www.clsholdings.com
CLS Holdings plc
86 Bondway
London
SW8 1SF
Tel: +44 (0)20 7582 7766
Fax: +44 (0)20 7735 2779
email: enquiries@clsholdings.com
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CLS Holdings plc
Annual Report & Accounts
2016
2016
PORTFOLIO
2016
PORTFOLIO
SCHEDULE
OF GROUP
PROPERTIES 2016
LONDON
Tenure
Area
sqm Use
Tenure
Area
sqm Use
Freehold
Freehold
Freehold
Freehold
EC4
138 Fetter Lane
139 Fetter Lane
SE1
Westminster Tower,
3 Albert Embankment
SW6
Quayside, William Morris Way
SW8
Cap Gemini House,
95 Wandsworth Road &
72/78 Bondway & 22 Miles Street Freehold
Freehold
80/84 Bondway
Freehold
86 Bondway*
18/20 Miles Street
Freehold
101/103/107/109/111
Wandsworth Road
131/137 Wandsworth Road
SE11
35 Albert Embankment
Western House,
5 Glasshouse Walk
Freehold
Gateway House, Milverton Street Freehold
Spring Gardens, Tinworth Street Freehold
Freehold
Spring Mews, Tinworth Street
Freehold
Freehold
Freehold
2,742 Offices
428 Residential
4,457 Offices
3,064 Offices
10,427 Offices/Industrial
1,631 Offices
891 Offices
152 Offices
742 Residential
1,546 Offices
527 Leisure
589 Community Centre
1,844 Offices
19,964 Offices
10,997 Student
accommodation/
Offices
Spring Gardens Court,
79 Vauxhall Walk
92/98 Vauxhall Walk
405 Kennington Road
WC1
214/236 Gray’s Inn Road
W3
Armstrong Road
W10
Buspace Studios,
10 Conlan Street
Bracknell
Reflex Building,
Cain Road, RG12
Brentford
Great West House,
Great West Road, TW8
Bromley
King’s House,
32/40 Widmore Road, BR1
One Elmfield Park, BR1
Unicorn House,
29 Elmfield Road, BR1
Chertsey
Melita House,
124 Bridge Road, KT16
Coulsdon
Sentinel House,
163 Brighton Road, CR5
Datchet
18 Horton Road
Harrow
Hygeia, College Road, HA1
Hayes
The Grange,
501 Uxbridge Road, UB4
Hounslow
115/123 Staines Road, TW3
125/135 Staines Road, TW3
Leatherhead
Cassini Court,
Randalls Research Park, KT22
Pascal Place,
Randalls Research Park, KT22
†
* Owner-occupied
‡
Acquired in 2016
Acquired in 2017
†
†
Leasehold
Freehold
Freehold
115 Residential
415 Offices
1,680 Offices
Freehold
26,295 Offices
Freehold
4,039 Offices
Freehold
3,006 Workshops/Offices
Studios/
Freehold
9,607 Offices
Freehold
14,197 Offices
Freehold
Freehold
2,244 Offices/Retail
2,238 Offices
Freehold
5,456 Offices
Freehold
1,257 Offices
Freehold
3,411 Offices
Freehold
945 Offices
Freehold
6,757 Offices
Freehold
1,042 Offices
Freehold
Freehold
2,314 Offices
2,340 Offices
Freehold
1,630 Offices
Freehold
983 Offices
‡
‡
‡
Maidenhead
St Cloud Gate
St Cloud Way, SL6
New Malden
CI Tower, High Street, KT3
Apex Tower, High Street, KT3
Reigate
45 London Road, RH2
Sidcup
Heather Court
6 Maidstone Road, DA14
Staines
62 London Road, TW18
Sunbury-on-Thames
Benwell House,
Green Street, TW16
Sutton
Chancery House,
St Nicholas Way, SM1
Teddington
Harlequin House
7 High Street, TW11
Wallington
Crosspoint House,
28 Stafford Road, SM6
REST OF UK
Total London
‡
Freehold
941 Offices
Freehold
Freehold
7,597 Offices
10,066 Offices/Retail
Freehold
1,791 Offices
Freehold
2,904 Offices
Freehold
1,272 Offices
Freehold
2,377 Offices
Freehold
5,132 Offices
Freehold
1,981 Offices
Freehold
1,963 Offices
185,996
SOUTH
Basildon
Great Oaks House, SS14
Bridgwater
Hanover House, Northgate, TA6
Cardiff
29 Newport Road, CF24
Chippenham
Cyppa Court,
Avenue La Fleche, SN15
Plymouth
Foliot House
Brooklands Office Campus, PL6
Units 3, 4 & 5 Brooklands Office
Campus, PL6
Southampton
St Cross House,
18 Bernard Street, SO14
Leasehold
5,057 Offices
Freehold
2,007 Offices
Freehold
3,135 Offices
Freehold
1,143 Offices
Freehold
1,160 Offices
Freehold
687 Offices
Freehold
3,993 Offices
Leasehold
Freehold
Freehold
MIDLANDS
Bedford
Chailey House,
30 Cardington Street, MK42
Birmingham
Aqueous 2, Aston Cross,
‡
Chester Street, B6
Unit 2500, The Cresent
Northampton
St Katherine's House,
21/27 St Katherine's Street, NN1 Freehold
Norwich
Blackburn House,
1 Theatre Street, NR2
Peterborough
Clifton House, 84 Broadway &
126/128 Park Road, PE1
Wolverhampton
Temple House,
Temple Street, WV2
Freehold
Freehold
Leasehold
1,534 Offices
3,434 Offices
2,525 Offices
2,578 Offices
864 Retail
5,344 Offices
2,557 Offices
Tenure
Area
sqm Use
Tenure
Area
sqm Use
SCOTLAND
Aberdeen
Atholl House,
84/88 Guild Street, AB11
Lord Cullen House,
Causeway End, AB25
Dundee
Lindsay House,
18/30 Ward Road, DD1
Sidlaw House,
4 Explorer Road, DD2
Edinburgh
Ladywell House,
Ladywell Road, EH12
Leasehold 5,058 Offices
Freehold
2,995 Offices
Freehold
3,605 Offices
Freehold
5,690 Offices
Freehold
4,807 Offices
Aberdeen
Dundee
Edinburgh
Billingham
Redcar
Bradford
NORTH
St Asaph
Netcom House,
St Asaph Business Park LL17
Billingham
Theatre Buildings, Kingsway, TS23
Birkenhead
Great Western House,
Woodside Ferry Approach, CH41
Bradford
Centenary Court,
Forster Square, BD1
Phoenix House,
Rushton Avenue, BD3
Chester
Chantry House,
55/59 City Road, CH1
Redcar
Portland House,
West Dyke Road, TS10
Rotherham
Bradmarsh Business Park,
Bow Bridge Close, S60
Salford Quays
Units 1 & 2 Dallas Court,
South Langworthy Road, M50
Total Rest of UK
LONDON
Leasehold 1,972 Offices
Freehold
675 Offices
Freehold
7,445 Offices
Freehold
9,774 Offices
Freehold
3,498 Offices
Freehold &
leasehold
3,237 Offices
Freehold
892 Offices
Freehold
1,120 Offices
Leasehold 1,491 Offices
88,277
M1
A1(M)
Harrow
NW10
WC1
Brentford
W3
W6
W10
Maidenhead
M40
Hayes
Datchet
Hounslow
Bracknell
M4
Staines
SW8
SW6
Teddington
Sunbury-on-Thames
New Malden
EC4
SE1
SE11
Sidcup
Bromley
Chertsey
Sutton
Wallington
M2
Coulsdon
Reigate
M25
Birkenhead
Salford Quays
Rotherham
St Asaph
Chester
M3
Wolverhampton
Peterborough
Norwich
Birmingham
Northampton
Bedford
Chippenham
London
Basildon
Southampton
Cardiff
Bridgwater
Plymouth
SCHEDULE
OF GROUP
PROPERTIES CONTINUED
Spring Mews, London
Unit 2500, The Crescent, Birmingham
Chancery House, Sutton
Reflex Building, Bracknell
Unicorn House, Bromley
Westminster Tower, London SE1
Tenure
Area
sqm Use
Süderhastedt
Freehold
16,460 Offices
Hamburg
Freehold
13,835 Offices
Freehold
Freehold
8,527 Offices
2,588 Offices
Freehold
14,867 Offices
Freehold
Freehold
3,330 Offices
3,415 Offices
Berlin
Bochum
Düsseldorf
Freiburg
Munich
SCHEDULE
OF GROUP
PROPERTIES CONTINUED
GERMANY
Munich
East Gate, Kapellenstrasse 12,
D-85622 Feldkirchen
Maximilian Forum,
Lochhamer Strasse 11, 13 & 15,
D-82152 Martinsried
Lochhamer Schlag 1
D-82166 Gräfelfing
Rüdesheimer Strasse 9, D-80686
Tangentis, Beta Strasse 5/9a,
D-85774 Unterföhring
Hamburg
Harburger Ring 33, D-21073
†
Harburger Ring 35, D-21073
Fleethaus, Schellerdamm 2, D-21079
Freehold
5,419 Offices
Silo, Schellerdamm 16, D-21079
Freehold
13,233 Offices
Fangdieckstrasse 75, 75a, b, D-22547 Freehold
13,151 Offices
Jarrestrasse 8/10, D-22303
Merkurring 33/35, D-22143
Frohbösestrasse 12, D-22525
Berlin
Adlershofer Tor
Rudower Chausee 12, D-12489
Bismarckstrasse 105 &
Leibnitzstrasse 11/13,
D-10625 Charlottenburg
Freehold
Freehold
Freehold
5,569 Offices
5,605 Offices
1,941 Offices
Freehold
19,991 Retail
Offices/
Freehold
6,045 Offices
Bochum
Hans-Böckler-Strasse 19, D-44787
Freehold
25,007 Offices
Düsseldorf
Schanzenstrasse 76, D-40549
†
Parsevalstrasse 11, D-40648
