation increase for Adlershofer Tor following the granting of building consent for a rooftop extension.

"Whilst Germany experienced some economic turmoil in 2022, the market fundamentals remain strong and we expect vacancy to reduce further in 2023."

Acquisitions and disposals

In 2022 we purchased two properties for £76.9 million with combined initial yields of 5.1% and a combined reversionary yield of 5.6%. There were no disposals in the year.

The acquisition of these two properties is discussed in more in the 'investing in our portfolio' section.

Developments and refurbishments

Various refurbishments continue across our portfolio focusing on improving the quality of our assets by meeting tenants' needs and enhancing the sustainability credentials of our properties. At Office Connect in Cologne and Hansaallee in Düsseldorf, the entrance areas as well as outdoor facilities have been completely redesigned and the buildings now include co-working spaces, as well as refurbished receptions.

Flexion in Berlin was purchased in 2021. The 71% acquired vacancy rate has been reduced through a substantial re-design, allowing us to re-position the property in the local market and successfully let 30,279 sq. ft (2,813 sqm). All space not currently under development in this building is now let. Grafelfing in Munich, was previously occupied by a single tenant for 15 years. We are currently working closely with our new tenant Toptica on their 62,458 sq. ft (5,803 sqm) space, improving it by tailoring to their needs. In terms of executing our longer term development strategy, planning has been granted for a rooftop extension at Adlershofer Tor, Berlin which would increase the lettable area of the building by approximately 46,285 sq. ft (4,300 sqm).

Asset management

EPRA vacancy rates reduced from 7.4% at 31 December 2021 to 6.1% the end of 2022. This reduction was due to a significant number of lettings during the year, acquisitions with lower weighted average vacancy and ongoing refurbishment of vacant units. In 2022, we let or renewed leases on 503,473 sq. ft (46,774 sqm) and lost 507,074 sq. ft (47,109 sqm) of space from expiries. Excluding those arising from contractual indexation uplifts, 32 lease extensions and new leases secured £3.8 million of rent at an average of 8.2% above ERV. Leases subject to indexation increased by an average of 6.3%. The most significant transactions were a new 10-year letting for 62,458 sq. ft (5,803 sqm) to Toptica at Grafelfing in Munich and a new 5-year letting for 19,343 sq. ft (1,797 sqm) to All3Media. Both deals were executed at rents above ERV and helped significantly decrease vacancy in their respective buildings. At the end of 2022, the portfolio was 2.1% net reversionary. In light of the continued recovery of the letting markets and despite the market increased vacancy rates, we believe that there is the potential for further rental growth.

Market overview and outlook

The German economy has continued to recover and achieved 2022 GDP growth of 1.9% as a result of a strong finish to the year. German industry has proven to be much more resilient than some anticipated, with dependency from Russian gas reduced to such a level that the implementation of emergency plans did not materialise, and the entire winter supply was secured. Inflation was close to 9% in 2022 and the ECB increasingly raised the base rate from 0% in January 2002 to 2.5% by February 2023 with a further 0.50% increase announced for March.

The commercial property investment market for the year fell to c. €51 billion which was 16% below 2021 reflecting rising interest costs and continued uncertainty around the geopolitical situation.

Leasing transactions and take-up in the top seven cities were similar to 2021 and in-line with the 10-year average. Berlin and Munich performed strongly and we are continuing to see rental growth in most cities. Vacancy across the seven cities increased slightly to an average of 5% with Stuttgart and Cologne at 3%, Berlin, Hamburg, and Munich at circa 4%, and Frankfurt and Dusseldorf around 8%.

Many occupiers have started to show a willingness to return to the market and we expect activity to improve gradually over the year in the larger cities.

We acquire the right properties

£76.9m

Properties acquired in 2022

Acquisitions

Despite a challenging market, 2022 provided selected, attractive opportunities to grow the portfolio in our locations.

In April we completed on the purchase of Kanzlerstrasse 8, Dusseldorf for £20.9 million which is situated in a well-connected and growing submarket of the city. The 98,684 sq. ft (9,168 sqm) property is occupied by three tenants including the anchor tenant Amevida with a WAULT of c.8 years and net initial yield of 5.1%.

In July we completed on the purchase of The Yellow, Dortmund for £56.0 million. The 258,140 sq. ft (23,982 sqm) office is located in the central business district of Dortmund, next to the central shopping district. The property is occupied by Postbank, a department of the federal state of North Rhine-Westphalia and two smaller tenants with an overall WAULT of 5.2 years and net initial yield of 5.1%.

Both properties provide opportunities to take advantage of the net reversion through improving the ESG credentials of the buildings, under-renting and letting remaining vacancy. The combined reversionary yield is 5.6%.

France

£286.1m

Value of property portfolio

12%

Percentage of Group's property interests

17

Number of properties

147

Number of tenants

2.6%

EPRA vacancy rate

0.8m sq. ft

Lettable space

56%

Government and large companies

4.9 years

Weighted average lease length to end

100.0%

Leases subject to indexation

Portfolio movement and valuation summary

The value of the French portfolio increased by £3.7 million as a result of: net acquisitions of £4.8 million (capital expenditure of £11.7 million offset by disposals of £6.9 million); and a foreign exchange increase of £14.4 million, partly offset by a revaluation decline of 15.5 million or 5.3% in local currency. The 5.3% valuation decline was as a result of equivalent yields expanding by 9 basis points (12 basis points on a like-for-like basis) with some offset from ERVs increasing by 4.9% as well as benefits from reducing vacancy and all leases being indexed.

Values in Paris dropped 7.4% reflecting our more suburban locations whilst valuations in Lyon and Lille were down 2.1% given the stronger Lyon investment market.

"The market in France remains mixed with good demand in central Paris and Lyon but weaker demand in Parisian suburbs such as those around La Défense. There is also good demand for smaller space, as offered by CLS, which is keeping our vacancy low."

Developments and refurbishments

During the year we continued on a programme of refurbishing several of our French properties. The two most significant are the redevelopment of D'Aubigny and Park Avenue, both in Lyon.

The works at Park Avenue are close to completion with the building launch taking place in January 2023. Several agents attended and were given a tour of the €11.2 million refurbishment which included replacement of the existing façade and creation of new common terraces through the extension of existing landings. The sustainability credentials of the building were improved through the installation of new windows, electric shades and a green roof. During the works, the tenants have been relocated to temporary office space to ensure the project was delivered as quickly as possible. They will resume occupation in Q1 2023. There has been good interest in the refurbished vacant areas with two deals already executed with the tenants moving in on completion of the works towards the end of Q1 2023.

The works completed at D'Aubigny included the replacement of the existing façade and new windows. This project completed on time in October 2022 and at the budgeted cost of €3.2 million. The improvements will be BREEAM certified and are expected to achieve "Excellent".

Disposals

During the course of 2022 we disposed of Rue Nationale and a small piece of land for £7.8 million. The disposals were completed at 13.6% above 31 December 2021 valuation. In February we exchanged on the sale of a property in Paris which offers higher value as a development opportunity. The sale price of €11.1 million was 0.5% above the 31 December 2022 year end valuation and is expected to complete in April 2023.

Asset management

EPRA vacancy in France reduced to 2.6% as at 31 December 2022 (2021: 3.0%) with the reduction largely driven by active asset management. Despite several tenants leaving during the period, new tenants were secured to the fill the vacancies, with new lettings exceeding expiries.

In 2022, we let or renewed leases on 67,130 sq. ft (6,237 sqm) and lost 65,261 sq. ft (6,063 sqm) of space from expiries or vacancies. Excluding contractual indexation uplifts, 20 lease extensions and new leases secured £1.5 million of rent at an average of 0.3% above ERV. The most significant transactions during the year were: a lease renewal at Rhône Alpes for 11,345 sq. ft (1,054 sqm) with Aesio Mutuelle via a 1/3/6/9 year lease; and a pre-letting at Park Avenue for 9,289 sq. ft (863 sqm) with Hopscotch Group. On a like-for-like basis, ERVs increased by 4.9%, with index-linked rental increases at an average of 3.3%.

Market overview and outlook

The French economy achieved GDP growth of 2.5% in 2022, also on the back of a strong fourth quarter, and again proved its resilience with the benefits of a diversified and large domestic market. French inflation was lower than other European countries at 6% driven by state interventions in the energy markets and other stimuli. In common with Germany, the ECB increasingly raised the base rate from 0% to 2.5% by February 2023 with a further 0.50% increase announced for March.

The French property investment market had a strong year with an increase of 6% to c. €25 billion. The strongest growth was recorded in the larger regional cities like Lyon and Lille, while Greater Paris was marginally up but with a mixed picture between the different districts.

In the letting market, after two relatively flat years, we saw a return to a more dynamic market with 10% growth in take-up in Greater Paris. The Lyon market continued to perform strongly with 16% growth over the year. Vacancy in Greater Paris was up marginally to 7.8% but with large variances between the districts; Paris CBD has 3.5% vacancy while La Défense is close to 16%. Vacancy in Lyon fell from 5.2% to 4.4% on the back of the strong demand mentioned above.

We expect to see a similar picture for this year with a strong Lyon market and a fragmented Greater Paris market with pockets of growth and other areas proving more challenging.

We deliver value through active management

2.6%

2022 year end vacancy rate

Letting success in the French portfolio

At the end of 2022, CLS' French portfolio had a 2.6% vacancy rate. This is an excellent outcome in the context of average vacancy rates in Greater Paris in the region of 7.8% and 4.4% in Lyon. There were no stand-out lettings and thus it is worth highlighting some of the factors behind our successful active asset management.

Whilst having offices that are highly competitive in terms of location, building quality and services with efficient operating costs is critical, successful lettings are ultimately about satisfying our current and future tenants. There are a number of actions that our team take to achieve this:

· Maintain a close relationship with tenants to meet their needs and deliver excellent service;

· React as quickly as possible when a tenant intends to change their space requirements - offering the best options in our portfolio;

· Adapt the premises to the market rapidly in terms of specifications, size of space, etc.;

· Renovate any areas immediately upon becoming vacant to current market quality;

· Ensure all internal and external team members deliver actions in progress; and

· Always meet prospective clients in person.

Rental data¹

	Rental income for the year £m	Net rental income for the year £m	Lettable space sqm	Contracted rent at year end £m	ERV at year end £m	Contracted rent subject to indexation £m	EPRA vacancy rate at year end
United Kingdom	48.5	48.5	166,234	48.1	54.2	15.9	10.0%
Germany	38.0	35.4	357,865	47.4	51.5	30.6	6.1%
France	12.9	12.7	71,015	14.7	15.7	14.7	2.6%
Total portfolio	99.4	96.6	595,144	110.2	121.4	61.2	7.4%

Valuation data¹

	Market value of property £m	Valuation movement in the year		EPRA net initial yield	EPRA 'topped-up' net initial yield	Reversion	Over-rented	Equivalent yield
		Underlying £m	Foreign exchange £m
United Kingdom	946.8	(74.7)	-	4.9%	5.2%	6.2%	4.9%	5.6%
Germany	994.1	(34.6)	49.0	3.9%	4.3%	9.1%	7.0%	4.7%
France	284.2	(15.4)	14.3	4.1%	4.8%	8.1%	4.3%	5.1%
Total portfolio	2,225.1	( 124 .7)	63.3	4.3%	4.7%	7.7%	5.7%	5.2%

Lease data¹

	Average lease length		Contracted rent of leases expiring in:				ERV of leases expiring in:
	To break years	To expiry years	Year 1 £m	Year 2 £m	3 to 5 years £m	After 5 years £m	Year 1 £m	Year 2 £m	3 to 5 years £m	After 5 years £m
United Kingdom	2.9	3.7	3.6	6.0	26.6	11.9	3.7	5.8	27.4	11.8
Germany	5.1	5.2	7.7	9.0	16.4	14.3	8.6	9.0	16.9	13.9
France	2.1	4.9	2.2	1.0	3.1	8.4	2.0	0.9	3.1	9.2
Total portfolio	3.7	4.5	13.5	16.0	46.1	34.6	14.3	15.7	47.4	34.9

1  The above tables comprise data for our offices in investment properties and held for sale (see note 12). They exclude owner occupied, land, student accommodation and hotel.

Key performance indicators

Measuring the performance of our strategy

EPRA earnings per share

Definition

EPRA earnings is a measure of operational performance and represents the net income generated from the Group's underlying operational activities.

Why this is important to CLS

This KPI gives relevant information to investors on the income generation of the Group's underlying property investment business and an indication of the extent to which current dividend payments are supported by earnings.

Our target

We will seek to grow the earnings of the business alongside net asset value.

Progress

EPRA earnings per share for 2022 was 11.6 pence.

Total accounting return

Definition

Total accounting return is the aggregate of the change in EPRA NTA plus the dividends paid, as a percentage of the opening EPRA NTA.

Why this is important to CLS

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

Our target

Our target total accounting return is between 3% and 9%.

Progress

In 2022, the total accounting return was -3.7%.

More detail is provided in the Chief Financial Officer's review and in note 6.

Vacancy rate

Definition

Estimated rental value (ERV) of immediately available space divided by the ERV of the lettable portfolio.

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

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 in the current market; if it is below 3% we may be letting space too cheaply.

Progress

At 31 December 2022, the EPRA vacancy rate was 7.4%.

More detail is provided in the Country business reviews and in note 6.

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 24 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

Our target total shareholder return (relative) is between the median and upper quartile.

Progress

The TSR was -24.3%, making CLS the 11th ranked share of the FTSE 350 Real Estate Super Sector Index of 24 companies.

Other performance indicators

In addition to these key performance indicators, the Group also has a number of other performance indicators by which it measures its progress. These are regularly reviewed. Three are shown here but others are in note 6 and are discussed throughout this strategic report. Our environmental and social indicators (including health and safety) are discussed in the ESG section of the Annual Report.

Net initial yield vs 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 2022, the cost of debt of 2.69% was 202 bps below the net initial yield of 4.71%.

More detail is provided in the Chief Financial Officer's review and in note 6.

Administration cost ratios

These measure 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. We aim to maintain the CLS ratio between 15% and 17%. The administration cost ratio was for 2022 14.4%.

GRESB (ESG) score/100

Our main sustainability indicator is the Group's GRESB rating as this is an industry standard measure and also due to the difficulty in drawing conclusions from carbon-related measures due to the variability in occupancy of our buildings during the pandemic. In 2022 we maintained our GRESB rating of 85 and four green stars.

More detail is provided in the ESG section of the Annual Report.

Our investment proposition

1. A clear strategy

Key investment tenets

Diversified approach

This approach is across: Countries (we invest in Europe's three largest economies); Tenants (over 700 tenants spread across most sectors); and Financing (25 different lenders).

Sole focus on multi-let offices

Long-term investment in high yielding, multi-let offices in London and the South East of the UK and the larger cities in Germany and France.

Selected development schemes

Occasional opportunities arise in the portfolio to carry out development projects to capture rental and capital growth; the amount of development is kept below 10% of the portfolio value at any one time. Opportunities to secure alternative uses are pursued usually until planning permission is secured and then the property is sold to a developer.

2. Active management

Key investment tenets

Experienced in-house capabilities

In-house asset, property and facilities management teams result in better cost control, closer asset knowledge and synergies across the property portfolio.

Secure rents and high occupancy

Targeted occupancy levels above 95%, whilst providing affordable rents and flexible lease terms to meet tenant demand and so create opportunities to capture above market rental growth.

Interest rate management

Financing facilities, which are arranged in-house, seek to balance flexibility, diversity and maturity of funding whilst ensuring a low cost of debt which is targeted to be at least 200 basis points below the Group's net initial yield.

95%

Targeted occupancy rate

3. Leading track record

Key investment tenets

Disciplined approach to investment

Acquisitions are assessed against strict return and strategic fit criteria but are pursued on an opportunistic basis with no set capital allocation across countries. Low yielding assets with limited potential or where the risk/reward ratio is unfavourable are sold.

Cash-backed progressive dividend

CLS is a total return share using cash flow generated to pay a progressive dividend and also to reinvest in the business to generate further net asset growth. We aim to grow the dividend in line with the growth of the business, targeting the dividend to be covered 1.2 to 1.6 times by EPRA earnings.

Financing headroom

Our aim is to keep at least £100 million of liquid resources including financing headroom. This approach gives the ability to move quickly to complete acquisition opportunities as well as the flexibility to secure the optimal financing solution.

£100m

Targeted liquid resources including financing headroom

4. A focus on sustainability

Key investment tenets

Responsible profit

Across our business model, in everything we do, we seek to generate responsible profit through employing sustainable long-term decisions with the environment in mind.

Strong ESG performance

We believe in full transparency and therefore continually submit our progress to global ESG benchmark schemes in our industry, such as GRESB. This also allows us to monitor our progress and gives our stakeholders confidence in our delivery against our commitments.

Climate risk mitigation

Our in-house sustainability programme is focused on mitigating our impact on environmental climate risks and energy security whilst maximising the benefits we deliver to the communities in which we are involved.

99%

of rated portfolio achieving at least BREEAM In-Use "Good" or better

Investing in our portfolio

As an active asset manager who stays close to our tenants, CLS has always invested in our properties to ensure that our offices provide attractive work environments. Before the Covid pandemic, CLS was investing around £20 to £25 million per annum in refurbishments and routine upkeep across around 10-20 buildings.

in 2022, CLS invested £58.3 million in our properties reflecting changing tenant demands and increased opportunities in the portfolio with refurbishments taking place in over 30 properties. The works have focussed on the five areas CLS has identified to enhance value being improved amenity, flexibility, sustainability, health & wellbeing and digital - more of which is highlighted in the descriptions of the individual projects.

In 2023, CLS expects capital expenditure to remain at a higher level of c.£40 to £60 million as ongoing and other identified refurbishments are completed. Going forward, we expect capital expenditure to be around £20 to £30 million reflecting overall greater investment, including more sustainability spend. Clearly as and when more opportunities emerge, spending may be higher again.

CLS' approach

CLS' underlying philosophy when carrying out a refurbishment or new development is to transform the space to create distinctive, unique offices, that are on-trend and provide best-in-class facilities, appropriate to their location. Our buildings are set apart from the competition by ensuring flexibility to meet the changing market and our commitment to the idea that good design is about people. We carefully consider the tenants who use and enjoy the spaces to determine the optimum way to modernise the building, thereby creating the best environment for businesses and their staff to thrive.

Our approach is to make key improvements that will make the building more attractive to potential occupiers by providing services and space, such as better air quality, digital services and meeting rooms, that help them work more productively. In addition, this involves introducing or improving amenities that contribute to their health and wellbeing, such as roof terraces, biodiversity and end-of-trip facilities. Wherever possible, we also seek to add value by repositioning/rebranding or increasing the lettable space on the site.