Freiburg
Bismarckallee 18/20, D-79098
Landshut
E.On Allee 1, 3 & 5,
Roider-Jackl-Strasse &
Kiem-Pauli-Strasse 2, D-84036
Süderhastedt
Dorfstrasse 14, D-25727
†
Acquired in 2016
Freehold
Freehold
3,095 Residential
22,770 Offices
Freehold
7,471 Offices
Freehold
16,054 Offices
Freehold
1,185 Nursing
home
209,558
Lochhamer Schlag, Munich
Bismarckstrasse, Berlin
Landshut, Germany
SCHEDULE
OF GROUP
PROPERTIES CONTINUED
FRANCE
Tenure
Area
sqm Use
Tenure
Area
sqm Use
Freehold
Freehold
Freehold
2,000 Offices
2,080 Offices
563 Offices
Freehold
2,798 Offices
Freehold
2,477 Offices
Freehold
1,020 Offices
Freehold
525 Offices
Freehold
2,459 Offices
Freehold
3,118 Offices
Freehold
10,778 Offices
Freehold
6,690 Offices
Freehold
4,198 Offices
Freehold
181 Offices
Freehold
4,029 Offices
Freehold
2,784 Offices
Freehold
2,121 Offices
Freehold
7,308 Offices
Paris
Ateliers Victoires, 48 Rue Croix des
Petits Champs, 75001
20/22 Rue des Petits Hôtels, 75010
18 Rue Stephenson, 75018
Le Sully, Ilôt 2, Rue Georges Bizet,
78200 Mantes la Jolie
95/97 Bis Rue de Bellevue,
92100 Boulogne
16 Rue de Solférino,
92100 Boulogne
58 Avenue Général Leclerc,
92100 Boulogne
††
Le Quatuor, 168 Avenue Jean
Jaurès, 92120 Montrouge
2 Rue Pierre Timbaud,
92230 Gennevilliers
23/27 Rue Pierre Valette,
92240 Malakoff
Le Sigma, Place de Belgique,
90 Bld de L’Europe,
92250 la Garenne-Colombes
Le Debussy, 77/81 Boulevard
de la République,
92250 la Garenne-Colombes
62 Avenue Foch,
92250 la Garenne-Colombes
120 Rue Jean Jaurès,
92300 Levallois Perret
*
56 Boulevard de la Mission
Marchand, 92400 Courbevoie
53/55 Rue du Capitaine Guynemer,
92400 Courbevoie
7 Rue Eugène et Armand Peugeot,
92500 Rueil-Malmaison
††
co-ownership
* owner occupied
Lille
Mantes la Jolie
Paris
††
Lyon
Forum, 27/33 Rue Maurice Flandin,
69003
††
D’Aubigny, 27 Rue de la Villette,
69003
††
Rhône Alpes, 235 Cours Lafayette,
69006
Park Avenue, 81 Boulevard de
Stalingrad, Villeurbanne, 69100
††
Front de Parc, 109 Boulevard de
Stalingrad, 69100
Lille
96 Rue Nationale, 59000
La Madeleine, 105 Avenue de la
République, 59110
Freehold
6,783 Offices
Leasehold
4,316 Offices
Freehold
3,147 Offices
Freehold
4,249 Offices
Leasehold
5,373 Offices
Freehold
2,599 Offices
Freehold
4,446 Offices
86,042
PARIS
Gennevilliers
A86
La Garenne-Colombes
A14
Courbevoie
Rueil-Malmaison
Levallois-Perret
Boulevard Périférique
PARIS
Boulogne-Billancourt
A13
Malakoff
Montrouge
Lyon
N118
Rue Pierre Timbaud, Paris
Avenue Général Leclerc, Paris
Ateliers Victoires,
Paris
Park Avenue, Lyon
PROPERTY
PORTFOLIO
RENTAL DATA
London
Rest of UK
Germany
France
Sweden
Total Portfolio
VALUATION DATA
Gross rental
income for
the year
£m
Net rental
income for
the year
£m
43.4
11.5
20.4
14.7
1.3
91.3
41.8
13.2
19.4
15.0
0.9
90.3
Lettable
space
sqm
169,697
80,693
209,450
83,675
–
543,515
Contracted
rent at
year end
£m
ERV at
year end
£m
Contracted
rent subject
to indexation
£m
Vacancy rate
at year end
41.5
11.3
22.5
15.9
51.1
8.6
23.3
16.0
7.2
6.0
16.3
15.9
4.0%
0.9%
1.7%
2.9%
91.2
99.0
45.4
2.9%
Valuation movement in the year
Market value
of property
£m
Underlying
£m
Foreign
exchange
£m
EPRA
topped up
initial yield net initial yield
EPRA net
Reversion
Over-rented
20.4
826.6
London
(6.2)
Rest of UK
94.7
12.5
Germany 356.9
France 258.4 11.8
Total Portfolio 1,536.6 38.5
LEASE DATA
–
–
43.0
34.2
77.2
4.7%
11.9%
5.8%
5.6%
5.6%
5.0%
11.9%
5.9%
6.0%
5.9%
21.7%
0.8%
7.4%
2.8%
12.3%
2.6%
25.6%
5.9%
4.9%
6.7%
True
equivalent
yield
5.7%
8.4%
5.9%
5.8%
Average lease length
Passing rent of leases expiring in:
ERV of leases expiring in:
To break
years
To expiry
years
Year 1
£m
Year 2
£m
4.7
2.3
7.0
3.0
4.7
6.1
5.4
7.2
5.7
6.2
6.5
1.2
2.3
0.8
10.8
1.2
2.0
2.2
1.5
6.9
Year
3 to 5
£m
7.5
1.6
8.8
1.8
19.6
After
year 5
£m
26.3
6.5
9.3
11.8
53.9
Year 1
£m
Year 2
£m
9.4
0.9
3.2
0.7
14.2
1.2
1.5
2.3
1.2
6.2
Year
3 to 5
£m
9.0
1.4
8.6
1.8
20.8
After
year 5
£m
29.9
4.6
8.8
11.8
55.1
London
Rest of UK
Germany
France
Total Portfolio
RENT BY LEASE LENGTH
RENT BY SECTOR
Vacant
£2.7m
Up to
5 years
£37.3m
Over 10 years
£6.7m
5 to 10
years
£47.2m
Other
29.1%
Finance
2.1%
IT
7.4%
Manufacturing
8.1%
Government
35.5%
Business
Services
17.8%
Note: Property portfolio data comprises investment properties; it excludes the hotel, owner-occupied property, landholdings and First Camp land and buildings
Centenary Court, Bradford
62 Avenue Foch, Paris
Maximilian Forum, Munich
CONTENTS
Annual Report & Accounts 2016
CLS Holdings plc
FINANCIAL CALENDAR
2-35
STRATEGIC REPORT
Announcement of results
– 8 March 2017
Publication of Annual Report
and Accounts
– 23 March 2017
Annual General Meeting
– 26 April 2017
Trading Update
– mid-May 2017
Announcement of half-year results
– 16 August 2017 (provisional)
Trading Update
– mid-November 2017
>
HOW WE PERFORMED IN 2016
CLS at a glance
How we operate
2016 Business Highlights
2016 Financial Highlights
Chairman’s Statement
2
4
6
7
8
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
GOVERNANCE
>
INFORMATION ABOUT OUR BOARD OF DIRECTORS
AND CORPORATE GOVERNANCE
36-72
36 Directors’ Report
40 Corporate Governance Report
48 Remuneration Committee Report
70 Audit Committee Report
ACCOUNTS
73-114
>
FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2016
73 Independent Auditor’s Report to the members
of CLS Holdings Plc
78 Group Income Statement
78 Group Statement of Comprehensive Income
79 Group Balance Sheet
80 Group Statement of Changes in Equity
81 Group Statement of Cash Flows
82 Notes to the Group Financial Statements
109 Company Balance Sheet
110 Notes to the Company Financial Statements
114 Five Year Financial Summary
OTHER INFORMATION
>
115 Glossary of Terms
116 Directors, Officers and Advisers
115-116
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CLS AT
A GLANCE
WHO WE ARE
CLS IS A FTSE 250 PROPERTY INVESTMENT COMPANY WITH
A £1.6 BILLION PORTFOLIO IN THE UK, GERMANY AND FRANCE
OFFERING GEOGRAPHICAL DIVERSIFICATION WITH LOCAL
PRESENCE AND KNOWLEDGE
WHAT WE DO
HOW WE
OPERATE
WHERE WE
OPERATE
>
>
>
>
>
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Our core business is owning and managing high-yielding offices
in good, non-prime locations close to major transportation links
We are an active manager, repositioning properties through lease
restructuring, refurbishments and developments, and working closely
with our customers
We look to achieve long-term capital appreciation with a strong
emphasis on cash generation and an opportunistic approach to
acquisition, development and disposal
We finance our activities through diverse and flexible structures,
multiple sources of finance and active cash management
See pages 4-5
The main activity of the Group is the
investment in commercial real estate
across four European regions – London,
the Rest of the UK, Germany and France –
with a focus on providing well-managed,
cost-effective offices in key European cities
UK
France
Germany
2
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
TOP 15 CUSTOMERS
CUSTOMER
The fifteen customers which contribute most rental income to the
Group account for 43.7% of contracted rent, and comprise:
LOCATION
SECTOR
Customer
Location
Sector
Secretary of State
London and Rest of UK
Government
National Crime Agency
London
Government
Trillium
London and Rest of UK
Government
City of Bochum
Germany
Government
E.ON
BAe Systems
Kaufland
Germany
London
Germany
Major Corporation
Major Corporation
Major Corporation
Honda Motor Europe
London
Major Corporation
Veolia
Colt
Dr. Hönle
Volksbank
France
France
Germany
Germany
Major Corporation
Major Corporation
Major Corporation
Major Corporation
Signature Litigation
London
Major Corporation
CPAM
MediGene
France
Germany
Major Corporation
Major Corporation
PROPERTY PORTFOLIO1 BY VALUE £1,575 MILLION
France
16%
£258m
Rest of UK
6%
£95m
1
Investment properties,
hotel, owner-occupied property
and landholding
Germany
23%
£363m
London
55%
£859m
Annual Report & Accounts 2016
CLS Holdings plc
KEY STATISTICS
115
Number of properties
544,000 sqm
Lettable floor space
525
Number of tenants
£91 million
Contracted annual rents
£1.6 billion
Value of property portfolio
£40 million
Annual operating cash flow
159 %
Total shareholder return
in last 5 years
£98 million
Profit after tax
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HOW WE
OPERATE
OUR CORPORATE OBJECTIVE IS TO CREATE SUSTAINABLE LONG-TERM
SHAREHOLDER VALUE THROUGH OWNING AND ACTIVELY MANAGING
HIGH-YIELDING OFFICE PROPERTIES IN KEY EUROPEAN CITIES
BUSINESS MODEL
STRATEGY
KPIs
INVESTMENTS
Invest in high-yielding properties,
predominantly offices, with a focus
on cash returns
We target modern, high quality, well-let properties
in good non-prime locations in key European cities
We maintain and add value through an active rolling
refurbishment programme
We create extra value through developments at the
appropriate time in the cycle, after largely mitigating
letting risk and financing risk
To achieve a return on equity
of over 12%*
To achieve EPRA NAV growth
of over 7.5%*
Diversify market risk by investing
in geographical areas with differing
CUSTOMERS
characteristics
We invest in the UK, Germany and France and in sterling
and the euro
Maintain high occupancy rates
Maintain a diversified customer
base underpinned by a strong core
income stream
COST CONTROL
We use in-house local property managers who maintain
close links with occupiers to understand their needs
We focus on the quality of service and accommodation
for our customers
We avoid a heavy reliance on any one customer or
business sector
To maintain an occupancy rate of 95%*
Maintain strict cost control
FINANCE
We perform as many back office functions as possible
in-house, and monitor our performance against our
peer group
To maintain an administration cost ratio
of 16.5%* or below
Target a low cost of debt
We keep the cost of debt well below the net initial yield of
the properties to enhance the return on equity
To maintain a cost of debt at least
200 bps below the net initial yield
We use interest rate caps and hedges to control interest
rate risk
Utilise diversified sources of finance
to reduce risk
We maintain strong links with banks and other lending
sources across Europe
We own properties in single purpose vehicles, financed by
non-recourse bank debt in the currency used to purchase
the asset
We restrict the exposure of the Group to any one bank
Maintain a high level of liquid resources
We operate an in-house Treasury team which manages
cash and corporate bonds to maximise their returns
4
* Linked to Executive remuneration
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
ACHIEVEMENTS IN 2016
PLANS FOR 2017
RISKS
Annual Report & Accounts 2016
CLS Holdings plc
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(See details on page 28 & 29)
Return on equity was 18.1%
EPRA NAV growth was 17.9%
To continue to reposition the portfolio through acquisitions
and selective disposals
Property Investment Risks
Development Risk
4 properties acquired for £45.7 million
at an average net initial yield of 6.9%
4 properties sold for £85.5 million at
an average net initial yield of 5.6%
We expect to continue to see the better investment
opportunities to be in the UK and Germany
To consider several options on Vauxhall Square
At 31 December 2016 our occupancy
rate was 97.1%
Sustainability Risk
Political and Economic Risk
We have 525 customers
36% of rental income is derived from
government occupiers, and a further
31% from major corporations
The weighted average unexpired lease
term is 6.2 years
To maintain close and regular contact with customers
to proactively understand their needs
To add to the asset management and property
management teams in London and Germany to reflect
the planned growth in the portfolio
Our administration cost ratio for 2016
of 14.9% was one of the lowest in the
property sector
To reflect the loss of rental income from properties under
development and refurbishment, the target administration
cost ratio for 2017 has been set at 16.5%
Taxation Risk
If medium-term interest rates remain low, the debt
refinanced in the year is likely to be predominantly set at
fixed rates
Funding Risk
Other Investment Risk
We have £81m of debt due to expire, which will be
refinanced on a case-by-case basis
At 31 December 2016 the weighted
average cost of debt was 2.91%
During the year we took out £177m of
loans at an average interest rate of 1.90%
We have 58 loans from a range of
lenders, including 24 banks, 2 public
bonds and other financial institutions
79 of our 115 properties are owned
by single purpose vehicles, principal
amounts of debt are non-recourse to
the rest of the Group, and all are in the
currency used to purchase the asset
No bank provides over 13% of the
Group's debt
At 31 December 2016 we had liquid
resources of £164m, and undrawn bank
facilities of £105m
To maintain a high level of liquid resources to ensure
flexibility for the Group’s development programme
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2016
BUSINESS
HIGHLIGHTS
OPERATING ENVIRONMENT
THE YEAR WAS DEFINED BY POLITICAL AND ECONOMIC
UNCERTAINTY TRIGGERED BY THE PROSPECT OF BREXIT,
BUT OUR DIVERSITY – OF OPERATING IN THREE MARKETS,
OF A BROAD SPREAD OF TENANTS AND OF SOURCES OF
FINANCING – PROVIDED THE RESILIENCE TO PRODUCE
A STRONG YEAR FOR THE GROUP
Actively managing our business in-house
> 58,933 sqm of new lettings and lease renewals and 59,386 sqm of expiries
> The resulting vacancy rate fell to 2.9% (2015: 3.1%)
Repositioning the portfolio through acquisitions and disposals
> 4 properties acquired for £45.7 million at an average net initial yield of 6.9%
> 4 properties sold for £85.5 million at an average net initial yield of 5.6%
> 5 further acquisitions since the year end for £31.4 million and at an average
net initial yield of 8.0%
Enhancing our assets through developments and ongoing refurbishments
> Obtained enhanced planning consent on Vauxhall Square, SW8 and began
works on site at 3 developments
Financing the business prudently
> 14 new loans or refinancings completed with a value of £177 million and at
an average all-in annual rate of 1.90%
> Repositioned the loan portfolio to 63% at fixed rates (2015: 51%)