Sustainability has always been a fundamental part of CLS' DNA and our approach to refurbishments and developments. However, this was elevated further by the publication of our enhanced 2021 Sustainability Strategy including our Net Zero Carbon Pathway with a forecast spend of £58 million (now £65 million) to achieve the goal of being New Zero Carbon by 2030. Practically, this has meant the introduction of photovoltaics across most of our schemes but also a focus to: improve energy efficiency when refurbishing buildings; reduce carbon emissions; as well as looking to support our local communities so they share in the benefit of the investment we are making.

In 2022, CLS successfully undertook a new development and three significant refurbishments (in addition to many smaller schemes) which show this approach in action.

The Coade, Vauxhall Walk

New Build

28,400 sq. ft NIA

£18.5 million total investment

ERV on letting £1.5 million

This highly sustainable, ground plus 9 storey office, represents a substantial increase in lettable office space on the site from 4,500 sq. ft to 28,400sq. ft.

Digital

Our Digital Building Strategy places technology at the service of people to create more comfortable, safe and productive office environments.

The development of The Coade is an example of CLS' digital building strategy in action. For example, 2 fibre lines have been installed to provide a main internet connection and a backup line, thereby reducing the risk of internet outages to the tenant's business. Cat 6A cables have been distributed throughout the building and placed in risers across all the floors allowing tenants to establish swift internet access, without the delay usually experienced by requiring wayleave agreements. Wi-Fi points have been installed throughout all landlord/communal areas, including the terraces but also on the office floors as part of the internet package.

Community

CLS is committed to sharing the value of the investment it makes in buildings with the surrounding community.

At The Coade, this has involved developing Employment and Skills Construction and Occupation Plans to target various work opportunities for people normally resident within Lambeth and payments toward training and employability programmes. An Affordable Workspace of 72sqm will also be provided on a 15 year lease and fitted-out to support a local charity or not-for-profit organisation.

Health & Wellbeing

One of the key drivers for improved staff productivity within an office setting is the air quality. At The Coade, CLS ensured that occupiers could benefit from having openable windows and also increased the amount of fresh air to the BCO COVID recommendation of 14 litres per second.

Artesian, Prescot Street

92,500 sq. ft NIA

£31 million total investment

ERV on letting £4.8 million

Digital

Artesian is the first CLS building designed to achieve Wiredscore Platinum certification. Key features include the diverse points of entry on different sides of the building for incoming internet providers, free WiFi in common areas including the roof terrace to enable tenants and their guests to remain connected throughout the building and provision of pre-defined space on the roof top for tenants who have additional communication equipment or want their own backup generator space.

Sustainability

CLS takes the view that green modes of transport, such as cycling and walking, should be encouraged through provision of end-of-trip facilities to reduce the impact of travel on the environment. At Artesian, an area of the lower ground floor, unsuitable for letting, was identified to provide 163 cycle parks, 15 showers (plus a Disability Discrimination Act shower at ground floor) and 183 lockers. Drying rooms are also provided on floors 1-6. This new amenity area is designed to achieve Cyclescore Platinum certification and meets the Greater London Authorities cycle requirements for a new building.

Originally, only 36 cycle spaces were provided on two separate floors of the building along with 3 showers.

Health & Wellbeing

Many years ago, approximately half the eastern windows at Lower Ground, Ground and 1st Floor had been blocked or utilised as vents for a kitchen, which severely reduced the amount of natural light available to occupiers. As part of the planning application, CLS argued for opening up these windows but also, identified areas on the western and southern elevation for new windows on the upper floors. The purpose of this is to maximise the amount of natural daylight available to people working in the building.

Flexion, Berlin

48,400 sq. ft refurbishment

€1.4 million total investment

ERV on letting €0.7 million

Vacancy of approximately 65,000 sq. ft provided the opportunity to refurbish the ground floor entrance and four tired, single office floor layouts into a more modern, flexible space. Following the refurbishment, which includes co-working space, the building was rebranded Flexion.

Flexibility

Refurbishment work involved the stripping out of the ground and 4 office floors of the building back to shell and the addition of new fire protection. This allows for the flexibility to split the floors down to 2,700 sq. ft areas and therefore suitable for traditional individual and open-plan offices, as well as think tanks, creative spaces and meeting spaces.

Improved amenity

Refurbishment work has created a welcoming entrance and reception area which provides collaboration space. Occupiers and their guests now have the opportunity to hold informal meetings, exchange ideas and relax over a coffee.

Sustainability

As part of the CLS commitment to decarbonise its buildings, a review was undertaken of the technical equipment at the building. The existing inefficient system has been replaced with natural ventilation via the windows and cooling at the lowest possible energy level. In future, a change will be made to the use of heat pumps for heating and cooling at the lowest possible energy level.

Park Avenue, Lyon

75,700 sq. ft refurbishment and addition of 2,300 sq. ft

€11.2 million total investment

ERV on letting €1.7 million

CLS' strategy to acquire all the floors previously in other ownerships secured the ability to transform the internal and external parts of the building into a truly sustainable modern office. An additional 2,300 sq. ft of rentable area was created on the 2nd, 8th and 9th floors.

Sustainability

Works included the complete façade replacement and new windows, which is expected to achieve BREEAM 'Excellent' certification and reduce the carbon emissions of the building by approximately 50%. New solar shading has also been provided which helps reduce overheating and the amount of air conditioning required.

Health & Wellbeing

Through the design process, a 1,991 sq. ft communal roof terrace and a 2,088 sq. ft private roof terrace space were added by extending over landings. This will provide outdoor space for tenants to relax and unwind, with stunning views towards the green space of Parc de la Tête d'Or.

Improved amenity

Arriving at the building, occupiers are now greeted by a landscaped pedestrian square and new reception which gives easier access. WC's in the building have been refurbished and converted to provide DDA facilities. Bicycle facilities have been enlarged to provide parking for 40 cycles and 6 electric vehicle chargers have been installed in the underground carpark.

Financing at CLS

One of the key parts of CLS' business model is "Securing the right finance" with the clear objectives of achieving a low cost of debt, utilising diversified sources of funding and maintaining a high level of liquid resources. This approach has served CLS well over its history but CLS retains a dynamic approach which is continually assessed as market conditions change.

CLS ensures that its flexible approach to the Group financing strategy fits into a framework where the company's appetite for financial risk and approach to controlling it are defined. The treasury policy considers both individual transactions as well as their cumulative impact and the policy is presented to the Board for review and approval annually. Overall, CLS has an active approach to its treasury management with the key aspects highlighted below.

Our Approach

Secured vs unsecured, Special Purpose Vehicle ("SPV") and portfolio financings, and other facilities

The preferred financing model for CLS has been, and continues to be, non-recourse financing arranged for individual properties and secured by these properties (mortgage-type loans in SPVs). As a result, the parameters and characteristics of the properties being financed are decisive for the financing terms and conditions agreed.

Portfolio loans secured by multiple properties are also used when circumstances require it or to obtain better terms. CLS has more portfolio financings in the UK as this has allowed longer term loans (i.e. longer than 5-years) to be secured whereas in Europe, 7 or even 10-year loans can be secured on individual properties.

From time to time, CLS has evaluated unsecured loans but has concluded against a switch as the rates obtained on our European secured loans are very competitive and that across the portfolio, but particularly in the UK, very high break costs would be incurred. Also in the current market, secured financing is cheaper than the unsecured market and thus remains our preference.

CLS had 46 loans at the end of 2022 with 25 different lenders and places great importance on the value, and diversity, of these relationships. In addition, CLS had unsecured and undrawn facilities of 50 million, being an overdraft of £20 million and a £30 million Revolving Credit Facility ("RCF"). We continue to explore whether to increased the size of the RCF, recognising the increased size of the Group, to provide greater flexibility.

Loan To Value ("LTV")

For the CLS Group, a LTV in the range 35% to 45% is targeted, albeit it could be higher or lower for a short period of time. As it is a net debt measure, it should be noted that Group LTV is not impacted by the original LTV of loan transactions but instead by valuations, acquisitions, capex and disposals. Given the more uncertain economic backdrop currently, a loan to value below 40% is being targeted in the short-to-medium-term which is expected to result in CLS being a net seller of property in 2023.

For individual financing transactions, CLS will try to secure as high a loan amount as available from the lenders approached, whilst remaining conservative and ensuring that the cost of debt is not adversely affected. The general aim is to secure LTVs at prevailing levels, based on market knowledge and understanding of lenders' appetite, with an individual maximum LTV of 80%. If the LTV of a loan transaction falls below 35% (through amortisation or an increase in valuation), the aim is to refinance the loan to release some equity on expiry or earlier if significant break costs are not incurred.

Debt maturity

For individual loan transactions, the general aim is to secure as long a maturity as available from the lenders approached, assuming the property financed is a long-term investment. The maturity though will be adapted to the specifics of the property. For instance, it may be best to execute a short-term extension to a loan when a property's letting situation is expected to improve and then refinance longer-term when that letting situation has improved.

The overall intention is to align the maturity of the debt portfolio with that of the WAULT of the property portfolio. However, if market lease terms continue to shorten, a longer relative debt maturity may be preferred. The intention is to avoid large refinancing risks over short time periods where possible. The general rule is that a maximum of 30% of the Group's debt is in one currency or 20% of consolidated Group debt should mature in any 12-month period, although, pre the recently agreed refinancings, 2024 was an outlier. However, this is somewhat dependent on the availability of longer-term debt at different periods of time.

Fixed/floating debt mix and hedging strategy

Fixed rate debt is targeted to be in the range 60% to 90% of total group debt. Fixed rate debt is defined as fixed rate loans and floating rate loans swapped to fixed rate via interest rate swaps. The advantage of fixed rate debt is that it gives certainty of cash flow but on the downside can result in high break costs when repaid early due to make whole clauses with the vice versa true for floating rate debt. Fixed rate debt will not usually be chosen if there is much doubt about keeping the property for the life of the loan.

On the whole, lenders require floating rate loans to be hedged. When negotiating loans, CLS will aim for a flexible interest rate hedging approach if possible (e.g. only hedge part of the loan, or only if underlying index rate resets above a defined level). A minimum 50% of floating rate debt is to be hedged.

Whilst fixed rate debt is the default position, CLS always evaluates each property on its merits. Floating rate debt is sometimes preferred as a short-term solution whilst the letting situation is improved or as a sale of the building is expected in the near term. In the current market, more floating rate loans have been executed partly in the expectation that interest rate volatility and swap levels will reduce in the short to medium term.

CLS uses natural FX hedging by borrowing in the currency of the country in which the property is located and does not seek to hedge the equity portion of a property's financing. Interest rate hedging is limited to simple vanilla instruments such as interest rate swaps, and interest rate caps or collars. There are no speculative transactions over-hedging, speculative transactions nor hedging at a group level.

Sustainable finance

Sustainability is a fundamental part of CLS' DNA with it being one of: our key performance indicators; our quality differentiators for refurbishments; and our investment tenets. In 2020 and 2021, CLS executed our first two "green" loans with Aviva and Scottish Widows, each of which had a 10-basis point incentive for meeting certain sustainability targets which align with our Net Zero Carbon Pathway for these properties. All KPIs have been met.

CLS has approximately 20% of its debt portfolio in green loans and is targeting to have over 50% by 2030. We think this target should be achievable as the UK financing market is fairly well advanced in terms of sustainable financing, the markets in Germany and France are now increasingly maturing. We would therefore anticipate securing more green financing in the next couple of years.

Going forward

2023 focus and priorities

On the whole, CLS only starts to engage with banks around six months before the expiry of a loan as at that point there is good clarity around the property's letting situation and the loan is now within the bank's period of focus. The same situation holds true in 2023 but CLS is now more focused on all the financings in 2023 and 2024 given the relatively higher proportion of the debt portfolio maturing during this period and greater uncertainty in the market.

Considerable progress has been made in the first two months of 2023 with extending or refinancing 2023 and 2024 maturities such that 6 financings have been executed, received credit approval or been agreed. These actions not only spread out the debt profile but would have resulted in an increase in the debt maturity from 3.8 to 4.2 years.

Once these financings have been executed, the total debt to be refinanced over 2023 and 2024 would have reduced from £505 million to £301 million. This would leave 7 refinancings left in 2023 for £94 million, all of which are in Germany and France, and we are confident that these will be completed successfully.

Evolution of our cost of debt

Given the increase in the cost of debt for floating rate loans during 2022 and the start of 2023, and as existing fixed rate loans mature, CLS' cost of debt will increase. CLS' cost of debt hit an all time low of 2.22% at 31 December 2021 and had risen to 2.69% at 31 December 2022.

Based on the current interest rate yield curve, it is expected that CLS' overall cost of debt will increase by 50-60 basis points in 2023 (14% of total debt to be refinanced at c.250 basis points higher than the current group weighted average and 24% floating and unhedged) cost of debt will rise by a further by 20-25 basis points in 2024 despite rates having peaked in 2022 due to the expiration of historic low cost fixed rate debt (a further 13% of total debt to be refinanced at c.200 basis points higher than the current weighted group average as well as 38% unhedged or recently refinanced). However, the increases in the cost of debt will be lower if disposals of properties financed with higher rate floating debt are made as expected.

It should be noted that 5-year sterling swap rates have already fallen by 120 basis points since their peak rates at the end of the third quarter of 2022 and could well drop further. In addition, as highlighted in the Chief Executive Office's Review, there are considerable increases in rental income that can be captured by filling existing vacancy and upcoming vacancy in refurbishment schemes which would more than offset these increased finance costs, albeit this rental income may take longer to come through.

From the future of the office to the office of the future

In the 2020 Annual Report, which was published at the height of the Covid-19 pandemic, we wrote about the then current thinking regarding the future of the office. There was considerable uncertainty and a whole spectrum of views about the future shape of the market and the use of space. The future of offices remains a very pertinent topic of debate for many audiences including workers, urban dwellers, journalists and the more general population, but moreover it is of paramount importance for office investors.

In the past two years, much more clarity has emerged with: many of the trends evident before Covid having accelerated; hybrid working becoming much more established and accepted; and the office market becoming bifurcated with quality, in its many forms, becoming the determining criteria. Consequently, tenants are becoming much more certain about their letting needs and have therefore made letting enquiries or decisions on this basis. What is also clear is that any concerns of a seismic shift in office demand, comparable to the retail property market, have been disproved.

It has also become evident that not all countries in our portfolio or even macro (and some micro) locations are responding in the same ways.

Working from home is more popular in the UK, particularly in London with its longer commuting times, whereas, often for cultural reasons, the office is more popular in Germany and France. Given that CLS has more of its properties in the UK, much of the commentary refers to this market. At its essence, the future direction and trends of the market come down to the balance between demand and supply; albeit even this is somewhat nuanced with the increased demand for quality limiting and reducing the available supply.

Demand

Hybrid working and occupancy

One of the clearest indicators of a shift in office demand has been the reduction in office occupancy, and the consequent reduction in travel, leisure and other associated infrastructure, as a result of hybrid working. It does though need to be remembered that pre-pandemic, occupancy (which was not hugely then monitored) was thought to be only 60% to 70% as a result of holidays, illness, working at other sites and existing flexible work policies, amongst others.

Since the roll-out of vaccines and the lifting of Covid restrictions, occupancy has been slowly rising to anywhere between 30% and 50% on average, with far greater attendance on Tuesdays, Wednesdays and Thursdays. However, this is not an even trend across all types of property or locations and there are great variations by industry as many jobs are just not feasible at home.

The appeal of working from home appears to be diminishing with LinkedIn reporting in January 2023 that the number of fully remote jobs advertised in the UK had fallen for the eight month in a row to 11% - the lowest level since the site began collecting data. The return to the office is driven by multiple factors such as an improved office environment and better user experience and also, maybe counterintuitively, more presenteeism due to a weakening jobs market and greater employer power. As highlighted by Fredrik in his review, the benefits of being in an office such as collaboration, communication and creativity are also being increasingly valued again.

The Flex market has risen in importance but it only suits central locations and employers who are willing to pay much higher prices for greater flexibility and top-end amenities.

CLS has a limited flex offering, Base Offices, which we are currently rolling out in a few, select locations as a business incubator to encourage future take-up of greater amounts of space in the same building.

Quality

One of the other reasons that working from home is diminishing is the increase in the quality of offices that are now being offered. Both the challenges and opportunities in European offices can be summarised as recognising, and responding to, the experience, behaviour and needs of the end user. To a large extent it is about enticing workers back to the office but also recognising what the office does well that cannot be replicated by video conferencing and using better office design to reinforce these qualities. In the war for talent, the office acts as the physical embodiment of a company's culture and plays a vital part in attracting staff to join a company.

Quality is now the key market differentiator and, in this bifurcated market, higher prices and greater rental growth are being commanded by the better-quality space. The elements that we are seeing, and acting upon, are amenity, flexibility, sustainability, health & well-being, and digital. More about how CLS is implementing these quality factors can be read in our sections on "Investing in our properties" and Sustainability.

Supply

Sustainability

As with quality, sustainability dynamics are nuanced with both the pull effects of greater requirements for almost all stakeholders as well as the push impacts of increased regulation. At its simplest, there is increasing evidence that more sustainable buildings command higher prices. It is though somewhat hard to disaggregate the "green" elements of a property's value and more sustainable buildings tend to be newer. However, it is also clear that more sustainable buildings lead to a reduction in negative environmental impacts, lower operational and maintenance costs, and greater appeal to occupiers concerned with corporate reputation and sustainability targets.

On the regulatory front, Governments are increasing the Energy Performance Certificate (or equivalent) ratings with which office buildings need to comply. In a period of heightened energy and thus total occupancy costs, this also accords well with tenants' considerations. In addition, there is an increased emphasis on "retrofit first" as favoured by CLS rather than new build as the embodied carbon within existing buildings is taken into account in considering a building's carbon footprint lifecycle.

In 2023, in response to the post-pandemic world of work with the new era of flexible working and to meet zero carbon targets, the British Council for Offices increased its recommended average density to 10-12m² per person compared with the average in 2018 of 9.6m².

With the ability to convert offices to residential under permitted development rights in the UK being reduced, all of this is leading to an increased risk of stranded and unlettable assets, for which as yet there is no obvious solution, and overall less supply. Colliers estimates that some 20m sq. ft of London office space, or 10% of the total market, will be unlettable from April 2023 when the new minimum EPC E regulations come in.

Construction

The increased demand for quality, sustainable offices is leading to a shortage of available supply, at least in the short to medium term. England's office footprint had already declined by 6 per cent between 2014 and 2021. In Q4 2022, Cushman and Wakefield reported that the availability of grade-A office space in London was at its lowest level since 2010 and assuming demand remained consistent, further rent increases could be expected. Whilst Knight Frank estimates that London will have an office shortfall of 11 million sq. ft between 2023 and 2026.

This situation has been exacerbated by unfavourable economic conditions in the construction market with DZ HYP commenting on the German market in October 2022 that, "Since space under construction is usually already let, the postponement of planned projects due to increased construction and financing costs could lead to an even scarcer supply of space."

This reduced supply and more pre-lets for new-build offices will also start to benefit the office refurbishments that CLS is carrying out.

Conclusion

In summary, there is still no definitive answer to all the questions around the future of the office in a post-pandemic world but there are much clearer trends which continue to evolve, e.g. we are currently seeing greater employer demands and employee desires for increased time in the office. It is expected that the market, as before, will still be heavily subject to overall supply and demand factors. We believe that as a result of hybrid working there will be around 10% lower demand but there will also be much lower supply particularly for the "Future Office Winners" which are high quality, sustainable, and well-connected to public transport and urban amenities.

Valuation trends are currently dominated by macro-economic factors in terms of forecast interest rates, GDP and employment. Although rental indexation, which applies to the majority of CLS' properties, is acting as a significant offset. Ultimately, the Future Office Winners will start to see higher valuations coming through from rental growth and lower yields. CLS' business model, to own the best offices in our locations, fits very well into the new world.

Our risk management framework

How we manage and govern risk

Top down - the Board and its committees create the boundaries

The Board

The Board has overall responsibility for risk and for maintaining robust risk management and internal controls. The Board is responsible for establishing the extent to which it is willing to accept some level of risk to deliver CLS' strategy i.e. determining a risk appetite. It is also responsible for undertaking a thorough risk assessment. The strategy and strategic objectives for any one year are discussed alongside monitoring the longer-term viability of the Group. The Board sets business wide delegated authority limits. Risk management processes, which include health and safety, human resources and sustainability risk management amongst others, are employed within the business and updates are reported to the Board at each meeting.

The Audit Committee

The Audit Committee is the key oversight and assurance function for risk management, internal controls and viability. An update on risks and the control environment is presented at each Audit Committee meeting including the results of any internal control review procedures undertaken in the period. Senior managers also attend Audit Committee meetings to discuss specific risk areas and these discussions are supplemented by external advisors where relevant. The Audit Committee then reports up to the Board on the effectiveness of risk management and internal controls.

The Executive Committee

The Executive Committee meets weekly and comprises the CEO and the CFO together with other senior leaders as required. It has day-to-day operational oversight of risk management. Major business-wide decisions such as property acquisitions, disposals and significant strategy changes are discussed at the Executive Committee meetings including consideration of their impact on risk assessment and appetite. These are reviewed by the Board before implementation, subject to authorisation limits.

The Senior Leadership Team

The risks, being both principal and emerging, which the Group faces are reviewed and monitored in Senior Leadership Team meetings throughout the year and presented to the Board and Audit Committee at least every six months for further discussion and oversight. The Senior Leadership Team comprises the CEO, the CFO, the COO, regional business heads as well as other senior managers and meets every fortnight.

Bottom up - Management of risks throughout the business

Each business area operates various processes to ensure that key risks are identified, evaluated, managed and reviewed appropriately. For example:

· a monthly asset management portfolio review for each region 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.

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 focus 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, or other sports club, memberships. In this way some people risks are somewhat mitigated.

The Group invested in an internal controls and risk software at the end of 2021. Work continued throughout 2022 to populate this system so that we can fully embed an effective risk management structure within our operations as well as monitor and report the risks and their associated internal controls more efficiently to the Audit Committee and the Board.

Our priorities for 2022

· Roll-out of risk and internal control software.

· Implement Grant Thornton findings.

· Establish milestone targets for Net Zero Carbon pathway.

· Engage external consultants to assist us with in-depth analysis of climate-related resilience risk set across different climate scenarios.

· Establish Risk and Sustainability Committee.

· Establish benchmarks and targets for Social Value Framework.

· Make improvements based on tenant surveys.

· Simulate a major business interruption to test the Group's updated business continuity plan.

· Ensure Cyber Essentials plus ranking retained.

What we did in 2022

· We established our Sustainability Committee to oversee the implementation our sustainability strategy, incorporating our Net Zero Carbon Pathway and Social Value framework. The Committee discussed strategy implementation, Net Zero Carbon Pathway progression and development of our Social Value Framework.

· Software for modelling the impact of physical climate risk on our property portfolio was launched.

· The Board and Senior Leadership Team had an externally facilitated risk workshop to discuss the principal risks of the Group, the associated risk appetite and risk assessment and emerging risks.

· Cyber security protection levels have been raised to a market leading position as well as ensuring compliance with industry standards such as Cyber Essential Plus.

Risk assessment and appetite

Risk appetite

Our risk appetite is reviewed at least annually and assessed with reference to changes both that have occurred, or trends that are beginning to emerge 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 for 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 for each of the Group's principal risks as follows:

Principal risk	2022 Risk appetite	2021 Risk appetite	Change in risk appetite
1. Property	High	Medium	Increased
2. Sustainability	Medium	Medium	No change
3. Business interruption	Low	Low	No change
4. Financing	Medium	Medium	No change
5. Political & economic	Medium	Medium	No change
6. People	Medium	Medium	No change

On reviewing our risk appetite, the Board recognised that there are factors outside of the Group's control, for example the market that influences their appetite in any one year. In 2022, the market uncertainty meant that in order to continue to operate our business model effectively, a model that has been tried and tested over decades, it was necessary to increase appetite for property risk. The Board do not consider this an increase in their appetite per se but rather a reflection that that their appetite for property risk will align with the market in which the Group does business. In addition to the macro-economic factors, on reviewing our risk appetite the Board took note of the prior year divergence between risk appetite and risk assessment.

Risk assessment

The general risk environment in which the Group operates has remained at a higher level over the course of the year. This is largely due to the uncertain Global and European economic conditions, particularly higher interest rates and inflation and the impacts of the continued war in Ukraine.

Throughout the year, the Board monitored the changing situation and considered its effect on the business, as it will continue to do so going forward. The impact of the market uncertainty is discussed in the CEO review and the individual country property reviews. The Board continues to be confident in the CLS business model and the office market.

In considering our principal risks, set out on the following pages, any potential impact as a result of the market uncertainties has been taken into account.

Principal risk	Risk assessment	Change in risk profile in year	Current direction of travel
1. Property	High	Unchanged	No change
2. Sustainability	Medium	Unchanged	Increasing
3. Business interruption	Low	Reduced	No change
4. Financing	High	Increased	No change
5. Political & economic	High	Unchanged	No change
6. People	Medium	Unchanged	Reducing

Risk assessment vs risk appetite

The Board's risk appetite in relation to the Group's principal risks is broadly aligned. As shown in the table below, there is divergence of risk appetite and risk status in relation to the financing, and political and economic principal risks. The Board accepts there are factors in relation to these principal risks that are outside the Group's control and are likely to change over time. Mitigating actions have been put in place to ensure financing risk is adequately managed and monitored to reduce the potential impact on the Group. The Board recognises that not all risk can be fully mitigated and that they need to be balanced alongside commercial and political and economic considerations. If a difference between the Board's risk appetite and the risk assessment persists for an extended period, this variance is debated as to whether and how the gap should be closed.

2022 ratings	1. Property	2. Sustainability	3. Business interruption	4. Financing	5. Political & economic	6. People
Risk assessment	High	Medium	Low	High	High	Medium
Risk appetite	High	Medium	Low	Medium	Medium	Medium

Our principal risks

Our principal risks are discussed over the following pages along with any change in their risk profile since the last year end and the current direction of travel as well as our risk mitigation actions and plans. Whilst we do not consider there has been any material change to the nature of the Group's principal risks over the last 12 months, several risks remain elevated as a result of the challenging external environment and significant ongoing uncertainty.

The following pages are only focused on our principal risks being those that have the greatest impact on our strategy and/or business model. In addition, there are many lower level operational and financial risks which are managed on a day-to-day basis through the effective operation of a comprehensive system of internal controls.

Principal risk	Risk description	Risk assessment	Change in risk profile in the year	Current direction of travel	Key risks	KPI/OPI	Link to Strategy and Business Model:
1. Property	Market fundamentals and/or internal behaviours lead to adverse changes to capital values of the property portfolio or ability to sustain and improve income generation from these assets.	High	Unchanged	No change	· Cyclical downturn in the property market which may be indicated by an increase in yields · Changes in supply of space and/or demand (vacancy rate) · Poor property/ facilities management · Inadequate due diligence and/or poor commercial assessment of acquisitions · Failure of tenants · Insufficient health and safety risk protection · Building obsolescence	EPS TSR(R) TAR VR ACR	We acquire the right properties We secure the right finance We deliver value through active management and cost control
2. Sustainability	As a result of a failure to plan properly for, and act upon, the potential environmental and social impact of our activities, changing societal attitudes, and/or a breach of any legislation, this could lead to damage to our reputation and customer relationships, loss of income and/or property value, and erosion of shareholder confidence in the Group.	Medium	Unchanged	Increasing	Transition risks: These include regulatory changes, economic shifts, obsolescence and the changing availability and price of resources. Physical risks: These are climate-related events that affect our supply chain as well as the buildings' physical form and operation; they include extreme weather events, pollution and changing weather patterns.	EPS TSR(R) TAR VR ACR	We acquire the right properties We deliver value through active management and cost control
3. Business interruption risk	Data loss; or disruption to corporate or building management systems; or catastrophic external attack; or disaster; may limit the ability of the business to operate resulting in negative reputational, financial and regulatory implications for long term shareholder value.	Low	Reduced	No change	· Cyber threat · Large scale terrorist attack Environmental disaster, power shortage or pandemic	EPS TSR(R) TAR VR ACR	We acquire the right properties We secure the right finance We deliver value through active management and cost control
4. Financing risk	The risk of not being able to source funding in cost effective forms will negatively impact the ability of the Group to meet its business plans or satisfy its financial obligations.	High	Increased	No change	· Inability to refinance debt at maturity due to lack of funding sources, market liquidity, etc. · Unavailability of financing at acceptable debt terms · Risk of rising interest rates on floating rate debt · Risk of breach of loan covenants · Foreign currency risk · Financial counterparty risk · Risk of not having sufficient liquid resources to meet payment obligations when they fall due	EPS TSR(R) TAR Cost of debt	We secure the right finance We continually assess whether to hold or sell properties
5. Political and economic	Significant events or changes in the Global and/or European political and/or economic landscape may increase the reluctance of investors and customers to make timely decisions and thereby impact the ability of the Group to plan and deliver its strategic priorities in accordance with its core business model.	High	Unchanged	Reducing	· Ongoing transition of the UK from the EU · Global geopolitical and trade environments	EPS TSR(R) TAR VR ACR	We acquire the right properties We secure the right finance We deliver value through active management and cost control
6. People	The failure to attract, develop and retain the right people with the required skills, and in an environment where employees can thrive, will inhibit the ability of the Group to deliver its business plans in order to create long term sustainable value.	Medium	Unchanged	Reducing	· Failure to recruit senior management and key executives with the right skills · Excessive staff turnover levels · Lack of succession planning · Poor employee engagement levels	EPS TSR(R) TAR VR ACR	We deliver value through active management and cost control

1. Property risk

This risk remained high during 2022 due to an uncertain market in response to rising interest rates and a worsening economic outlook.

Mitigation in 2022

Mitigation in 2023

· In-house management model allowing close links with our tenants · First hand knowledge of tenants changing requirements · Asset management committees meet once a month to discuss each property · Investment of £58.3 million in our properties reflecting tenant demands · Refurbishments taking place in over 30 properties · Rigorous and established governance approval processes for capital and leasing decisions · Disposal of six properties with low yield, limited asset management potential or risk/reward ratio unfavourably balanced · Continue to maintain a high quality and diversified tenant base · Health and safety committee that closely monitors activity and regulation and reports to every Board meeting

· Continued engagement with tenants to understand their needs and space requirements · Targeted capital expenditure often with a focus on ESG credentials · Deliver the disposal of low yielding and asset management opportunity poor properties · Continued monitoring of covenant strength and health of tenants · Continue high quality provision of property and facilities management services with an in-house team · Maintain focus on operating our buildings safely

2. Sustainability risk

The overall risk assessment remains at Medium. The trend of global increases in emissions and the increasing world-wide focus on this area, as well as the resulting focus on carbon and waste/resource reduction and habitat preservation and restoration means the risk in this area is increasing.

Mitigation in 2022

Mitigation in 2023

· Sustainability Committee instigated to monitor progress · Detailed sustainability risk registers maintained by our in-house team which were formally reviewed every six months · Acquisition of climate score platform and TCFD physical risk assessment · All KPIs for 2022 on green loans met · On track with NZC pathway projects and performance · Independent assurance received on all environmental EPRA SBPR KPI data for more detail · Scope 3 tracking commenced with full calculation for the first time · Baseline social value calculation completed

· Continue delivery of NZC pathway · Complete planned energy efficiency and PV projects · Build on physical risk assessment to develop a climate resilience strategy · Implement a Sustainable and Responsible Supplier Code of Conduct · Complete and commence implementation of biodiversity net gain plan · Start update to BREEAM In-use V6 · Improve social value calculation to include supply chain · Apply for Living Wage accreditation in the UK · Continue implementation of diversity, equity and inclusion plan

3. Business interruption risk

The business interruption risk to long-term shareholder value is deemed to have reduced in the year due to our robust IT infrastructure. Companies will continue to see attempted cyber attacks, phishing and fraud but knowledge and expertise in this area remains strong and so there is no change in the current direction of travel.

Mitigation in 2022	Mitigation in 2023
· Obtained a Centre of Internet Security 'A' rating · Started the transition from annual penetration testing to a continuous penetration testing regime through automation · Employees tested and trained on cyber security · External partners used to compliment internal resource and provide independent reviews · Annual review of each property's specific emergency plan ·	· Maintain market leading protection position and Cyber Essentials Plus certification · Progress work on digital assets within the Group's properties (e.g. cyber-attacks on building management systems) · Continued implementation of shared property and finance system across the Group · Continued use of external partners to deliver holistic approach

4. Financing risk

  The heighted economic uncertainty and interest rate increases throughout the year has resulted in this risk increasing to High.

Mitigation in 2022

Mitigation in 2023

· Financed, refinanced or extended 12 loans to a value of £229.9 million · Weekly treasury meetings take place with the CEO and CFO including discussion of financings, rolling 12 month cash flow forecasts, FX requirements and hedging, amongst other items · Weekly cash flow forecasts prepared and distributed to Senior Leadership Team · 72% of the Group's borrowings are fixed rate plus a further 4% of interest rate caps · Regularly monitored loan covenants · CLS borrows in local markets, and in local currencies via individual SPVs to provide a 'natural' hedge · Maintained a wide number of banking relationship with 25 lenders across the Group to diversify funding sources · Maintained low weighted average cost of debt (2.69%) · Maintained average debt maturity of 3.8 years · Significant headroom across three main loan covenants of between 25% and 35% · All loans have equity cure mechanisms to repair breaches

· Be a net seller of property in 2023 to try to reduce Group LTV below 40% · Obtain bids from multiple counterparties to compete for new lending · Continue weekly treasury meetings · Continue weekly updates to cash flow forecasts · Maintain level of fixed rate debt between 60 and 90% · Monitoring lender exposure to ensure  no one lender represents more than 20% of total Group debt · Continue to ensure a minimum 50% of floating rate debt is hedged · Given the significant quantum of debt expiry in 2023 and 2024 conversations with banks to be started earlier than the usual 6 months ahead of refinancing · Continue implementing well-established Group financing strategy

5. Political and economic risk

The economic and political uncertainty experienced throughout 2022 remain heightened and the risk is classified as High.  However, there are tentative signs that geopolitical turmoil is calming and it appears that interest rates and inflation have peaked but as yet there is no change in current direction of travel.

Risk mitigation in 2022	Mitigation in 2023
· Reviewed sanctions processes · Used third party compliance screening tool for anti-money laundering checks, and sanction and PEP lists · Monitored changing regulation particularly in respect of decoupling from EU for any impact on our business model · Encouraged employees to join key industry forums	· Continue to monitor events and trends closely, making business responses if needed · Continue to monitor tenants for sanction issues · Maintain membership of key industry bodies for example the British Property Federation, British Council of Offices and Better Buildings Partnership

6. People risk

The risk assessment remains medium with the direction of travel somewhat reducing with the post Covid-19 "great resignation" over however low unemployment rates across Europe means CLS must remain an attractive employer as the war for talent continues.

Risk mitigation in 2022	Mitigation in 2023
· CLS Group wide staff conference held in Windsor, UK · Engaged workforce advisory panel · Quarterly mental health workshops carried out · Successful recruitment of Head of Germany Asset Management · Implemented multi-lingual learning platform	· Undertake staff survey · Continue work with workforce advisory panel · Monitor market to ensure competitive remuneration packages across the Group · Introduce revised employee bonus scheme aligned to Group performance

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 Leadership Team, 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.

In 2022, the Board and the Senior Leadership Team participated in a facilitated risk workshop to explore the risks and emerging risks for the CLS Group.  No new emerging risks were identified and the mitigations remain the same. 

						Time Horizon
Risk		Potential Impact		Mitigation		Short < 2yrs	Medium 2-5 yrs	Long > 5 yrs
Regulation/ compliance		Increased capital cost of maintaining our property portfolio. Increased administration costs to ensure resources sufficient to deliver corporate compliance.		Continued ongoing assessment of all properties against emerging regulatory changes and benchmarking of fit-out and refurbishment projects against third ‑ party schemes.			X	X
Increasing energy and construction costs		Increased cost of operating properties will reduce attractiveness of tenancies to existing and potential customers. Increased costs of refurbishments and developments leading to reduced investment returns.		Ongoing consideration of, and investment in, energy efficient plant and building-mounted renewable energy systems. Continued monitoring of materials, investment in key skills for staff and viability assessments of buildings.		X	X	X
Changes in technology		The attractiveness of our properties may decline if the challenges to adapt office facilities, to changing work practices/environment expectations of customers and advances in technology and digitisation, are not met.		Each region updates the Senior Leadership Team on trends, including technology, throughout the business. The in-house management model also gives valuable insights into tenants' ongoing needs and potential trend changes that can be incorporated into the future fit-out of properties.		X	X	X
Changes in office occupation trends		Changes in social attitudes to agile and flexible working practices may reduce demand for space compared to historic trends as well as there being changing needs of occupiers.		In-house asset management model provides the means for the property team to: proactively manage customers; and gain real-time insight and transparency on changes in needs and trends.		X	X	X
Workforce and society		Failure to adapt to evolving expectations of an intergenerational working population may reduce attractiveness as an employer in the market. In response to conflicts, economic disparity and climate change, there may be greater social tensions and movements which may cause staffing issues.		The establishment of the Workforce Advisory Panel and the staff survey process provide forums for employees to communicate views on the working environment. The Group also interacts with recruitment agents to keep abreast of trends in the employment marketplace.		X	X	X
Climate change		Increased risk of weather-related damage to property portfolio and reputational impact of not evolving sustainability goals in line with global benchmarks and/or public expectations.		Our sustainability strategy continues to evolve and has been developed in alignment with Global Real Estate Sustainability Benchmarks (GRESB), consideration of the UN Sustainable Development Goals (SDGs) and climate risk modelling.			X	X
		Inability to obtain sufficient carbon credits at suitable price to offset residual carbon emissions in order to achieve net zero carbon.		We are investigating various solutions to achieve sufficient offsets by 2030.				X

Going concern & viability

Going concern

Background

CLS' strategy and business model include regular secured loan refinancings, and capital deployment and recycling through acquisitions, capital expenditure and disposals. Over the last thirty years, the Group has successfully navigated several periods of economic uncertainty, including the recent economic stress resulting from the Covid-19 pandemic, Russia's invasion of Ukraine and the cost-of-living crisis. The Group continues to have high rent collection and low bad debts, and has a long-term track record in financing and refinancing debt including £229.9 million completed in 2022 and a further £237.3 million subsequent to year end, of which roughly half has been executed and half for which credit approval has been obtained by lenders or terms have been agreed.