> Reduced the weighted average cost of debt to 2.91% (2015: 3.40%)
Achieving wins in sustainability
> Group Carbon Emissions reduced by 11.4%
> Increased the amount of renewable and low carbon energy generated on our sites by 32%
6
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
2016
FINANCIAL
HIGHLIGHTS
Annual Report & Accounts 2016
CLS Holdings plc
EPRA NET ASSETS PER SHARE
(pence)
EPRA EARNINGS PER SHARE
(pence)
PROPERTY PORTFOLIO
(£ million)
2,500
2,000
1,500
1,000
500
2012
2013
2014
2015
2016
125
100
75
50
25
2012
2013
2014
2015
2016
1,600
1,400
1,200
1,000
800
600
2012
2013
2014
2015
2016
+17.9 %
+45.2 %
+7.6 %
Increase in EPRA net assets
per share to 2,456p
(2015: 2,083p)
+18.8 %
Increase in EPRA earnings
per share to 123.0p
(2015: 84.7p)
-22.7 %
1
Increase in portfolio
value to £1,574.7m
(2015: £1,462.9m)
-24.7 %
Increase in net assets
per share to 2,151p
(2015: 1,810p)
+23.0 %
Fall in earnings per share
to 236.3p (2015: 305.7p)
Fall in profit after tax to
£97.8m (2015: £129.9m)
2.91 %
3.4 times
Increase in distributions
to shareholders for the year
with a proposed dividend
of 40p per share
97.1 %
Weighted average cost of
debt lowered still further
(2015: 3.40%)
Interest cover at a
strong level
(2015: 3.2 times)
69.0 %
Occupancy rate remains
well above KPI target of 95%
(2015: 96.9%)
Adjusted gearing continues
well under control
(2015: 71.3%)
1
Investment property, property held for sale, hotel, owner-occupied property and landholding
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CHAIRMAN’S
STATEMENT
OUR RESULTS SHOW THE BENEFITS
OF A DIVERSE BUSINESS INVESTING
IN HIGH-YIELDING OFFICES IN MAJOR
CITIES ACROSS THREE MARKETS WITH A
BROAD TENANT BASE AND DIVERSIFIED
SOURCES OF FUNDING
Overview Our 2016 results reflected a successful year for
the Group in which we passed several milestones. While EPRA
earnings per share and EPRA NAV rose to their highest ever
levels, the vacancy rate and cost of debt fell to record lows.
The rise in EPRA NAV was driven by underlying earnings,
foreign exchange gains and property valuation uplifts across
London and Europe, and the strong cash flow from operations
underpinned the increase in distributions to our shareholders.
To make the Group more comparable with other listed
companies, and following feedback from our shareholders, we
have decided to change our method of distribution and in April
we will pay the final distribution for 2016 by way of a dividend.
In the year we made acquisitions and selective disposals
across the Group as we continued to reposition our
investment property portfolio to further improve returns,
and we gained an enhanced planning consent on our Vauxhall
Square development scheme in London which increased the
office space.
In the second half of the year the UK investment market
demonstrated resilience to the prospect of the UK leaving
the EU, while the rise in the relative value of the euro further
emphasised the benefits of the Group’s geographical diversity.
The Group is strongly cash-generative. Our portfolio produces
a net initial yield of 5.6%, which will rise to 5.9% on the expiry
of rent-frees, and is financed by debt with a weighted average
cost of 2.91%. In 2016 our Group revenue rose 8.1% to
£128.5 million (2015: £118.9 million), and our net cash flow
from operating activities was £40.1 million (2015: £48.9 million).
Property Portfolio The increase in EPRA net assets per
share was driven by a rise in values across virtually all of our
regions. The Group’s property portfolio grew to £1.57 billion,
due predominantly to revaluation uplifts and foreign exchange
gains. The investment property portfolio rose by 2.7% in local
currencies, with strong contributions from France (+4.8%),
Germany (+3.8%) and London (+2.5%). The only part of our
portfolio to see a decline in value was the rest of the UK,
representing 6% of the total portfolio, lower by 6.1% as it
approached several lease events in March 2018, but which
are already under negotiation.
8
At the year end the contracted rent roll was £91.2 million
(2015: £89.0 million), of which 67% came from governments
and major corporations and 50% was index-linked. Overall,
the vacancy rate at 31 December 2016 was only 2.9% (2015:
3.1%); whilst 59,386 sqm of space was vacated in the year,
4,026 sqm was taken to development stock and 58,933 sqm
was let or renewed.
Our development schemes in Vauxhall have progressed in
line with expectations. As previously reported, at Vauxhall
Square, SW8, in February 2016 we gained an amendment to
the overall planning consent, replacing a four-star hotel with
offices, increasing the office element of the entire scheme
to 353,300 sq ft (32,823 sqm). In September, we began the
demolition of Wendle Court in preparation for the construction
of a new hostel and at the end of 2016 we gained vacant
possession of 95 Wandsworth Road. The Board is considering
several options for Vauxhall Square and I look forward to
informing our shareholders of those discussions when they
have been concluded.
At Spring Mews, SE11, in July we began the development of
the next phase of the site, adjacent to the hotel, student and
office scheme which completed in 2014. Phase 2 comprises
a £8.6 million, 7-storey development of 9,181 sq ft (853 sqm)
of office accommodation and nine residential apartments,
expected to reach practical completion by the end of this year.
We acquired four properties in Düsseldorf, Hamburg and
Leatherhead during the year at an aggregate cost of
£45.7 million, generating a net initial yield of 6.9%.
The largest, Parsevalstrasse 11, Düsseldorf, comprised
239,496 sq ft (22,701 sqm) of high quality, mixed-use space,
and was acquired for
7.1% and financed for 7 years at a fixed rate of 0.92%.
43.6 million at a net initial yield of
€
Since the year end we have bought a portfolio of five buildings
in the UK comprising 107,000 sq ft (9,940 sqm) of offices
in Reigate, Teddington, Sidcup, Maidenhead and Birmingham
for £31.4 million generating a net initial yield of 8.0%,
and providing excellent short to medium-term asset
management opportunities.
We also continued to dispose of peripheral assets which did
not fit within the Group’s strategy. We sold Vänerparken, our
only remaining investment property in Sweden, for SEK590
million, and we disposed of our only properties in Luxembourg
and Antibes. In London, we sold Chancel House, Neasden at
39% above its book value. In total, disposals produced proceeds
of £85.5 million, generating an aggregate profit on disposal
of £9.1 million, and a release of tax of a further £6.6 million.
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
Results In 2016 EPRA net assets per share rose by 17.9%
to 2,456 pence (2015: 2,083 pence), and basic NAV increased
by 18.8% to 2,151 pence (2015: 1,810 pence). Profit after tax
of £97.8 million (2015: £129.9 million) included a property
revaluation uplift of £36.1 million (2015: £98.0 million) and,
excluding such revaluations, EPRA earnings per share rose
by 45.2% to 123.0 pence (2015: 84.7 pence); basic earnings
per share were 236.3 pence (2015: 305.7 pence).