Going concern period and basis

The Group's going concern assessment covers the period to 31 July 2024 ("the going concern period"). The period chosen takes into consideration the maturity date of loans totalling £474.4 million that expire by July 2024, of which £226.0 million expire in the last three months of the going concern period. The going concern assessment uses the forecast cash flows approved by the Board at its November 2022 meeting as the Base case, updated for the actual results achieved for 2022, benchmarked against 2023. The assessment also considers a Severe but plausible case and Reverse stress testing.

Forecast cash flows - Base case

The forecast cash flows prepared for the Base case take account of the Group's principal risks and uncertainties, and reflect the current greater uncertainty and more challenging economic backdrop. The forecast cash flows have been updated using assumptions regarding forecast forward interest curves, inflation and foreign exchange, updated for a worsening of these assumptions in 2023 and 2024. The Base case includes the impact of revenue growth, principally from contractual increases in rent, and increasing cost levels in line with forecast inflation. An assumed property valuation reduction of 5% over the going concern period has also been included.

The Base case is focussed on the cash and working capital position of the Group throughout the going concern period. In this regard, the Base case assumes continued access to lending facilities in the UK, Germany and France, and specifically that debt facilities of £474.4 million expiring within the going concern period will be refinanced as expected (£335.0 million) or will be repaid (£139.4 million, of which £125.4 million is linked to forecast property disposals, with the balance being planned repayments). The Group acknowledges that these refinancings are not fully within its control; however, it is highly confident that refinancings or extensions of these loans will be executed within the required timeframe, having taken into account:

· existing banking relationships and ongoing discussions with the lenders in relation to these refinancings;

· CLS' track record of prior refinancings, particularly in 2022 when £229.9 million was successfully refinanced or extended; and

· recent refinancings subsequent to the year end that have been executed, credit approved by lenders, or where the terms have been agreed, totalling £237.3 million.

Both the Base case and the Severe but plausible case also include property disposals in the going concern period in line with the Group's business model and the forecast cash flows approved by the Board in November 2022. The Group acknowledges that property disposals are not fully within its control; however, it is highly confident these transactions will be completed within the going concern period, based on its history of achieving disposals, disposals post year end and the status of transactions. The value of the properties available for disposal is significantly in excess of the value of the debt maturing during the going concern period.

The Group's financing arrangements contain Loan to Value ('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the Base case, minimal cure payments have been forecast given that the Group expects to maintain its compliance with the covenant requirements.

The near-term impacts of climate change risks within the going concern period have been considered in both the Base and the Severe but plausible case and are expected to be immaterial.

Forecast cash flows - Severe but plausible case

A Severe but plausible case has been assessed which has been produced by flexing key assumptions further including: lower rents; increased service charges; higher property and administration expenses; falling property values; and higher interest rates. The flexed assumptions are more severe than CLS experienced during the 2007-2009 global financial crisis and other downturns such as that experienced in 2020-2022 during the Covid-19 pandemic. A key assumption in this scenario is a reduction in property values of 20% until July 2024, impacting forecast refinancings, sales and cash cures. This is in addition to the 5% in the Base case and the reduction experienced in 2022.

In the Severe but plausible case, CLS would need to take some mitigating actions in terms of depositing cash to equity cure some loans, scaling back uncommitted capital expenditure (without impacting revenue streams over the going concern period) and reducing the dividend to the Property Income Distribution required under the UK REIT rules as well as drawing some of its existing £50 million of currently unutilised facilities of which £30 million is committed until 30 June 2023 and £20 million is available subject to certain criteria being met and until further notice. As with the Base case, it is assumed that loan facilities are refinanced as they become due. If needed, further disposals could be considered as there are no sale restrictions on CLS' £2.4 billion of properties.

Reverse Stress Testing

The use of a Severe but plausible case above allows for the simultaneous consideration of the impact of a number of the Group's principal risks at the same time. The Board has also considered Reverse stress testing of the individual assumptions which were flexed in the Severe but plausible case to determine at which point the Group runs out of liquidity. These included lower rents, increased service charges, higher property and administration expenses, falling property values and higher interest rates. The most sensitive of the impacts of the Reverse stress tests is on the Group's loan covenants, given that non-compliance would trigger cure payments that would further reduce available liquidity. On average across its 46 loans, CLS has comfortable headroom for the three main covenant ratios of LTV, ICR and DSCR. This headroom has reduced from the half-year 2022 position given the investment property valuation reductions.

The Board considers that the Reverse stress testing is a remote scenario, given the magnitude of the downside assumptions applied, in the context of the historic and forecast performance of the Group and the current economic environment. There is also a remote likelihood that all the changes modelled would occur at the same time, and to this extent, during the going concern period, due to the severity of the assumptions applied and their magnitude, and the length of the going concern period. In addition, the assumptions have been applied equally to all regions and thus there is no benefit given for CLS' geographic and tenant diversity.

Conclusion

Given our track-record, and the progress made on refinancing and disposals since 31 December 2022, the Directors are highly confident that the debt falling due for repayment in the going concern period will be refinanced or settled in line with their plans for the reasons set out above, rather than requiring repayment on maturity, or will be extinguished as part of property disposals in the period. After due consideration, and having taken into account the key judgements made in relation to the magnitude and timing of debt maturity and asset disposals during the going concern period, and the current progress on both these categories of transactions, the Directors can confirm that they have a reasonable expectation that the Group and the Company will be able to continue in operation and meet its liabilities as they fall due, with no material uncertainties that would cast significant doubt on the ability of the Group and the Company to continue as a going concern for the period to 31 July 2024. The Directors continue to adopt the going concern basis in preparing these Group and Company financial statements.

Viability statement

Background, period and basis

The Group's viability assessment follows a similar methodology to the going concern assessment in terms of analysing the Base case financial forecasts and a Severe but plausible case but makes the assessment of the viability of the company to continue in operation and meet its liabilities as they fall due over a considerably longer period. The same strategy and business model, and track record, are relevant considerations for the viability assessment.

The viability assessment covers the period to 31 December 2026 ("the viability period"), a period chosen as it is aligned with the period of the forecast cash flows approved by the Board at its November 2022 Board meeting. These forecasts comprise the Base case but they have been updated for the actual results achieved for 2022 and the first two months of 2023. The period of 4 years was chosen as this is similar to the Group's WAULT and weighted average debt maturity, and so aligns with the period over which the Group has sufficient visibility to reliably assess viability.

Forecast cash flows - Base case

As with the Going Concern assessment, the forecast cash flows prepared for the Base case take account of the Group's principal risks and uncertainties, and reflect the current greater uncertainty and more challenging economic backdrop. The forecast cash flows have been updated using assumptions regarding forecast forward interest curves, inflation and foreign exchange, updated for a worsening of these assumptions in 2023 and 2024 but with some improvement in 2025 and 2026. The Base case includes the impact of revenue growth, principally from contractual increases in rent, and increasing cost levels in line with forecast inflation. An assumed property valuation reduction of 5% over the viability period but no subsequent bounce back in valuations has also been included.

The Base case is focussed on the cash and working capital position of the Group throughout the viability period. In this regard, the Base case assumes continued access to lending facilities in the UK, Germany and France but given the longer time period than the going concern period the amounts are consequentially greater. Within the viability period, debt facilities of £674.5 million expiring will be refinanced as expected (£535.1 million) or will be repaid (£139.4 million, of which £125.4 million is linked to forecast property disposals, with the balance being planned repayments). The Group acknowledges that these refinancings are not fully within its control; however, it is highly confident that refinancings or extensions of these loans will be executed within the required timeframe, having taken into account:

· existing banking relationships and ongoing discussions with the lenders in relation to these refinancings;

· CLS' track record of prior refinancings, particularly in 2022 when £229.9 million was successfully refinanced or extended; and

· recent refinancings subsequent to the year end that have been executed, credit approved by lenders, or where the terms have been agreed, totalling £237.3 million.

Both the Base case and the Severe but plausible case also include property disposals in the viability period in line with the Group's business model and the forecast cash flows approved by the Board in November 2022. The Group acknowledges that property disposals are not fully within its control; however, it is highly confident these transactions will be completed within the viability period, based on their history of achieving disposals, disposals post year end and the status of transactions. The value of the properties available for disposal is significantly in excess of the value of the debt maturing during the viability period.

The Group's financing arrangements contain Loan to Value ('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the Base case, minimal cure payments have been forecast given that the Group expects to maintain its compliance with the covenant requirements.

The near-term impacts of climate change risks within the viability period have been considered in both the Base and the Severe but plausible case and are expected to be insignificant.

Forecast cash flows - Severe but plausible case

A Severe but plausible case has been assessed which has been produced by flexing key assumptions further including: lower rents; increased service charges; higher property and administration expenses; falling property values; and higher interest rates. The flexed assumptions are more severe than CLS experienced during the 2007-2009 global financial crisis and other downturns such as that experienced in 2020-2022 during the Covid-19 pandemic. A key assumption in this scenario is a reduction in property values of 20% until June 2024, impacting forecast refinancings, sales and cash cures, with no further falls or recovery of values thereafter. This is in addition to the 5% in the Base case and the reduction experienced in 2022.

In the Severe but plausible case, CLS would need to take some mitigating actions in terms of depositing cash to equity cure some loans as envisaged under the facilities of up to £65 million, scaling back uncommitted capital expenditure (without impacting revenue streams over the going concern period) and reducing the dividend to the Property Income Distribution required under the UK REIT rules as well as drawing some of its existing £50 million of currently unutilised facilities of which £30 million is committed until 30 June 2023 and £20 million is available subject to certain criteria being met and until further notice. As with the Base case, it is assumed that loan facilities are refinanced as they become due. If needed, further disposals could be considered as there are no sale restrictions on CLS' £2.4 billion of properties.

Conclusion

Given our track-record, and the progress made on refinancings and disposals since 31 December 2022, the Directors are highly confident that the debt falling due for repayment in the viability period will be refinanced or settled in line with their plans for the reasons set out above, rather than requiring repayment on maturity, or will be extinguished as part of property disposals in the period. After due consideration, and having taken into account the key judgements made in relation to the magnitude and timing of debt maturity and asset disposals during the viability period, and the current progress on both these categories of transactions, the Directors can confirm that they have a reasonable expectation that the Group and the Company will be able to continue in operation and meet its liabilities as they fall due over the viability period.

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 the Companies Act 2006 and United Kingdom adopted International Accounting Standards and International Financial Reporting Standards (IFRSs) 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 8 March 2023.

Approved and authorised on behalf of the Board

David Fuller BA FCG

Company Secretary

8 March 2023

Group income statement

for the year ended 31 December 2022

		2022			2021
	Notes	Recurring items £m	Non-recurring items £m	Total £m	Restated Recurring items £m Note 4	Non-recurring items £m Note 11	Restated Total £m Note 4
Revenue	5	139.7	-	139.7	139.8	-	139.8
Costs		(31.9)	-	(31.9)	(31.8)	-	(31.8)
Net rental income	5	107.8	-	107.8	108.0	-	108.0
Administration expenses		(15.7)	-	(15.7)	(15.0)	(1.2)	(16.2)
Other expenses		(16.2)	-	(16.2)	(14.4)	-	(14.4)
Operating profit before revaluation and disposals		75.9	-	75.9	78.6	(1.2)	77.4
Net revaluation movements on investment property	14	(136.5)	-	(136.5)	28.5	-	28.5
Net revaluation movements on equity investments		(3.8)	-	(3.8)	6.1	-	6.1
Profit/(loss) on sale of investment property		0.5	-	0.5	(0.1)	-	(0.1)
Operating (loss)/profit		(63.9)	-	(63.9)	113.1	(1.2)	111.9
Finance income	9	10.1	-	10.1	5.9	-	5.9
Finance costs	10	(26.8)	-	(26.8)	(25.4)	-	(25.4)
Foreign exchange loss		(0.3)	-	(0.3)	(2.3)	-	(2.3)
Impairment of goodwill		(1.1)	-	(1.1)	-	-	-
Share of profit of associates after tax		-	-	-	-	1.4	1.4
(Loss)/profit before tax		(82.0)	-	(82.0)	91.3	0.2	91.5
Taxation	12	0.1	-	0.1	(14.0)	42.0	28.0
(Loss)/profit for the year attributable to equity shareholders		(81.9)	-	(81.9)	77.3	42.2	119.5
Basic and diluted earnings per share	6			(20.2)p			29.3p

Group statement of comprehensive income

for the year ended 31 December 2022

	Notes	2022 £m	2021 £m
(Loss)/profit for the year		(81.9)	119.5
Other comprehensive income:
Items that may be reclassified to profit or loss
Revaluation of property, plant and equipment	27	1.9	5.5
Foreign exchange differences	27	28.5	(32.8)
Deferred tax on revaluation of property, plant and equipment	20	(0.4)	(1.0)
Total items that may be reclassified to profit or loss		30.0	(28.3)
Total other comprehensive income/(expense)		30.0	(28.3)
Total comprehensive (expense)/income for the year attributable to equity shareholders		(51.9)	91.2

Group balance sheet

at 31 December 2022

	Notes	2022 £m	Restated 2021 £m Note 4
Non-current assets
Investment properties	14	2,295.0	2,247.1
Property, plant and equipment	15	39.6	41.3
Goodwill and intangible assets		2.8	3.1
Equity investments		2.7	6.6
Deferred tax	20	2.8	2.6
Derivative financial instruments	22	8.5	0.4
Other receivables	17	-	7.7
		2,351.4	2,308.8
Current assets
Trade and other receivables	17	15.8	18.1
Cash and cash equivalents	18	113.9	167.4
		129.7	185.5
Assets held for sale	16	20.3	44.2
Total assets		2,501.4	2,538.5
Current liabilities
Trade and other payables	19	(58.6)	(57.6)
Current tax		(2.0)	(4.5)
Borrowings	21	(173.4)	(169.1)
Derivative financial instruments	22	-	(0.7)
		(234.0)	(231.9)
Non-current liabilities
Deferred tax	20	(110.5)	(109.9)
Borrowings	21	(932.5)	(862.5)
Leasehold liabilities		(3.6)	(3.4)
Derivative financial instruments	22	-	(0.1)
		(1,046.6)	(975.9)
Total liabilities		(1,280.6)	(1,207.8)
Net assets		1,220.8	1,330.7
Equity
Share capital	25	11.0	11.0
Share premium		83.1	83.1
Other reserves	27	115.4	88.7
Retained earnings		1,011.3	1,147.9
Total equity		1,220.8	1,330.7

The financial statements of CLS Holdings plc (registered number: 02714781) were approved by the Board of Directors and authorised for issue on 8 March 2023 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 2022

	Share capital £m	Share premium £m	Other reserves £m	Retained earnings £m	Total equity £m
	Note 25		Note 27
Arising in 2022:
Total comprehensive expense for the year	-	-	30.0	(81.9)	(51.9)
Share-based payments	-	-	0.2	-	0.2
Dividends to shareholders	-	-	-	(32.4)	(32.4)
Transfer of fair value on property, plant and equipment	-	-	(3.5)	3.5	-
Purchase of own shares	-	-	-	(25.8)	(25.8)
Total changes arising in 2022	-	-	26.7	(136.6)	(109.9)
At 1 January 2022	11.0	83.1	88.7	1,147.9	1,330.7
At 31 December 2022	11.0	83.1	115.4	1,011.3	1,220.8

	Share capital £m	Share premium £m	Other reserves £m	Retained earnings £m	Total equity £m
	Note 25		Note 27
Arising in 2021:
Total comprehensive income for the year	-	-	(28.3)	119.5	91.2
Share-based payments	-	-	(0.3)	-	(0.3)
Dividends to shareholders	-	-	-	(30.8)	(30.8)
Total changes arising in 2021	-	-	(28.6)	88.7	60.1
At 1 January 2021	11.0	83.1	117.3	1,059.2	1,270.6
At 31 December 2021	11.0	83.1	88.7	1,147.9	1,330.7

Group statement of cash flows

for the year ended 31 December 2022

	Notes	2022 £m	2021 £m
Cash flows from operating activities
Cash generated from operations	28	70.5	73.1
Interest received		1.3	0.5
Interest paid		(24.2)	(24.3)
Income tax paid on operating activities		(4.6)	(5.1)
Net cash inflow from operating activities		43.0	44.2
Cash flows from investing activities
Purchase of investment properties		(83.4)	(164.6)
Capital expenditure on investment properties		(57.2)	(35.8)
Proceeds from sale of properties		56.2	37.0
Income tax paid on sale of properties		(3.2)	(1.3)
Purchases of property, plant and equipment		(0.4)	(0.6)
Purchase of intangibles		(0.8)	(0.9)
Repayment of vendor loan		7.7	-
Cost on foreign currency transactions		(0.2)	-
Distributions received from associate and investment undertakings		-	0.2
Disposal of associate undertakings		-	0.5
Net cash outflow from investing activities		(81.3)	(165.5)
Cash flows from financing activities
Dividends paid	26	(32.4)	(30.8)
Purchase of own shares		(25.8)	-
New loans		144.1	196.7
Issue costs of new loans		(1.1)	(1.4)
Repayment of loans		(99.4)	(107.2)
Net cash (outflow)/inflow from financing activities		(14.6)	57.3
Cash flow element of net decrease in cash and cash equivalents		(52.9)	(64.0)
Foreign exchange loss		(0.6)	(4.3)
Net decrease in cash and cash equivalents		(53.5)	(68.3)
Cash and cash equivalents at the beginning of the year		167.4	235.7
Cash and cash equivalents at the end of the year	18	113.9	167.4

Notes to the Group financial statements

for the year ended 31 December 2022

1. General information

CLS Holdings plc (the 'Company' or 'Ultimate Parent') 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 an incorporated public limited company and is registered and incorporated in the United Kingdom. Its registration number is 02714781, with its registered address at 16 Tinworth Street, London SE11 5AL. The Company is listed on the London Stock Exchange and domiciled in the United Kingdom. The Company did not change its name during the year ended 31 December 2022 or the year ended 31 December 2021.

2. Annual financial report

This financial information has been prepared in accordance with the Companies Act 2006 and United Kingdom adopted International Accounting Standards and International Financial Reporting Standards (IFRSs). The Company prepares its Parent Company financial statements in accordance with FRS 101. 

The financial information set out in this announcement is unaudited and does not constitute the Group's financial statements for the year ended 31 December 2022 or 31 December 2021 as defined by Section 434 of the Companies Act 2006. Statutory accounts for 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's Annual General Meeting.

The 2021 accounts were audited Deloitte LLP and their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006.

The Group's full financial statements for the year ended 31 December 2022 will be approved by the Board of Directors and reported on by the auditors, Ernst & Young LLP, in March 2023. Accordingly, the financial information for 2022 is presented unaudited in this announcement.

The financial statements have been prepared on the historical cost basis, except for the revaluation properties and financial instruments that are measured at fair values at the end of each reporting period, as explained in the accounting policies. The consolidated financial statements, including the results and financial position, are presented in pounds sterling, which is the functional and presentational currency of CLS Holdings plc. The amounts presented in the financial statements are rounded to the nearest £0.1 million.

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 2022 Annual Report and Accounts is expected to be posted to shareholders on 23 March 2023 and will also be available on the Company's website.

3. Going concern

Background

CLS' strategy and business model include regular secured loan refinancings, and capital deployment and recycling through acquisitions, capital expenditure and disposals. Over the last thirty years, the Group has successfully navigated several periods of economic uncertainty, including the recent economic stress resulting from the Covid-19 pandemic, Russia's invasion of Ukraine and the cost-of-living crisis. The Group continues to have high rent collection and low bad debts, and has a long-term track record in financing and refinancing debt including £229.9 million completed in 2022 and a further £237.3 million subsequent to year end, of which roughly half has been executed and half for which credit approval has been obtained by lenders or terms have been agreed.

Going concern period and basis

The Group's going concern assessment covers the period to 31 July 2024 ("the going concern period"). The period chosen takes into consideration the maturity date of loans totalling £474.4 million that expire by July 2024, of which £226.0 million expire in the last three months of the going concern period. The going concern assessment uses the forecast cash flows approved by the Board at its November 2022 meeting as the Base case, updated for the actual results achieved for 2022, benchmarked against 2023. The assessment also considers a Severe but plausible case and Reverse stress testing.

Forecast cash flows - Base case

The forecast cash flows prepared for the Base case take account of the Group's principal risks and uncertainties, and reflect the current greater uncertainty and more challenging economic backdrop. The forecast cash flows have been updated using assumptions regarding forecast forward interest curves, inflation and foreign exchange, updated for a worsening of these assumptions in 2023 and 2024. The Base case includes the impact of revenue growth, principally from contractual increases in rent, and increasing cost levels in line with forecast inflation. An assumed property valuation reduction of 5% over the going concern period has also been included.

The Base case is focussed on the cash and working capital position of the Group throughout the going concern period. In this regard, the Base case assumes continued access to lending facilities in the UK, Germany and France, and specifically that debt facilities of £474.4 million expiring within the going concern period will be refinanced as expected (£335.0 million) or will be repaid (£139.4 million, of which £125.4 million is linked to forecast property disposals, with the balance being planned repayments). The Group acknowledges that these refinancings are not fully within its control; however, it is highly confident that refinancings or extensions of these loans will be executed within the required timeframe, having taken into account:

· existing banking relationships and ongoing discussions with the lenders in relation to these refinancings;

· CLS' track record of prior refinancings, particularly in 2022 when £229.9 million was successfully refinanced or extended; and

· recent refinancings subsequent to the year end that have been executed, credit approved by lenders, or where the terms have been agreed, totalling £237.3 million.

Both the Base case and the Severe but plausible case also include property disposals in the going concern period in line with the Group's business model and the forecast cash flows approved by the Board in November 2022. The Group acknowledges that property disposals are not fully within its control; however, it is highly confident these transactions will be completed within the going concern period, based on its history of achieving disposals, disposals post year end and the status of transactions. The value of the properties available for disposal is significantly in excess of the value of the debt maturing during the going concern period.

The Group's financing arrangements contain Loan to Value ('LTV'), Interest Cover Ratio ('ICR') and Debt Service Coverage Ratio ('DSCR') covenants. In the Base case, minimal cure payments have been forecast given that the Group expects to maintain its compliance with the covenant requirements.

The near-term impacts of climate change risks within the going concern period have been considered in both the Base and the Severe but plausible case and are expected to be immaterial.

Forecast cash flows - Severe but plausible case

A Severe but plausible case has been assessed which has been produced by flexing key assumptions further including: lower rents; increased service charges; higher property and administration expenses; falling property values; and higher interest rates. The flexed assumptions are more severe than CLS experienced during the 2007-2009 global financial crisis and other downturns such as that experienced in 2020-2022 during the Covid-19 pandemic. A key assumption in this scenario is a reduction in property values of 20% until July 2024, impacting forecast refinancings, sales and cash cures. This is in addition to the 5% in the Base case and the reduction experienced in 2022.

In the Severe but plausible case, CLS would need to take some mitigating actions in terms of depositing cash to equity cure some loans, scaling back uncommitted capital expenditure (without impacting revenue streams over the going concern period) and reducing the dividend to the Property Income Distribution required under the UK REIT rules as well as drawing some of its existing £50 million of currently unutilised facilities of which £30 million is committed until 30 June 2023 and £20 million is available subject to certain criteria being met and until further notice. As with the Base case, it is assumed that loan facilities are refinanced as they become due. If needed, further disposals could be considered as there are no sale restrictions on CLS' £2.4 billion of properties.

Reverse Stress Testing

The use of a Severe but plausible case above allows for the simultaneous consideration of the impact of a number of the Group's principal risks at the same time. The Board has also considered Reverse stress testing of the individual assumptions which were flexed in the Severe but plausible case to determine at which point the Group runs out of liquidity. These included lower rents, increased service charges, higher property and administration expenses, falling property values and higher interest rates. The most sensitive of the impacts of the Reverse stress tests is on the Group's loan covenants, given that non-compliance would trigger cure payments that would further reduce available liquidity. On average across its 46 loans, CLS has comfortable headroom for the three main covenant ratios of LTV, ICR and DSCR. This headroom has reduced from the half-year 2022 position given the investment property valuation reductions.

The Board considers that the Reverse stress testing is a remote scenario, given the magnitude of the downside assumptions applied, in the context of the historic and forecast performance of the Group and the current economic environment. There is also a remote likelihood that all the changes modelled would occur at the same time, and to this extent, during the going concern period, due to the severity of the assumptions applied and their magnitude, and the length of the going concern period. In addition, the assumptions have been applied equally to all regions and thus there is no benefit given for CLS' geographic and tenant diversity.

Conclusion

Given our track-record, and the progress made on refinancing and disposals since 31 December 2022, the Directors are highly confident that the debt falling due for repayment in the going concern period will be refinanced or settled in line with their plans for the reasons set out above, rather than requiring repayment on maturity, or will be extinguished as part of property disposals in the period. After due consideration, and having taken into account the key judgements made in relation to the magnitude and timing of debt maturity and asset disposals during the going concern period, and the current progress on both these categories of transactions, the Directors can confirm that they have a reasonable expectation that the Group and the Company will be able to continue in operation and meet its liabilities as they fall due, with no material uncertainties that would cast significant doubt on the ability of the Group and the Company to continue as a going concern for the period to 31 July 2024. The Directors continue to adopt the going concern basis in preparing these Group and Company financial statements.

4. Restatement of prior period

The restatements of the prior period noted below do not change profit, earnings per share or the net assets of the Group; they are presentational restatements that reclassify amounts to alternative financial statement lines.

£94.1 million reclassification from property plant and equipment to investment property

The student accommodation at Spring Mews was held as investment property until 31 December 2020 when it was reclassified to property, plant and equipment. The accounting judgement made at that time was reconsidered and it was determined that it was more appropriate and market sector comparable to classify the student accommodation as an investment property and so it has been reclassified back to investment property. There is no material impact on the income statement, other comprehensive income or basic and diluted earnings per share.

£4.9 million reclassification from investment in associate to equity investments

The Group has a 24.2% holding in 24 Media Network AB ("N24"). This holding was accounted for as an investment in associate (carried interest £4.9 million at 31 December 2021 and £nil at 1 January 2021. It was determined that significant influence did not exist and therefore this holding should be reclassified as an unlisted equity investment under IFRS 9. This has been corrected by restating each of the affected financial statement lines for the prior period.

In the income statement the £5.1 million presented as 'share of profit of associates after tax' at 31 December 2021 has therefore been reclassified to 'net revaluation movements on equity investments'.

5. Segment information

The Group has two operating divisions - investment properties and other investments. Other investments comprise the hotel at Spring Mews and other small corporate investments. The Group manages the investment properties division on a geographical basis due to its size and geographical diversity. Consequently, the Group's principal operating segments are:

Investment properties:	United Kingdom
	Germany
	France

Other investments

	2022
Year ended 31 December 2022	Investment properties			Other investments1 £m	Central administration £m	Non-recurring items £m	Total £m
	United Kingdom 1 £m	Germany £m	France £m
Rental income	48.5	38.0	12.9	-	-	-	99.4
Other property-related income	8.2	0.2	-	4.9	-	-	13.3
Service charge income	11.2	11.3	4.5	-	-	-	27.0
Revenue	67.9	49.5	17.4	4.9	-	-	139.7
Service charges and similar expenses	(13.1)	(14.1)	(4.7)	-	-	-	(31.9)
Net rental income	54.8	35.4	12.7	4.9	-	-	107.8
Administration expenses	(6.4)	(2.8)	(1.4)	(0.2)	(4.9)	-	(15.7)
Other expenses	(8.1)	(4.2)	(0.7)	(3.2)	-	-	(16.2)
Revenue less costs	40.3	28.4	10.6	1.5	(4.9)	-	75.9
Net revaluation movements on investment property	(79.6)	(41.5)	(15.4)	-	-	-	(136.5)
Net revaluation movements on equity investments	-	-	-	(3.8)	-	-	(3.8)
(Loss)/profit on sale of investment property	(0.3)	-	0.8	-	-	-	0.5
Segment operating loss	(39.6)	(13.1)	(4.0)	(2.3)	(4.9)	-	(63.9)
Finance income	5.3	1.4	1.4	2.0	-	-	10.1
Finance costs	(16.4)	(6.8)	(2.4)	(0.8)	(0.4)	-	(26.8)
Foreign exchange loss	-	-	-	-	(0.3)	-	(0.3)
Impairment of goodwill	-	(0.3)	(0.8)	-	-	-	(1.1)
Segment loss before tax	(50.7)	(18.8)	(5.8)	(1.1)	(5.6)	-	(82.0)

	2021
Year ended 31 December 2021	Investment properties			Other investments1 £m	Central administration £m	Non-recurring items £m	Total £m
	United Kingdom 1 £m	Germany £m	France £m
Rental income	53.3	33.8	14.1	-	-	-	101.2
Other property-related income	6.0	0.3	0.5	2.7	-	-	9.5
Service charge income	12.3	11.2	5.6	-	-	-	29.1
Revenue	71.6	45.3	20.2	2.7	-	-	139.8
Service charges and similar expenses	(13.8)	(12.0)	(6.0)	-	-	-	(31.8)
Net rental income	57.8	33.3	14.2	2.7	-	-	108.0
Administration expenses	(6.9)	(2.9)	(1.7)	0.2	(3.7)	(1.2)	(16.2)
Other expenses	(8.0)	(3.3)	(1.1)	(2.5)	0.5	-	(14.4)
Revenue less costs	42.9	27.1	11.4	0.4	(3.2)	(1.2)	77.4
Net revaluation movements on investment property	3.7	24.2	0.6	-	-	-	28.5
Net revaluation movements on equity investments	-	-	-	6.1	-	-	6.1
Profit/(loss) on sale of investment property	0.7	(1.1)	0.3	-	-	-	(0.1)
Segment operating profit/(loss)	47.3	50.2	12.3	1.4	(3.2)	(1.2)	111.9
Finance income	3.8	0.2	-	1.9	-	-	5.9
Finance costs	(15.7)	(5.4)	(2.7)	(1.3)	(0.3)	-	(25.4)
Foreign exchange loss	-	-	-	(2.3)	-	-	(2.3)
Share of profit of associate after tax	-	-	-	-	-	1.4	1.4
Segment profit/(loss) before tax	35.4	45.0	9.6	4.8	(3.5)	0.2	91.5

1   Due to the prior year balance sheet restatement in respect of the student accommodation (see note 4), the associated income and expenses have been transferred from the 'Other investments' segment to the United Kingdom investment property segment.

Other segment information

	Assets		Liabilities		Capital expenditure
	2022 £m	2021 £m 1	2022 £m	2021 £m	2022 £m	2021 £m
Investment properties
United Kingdom	1,083.6	1,159.7	551.7	555.0	36.6	20.6
Germany	1,011.6	900.2	536.4	462.4	9.8	9.4
France	294.3	293.8	185.7	183.8	11.7	6.0
Other investments	111.9	184.8	6.8	6.6	0.4	0.5
	2,501.4	2,538.5	1,280.6	1,207.8	58.5	36.5

1  Due to the prior year balance sheet restatement in respect of the student accommodation (see note 4), the associated assets and liabilities have been transferred from the 'Other investments' segment to the United Kingdom investment property segment.

6. Alternative performance measures

Alternative performance measures ('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 October 2021 Financial Reporting Council ('FRC') thematic review of APMs in these results, whilst noting the International Organization of Securities Commissions (IOSCO) 2016 guidance and 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 across the European real estate sector. 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 two sets of APMs which we utilise, and which are reconciled where possible to statutory measures on the following pages.

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 latest edition of the EPRA guidelines were issued in February 2022. The October 2019 edition of the guidelines replaced EPRA NAV and EPRA NNNAV with three other balance sheet reporting measures, which are defined in the glossary:

· EPRA net tangible assets (NTA);

· EPRA net realisable value (NRV); and

· EPRA net development value (NDV).

CLS considers EPRA NTA to be the most relevant of these new measures as we believe that this will continue to reflect the long-term nature of our property investments most accurately. However, all the new measures have been disclosed. EPRA Earnings remains the same.

Whilst CLS primarily uses the measures referred to above, we have also disclosed all other EPRA metrics as well as disclosing the measures that CLS used to prefer for certain of these categories. The notes below highlight where the measures that we monitor differ and our previous rationale for using them. From 2021 onwards, following CLS' re-entry into the EPRA indices, we are using all EPRA measures.

The measures we disclose are:

· EPRA net initial yield;

· EPRA 'topped-up' net initial yield;

· EPRA vacancy;

· EPRA capital expenditure;

· EPRA cost ratio; and

· EPRA LTV.

Other APMs

CLS uses a number of other APMs, many of which are commonly used by industry peers:

· Total accounting return;

· Net borrowings and gearing;

· Loan-to-value;

· Administration cost ratio;

· Dividend cover; and

· Interest cover.

Apart from the introduction of EPRA LTV, 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. Set out below is a reconciliation of the APMs used in these results to the statutory measures.

1. EPRA APMs

For use in earnings per share calculations	2022 Number	2021 Number
Weighted average number of ordinary shares in circulation	404,410,051	407,395,760
For use in net asset per share calculations
Number of ordinary shares in circulation at 31 December	397,210,866	407,395,760

i) Earnings - EPRA earnings

	Notes	2022 £m	2021 £m
(Loss)/profit for the year		(81.9)	119.5
Non-recurring items after tax	11	-	1.5
Recurring (loss)/profit for the year		(81.9)	121.0
Net revaluation movement on investment property	14	136.5	(28.5)
Deferred tax on revaluations		(4.8)	(38.6)
Net revaluation movement on equities		3.8	(1.0)
(Profit)/loss on sale of investment property		(0.5)	0.1
Current tax thereon		1.6	3.2
Movement in fair value of derivative financial instruments	9	(8.8)	(5.2)
Impairment of goodwill		1.1	-
Uplift in value of equity investments		-	(5.1)
EPRA earnings		47.0	45.9
Basic and diluted earnings per share		(20.2)p	29.3p
EPRA earnings per share		11.6p	11.3p

ii) Net asset value measures

	2022				2021
2022	IFRS NAV £m	EPRA NTA £m	EPRA NRV £m	EPRA NDV £m	IFRS NAV £m	EPRA NTA £m	EPRA NRV £m	EPRA NDV £m
Net assets	1,220.8	1,220.8	1,220.8	1,220.8	1,330.7	1,330.7	1,330.7	1,330.7
Goodwill as a result of deferred tax on acquisitions	-	-	-	-	-	(1.1)	(1.1)	(1.1)
Other intangibles	-	(2.8)	-	-	-	(2.0)	-	-
Fair value of fixed interest debt	-	-	-	87.2	-	-	-	(4.2)
Tax thereon	-	-	-	(6.4)	-	-	-	0.8
Deferred tax on revaluation surplus	-	108.6	108.6	-	-	107.8	107.8	-
Adjustment for short-term disposals	-	(8.6)	-	-	-	(7.8)	-	-
Fair value of financial instruments	-	(8.5)	(8.5)	-	-	0.4	0.4	-
Purchasers' costs1	-	-	149.3	-	-	-	149.3	-
	1,220.8	1,309.5	1,470.2	1,301.6	1,330.7	1,428.0	1,587.1	1,326.2
Per share	307.3p	329.6p	370.1p	327.7p	326.6p	350.5p	389.6p	325.5p

1  EPRA NTA and EPRA NDV reflect IFRS values which are net of purchasers' costs. Purchasers' costs are added back when calculating EPRA NRV.

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, student accommodation, held as PPE or occupied by CLS).

	2022				2021
	United Kingdom £m	Germany £m	France £m	Total £m	United Kingdom £m	Germany £m	France £m	Total £m
Rent passing	46.0	42.6	12.8	101.5	52.8	34.9	11.7	99.4
Adjusted for properties in development	(0.9)	-	-	(0.9)	(2.6)	(0.5)	-	(3.1)
Forecast non-recoverable service charge	(1.5)	(2.1)	(0.3)	(3.9)	(2.0)	(0.6)	(0.3)	(2.9)
Annualised net rents (A)	43.6	40.5	12.5	96.7	48.2	33.8	11.4	93.4
Property portfolio1	946.8	990.1	284.2	2,221.1	1,034.5	883.0	280.1	2,197.6
Adjusted for properties in development	(118.7)	(4.9)	-	(123.6)	(103.7)	(46.2)	-	(149.9)
Purchasers' costs at 6.8%	56.3	67.0	19.3	142.6	63.3	56.9	19.0	139.2
Property portfolio valuation including purchasers' costs (B)	884.4	1,052.2	303.5	2,240.1	994.1	893.7	299.1	2,186.9
EPRA NIY (A/B)	4.9%	3.9%	4.1%	4.3%	4.8%	3.8%	3.8%	4.3%

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).