The 373 pence increase in EPRA net assets per share to
2,456 pence largely comprised underlying earnings (131 pence),
foreign exchange gains (119 pence) and property valuation
uplifts (97 pence). Shareholders’ funds rose by 14.9% to
£876.4 million, after distributions to shareholders of
£24.8 million, and the balance sheet continued to be strong,
with cash and liquid resources of £164.1 million.
Recurring interest cover remained robust at 3.4 times
(2015: 3.2 times), as the Group continued to enjoy a very low
weighted average cost of debt and at 31 December 2016 the
weighted average loan to value of our secured debt was 49.8%
(2015: 48.1%).
Financing The Group’s strategy is to have diversity of financing
from banks and other debt providers and to ring-fence debt
on individual properties where appropriate. During the year,
£177 million was financed in 14 new loans at a weighted
average rate of 1.90%, and our weighted average cost of debt
was reduced to 2.91%. Diversity of financing is important to
reduce risk and we enjoy active lending relationships with
24 debt providers. Medium-term interest rate swaps have
remained attractively low, and by taking advantage of these
we have increased the proportion of loans at fixed rate to 63%
(2015: 51%), with a further 5% protected against rising rates
with interest rate caps. 32% of our debt remains unhedged.
The Group’s corporate bond portfolio has continued to be a
valuable part of our cash management strategy. The portfolio
outperformed the bond market during the year, delivering a
total return of £10.5 million, or 18.6% in local currencies on
invested capital. At the year end the portfolio consisted of 31
bonds valued at £65.1 million with a running yield of 7.8% on
market value, and a weighted average duration of 12.6 years.
People Our skilled and motivated workforce, drawn from
15 nationalities and split evenly between men and women,
is key to the Group’s success. In order to continue to understand
the needs and requirements of our employees, we conducted
an anonymous Group-wide staff survey during the year, from
which we received positive and constructive feedback and
have begun to implement several of the suggestions, with
a timetable to address those which remain.
Sustainability We have continued to implement our
sustainability strategy across the Group, with technological
improvements in the way we are able to monitor energy usage
and to work with our customers to reduce costs. We maintain
our involvement in the communities in which we invest, and
have increased staff involvement in community and charitable
events. I am very pleased that we have been able to reduce
our carbon emissions for the fifth consecutive year, which will
continue with the installation of further photovoltaic arrays
during 2017. Further details of these initiatives are set out in
the Corporate Social Responsibility Report on page 30.
Distributions to Shareholders In 2016, the Group distributed
through tender offer buy-backs £13.4 million in April, equivalent
to 31.8 pence per share, and £7.2 million in September,
equivalent to 17.5 pence per share. In addition, £4.1 million
was spent pursuant to market purchases on acquiring
255,099 shares which were placed in treasury.
The Board intends to make future distributions by way of
a progressive dividend paid twice-yearly. Accordingly, the
Board is proposing a final dividend of 40 pence per share,
bringing the total distribution for the year to 57.5 pence per
share, or £23.5 million. In addition, the Board is proposing a
share sub-division of the existing ordinary shares of 25 pence
each into 10 ordinary shares of 2.5 pence each.
Outlook Our record results illustrate the benefits of our
diverse business: investing in high-yielding properties in
secondary areas of major cities, across three markets,
with a broad tenant base and diversified sources of funding.
Looking ahead, 2017 is set to be an eventful year, with the
UK due to start the process of leaving the European Union
and several important elections taking place in Europe. With
our proven and successful business model, a strong balance
sheet and ample liquid resources, and our highly skilled and
committed staff, we are well positioned to benefit from any
challenges and opportunities which lie ahead.
With our proven opportunistic business approach we will
continue to focus on cash flow, selling low yielding assets
with no immediate prospect of value-adding initiatives,
and redeploying our capital elsewhere with our customary
discipline. I remain confident that the Group is well positioned
to continue to deliver value to our shareholders.
Henry Klotz
Executive Chairman
8 March 2017
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INVESTORS
TOP 10 SHAREHOLDERS
(% of ISC)
Directors
Fidelity International
Mr Bengt Morstedt
Invesco Perpetual
Schroder Investment Management
Thames River Capital
AXA Framlington Investment Managers
Kames Capital
BMO Global Asset Management (UK)
Other holders
SHAREHOLDERS BY SECTOR
Directors
Mutual Funds
Individuals
Inv Trusts
Insurance
Pensions
SHAREHOLDER DISTRIBUTIONS
(£ million)
25
20
15
10
5
0
2012
2013
2014
2015
2016
Final
Interim
INVESTOR ENGAGEMENT
March 2017 Annual results presentation
Annual results roadshow:
London, Edinburgh
April 2017 Annual General Meeting
May 2017 Q1 Trading Update
August 2017 Half-year results presentation
September 2017 Half-year results roadshow:
London, Edinburgh
10
November 2017 Q3 Trading Update
52
10
7
6
4
3
2
1
1
14
52
19
13
10
3
2
DISTRIBUTIONS TO SHAREHOLDERS
THE BOARD INTENDS TO MAKE
FUTURE DISTRIBUTIONS BY WAY OF
TWICE-YEARLY DIVIDENDS AND TO
SUB-DIVIDE THE ORDINARY SHARES
Tender Buy-Backs For many years the Company
has made distributions to shareholders twice a year
through tender offer buy-backs. The last of these
was in September 2016, being £7.2 million with
which the Company bought back 1 in 100 shares
at 1,750 pence per share.
Dividends On 8 February 2017, the Company
announced that future distributions would be by
dividend, beginning in April 2017 when we propose
to distribute £16.3 million (40 pence per share),
making a total of £23.5 million for the year. This is
an increase of 23.0% on distributions last year and
47.6% above the level of two years ago.
Share Split At the annual general meeting we will
ask shareholders to approve a sub-division of each
of the Company’s ordinary shares of 25 pence into
10 shares of 2.5 pence each.
Why Change? We believe that changing the
distribution method to one of dividends and splitting
the shares will make CLS more easily comparable
with other listed property companies and a more
attractive investment proposition for new
shareholders. Our aim is to improve liquidity in the
Group’s shares and broaden the shareholder base.
Dividend Policy The Company expects sufficient
cash flow to be able to meet the growth requirements
of the business, maintain an appropriate level of
debt and provide cash returns to shareholders via
a dividend. It is our intention to pay a progressive
dividend fully covered by EPRA earnings.
Approximately one-third of the annual dividend
will be made as an interim in September, with the
balance paid as a final dividend in April.
Market Purchases Between 13 May and 31 May 2016,
the Company engaged in a share buy-back
programme, acquiring 255,099 shares in the market
at an aggregate cost of £4.1 million and at an
average price of 1,595 pence per share, which added
3 pence per share to NAV.
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
Fangdieckstrasse, Germany
•
•
•
Acquired in 2007
Multi-let property of 141,556 sq ft
(13,151 sqm) with office, production
and laboratory space
Extended leases with existing tenants
in 2016
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“WE BELIEVE THAT PAYING DIVIDENDS AND
SUB-DIVIDING THE SHARES WILL MAKE CLS A
MORE ATTRACTIVE INVESTMENT PROPOSITION
FOR SHAREHOLDERS.”
Fredrik Widlund
Chief Executive Officer
SHARE PRICE v EPRA NAV
(Pence)
2,500
TOTAL RETURNS TO SHAREHOLDERS 1994-2016
1994 = 100
2,500
2,000
1,500
1,000
500
0
D ec 2011
D ec 2012
D ec 2013
D ec 2014
D ec 2015
D ec 2016
Share price
EPRA NAV
2,000
1,500
1,000
500
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
2016
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CLS Holdings
FTSE Real Estate
FTSE All Share
BUSINESS
REVIEW
THE MAIN ACTIVITY OF THE GROUP
IS THE INVESTMENT IN COMMERCIAL
REAL ESTATE ACROSS FOUR EUROPEAN
REGIONS – LONDON, THE REST OF THE
UNITED KINGDOM, GERMANY AND
FRANCE – WITH A FOCUS ON PROVIDING
WELL-MANAGED, COST-EFFECTIVE
OFFICES IN KEY EUROPEAN CITIES
INVESTMENT PROPERTIES
Overview At 31 December 2016, the directly held
investment property portfolio was independently
valued at £1,536.6 million (31 December 2015:
£1,366.8 million). The increase of £169.8 million
comprised new acquisitions of £45.7 million and other
capital expenditure of £20.7 million, a £38.5 million
valuation uplift, £77.2 million of positive exchange
rate variances, and £9.2 million transferred from
properties held for sale; the cumulative effect of
these was mitigated by disposals of £21.5 million.