	2022				2021
	United Kingdom £m	Germany £m	France £m	Total £m	United Kingdom £m	Germany £m	France £m	Total £m
Contracted rent	48.1	47.4	14.7	110.2	55.0	38.8	13.8	107.6
Adjusted for properties in development	(0.9)	-	-	(0.9)	(2.6)	(0.6)	-	(3.2)
Forecast non-recoverable service charge	(1.5)	(2.1)	(0.3)	(3.9)	(2.0)	(0.6)	(0.3)	(2.9)
'Topped-up' annualised net rents (A)	45.7	45.3	14.4	105.4	50.4	37.6	13.5	101.5
Property portfolio1	946.8	990.1	284.2	2,221.1	1,034.5	883.0	280.1	2,197.6
Adjusted for properties in development	(118.7)	(4.9)	-	(123.6)	(103.7)	(46.2)	-	(149.9)
Purchasers' costs (6.8%)	56.3	67.0	19.3	142.6	63.3	56.9	19.0	139.2
Property portfolio valuation including purchasers' costs (B)	884.4	1,052.2	303.5	2,240.1	994.1	893.7	299.1	2,186.9
EPRA 'topped-up' NIY (A/B)	5.2%	4.3%	4.8%	4.7%	5.1%	4.2%	4.5%	4.6%

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

iv) Vacancy

The EPRA vacancy rate calculates vacancy as a proportion of the ERV of the total portfolio and, from 2021, is the only measure used by the Group.

EPRA vacancy

		2022 £m	2021 £m
ERV of vacant space (A)		9.0	7.0
ERV of let space		112.4	113.0
ERV of total portfolio (B)		121.4	120.0
EPRA vacancy rate (A/B)		7.4%	5.8%

v) Capital expenditure

EPRA capital expenditure

This measure shows the total amounts spent on the Group's investment properties on an accrual and cash basis with a split between expenditure used for the creation of incremental space and enhancing space ('no incremental space').

	Notes	2022 £m	2021 £m
Acquisitions	14	83.4	179.5
Amounts spent on the completed investment property portfolio	14
Creation of incremental space		12.7	8.6
Creation of no incremental space		45.5	27.4
EPRA capital expenditure		141.6	215.5
Conversion from accrual to cash basis		(1.0)	(15.1)
EPRA capital expenditure on a cash basis	CF1	140.6	200.4

1  Group statement of cash flows

vi) Cost ratios

EPRA cost ratio

	Notes	2022 £m	2021 £m
Recurring administration expenses		15.7	15.0
Other expenses	5	16.2	14.4
Less: Other investments segment	5	(5.7)	(4.4)
		26.2	25.0
Net service charge costs	5	4.9	2.7
Service charge costs recovered through rents but not separately invoiced		(0.3)	(0.3)
Dilapidations receipts		(1.2)	(1.2)
EPRA costs (including direct vacancy costs) (A)		29.6	26.2
Direct vacancy costs		(4.0)	(3.4)
EPRA costs (excluding direct vacancy costs) (B)		25.6	22.8
Gross rental income	5	99.4	101.2
Service charge components of gross rental income		(0.3)	(0.3)
EPRA gross rental income (C)		99.1	100.9
EPRA cost ratio (including direct vacancy costs) (A/C)		29.9%	26.0%
EPRA cost ratio (excluding direct vacancy costs) (B/C)		25.8%	22.6%

vii) EPRA LTV

	Notes	2022 £m	2021 £m
Borrowings from financial institutions	21	1,105.9	985.2
Bank loans (secured notes)	21	-	46.4
Foreign currency derivatives	22	-	0.7
Net payables		44.8	44.0
Cash and cash equivalents	18	(113.9)	(167.4)
Net debt (A)		1,036.8	908.9
Properties held as property, plant and equipment	15	37.5	39.2
Investment properties	14	2,295.0	2,247.1
Properties held for sale	16	20.3	44.2
Financial assets - equity investments		2.7	1.7
Total property value (B)		2,355.5	2,344.8
EPRA LTV (A/B)		44.0%	38.8%

2. Other APMs

i) Total accounting return per share

	Notes	2022 pence	2021 pence
EPRA NTA at 31 December	6	329.6	350.5
Distribution - prior year final1	26	5.4	5.2
Distribution - current year interim2	26	2.6	2.4
Less: EPRA NTA at 1 January (A)	6	(350.5)	(345.2)
Return before dividends (B)		(12.9)	12.9
Total accounting return (NTA) (B/A)		(3.7)%	3.7%

1  The 2022 prior year final dividend was 5.35p but has been rounded to 5.4p for the purpose of this note.

2  The 2021 interim dividend was 2.35p but has been rounded to 2.4p for the purpose of this note.

ii) Net borrowings and gearing

	Notes	2022 £m	2021 £m
Borrowings short-term	21	173.4	169.1
Borrowings long-term	21	932.5	862.5
Add back: unamortised issue costs	21	5.3	5.9
Gross debt	21	1,111.2	1,037.5
Cash	18	(113.9)	(167.4)
Net borrowings (A)		997.3	870.1
Net assets (B)		1,220.8	1,330.7
Net gearing (A/B)		81.7%	65.4%

iii) Balance sheet loan-to-value

	Notes	2022 £m	2021 £m
Borrowings short-term	21	173.4	169.1
Borrowings long-term	21	932.5	862.5
Less: cash	18	(113.9)	(167.4)
Net debt (A)		992.0	864.2
Investment properties	14	2,295.0	2,247.1
Properties in plant, property and equipment	15	37.5	39.2
Properties and land held for sale	16	20.3	45.0
Total property portfolio (B)		2,352.8	2,331.3
Balance sheet loan-to-value (A/B)		42.2%	37.1%

iv) 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.

	Notes	2022 £m	2021 £m
Recurring administration expenses		15.7	15.0
Less: Other investment segment	5	(0.2)	0.2
Underlying administration expenses (A)		15.5	15.2
Net rental income (B)	5	107.8	108.0
Administration cost ratio (A/B)		14.4%	14.1%

v) Dividend cover

	Notes	2022 £m	2021 £m
Interim dividend	26	10.6	9.6
Final dividend	26	21.3	21.8
Total dividend (A)		31.9	31.4
EPRA earnings (B)	6	47.0	45.9
Dividend cover (B/A)		1.47	1.46

vi) Interest cover

	Notes	2022 £m	2021 £m
Net rental income	5	107.8	108.0
Recurring administration expenses		(15.7)	(15.0)
Other expenses	5	(16.2)	(14.4)
Group revenue less costs (A)		75.9	78.6
Finance income (excluding derivatives and dividend income)	9	1.3	0.5
Finance costs (excluding derivatives)	10	(26.8)	(25.4)
Net interest (B)		(25.5)	(24.9)
Interest cover (-A/B)		2.98	3.16

7. Loss/profit for the year

Loss/profit for the year has been arrived at after charging/(crediting): 


	Notes	2022 £m	2021 £m
Auditor's remuneration: Fees payable to the Company's Auditor for:
Audit of the Parent Company and Group accounts		0.4	0.5
Audit of the Company's subsidiaries pursuant to legislation		0.2	0.1
Depreciation of property, plant and equipment	15	0.6	1.0
Employee benefits expense	8	10.2	11.3
Foreign exchange loss		0.3	2.3
Provision against trade receivables	17	0.6	(0.3)

Other services provided to the Group by the Company's Auditor consisted of the 2022 interim review of £50k (2021: £40k) and the provision of access to a technical financial reporting database of £1k (2021: £nil).

8. Employee benefits expense

	2022 £m	2021 £m
Wages and salaries	7.3	8.6
Social security costs	0.8	1.1
Pension costs - defined contribution plans	0.3	0.4
Performance incentive plan	0.8	1.0
Other employee-related expenses	1.0	0.2
	10.2	11.3

The Directors are considered to be the only key management of the Group.

Information on Directors' emoluments, share options and interests in the Company's shares is given in the Remuneration Committee Report in the Annual Report .

The monthly average number of employees of the Group in continuing operations, including Executive Directors, was as follows:

	2022			2021
	Property Number	Hotel Number	Total Number	Property Number	Hotel Number	Total Number
Male	47	9	56	46	9	55
Female	46	7	53	48	9	57
	93	16	16	94	18	112

9. Finance income

	2022 £m	2021 £m
Interest income
Financial instruments carried at amortised cost	1.3	0.5
Movement in fair value of derivative financial instruments	8.8	5.2
Dividend income	-	0.2
	10.1	5.9

10. Finance costs

	2022 £m	2021 £m
Interest expense
Secured bank loans	23.3	21.4
Secured notes	1.7	2.1
Amortisation of loan issue costs	1.8	1.9
Total interest costs	26.8	25.4

11. Non-recurring items

		Notes	2022 £m	2021 £m
Administration costs - UK restructuring costs1	A		-	(1.2)
Share of associates - profit on sale of associate1	B		-	1.4
			-	0.2
Taxation - tax credit on UK restructuring costs1	A	12	-	0.2
Taxation - deferred tax liability release due to REIT conversion	C	12	-	43.7
Taxation - deferred tax asset release due to REIT conversion1	C	12	-	(1.9)
Non-recurring tax			-	42.0
Total non-recurring			-	42.2

1  These items are included as non-recurring items in the ERPA earnings reconciliation presented in note 6.

A - UK restructuring costs

The Group incurred costs of £1.2m associated with redundancies made in the UK. These costs are tax deductible and so the associated tax credit of £0.2m has also been treated as non recurring.

B - Profit on sale of associate

This relates to the sale of our 21.8% share in Fragbite AB to Funrock (now renamed Fragbite Group AB). The consideration for the sale was a combination of cash and shares in the purchaser. Subsequent to our sale, the purchaser listed on the Nasdaq Nordic stock exchange and the shares are held as an 'equity investment' on the Group balance sheet and were revalued at the year end. The revaluation of £1.0m has been treated as a recurring item.

C - Deferred tax arising on conversion to REIT

The UK property business became a REIT on 1 January 2022. As a result, the majority of the UK deferred tax liabilities and assets were released. The majority of the deferred tax liability released relates to the revaluation of the UK properties. The deferred tax assets disclosed as non-recurring relate to the non property business in the UK and were released as it is no longer probable that sufficient taxable profits will be generated in the future for the recognition criteria to be met.

12. Taxation

	2022 £m	2021 £m
Corporation tax
Current year charge	5.8	11.7
Non-recurring tax on restructuring costs	-	(0.2)
Adjustments in respect of prior years	(0.5)	(0.7)
	5.3	10.8
Deferred tax (see note 20)
Origination and reversal of temporary differences	(5.4)	3.0
Non-recurring deferred tax liability release due to REIT conversion	-	(43.7)
Non-recurring deferred tax asset release due to REIT conversion	-	1.9
	(5.4)	(38.8)
Tax credit for the year	(0.1)	(28.0)

A deferred tax charge of £0.4 million (2021: charge of £1.0 million) was recognised directly in equity (note 20). The charge for the year differs from the theoretical amount which would arise using the weighted average tax rate applicable to profits of Group companies as follows:

	2022 £m	2021 £m
(Loss)/profit before tax	(82.0)	91.5
Expected tax charge at applicable tax rate	(15.1)	17.0
Expenses not deductible for tax purposes	1.0	2.6
Non-taxable income	-	(3.8)
Non-deductible loss from REIT	13.4
Deferred tax on losses not recognised	1.2	0.7
Adjustments in respect of prior years	(0.5)	(0.7)
Release of deferred tax on election into UK REIT regime	-	(43.7)
Other	(0.1)	(0.1)
Tax credit for the year	(0.1)	(28.0)

The weighted average applicable tax rate of 18.5% (2021: 18.6%) 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% (2021: 19.0%).

13. Property portfolio

	Notes	United Kingdom £m	Germany £m	France £m	Total £m
Investment property	14	1,030.0	990.5	274.5	2,295.0
Property held as property, plant and equipment	15	33.6	2.0	1.9	37.5
Properties held for sale	16	7.0	3.6	9.7	20.3
Property portfolio at 31 December 2022		1,070.6	996.1	286.1	2,352.8

	Notes	United Kingdom £m 2	Germany £m	France £m	Total £m
Investment property	14	1,090.5	883.0	273.6	2,247.1
Property held as property, plant and equipment	15	32.3	5.0	1.9	39.2
Properties held for sale1	16	38.1	-	6.5	44.6
Land held for sale1	16	-	-	0.4	0.4
Property portfolio at 31 December 2021		1,160.9	888.0	282.4	2,331.3

1  Total differs from the assets held for sale on the Group balance sheet due to £0.8m of associated liabilities.

2  Restated for reclassification of student accommodation, see note 4 for detail.

14. Investment property

	United Kingdom £m	Germany £m	France £m	Total investment properties £m
At 1 January 2022	1,090.5	883.0	273.6	2,247.1
Acquisitions	-	83.4	-	83.4
Capital expenditure	36.6	9.9	11.7	58.2
Disposals	(11.5)	-	-	(11.5)
Net revaluation movement	(79.5)	(41.6)	(15.4)	(136.5)
Lease incentive debtor adjustments	0.9	6.9	-	7.8
Exchange rate variances	-	48.9	14.3	63.2
Transfer from/(to) plant, property and equipment	-	-	-	-
Transfer to properties held for sale	(7.0)	-	(9.7)	(16.7)
At 31 December 2022	1,030.0	990.5	274.5	2,295.0

	United Kingdom1 £m	Germany £m	France £m	Total investment properties £m
At 1 January 2021	997.9	733.2	301.7	2,032.8
Reclassification from property, plant and equipment	94.1	-	-	94.1
At 1 January 2021 (restated)	1,092.0	733.2	301.7	2,126.9
Acquisitions	17.9	161.6	-	179.5
Capital expenditure	20.6	9.4	6.0	36.0
Disposals	(5.0)	-	(10.7)	(15.7)
Net revaluation movement	3.7	24.2	0.6	28.5
Lease incentive debtor adjustments	(0.6)	3.0	0.3	2.7
Exchange rate variances	-	(48.0)	(17.9)	(65.8)
Transfer to properties held for sale	(38.1)	-	(6.5)	(44.6)
At 31 December 2021 (restated)	1,090.5	883.0	273.6	2,247.1

1  The prior year balances for investment property have been restated as described in note 4 along with their respective totals.

Investment properties included leasehold properties with a carrying amount of £77.7 million (2021: £48.6 million).

Interest capitalised within capital expenditure in the year amounted to £0.5 million (2021: £nil).

The property portfolio which comprises investment properties, properties held for sale (note 16), and hotel and landholding, detailed in note 15, was revalued at 31 December 2022 to its fair value. Valuations were based on current prices in an active market for all properties. The property valuations were carried out by external independent valuers as follows:

	Investment property 2022 £m	Other property 2022 £m	Property portfolio 2022 £m	Investment property 2021 £m 1	Other property 2021 £m 1	Property portfolio 2021 £m
Cushman and Wakefield	1,030.0	33.6	1,063.6	1,364.1	79.2	1,443.3
Jones Lang LaSalle	1,265.0	13.5	1,278.5	883.0	1.8	884.8
Directors' valuation/L Fällström AB	-	3.6	3.6	-	3.2	3.2
	2,295.0	50.7	2,345.7	2,247.1	84.2	2,331.3

1  The prior year balances for investment property have been restated as described in note 4

The total fees, including the fees for this assignment, earned by each of the valuers from the Group is less than 5% of their total revenues in each jurisdiction.

Valuation process

The Group's property portfolio was valued by external valuers on the basis of fair value using information provided to them by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group's property management systems and is subject to the Group's overall control environment. The valuation reports are based on assumptions and valuation models used by the external valuers. The assumptions are typically market related, such as yields and discount rates, and are based on professional judgement and market evidence of transactions for similar properties on arm's length terms. The valuations are prepared in accordance with RICS standards.

Each Country Head, who report to the Chief Executive Officer, verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the external valuers. When the process is complete, the valuation report is recommended to the Audit Committee and the Board, which considers it as part of its overall responsibilities.

Valuation techniques

The fair value of the property portfolio (excluding ongoing developments, see below) has been determined using the following approaches in accordance with International Valuation Standards:

United Kingdom	an income capitalisation approach whereby contracted and market rental values are capitalised with a market capitalisation rate
Germany	a 10 year discounted cash flow model with an assumed exit thereafter
France	both the market capitalisation approach and a 10 year discounted cash flow approach

The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable recent market transactions on arm's length terms. Other factors taken into account in the valuations include the tenure of the property, tenancy details, and ground and structural conditions.

Ongoing developments are valued under the 'residual method' of valuation, which is the same method as the income capitalisation approach to valuation described above, with a deduction for all costs necessary to complete the development, including a notional finance cost, together with a further allowance for remaining risk. As the development approaches completion, the valuer may consider the income capitalisation approach to be more appropriate.

All valuations have considered the environmental, social and governance credentials of the properties and the potential cost of improving them to local regulatory standards along with the broader potential impact of climate change.

These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use significant unobservable inputs such that the fair value measurement of each property within the portfolio has been classified as Level 3 in the fair value hierarchy.

There were no transfers between any of the Levels in the fair value hierarchy during either 2022 or 2021. The Group determines whether transfers have occurred between levels in the fair value hierarchy by re-assessing categorisation at the end of each reporting period.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to a loss of £136.5 million (2021: a gain of £28.5 million) and are presented in the income statement in the line item 'Net movements on revaluation of investment properties'. The revaluation deficit for the property, plant and equipment of £1.9 million (2021: gain of £5.5 million) was included within the revaluation reserve via other comprehensive income.

All gains and losses recorded in profit or loss in 2022 and 2021 for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at 31 December 2022 and 31 December 2021, respectively.

Quantitative information about investment property fair value measurement using unobservable inputs (Level 3)

	ERV				Equivalent yield
	Average		Range		Average		Range
	2022 £ per sq. ft	2021 £ per sq. ft	2022 £ per sq. ft	2021 £ per sq. ft	2022 %	2021 %	2022 %	2021 %
UK	34.01	37.12	10.00-58.09	10.00-66.19	5.61	5.36	2.94-9.61	2.54-10.30
Germany	14.10	13.21	10.14-25.27	8.88-24.05	4.75	4.39	3.30-5.90	3.00-5.40
France	21.69	19.49	13.26-41.38	11.96-37.36	5.13	5.04	4.05-6.75	4.38-6.00

Sensitivity of measurement to variations in the significant unobservable inputs

All other factors remaining constant, an increase in ERV would increase valuations, whilst an increase in the equivalent yield would result in a fall in value, and vice versa. There are inter-relationships between these inputs as they are partially determined by market conditions. An increase in the reversionary yield may accompany an increase in ERV and would mitigate its impact on the fair value measurement.