In local currencies, the portfolio rose by 2.7%, after
acquisitions and development expenditure. The
drivers were the French (+4.8%), German (+3.8%)
and London (+2.5%) portfolios; the rest of the UK
fell by 6.1%.
At the beginning of the year the last Swedish
investment property, Vänerparken, was held in the
balance sheet as a property held for sale, and was
duly sold in 2016.
Of the £45.7 million spent on acquisitions in the year,
£39.3 million related to two properties in Germany,
and £6.4 million to two in London. Our only properties
in Sweden, Luxembourg and Antibes were sold, and
a London property was sold to a special purchaser.
Contracted rent rose by 0.7% on a like-for-like basis.
The increase in capital values was driven by a fall in
yields: the EPRA net initial yield of the overall
investment property portfolio (excluding developments)
at 31 December 2016 fell to 5.6% (2015: 5.9%) and the
topped-up EPRA net initial yield to 5.9% (2015: 6.2%).
The average rent across the Group remained very
affordable at £16 per sq ft (£172 per sqm), and
the average capital value was also low at just
£268 per sq ft (£2,883 per sqm). This was very close
to replacement cost, meaning that the land element
of our investments in key European cities was minimal.
This also highlights how successful the Group can be
in attracting occupiers with cost-effective rents.
12
The bedrock of the Group’s rental income is strong,
with 36% being paid by government occupiers and
31% from major corporations, and 50% of our rents
are subject to indexation. The weighted average lease
length at 31 December 2016 increased to 6.2 years,
or 4.7 years to first break, and the portfolio was let
at a net £5.1 million below current market rents.
The overall vacancy rate remained very low at just
2.9% (2015: 3.1%), which is testament to the benefit
of active in-house asset management and property
management, and of maintaining strong links with
our customers to ensure we understand and respond
to their needs.
The benefits of the Group’s geographical diversification
remain self-evident: the threat of Brexit undermined
the London investment market for a time in 2016,
but it also weakened sterling, adding to the sterling
value of our euro-denominated assets, whilst we
saw good growth in values in Germany and France,
and Germany continues to provide good investment
opportunities and readily available debt.
The Group maintains its strong commitment to
sustainability, which has benefited both occupiers
and the Group. The Corporate, Social and
Environmental Responsibility Statement on page 30
provides more detail.
MOVEMENT IN PROPERTY PORTFOLIO 2016
(£ million)
PPE
Held for sale
Investment properties
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
45.7
20.7
1,462.9
77.7
38.6
1,574.7
-70.9
38.1
37.5
58.6
1,366.8
1,536.6
A dditions
At 1 January 2016
C apex
Valuation U plift
FX
At 31 D ece m ber 2016
Disposals
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
138 Fetter Lane, London EC4
•
•
•
Acquired in 1986
29,528 sq ft (2,742 sqm) of office
space and 4,610 sq ft (428 sqm)
of residential flats
Refurbishment completed in 2014,
including a new stone façade and
the addition of eight new flats
•
The property is fully let
AVERAGE UNEXPIRED LEASE TERM
(Years)
EFFECT OF RENT EXPIRIES
(£ million)
VACANCY RATE HISTORY
(%)
To first break
To end of lease
Rent expiring
ERV of rent expiring
8
7
6
5
4
3
2
1
0
London
R est of U K
G er m any
France
Total Group
18
16
14
12
10
8
6
4
2
0
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Later
8
7
6
5
4
3
2
1
0
KPI
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
13
BUSINESS
REVIEW
CONTINUED
LONDON
TOP CUSTOMERS
MARKET DURING THE YEAR:
>
>
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>
National Crime Agency
Government
Secretary of State
Government
Trillium
Government
BAe Systems
Major Corporation
14
•
•
•
•
•
•
GDP growth for 2016 down to 1.8% (2015: 2.2%)
The impact of the EU referendum was a short-lived hiatus in the investment
market in Q3
Investment volumes rebounded in Q4 to a total of £12bn for the year, in line with
the 5 year average
75% of investment transactions involved overseas buyers
Tenant demand for secondary properties remained unaffected by the prospect
of Brexit
PMI business confidence index remains strong at over 50
Outlook:
The decision to leave the EU created uncertainty in the London commercial property
market, especially in the City where the demand for space from the financial
services sector is likely to decline in the medium term. In the assets in which CLS
invests, which are outside the City and prime West End, tenant demand remains
robust. A negative impact on the broader economy could affect CLS more tangibly,
but the supply of commercial space in London remains constrained and by managing
all of our assets in-house we are in a strong position to withstand such an impact.
In 2016 the supply of, and demand for, investment opportunities in London
were constrained by the prospect of the EU referendum and by its outcome.
Consequently, in January we made our only acquisition in Greater London
in the year, comprising Cassini Court and Pascal Place, Randalls Research
Park, Leatherhead for £6.4 million, including costs. These adjacent buildings
provided 28,122 sq ft (2,613 sqm) of offices and, with a net initial yield of 6.0%
and around 10,580 sq ft of vacant space, presented the opportunity to undertake
a modernisation programme, which is now under way.
Since the end of the year we have acquired a portfolio of five properties comprising
107,000 sq ft (9,940 sqm) of offices in Reigate, Teddington, Sidcup and Maidenhead
(which will be managed within the London portfolio) and Birmingham (Rest of
UK) for £31.4 million generating a net initial yield of 8.0% from 10 tenants, and
providing excellent short to medium-term asset management opportunities.
In October, Chancel House, Neasden Lane NW10 was sold to the Education
Funding Agency for £18.7 million, 39% above its valuation at 31 December 2015.
It comprised 74,700 sq ft (7,081 sqm) of office space; 56% of the building was
income-producing from the Department of Works and Pensions until March 2018
and, with 44% of the property vacant, the sales price represented a net initial
yield of 3.3%.
The London occupancy market in which we operate maintained its strength
in 2016, largely ignoring the impact Brexit might have, and with a lack of new
developments to satisfy this demand, rental values rose. On average, new
lettings were achieved at 5.4% above their estimated rental values (ervs) of
31 December 2015. During 2016, ervs of the London portfolio rose by 2.6%, and
at 31 December 2016 the London portfolio was net reversionary. Those leases
which were reversionary were £9.0 million or 21.7% under-rented; of the
£1.1 million (2.6%) of over-renting in London, £0.7 million was on leases
which expire in 2026. The vacancy rate for London remained low at just 4.0%
(2015: 3.6%), excluding development stock. During 2016, 142,374 sq ft
(13,227 sqm) became vacant, of which 43,335 sq ft (4,026 sqm) was taken into
development stock, and we let or renewed leases on 106,573 sq ft (9,901 sqm).
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
£826.6 million
55 %
Value of investment properties
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178,377 sqm
No. of properties
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Lettable space
4.7 %
No. of tenants
5.0 %
EPRA net initial yield
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EPRA topped-up net
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4.0 %
Great West House, Brentford
•
•
•
•
Acquired in 1996
Multi-let office building of 152,815 sq ft (14,197 sqm)
Internal refurbishments completed in 2016
Improved external signage
2.5 %
Vacancy rate
64 %
Valuation uplift
Government and major
corporates6.1 years
Average unexpired
lease length
4.7 years
To first break
1
excluding developments
15
BUSINESS
REVIEW
CONTINUED
At Vauxhall Square, SW8, our 1.6 million sq ft
(151,700 sqm) major development opportunity
adjacent to Vauxhall’s transport hub, construction
is well advanced on the 454 bed, 30 storey student
tower by Urbanest, to whom we sold this adjacent
site in 2015. This represents just one of a number
of tower developments under way in the immediate
vicinity of our main development site. In February
2016 we gained an amendment to the overall
planning consent, replacing a four-star hotel with
108,586 sq ft (10,088 sqm) of Grade A offices,
increasing the office element of the entire scheme to
353,300 sq ft (32,823 sqm). In September, we began
the demolition of Wendle Court to the south of the
scheme at 131/137 Wandsworth Road, in preparation
for the construction of a new hostel to replace the
one on the main site. As previously indicated, at the
end of 2016 we were able to gain vacant possession
from Cap Gemini of 95 Wandsworth Road, the largest
existing building on the main site. We are considering
several options on the future of the main scheme.