A decrease in the equivalent yield by 25 basis points would result in an increase in the fair value of the Group's investment property by 138.5 million (2021: £126.9 million) whilst a 25 basis point increase would reduce the fair value by £107.0 million (2021: £125.9 million). A decrease in the ERV by 5% would result in a decrease in the fair value of the Group's investment property by 86.8 million (2021: £92.2 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 106.5 million (2021: £71.3 million).

Where the Group leases out its investment property under operating leases the duration is typically three years or more. No contingent rents have been recognised in the current or prior year.

Sustainability, climate change, Net Zero Carbon Pathway and EPC compliance

The Group published its sustainability strategy including a pathway to Net Zero Carbon ("NZC") in August 2021 and has set 2030 as its date to achieve this. During 2021 the Group employed technical experts to carry out individual property energy audits to identify energy and carbon saving opportunities. A total of 76 properties were visited from January to April 2021 across the UK, France and Germany, with new developments, properties under refurbishment and properties earmarked for sale all excluded from the programme. The investment needed to deliver the audit findings amounts to an estimated £65 million over 9 years for all properties. We have integrated these energy audits into each Asset Management Plan to enable strategic decisions about the refurbishment, sale or full redevelopment of assets to be made. The UK portfolio is already compliant with the 2023 Minimum Energy Efficiency Standard (MEES) requirements and the 2030 target of EPC B is factored in to the NZC Pathway model.

15. Property, plant and equipment

	Hotel £m	Land and buildings £m	Owner- occupied property £m	Fixtures and fittings £m	Total £m
Cost or valuation
At 1 January 2021 - restated1	25.0	3.1	10.6	6.3	45.0
Additions	-	-	-	0.5	0.5
Disposals	-	-	-	(0.9)	(0.9)
Reclassification (to)/from investment property2	-	-	0.4	-	0.4
Reclassification to accumulated depreciation	(1.2)	-	-	(2.7)	(3.9)
Revaluation	1.2	0.4	0.1	-	1.7
Exchange rate variances	-	(0.3)	(0.1)	-	(0.4)
At 31 December 2021	25.0	3.2	11.0	3.2	42.4
Additions	-	-	0.1	0.3	0.4
Disposals	-	-	-	(0.1)	(0.1)
Reclassification from investment property	-	-	-	-	-
Reclassification to held for sale	-	(3.6)	-	-	(3.6)
Revaluation	1.7	0.4	(0.4)	-	1.7
Exchange rate variances	-	-	0.1	0.1	0.2
At 31 December 2022	26.7	-	10.8	3.5	41.0
Comprising:
At cost	-	-	-	3.5	3.5
At valuation	26.7	-	10.8	-	37.5
	26.7	-	10.8	3.5	41.0
Accumulated depreciation and impairment
At 1 January 2021	(1.2)	-	-	(4.1)	(5.3)
Depreciation charge	(0.1)	-	(0.1)	(0.5)	(0.7)
Reclassification from cost	1.2	-	-	2.7	3.9
Disposals	-	-	-	0.8	0.8
Revaluation	0.1	-	0.1	-	0.2
At 31 December 2021	-	-	-	(1.1)	(1.1)
Depreciation charge	(0.1)	-	(0.1)	(0.4)	(0.6)
Disposals	-	-	-	0.1	0.1
Revaluation	0.1	-	0.1	-	0.2
At 31 December 2022	-	-	-	(1.4)	(1.4)
Net book value
At 31 December 2022	26.7	-	10.8	2.1	39.6
At 31 December 2021	25.0	3.2	11.0	2.1	41.3

1  The prior year balances for student accommodation have been restated as described in note 4 along with their respective totals. Student accommodation has not been presented as it has been reclassified in its entirety to investment property.

2  During 2021, the CLS Group opened an office in the City of Dusseldorf within a property classified as investment property. This is the transfer of the value of the part of this investment property that is now owner occupied by CLS.

Valuation techniques

The fair value of the hotel has been determined using the following approach in accordance with International Valuation Standards:

Hotel

a 10 year discounted cash flow model with an assumed exit thereafter. The projected net operating profit in the 11th year is capitalised at a market yield before being brought back to present day values.

This technique is consistent with the principles in IFRS 13 Fair Value Measurement and uses significant unobservable inputs such that the fair value measurement of the hotel within the portfolio has been classified as Level 3 in the fair value hierarchy.

Sensitivity of measurement to variations in the significant unobservable inputs

All other factors remaining constant, an increase in EBITDA would increase the valuation, whilst an increase in exit capitalised yield would result in a fall in value, and vice versa. A decrease in the exit capitalisation yield by 25 basis points would result in an increase in the fair value of the hotel by £1.1 million, whilst a 25 basis point increase would reduce the fair value by £1.1 million. A decrease in EBITDA by 5% would result in a decrease in the fair value of the hotel by £1.4 million whilst an increase in the EBITDA by 5% would result in an increase in the fair value of the Hotel by £1.3 million.

16. Assets held for sale

	2022				2021
	UK £m	Germany £m	France £m	Total £m	UK £m	Germany £m	France £m	Total £m
At 1 January	37.3	-	6.9	44.2	5.9	10.2	5.8	21.9
Disposals	(37.3)	-	(6.9)	(44.2)	(5.9)	(10.2)	(5.3)	(21.4)
Transfer from investment property	7.0	-	9.7	16.7	37.3	-	6.5	43.8
Transfer from property, plant and equipment	-	3.6	-	3.6	-	-	-	-
Revaluation	-	-	-	-	-	-	(0.1)	(0.1)
At 31 December	7.0	3.6	9.7	20.3	37.3	-	6.9	44.2

The balance above comprises 3 properties (2021: 5 properties). The facts and circumstance of the disposals or expected disposals are commercially sensitive and therefore are not disclosed. Management expect that properties transferred to held for sale during the year will be disposed of within 12 months, usually via an open market process.

17. Trade and other receivables

	2022 £m	2021 £m
Current
Trade receivables	5.3	8.8
Other receivables	4.9	3.9
Prepayments	2.7	2.4
Accrued income	2.9	3.0
	15.8	18.1
Non-Current
Other receivables1	-	7.7
	15.8	25.8

1  This is the vendor loan granted on completion of the sale of First Camp Sverige Holdings AB in March 2019. The loan was repaid in full during 2022.

Trade receivables are shown after deducting a provision of £2.8 million (2021: £2.4 million) which is calculated as an expected credit loss on trade receivables in accordance with IFRS 9 (see note 2). The movements in this provision were as follows:

	2022 £m	2021 £m
At 1 January	2.4	2.8
Debt write-offs	(0.2)	(0.1)
Charge/(credit) to the income statement	0.6	(0.3)
At 31 December	2.8	2.4

The group uses a provision matrix to calculate the expected credit loss for trade receivables. The provision rates are based on the Group's historical observed aging of debt and the probability of default. At every reporting date, the provision rates are updated to incorporate the previous 12 months data and forward-looking information such as actual and potential impacts of political and economic uncertainty, if applicable. In addition, on a tenant-by-tenant basis, the Group takes into account any recent payment behaviours and future expectations of likely default events. Specific provisions are made in excess of the expected credit loss where information is available to suggest a higher provision is required, for example individual customer credit ratings, actual or expected insolvency filings or company voluntary arrangements, likely deferrals of payments due, agreed rent concessions and market expectations and trends in the wider macroeconomic environment in which our customers operate. An additional review of tenant debtors was undertaken to assess recoverability in light of the political and economic uncertainty.

The Directors consider that the carrying amount of trade and other receivables is approximate to their fair value. There is no concentration of credit risk with respect to trade receivables as the Group has a large number of customers who are paying their rent in advance. Further details about the Group's credit risk management practices are disclosed in note 23.

18. Cash and cash equivalents

	2022 £m	2021 £m
Cash at bank and in hand	113.9	167.4

At 31 December 2022, cash at bank and in hand included £15.8 million (2021: £13.2 million) which was restricted by a third-party charge. £10.3 million of the restricted cash related to tenant deposits (2021: £10.1 million) and £0.2 million from a recently terminated contract for the provision of property management services to a related party (2021: £nil) (see note 33).

19. Trade and other payables

	2022 £m	2021 £m
Current
Trade payables	4.6	3.0
Social security and other taxes	2.1	1.9
Tenant deposits	10.3	10.1
Other payables	4.2	2.0
Deferred income	13.0	19.8
Accruals	24.4	20.8
	58.6	57.6

20. Deferred tax

	Liabilities				Assets				Total deferred tax £m
	UK capital allowances £m	Fair value adjustments to properties £m	Other £m	Total £m	UK capital allowances £m	Fair value adjustments to properties £m	Other £m	Total £m
At 1 January 2021	12.3	145.3	1.9	159.5	(0.3)	(6.0)	(1.4)	(7.7)	151.8
Charged/(credited)
to income statement	(12.0)	(32.0)	0.1	(43.9)	0.3	3.6	1.2	5.1	(38.8)
to OCI1	-	1.0	-	1.0	-	-	-	-	1.0
Exchange rate variances	-	(6.5)	(0.2)	(6.7)	-	-	-	-	(6.7)
At 31 December 2021	0.3	107.8	1.8	109.9	-	(2.4)	(0.2)	(2.6)	107.3
Charged/(credited)
to income statement	-	(4.9)	(0.2)	(5.1)	-	(0.3)	-	(0.3)	(5.4)
to OCI 1	-	0.4	-	0.4	-	-	-	-	0.4
Exchange rate variances	-	5.3	-	5.3	-	0.1	-	0.1	5.4
At 31 December 2022	0.3	108.6	1.6	110.5	-	(2.6)	(0.2)	(2.8)	107.7

1  Other Comprehensive Income.

Deferred tax has been calculated based on local rates applicable under local 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 2022 the Group offset tax losses valued at the applicable local tax rate of £9.8 million (2021: £9.6 million) against the deferred tax liability arising on the fair value adjustments to properties. At 31 December 2022 the Group did not recognise deferred tax assets of £8.0 million (2021: £7.5 million) in respect of losses amounting to £45.6 million (2021: £43.3 million) which may be carried forward and utilised against future taxable income or gains. There is no expiry period for the carried forward tax losses.

21. Borrowings

	At 31 December 2022			At 31 December 2021
	Current £m	Non- current £m	Total borrowings £m	Current £m	Non- current £m	Total borrowings £m
Secured bank loans	173.4	932.5	1,105.9	122.7	862.5	985.2
Secured notes	-	-	-	46.4	-	46.4
	173.4	932.5	1,105.9	169.1	862.5	1,031.6

Issue costs of £5.3 million (2021: £5.9 million) have been offset in arriving at the balances in the above tables.

Secured bank loans

Interest on bank loans is charged at fixed rates ranging between 0.8% and 4.4% including margin (2021: 0.8% and 5.5%) and at floating rates of typically SONIA or EURIBOR plus a margin. Floating rate margins range between 1.1% and 2.2% (2021: 1.1% and 2.3%). The bank loans are secured by legal charges over £2,247.6 million (2021: £2,194.3 million) of the Group's properties, and in most cases a floating charge over the remainder of the assets held in the company which owns the property. In addition, the share capital of some of the subsidiaries within the Group has been charged.

Secured green loans

The Group's debt portfolio includes two sustainability linked loans;

· £151.9m maturing in 2032

· £60.1m in 2033

These loans have an interest rate margin incentive for meeting annual sustainability targets which align with our Net Zero Carbon Pathway for the properties which are securing them. The targets have been independently verified to be aligned with the Loan Market Association (LMA) Sustainability-Linked loan principles. The targets set for any given year are based on actual ESG data/milestones achieved in the prior year. Each of the 2022 targets (tested on 31 December 2021 actual results) have been met resulting in lower interest rates being applied to these loans. The reduction in interest rate margin is not considered to be a substantial modification of the loan terms.

Secured notes

On 3 December 2013, the Group issued £80.0 million secured, partially-amortising notes. The notes attracted a fixed-rate coupon of 4.17% on the unamortised principal amount, the balance of which was repaid in November 2022. The notes were secured by legal charges over £137.1 million of the Group's properties. The prior year fair value was determined by the higher of the carrying principal amount and the discounted future cash flows (adjusted by excluding the margin component of the fixed interest rate¹) at a discount rate derived from the market interest rate yield curve at the date of the valuation.

1  The fixed interest rate is made up of a market interest rate (typically a swap rate) plus a margin.

Capitalised interest

Interest capitalised within investment property capital expenditure during the year was £0.5 million (2021: £0.1 million) at an average rate of 3.22% (2021: 3.01%).

The Group has complied with all externally imposed capital requirements to which it was subject.

The maturity profile of the carrying amount of the Group's borrowings was as follows:

At 31 December 2022	Secured bank loans £m	Secured notes £m	Total £m
Maturing in: Within one year or on demand	175.1	-	175.1
One to two years	350.1	-	350.1
Two to five years	314.4	-	314.4
More than five years	271.6	-	271.6
	1,111.2	-	1,111.2
Unamortised issue costs	(5.3)	-	(5.3)
Borrowings	1,105.9	-	1,105.9
Due within one year	(173.4)	-	(173.4)
Due after one year	932.5	-	932.5

At 31 December 2021	Secured bank loans £m	Secured notes £m	Total £m
Maturing in: Within one year or on demand	124.3	46.5	170.8
One to two years	111.3	-	111.3
Two to five years	432.7	-	432.7
More than five years	322.7	-	322.7
	991.0	46.5	1,037.5
Unamortised issue costs	(5.8)	(0.1)	(5.9)
Borrowings	985.2	46.4	1,031.6
Due within one year	(122.7)	(46.4)	(169.1)
Due after one year	862.5	-	862.5

The carrying amounts of the Group's borrowings are denominated in the following currencies:

	At 31 December 2022			At 31 December 2021
	Sterling £m	Euro £m	Total £m	Sterling £m	Euro £m	Total £m
Fixed rate financial liabilities	241.3	445.8	687.1	290.0	450.8	740.8
Floating rate financial liabilities - hedged	117.4	-	117.4	140.9	-	140.9
Total fixed rate	358.7	445.8	804.5	430.9	450.8	881.7
Floating rate financial liabilities - capped	-	42.6	42.6	-	47.3	47.3
Floating rate financial liabilities - unhedged	162.2	101.9	264.1	94.3	14.2	108.5
Total floating rate	162.2	144.5	306.7	94.3	61.5	155.8
	520.9	590.3	1,111.2	525.2	512.3	1,037.5
Unamortised issue costs	(3.5)	(1.8)	(5.3)	(3.9)	(2.0)	(5.9)
Borrowings	517.4	588.5	1,105.9	521.3	510.3	1,031.6

Of the Group's total borrowings, 72% (2021: 85%) are considered fixed rate borrowings.

The interest rate risk profile of the Group's borrowings was as follows:

At 31 December 2022	Weighted average interest rate 1			Weighted average life
	Sterling %	Euro %	Total %	Sterling Years	Euro Years	Total Years
Fixed rate financial liabilities	2.7	1.6	2.0	8.4	3.0	4.9
Floating rate financial liabilities - hedged	3.2	-	3.2	1.4	-	1.4
	2.9	1.6	2.2	6.1	3.0	4.4
Floating rate financial liabilities - capped	-	2.5	2.5	-	4.8	4.8
Floating rate financial liabilities - unhedged	4.8	3.5	4.3	1.4	2.5	1.8
	4.8	3.2	4.1	1.4	3.1	2.2
Gross borrowings	3.5	2.0	2.7	4.6	3.0	3.8

At 31 December 2021	Weighted average interest rate 1			Weighted average life
	Sterling %	Euro %	Total %	Sterling Years	Euro Years	Total Years
Fixed rate financial liabilities	2.9	1.4	2.0	8.0	3.2	5.1
Floating rate financial liabilities - hedged	3.4	-	3.4	2.2	-	2.2
	3.1	1.4	2.2	6.1	3.2	4.6
Floating rate financial liabilities - capped	-	1.3	1.3	-	5.1	5.1
Floating rate financial liabilities - unhedged	2.9	1.2	2.7	2.5	2.0	2.4
	2.9	1.3	2.2	2.5	4.4	3.3
Gross borrowings	3.1	1.4	2.2	5.5	3.3	4.4

1  The weighted average interest rate are based on the nominal value of the debt facilities.

The carrying amounts and fair values of the Group's borrowings are as follows:

	Carrying amounts		Fair values
	2022 £m	2021 £m	2022 £m	2021 £m
Current borrowings	173.4	169.1	173.4	169.1
Non-current borrowings	932.5	862.5	845.3	866.7
	1,105.9	1,031.6	1,018.7	1,035.8

The valuation methods used to measure the fair values of the Group's fixed rate borrowings were derived from inputs which were either observable as prices or derived from prices (Level 2).

The fair value of non-current borrowings represents the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties, discounted at the prevailing market rate, and excludes accrued interest.

The Group had the following undrawn committed facilities available at 31 December:

	2022 £m	2021 £m
Floating rate:
- expiring within one year	30.0	-
- expiring after one year	-	30.0
	30.0	30.0

In addition to the above committed facility, the Group has £20 million of uncommitted facilities available (2021: £20 million).

Contractual undiscounted cash outflows

The tables below show the contractual undiscounted cash outflows arising from the Group's gross debt.

At 31 December 2022	Less than 1 year £m	1 to 2 years £m	2 to 3 years £m	3 to 4 years £m	4 to 5 years £m	Over 5 years £m	Total £m
Secured bank loans	175.1	350.1	121.6	54.9	137.9	271.6	1,111.2
Secured notes	-	-	-	-	-	-	-
Total on maturity	175.1	350.1	121.6	54.9	137.9	271.6	1,111.2
Interest payments on borrowings 1	35.3	26.5	14.3	11.3	9.4	25.2	122.1
Effect of interest rate swaps	(3.9)	(2.6)	-	-	-	-	(6.5)
Gross loan commitments	206.5	374.0	135.9	66.2	147.3	296.8	1,226.7

At 31 December 2021	Less than 1 year £m	1 to 2 years £m	2 to 3 years £m	3 to 4 years £m	4 to 5 years £m	Over 5 years £m	Total £m
Secured bank loans	124.3	111.3	265.9	116.2	50.6	322.7	991.0
Secured notes	46.5	-	-	-	-	-	46.5
Total on maturity	170.8	111.3	265.9	116.2	50.6	322.7	1,037.5
Interest payments on borrowings1	21.1	18.4	14.6	9.7	7.6	30.0	101.4
Effect of interest rate swaps	1.1	-	0.1	-	-	-	1.2
Gross loan commitments	193.0	129.7	280.6	125.9	58.2	352.7	1,140.1

1  Interest payments on borrowings are calculated without taking into account future events. Floating rate interest is estimated using a future interest rate curve as at 31 December.

22. Derivative financial instruments

	2022 Assets £m	2022 Liabilities £m	2021 Assets £m	2021 Liabilities £m
Non-current:
Interest rate caps and swaps	8.5	-	0.4	(0.1)
Current:
Forward foreign exchange contracts	-	-	-	(0.7)
	8.5	-	0.4	(0.8)

The valuation methods used to measure the fair value of all derivative financial instruments were derived from inputs which were either observable as prices or derived from prices (Level 2).

There were no derivative financial instruments accounted for as hedging instruments.

Interest rate caps

The aggregate notional principal of interest rate caps at 31 December 2022 was £nil (2021: £nil). The average period to maturity of these interest rate caps was 3.7 years (2021: 4.2 years).

Interest rate swaps

The aggregate notional principal of interest rate swap contracts at 31 December 2022 was £117.4 million (2021: £159.4 million). The average period to maturity of these interest rate swaps was 1.4 years (2021: 1.9 years).

Forward foreign exchange contracts

The Group uses forward foreign exchange contracts from time to time to add certainty to, and to minimise the impact of foreign exchange movements on, committed cash flows. At 31 December 2022 and 31 December 2021 the Group had no outstanding foreign exchange contracts.

Derivative financial instruments cash flows

The following table provides an analysis of the anticipated contractual cash flows for the derivative financial instruments using undiscounted cash flows. These amounts represent the gross cash flows of the derivative financial instruments and are settled as either a net payment or receipt.

	2022 Assets £m	2022 Liabilities £m	2021 Assets £m	2021 Liabilities £m
Maturing in:
Less than 1 year	4.3	-	-	(1.1)
1 to 2 years	3.5	-	-	(0.1)
2 to 3 years	0.8	-	0.1	(0.1)
3 to 4 years	0.6	-	-	-
4 to 5 years	0.1	-	-	-
Over 5 years	-	-	-	-
	9.3	-	0.1	(1.3)

23. Financial instruments

Categories of financial instruments

Financial assets of the Group comprise: interest rate caps; foreign currency forward contracts; financial assets at fair value through other comprehensive income or fair value through profit and loss; trade and other receivables; and cash and cash equivalents.

Financial liabilities of the Group comprise: interest rate swaps; forward foreign currency contracts; bank loans; secured notes; and trade and other payables.

The fair values of financial assets and liabilities are determined as follows:

(a)  Interest rate swaps and caps are measured at the present value of future cash flows based on applicable yield curves derived from quoted interest rates;

(b)  Foreign currency options and forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts;

(c)  The fair values of non-derivative financial assets and liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. Financial assets in this category include financial assets at fair value through other comprehensive income or fair value through profit and loss such as equity investments;

(d)  In more illiquid conditions, non-derivative financial assets are valued using multiple quotes obtained from market makers and from pricing specialists. Where the spread of prices is tightly clustered the consensus price is deemed to be fair value. Where prices become more dispersed or there is a lack of available quoted data, further procedures are undertaken such as evidence from the last non-forced trade; and

(e)  The fair values of other non-derivative financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis, using prices from observable current market transactions and dealer quotes for similar instruments.

Except for investments in associates and fixed rate loans, the carrying amounts of financial assets and liabilities recorded at amortised cost approximate to their fair value.

Capital risk management

The Group manages its capital to ensure that entities within the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of debt and equity balances. The capital structure of the Group consists of debt, cash and cash equivalents, other investments and equity attributable to the owners of the parent, comprising issued capital, reserves and retained earnings. Management perform "stress tests" of the Group's business model to ensure that the Group's objectives can be met and these objectives were met during 2022 and 2021.

The Directors review the capital structure on a quarterly basis to ensure that key strategic goals are being achieved. As part of this review they consider the cost of capital and the risks associated with each class of capital.

The gearing ratio at the year end was as follows:

	Notes	2022 £m	2021 £m
Debt	21	1,111.2	1,037.5
Liquid resources	18	(113.9)	(167.4)
Net debt (A)		997.3	870.1
Equity (B)		1,220.8	1,330.7
Net debt to equity ratio (A/B)		81.7%	65.4%

Debt is defined as long-term and short-term borrowings before unamortised issue costs as detailed in note 21. Liquid resources are cash and short-term deposits. Equity includes all capital and reserves of the Group attributable to the owners of the Company.

Externally imposed capital requirement

The Group was subject to externally imposed capital requirements to the extent that debt covenants may require Group companies to maintain ratios such as debt to equity (or similar) below certain levels.

Risk management objectives

The Group's activities expose it to a variety of financial risks, which can be grouped as:

· market risk;

· credit risk; and

· liquidity risk.

The Group's overall risk management approach seeks to minimise potential adverse effects on the Group's financial performance whilst maintaining flexibility.

Risk management is carried out by the Group's treasury department in close co-operation with the Group's operating units and with guidance from the Board of Directors. The Board regularly assesses and reviews the financial risks and exposures of the Group.

(a) Market risk

The Group's activities expose it primarily to the financial risks of changes in interest rates and foreign currency exchange rates, and to a lesser extent other price risk such as inflation. The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk and also uses natural hedging strategies such as matching the duration, interest payments and currency of assets and liabilities. There has been no change to the Group's exposure to market risks or the manner in which these risks are managed and measured.

(I) Interest rate risk

The Group's most significant interest rate risk arises from its long-term variable rate borrowings. Interest rate risk is regularly monitored by the treasury department and by the Board on both a country and a Group basis. The Board's policy is to mitigate variable interest rate exposure whilst maintaining the flexibility to borrow at the best rates and with consideration to potential penalties on termination of fixed rate loans. To manage its exposure the Group uses interest rate swaps, interest rate caps and natural hedging from cash held on deposit.

In assessing risk, a range of scenarios is taken into consideration such as refinancing, renewal of existing positions and alternative financing and hedging. Under these scenarios, the Group calculates the impact on the income statement for a defined movement in the underlying interest rate. The impact of a reasonably likely movement in interest rates, based on historic trends, is set out below:

Scenario	2022 Income statement £m	2021 Income statement £m
Cash +50 basis points	0.6	0.8
Variable borrowings (including swaps and caps) +50 basis points	(0.9)	(1.0)
Cash -50 basis points	(0.6)	(0.8)
Variable borrowings (including swaps and caps) -50 basis points	1.5	0.5

(II) Foreign exchange risk

The Group does not have any regular transactional foreign exchange exposure. However, it has operations in Europe which transact business denominated in Euros and, to a minimal extent, in Swedish krona. Consequently, there is currency exposure caused by translating into sterling the local trading performance and net assets for each financial period and balance sheet, respectively.

The policy of the Group is to match the currency of investments with the related borrowing, which reduces foreign exchange risk on property investments. A portion of the remaining operations, equating to the net assets of the foreign property operations, is not hedged except in exceptional circumstances. Where foreign exchange risk arises from future commercial transactions, the Group will hedge the future committed commercial transaction using foreign exchange swaps or forward foreign exchange contracts.

The Group's principal currency exposure is in respect of the Euro. If the value of sterling were to increase or decrease in strength the Group's net assets and profit for the year would be affected. The impact of a reasonably likely movement in exchange rates, is set out below:

Scenario	2022 Net assets £m	2022 Profit before tax £m	2021 Net assets £m	2021 Profit before tax £m
1% increase in value of sterling against the Euro	(6.0)	0.3	(6.2)	(0.4)
1% fall in value of sterling against the Euro	6.1	(0.3)	6.3	0.4

(b) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises from the ability of customers to meet outstanding receivables and future lease commitments, and from financial institutions with which the Group places cash and cash equivalents, and enters into derivative financial instruments. The maximum exposure to credit risk is partly represented by the carrying amounts of the financial assets which are carried in the balance sheet, including derivatives with positive fair values.

For credit exposure other than to occupiers, the Directors believe that counterparty risk is minimised to the fullest extent possible as the Group has policies which limit the amount of credit exposure to any individual financial institution.

The Group has policies in place to ensure that rental contracts are made with customers with an appropriate credit history. Credit risk to customers is assessed by a process of internal and external credit review, and is reduced by obtaining bank guarantees from the customer or its parent, and cash rental deposits. At 31 December 2022, the Group held £10.3 million in rent deposits (2021: £10.1 million) against £5.3 million of trade receivables (2021: £8.8 million). The overall credit risk in relation to customers is monitored on an ongoing basis. Moreover, a significant proportion of the Group portfolio is let to Government occupiers which can be considered financially secure.

Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of investment grade are accepted.

At 31 December 2022 the Group held £8.5 million (2021: £0.4 million) of financial assets at fair value through profit and loss. Management considers the credit risk associated with individual transactions and monitors the risk on a continuing basis. Information is gathered from external credit rating agencies and other market sources to allow management to react to any perceived change in the underlying credit risk of the instruments in which the Group invests. This allows the Group to minimise its credit exposure to such items and at the same time to maximise returns for shareholders.

(c) Liquidity risk

Liquidity risk management requires maintaining sufficient cash, other liquid assets and the availability of funding to meet short, medium and long-term requirements. The Group maintains adequate levels of liquid assets to fund operations and to allow the Group to react quickly to potential risks and opportunities. Management monitors rolling forecasts of the Group's liquidity on the basis of expected cash flows so that future requirements can be managed effectively.

The majority of the Group's debt is arranged on an asset-specific, non-recourse basis (mortgage type loans in SPVs). This allows the Group a higher degree of flexibility in dealing with potential covenant defaults than if the debt was arranged under a Group-wide borrowing facility. Portfolio loans secured by multiple properties are also used when circumstances require it or to obtain better conditions.

Banking covenants vary according to each loan agreement, but typically include loan-to-value and income related covenants. In addition, the Group has two "green" loans, each of which have a 10-basis point incentive for contain certain sustainability targets. The Group targets a loan-to-value in the range of 35% to 45%. Balance sheet loan-to-value at 31 December 2022 was 42.2% (2021: 37.1%).

Loan covenant compliance is closely monitored by the treasury department. Potential covenant breaches can ordinarily be avoided by placing additional security or a cash deposit with the lender, or by partial repayment to cure an event of default.

The Group's loan facilities and other borrowings are spread across a range of 25 banks and financial institutions so as to minimise any potential concentration of risk.

24. Financial assets and liabilities

	Fair value through profit and loss £m	Amortised cost £m	Total carrying value £m
Financial assets:
Cash and cash equivalents	-	113.9	113.9
Derivative financial assets	8.5	-	8.5
Other assets - non-current 1	-	-	-
Other assets - current 1	-	13.0	13.0
	8.5	126.9	135.4
Financial liabilities:
Secured bank loans	-	(1,105.9)	(1,105.9)
Secured notes	-	-	-
Derivative financial liabilities	-	-	-
Other liabilities - current 2	-	(43.3)	(43.3)
	-	(1,149.2)	(1,149.2)
At 31 December 2022	8.5	(1,022.3)	(1,013.8)

	Fair value through profit and loss £m	Amortised cost £m	Total carrying value £m
Financial assets
Cash and cash equivalents	-	167.4	167.4
Derivative financial assets	0.4	-	0.4
Other assets - non-current1	-	7.7	7.7
Other assets - current1	-	15.7	15.7
	0.4	190.8	191.2
Financial liabilities
Secured bank loans	-	(985.5)	(985.5)
Secured notes	-	(46.4)	(46.4)
Derivative financial liabilities	(0.8)	-	(0.8)
Other liabilities - current2	-	(35.9)	(35.9)
	(0.8)	(1,067.8)	(1,068.6)
At 31 December 2021	(0.4)	(877.0)	(877.4)

1  Other assets included all amounts shown as trade and other receivables in note 17 except prepayments of 2.7 million (2021: £2.4 million). All current amounts are non-interest bearing and receivable within one year.

2  Other liabilities included all amounts shown as trade and other payables in note 19 except deferred income and sales and social security taxes of £15.1 million (2021: £21.7 million). All amounts are non-interest bearing and are due within one year.

Reconciliation of net financial assets and liabilities to borrowings and derivative financial instruments

	2022 £m	2021 £m
Net financial assets and liabilities:	1,013.8	877.4
Other assets - non-current	-	7.7
Other assets - current	13.0	15.7
Other liabilities - current	(43.3)	(35.9)
Cash and cash equivalents	113.9	167.4
Borrowings and derivative financial instruments	1,097.4	1,032.3

25. Share capital

	Number of shares authorised, issued and fully paid			Ordinary shares in circulation £m	Treasury shares £m	Total ordinary shares £m
	Ordinary shares in circulation	Treasury shares	Total ordinary shares
At 1 January 2021, 31 December 2021 and 1 January 2022	407,395,760	31,382,020	438,777,780	10.2	0.8	11.0
Purchase of own shares (market purchase)	(10,184,894)	10,184,894	-	(0.3)	0.3	-
At 31 December 2022	397,210,866	41,566,914	438,777,780	9.9	1.1	11.0

The Board is authorised, by shareholder resolution, to allot shares or grant such subscription rights (as are contemplated by sections 551(1) (a) and (b) respectively of the Companies Act 2006) up to a maximum aggregate nominal value of £3,310,090 representing one-third of the issued share capital of the Company excluding treasury shares.

26. Dividend

	Payment date		Dividend per share p	2022 £m	2021 £m
Current year
2022 final dividend1	02 May 2023		5.35	-	-
2022 interim dividend	03 October 2022		2.60	10.6	-
Distribution of current year profit				10.6	-
Prior year
2021 final dividend	29 April 2022		5.35	21.8	-
2021 interim dividend	24 September 2021		2.35	-	9.6
Distribution of prior year profit			7.70	21.8	9.6
2020 final dividend	29 April 2021		5.20	-	21.2
Dividends as reported in the Group statement of changes in equity				32.4	30.8

1  Subject to shareholder approval at the AGM on 27 April 2023. Total cost of proposed final dividend is £21.3 million.

27. Other reserves

	Notes	Capital redemption reserve £m	Cumulative translation reserve £m	Fair value reserve £m	Share-based payment reserve £m	Other reserves £m	Total £m
At 1 January 2022		22.7	31.2	5.0	1.7	28.1	88.7
Exchange rate variances		-	28.5	-	-	-	28.5
Property, plant and equipment:
- net fair value gains in the year	15	-	-	1.9	-	-	1.9
- deferred tax thereon	20	-	-	(0.4)	-	-	(0.4)
- reclassification of student accommodation				(3.5)			(3.5)
Share-based payment credit		-	-	-	0.2	-	0.2
At 31 December 2022		22.7	59.7	3.0	1.9	28.1	115.4

	Notes	Capital redemption reserve £m	Cumulative translation reserve £m	Fair value reserve £m	Share-based payment reserve £m	Other reserves £m	Total £m
At 1 January 2021		22.7	64.0	0.5	2.0	28.1	117.3
Exchange rate variances		-	(32.8)	-	-	-	(32.8)
Property, plant and equipment:
- net fair value deficits in the year	15	-	-	5.5	-	-	5.5
- deferred tax thereon	20	-	-	(1.0)	-	-	(1.0)
Share-based payment charge		-	-	-	(0.3)	-	(0.3)
At 31 December 2021		22.7	31.2	5.0	1.7	28.1	88.7

The cumulative translation reserve comprises the aggregate effect of translating net assets of overseas subsidiaries into sterling since acquisition.

The fair value reserve comprises the aggregate movement in the value of financial assets classified as fair value through comprehensive income, owner-occupied property and hotel since acquisition, net of deferred tax.

The amount classified as other reserves was created prior to listing in 1994 on a Group reconstruction and is considered to be non ‑ distributable.

28. Notes to the cash flow

Cash generated from operations	2022 £m	2021 £m
Operating (loss)/profit	(63.9)	111.9
Adjustments for:
Net movements on revaluation of investment properties	136.5	(28.5)
Net movements on revaluation of equity investments	3.8	(6.1)
Depreciation and amortisation	0.6	1.1
(Loss)/profit on sale of investment property	(0.5)	0.1
Lease incentive debtor adjustments	(7.8)	(2.7)
Share-based payment charge	0.2	(0.3)
Changes in working capital:
Decrease/(increase) in receivables	2.3	(3.7)
(Decrease)/increase in payables	(0.7)	1.3
Cash generated from operations	70.5	73.1

				Non-cash movements 2022
Changes in liabilities arising from financing activities	Notes	1 January 2022 £m	Financing cash flows £m	Amortisation of loan issue costs £m	Fair value adjustments £m	New leases £m	Foreign exchange £m	31 December 2022 £m
Borrowings	21	1,031.6	43.6	1.8	-	-	28.9	1,105.9
Interest rate swaps	22	0.4	-	-	(6.0)	-	-	(5.6)
Interest rate caps	22	-	-	-	(2.8)	-	(0.1)	(2.9)
Lease liabilities		3.4	-	-	-	-	0.2	3.6
		1,035.4	43.6	1.8	(8.8)	-	29.2	1,101.0

				Non-cash movements 2021
Changes in liabilities arising from financing activities	Notes	1 January 2021 £m	Financing cash flows £m	Amortisation of loan issue costs £m	Fair value adjustments £m	New leases £m	Foreign exchange £m	31 December 2021 £m
Borrowings	21	970.7	88.1	2.0	-	-	(29.2)	1,031.6
Interest rate swaps	22	5.6	-	-	(5.2)	-	-	0.4
Interest rate caps	22	-	-	-	-	-	-	-
Lease liabilities		-	-	-	-	3.4	-	3.4
		976.3	88.1	2.0	(5.2)	3.4	(29.2)	1,035.4

29. Contingencies

At 31 December 2022 and 31 December 2021 CLS Holdings plc had guaranteed certain liabilities of Group companies. These were primarily in relation to Group borrowings and covered interest and amortisation payments. Principal amounts of loans secured from external lenders by two Group companies totalling £29.9 million at 31 December 2022 are also covered by guarantees provided by CLS Holdings plc (£30.2 million at 31 December 2021).

30. Commitments

At the balance sheet date the Group had contracted with customers under non-cancellable operating leases for the following minimum lease payments:

Operating lease commitments - where the Group is lessor	2022 £m	2021 £m
Within one year	100.4	99.9
Between one and two years	85.7	88.7
Between two and three years	71.4	73.3
Between three and four years	50.3	59.2
Between four and five years	38.8	38.9
More than five years	135.0	133.4
	481.6	493.4

Operating leases where the Group is the lessor are typically negotiated on a customer-by-customer basis and include break clauses and indexation provisions.

Other commitments

At 31 December 2022 the Group had contracted capital expenditure of £16.7 million (2021: £25.1 million). At the balance sheet date, the Group had not exchanged contracts to acquire any investment properties (2021: £nil). There were no authorised financial commitments which were yet to be contracted with third parties (2021: £nil).

31. Post balance sheet events

On 2 February 2023, the Group exchanged on the disposal of a property in France for £9.8m. Completion is scheduled for 14 April 2023 and the sale will be paid in 2 instalments, 50% on completion and 50% on 20 December 2023.

 

END

 

 

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