At Spring Mews, SE11, in July we began the
development of the next phase of the site, adjacent
to the hotel, student and office scheme which
completed in 2014. Phase 2 comprises a £8.6 million,
7-storey development of 9,181 sq ft (853 sqm) of office
accommodation and nine residential apartments
expected to reach practical completion by the end
of this year.
The London portfolio rose in value by 2.5% in the year,
dampened by the 1% increase in stamp duty land tax,
and reflected a 30 bps fall in yield and a 1.6% growth
like-for-like in contracted rents.
Hygeia, Harrow
•
•
•
•
Acquired in 2013
Multi-let office building of 72,732 sq ft (6,757 sqm)
Ongoing lift and lobby refurbishment
Located in a growing and dynamic office location
16
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
TOP CUSTOMERS
>
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Secretary of State
Government
Trillium
Government
REST OF UK
£94.7 million
6 %
Investment properties
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MARKET DURING THE YEAR:
•
•
Tenant demand remained stable in regional cities
Demand for student accommodation and the
private rented sector continued to restrict the
supply of office stock
•
Vacancy levels fell as supply diminished
Outlook:
The key to the Rest of UK portfolio is the impact of the
lease events in March 2018.
The Rest of UK portfolio is predominantly let to
government departments. In 2016 there were no
acquisitions or disposals; during the year we
exchanged contracts to sell Atholl House, 84/88 Guild
Street, Aberdeen, with vacant possession but the
purchaser did not complete the contract, and a
non-refundable deposit of £1.5 million was taken
to Other Property Income in the income statement.
Since the year end, the acquisition in Birmingham
referred to above has been added to the rest of
UK portfolio.
In 2016, the only lease to expire was of 7,664 sq ft
(712 sqm) and was renewed to the existing tenant.
There are 11 leases with the Department of Work and
Pensions (Job Centres) which have tenant breaks or
expiries in March 2018 and we are in discussions with
the tenant’s advisers to extend most of these.
The Rest of UK portfolio fell in value by 6.1% in the
year, including the effect of the rise in stamp duty
land tax. Excluding the impact of stamp duty and
Atholl House, the remaining 25 properties in the
portfolio fell by less than 1.5% as the March 2018
lease events approached.
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property interests
26
85,751 sqm
No. of properties
25
Lettable space
11.9 %
No. of tenants
11.9 %
EPRA net initial yield
EPRA topped-up net
initial yield0.9 %
-6.1 %
Vacancy rate
100 %
Valuation fall
Government and
major corporates
5.4 years
Average unexpired
lease length
2.3 years
To first break
17
GERMANY
MARKET DURING THE YEAR:
•
•
•
•
•
GDP growth stable at 1.9% (2015: 1.7%)
Unemployment fell to 5.8%
Buoyant investment market driven by international investors
Office take-up increased by 6% on 2015 level
Rental growth of over 5% in major cities
Outlook:
Vacancies are falling, rental growth in larger cities has been over 5% per annum
and the economy grew by 1.9% in 2016. Further strong economic growth is expected
in 2017 which, underpinned by a widely-diversified economic structure, will benefit
our tenants. The general election will inevitably create some uncertainty, but the
economy is strong enough to withstand it. We intend to grow our portfolio in a
German economy which provides attractive investment and financing opportunities
in non-prime offices.
We continue to see good investment value in German commercial real estate,
supported by favourable financing conditions. In September, we acquired
Parsevalstrasse 11, Düsseldorf, comprising 239,496 sq ft (22,700 sqm) of
high quality, mixed-use space close to the airport. The cost of
€
provided a net initial yield of 7.1% and we financed the acquisition for
7 years at a fixed rate of 0.92%. In August, we bought Harburger Ring 35,
Hamburg, adjacent to our existing holding of Harburger Ring 33, for
43.6 million
€
5.7 million, which comprised 36,028 sq ft (3,415 sqm) of office space.
During 2016, 213,093 sq ft (19,797 sqm) vacated or expired in the German
portfolio, but 232,789 sq ft (21,627 sqm) was relet or renewed and,
consequently, the vacancy rate fell to 1.7% (2015: 2.5%). New leases and
renewals were achieved at 6.1% above their ervs at the end of 2015.
The valuation of the German portfolio rose by 3.8% in local currency, or by
18.4% in sterling. The uplift was driven by a 5 bps fall in yields, whilst ervs
were up 0.3% on a like-for-like basis in the year.
BUSINESS
REVIEW
CONTINUED
TOP CUSTOMERS
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>
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City of Bochum
Government
E.ON
Major Corporation
Kaufland
Major Corporation
Dr Hönle
Major Corporation
18
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
£356.9 million
Value23 %
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Percentage of Group’s
property interests
21
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209,558 sqm
No. of properties
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164
Lettable space
5.8 %
No. of tenants
5.9 %
EPRA net initial yield
EPRA topped-up net
initial yield1.7%
3.8 %
Vacancy rate
63 %
Valuation uplift
Government and
major corporates
7.2 years
Average unexpired
lease length
7.0 years
To first break
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19
Parsevalstrasse 11, Düsseldorf
€
Acquired in 2016
Purchase price of
43.6 million
Net initial yield of 7.1%
Multi-let office building of 244,341 sq ft (22,700 sqm)
Negotiations with tenants to extended leases will
be carried out in 2017
•
•
•
•
•
FRANCE
MARKET DURING THE YEAR:
•
•
•
•
•
Low GDP growth of 1.1% (2015:1.3%)
Unemployment still high at 9.9%
Strong Paris letting market was 7% up on 2015
Fall in availability of office space due to increase in demand and lack of new supply
Investment market 45% above 10 year average, dominated by domestic buyers
Outlook:
The French economy remains challenging, with GDP growth in 2016 of only 1.1%
and unemployment at 10%, and uncertainty surrounds both the outcome of the 2017
presidential election and its economic consequences. But 2016 proved the strength
of the Paris office letting market, and a continuing fall in supply bodes well for
rents. Robust valuations reflect a market dominated by domestic investors and a
lack of supply. Overall, we remain cautious of further investment in France until
signs of recovery and political stability have returned.
BUSINESS
REVIEW
CONTINUED
TOP CUSTOMERS
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Veolia
Major Corporation
Colt
Major Corporation
CPAM
Government
Carsat
Government
20
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Jean Jaurès
•
•
•
Acquired in 2004
Multi-let office building of
43,368 sq ft (4,029 sqm)
Fully let and well located for
transport links
•
Contains HQ of CLS France
In a highly competitive market, no acquisitions were made in France during
the year, but we took the opportunity to dispose of peripheral assets which
did not fit within the Group’s strategy of investing in Greater London and
the larger cities of Germany and France. We disposed of our only property
10.2 million,
investment in Luxembourg, at 16 Rue Eugene Ruppert, for
marginally ahead of the 2015 valuation for this empty property. Later in the
year we sold Le Chorus, 2203 Chemin de St Claude, Antibes a 46,640 sq ft
(4,421 sqm) office building at a price of
valuation at 31 December 2015.
9.4 million, 2.4% above its
€
€
Our in-house French team managed to reduce still further our vacancy rate
in France to only 2.9% (2015: 3.9%). Whilst a significantly large 276,094 sq ft
(25,650 sqm) of space vacated or expired during the year, 287,321 sq ft
(26,693 sqm) was let. This was achieved at a weighted average rent 1.9%
above ervs at 31 December 2015.
The French portfolio valuation rose by 4.8% in the year in local currency,
and by 21.6% in sterling. Contracted rent on a like-for-like basis fell by
1.5%, but yields fell by 8 bps, which accounted for most of the rise in the
value of the properties.
Annual Report & Accounts 2016
CLS Holdings plc
£258.4 million
Value16 %
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Percentage of Group’s
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24
86,042 sqm
No. of properties
166
Lettable space
5.6 %
No. of tenants
6.0 %
EPRA net initial yield
1
1
EPRA topped-up net
initial yield
2.9 %
4.8 %
Vacancy rate
56 %
Valuation uplift
Government and
major corporates
5.7 years
Average unexpired
lease length
3.0 years
To first break
1
excluding developments
21
BUSINESS
REVIEW
CONTINUED
OTHER INVESTMENTS
RESULTS FOR THE YEAR
£45.3 million
Financial Investments
£5.5 million
11.2 %
Catena AB – value
2.3 %
NP3 Fastigheter AB – value
£65.1 million
Catena AB – interest
NP3 Fastigheter AB – interest
Corporate bonds – value
At 31 December 2016 the Group held financial investments
in the shares of two companies listed on Nasdaq Stockholm.
The Group’s main financial investment was an 11.2% interest
in the share capital of Catena AB, a property company which
specialises in logistics warehouses in Sweden, from which
we received a dividend of £1.0 million during the year. NP3
Fastigheter AB is an investor in commercial real estate in
northern Sweden which produced good capital growth during
the Group’s ownership, and was sold in full in February 2017.
The Group’s other significant financial investment is in
corporate bonds, which are held as an alternative to cash
as a cash management tool. The average capital invested
in corporate bonds in the year was £56.4 million, which
generated a total return in local currencies of 18.6%. At the
year end the Group owned bonds from 31 issuers with an
aggregate value of £65.1 million.
£66.8 million
£26.8 million
Property, Plant and Equipment
£5.7 million
Hotel – value
58.0 %
First Camp – gross value of assets
£5.6 million
86 Bondway – value
First Camp – interest
Staybridge Suites London – Vauxhall
Landholding – value
The
Spring Mews development completed in 2014, and is operated
under a franchise agreement with Intercontinental Hotels
Group. It increased its revenue by 21.6% in 2016, contributing
£4.3 million (2015: 3.5 million) to other property income.
hotel is part of our
The assets of First Camp Sverige Holding AB, predominantly
vacation sites in Sweden, were valued at £66.8 million at
31 December 2016, and accounted for the majority of additions
in property, plant and equipment in 2016 as the company
consolidated its share of the Swedish market. The Group’s
share in the net assets of First Camp at the year end was
£14.1 million.
22
Headlines Profit after tax attributable to the owners of the
Company of £97.8 million (2015: £129.9 million) generated
EPRA earnings per share of 123.0 pence (2015: 84.7 pence),
and basic earnings per share of 236.3 pence (2015:
305.7 pence). Investment properties at 31 December 2016
were £1,536.6 million (2015: £1,366.8 million), EPRA net
assets per share were 17.9% higher at 2,456 pence
(2015: 2,083 pence), and basic net assets per share rose
by 18.8% to 2,151 pence (2015: 1,810 pence).
Approximately 55% of the Group’s business is conducted
in the reporting currency of sterling, 32% in euros, with the
balance in Swedish kronor. Compared to last year, sterling
weakened against the euro by 11.1% and against the krona
by 10.1%, increasing profits accordingly. Likewise, at
31 December 2016 the euro was 15.1% stronger and the krona
10.3% stronger against sterling than twelve months previously,
increasing the sterling equivalent value of non-sterling
net assets.
Exchange rates to the £
At 31 December 2014
2015 average rate
At 31 December 2015
2016 average rate
At 31 December 2016
EUR
SEK
1.2876
1.3774
1.3571
1.2242
1.1731
12.1654
12.8889
12.4420
11.5801
11.2754
Income Statement In 2016, rental income of £91.3 million
was £6.0 million higher than in 2015. Acquisitions added
£3.7 million, completed developments contributed £1.8 million
for the first time, general letting activity added £1.0 million
and the weakness of sterling added £4.3 million; these were
offset by £4.8 million of income lost through disposals. Other
property income of £21.4 million included income from First
Camp of £12.5 million (2015: £14.0 million), hotel revenue
from Spring Mews of £4.3 million (2015: £3.5 million) and
one-off receipts of £1.5 million on the aborted disposal of
Atholl House and £1.0 million from a rights of light settlement.
In aggregate net rental income rose by 8.2% to £107.1 million
(2015: £99.0 million).
We monitor the administration expenses incurred in running
the property portfolio by reference to the income derived from it,
which we call the administration cost ratio, and this is a key
performance indicator of the Group. In 2016, the one-off cost
of closing the Lyon office and of moving the Paris office to
larger premises to accommodate the entire French team was
part of the increase in administration expenses of the property
segment of the Group to £14.1 million (2015: £13.5 million).
But net rental income rose more steeply, and the administration
cost ratio fell to 14.9% (2015: 15.9%), well within our KPI
target for the year of 16.5%.
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
The net surplus on revaluation of investment properties of
£36.1 million was predominantly generated by the London
portfolio, which rose in value by £18.3 million, Germany
rose by £12.4 million and France by £11.6 million.
The disposals in Neasden, Luxembourg, Antibes and
Vänerparken together raised proceeds of £85.5 million,
realising a gain of £9.1 million after costs over their aggregate
valuation at 31 December 2015. In addition, tax liabilities of
£6.6 million were extinguished for the Group by selling the
corporate vehicles which contained the properties (and their
associated tax liabilities).
Finance income of £13.6 million (2015: £10.0 million) included
interest income of £4.1 million (2015: £4.9 million) from our
corporate bond portfolio, and also foreign exchange gains on
non-sterling monetary net assets at the year end, dividends
from Catena and interest on the deferred consideration on
the sale of Vänerparken. The average balance of corporate
bond investments in the year was lower than in previous
years, but they remained an important cash management
tool of the Group.
Finance costs of £32.7 million (2015: £27.5 million) were higher
than last year, but the underlying cost, excluding the fair value
movements of derivative financial instruments and atypical
losses on buying back the remaining balance of a zero coupon
note, fell to £26.3 million (2015: £26.6 million), after capitalising
interest of £0.7 million (2015: £0.4 million) on developments.
Interest costs before such capitalisation were in line with last
year at £27.0 million (2015: £27.0 million) reflecting a higher
level of borrowings in the year at a lower average cost.
The tax charge of 1.8% was significantly below the weighted
average rate of the countries in which we do business (22.2%),
primarily due to the change in the tax rate on existing liabilities,
and the release of liabilities on the disposal of properties by
selling the corporate vehicles which owned them. The tax rate
in France fell from 33.3% to 28.0%, and in the UK from 18.0%
to 17.0%, the collective effect of which was a one-off reduction
of the tax charge of £10.3 million. Without this and the effect
of the property disposals the effective tax rate would have
been 18.7%.
Overall, profit attributable to the owners of the Company was
£97.8 million (2015: 129.9 million). EPRA earnings, which
excludes items which are non-recurring in nature, such as
profits on sales of investment properties, or which have no
impact to earnings over their life, such as movements on
the revaluation of investment properties, were £50.9 million
(2015: 36.0 million), and generated EPRA earnings per share
up 45.2% at 123.0 pence (2015: 84.7 pence).
EPRA Net Asset Value At 31 December 2016, EPRA net
assets per share (a diluted measure which highlights the fair
value of the business on a long-term basis) were 2,456 pence
(2015: 2,083 pence), a rise of 17.9%, or 373 pence per share.
The main reasons for the increase were underlying profit after
tax of 131 pence, foreign exchange gains from the weakness
of sterling (119 pence), and the benefit of the uplift in the
valuation of the investment property portfolio (97 pence).
Smaller gains were made from buying back shares at a
discount to NAV (11 pence) and the revaluation of bonds
and equities (15 pence).
Annual Report & Accounts 2016
CLS Holdings plc
129.9
97.8
2015
2016
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P
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PROFIT AFTER TAX
(£ million)
150
125
100
75
50
25
85.7
50.9
36.0
27.2
19.7
8.2
0
E P R A profit after tax
Property valuation
Other
Profit after tax
MOVEMENT IN RENTAL INCOME
(£ million)
1.8
3.7
85.3
4.3
1.0
91.3
-4.8
100
95
90
85
80
75
70
65
60
Acquisitions
R ental Inco m e 2015
D evelop m ents
FX
N et other lettings
Disposals
R ental Inco m e 2016
MOVEMENT IN EPRA NAV 2016
(Pence)
119
11
15
2,456
97
131
2,083
2,700
2,500
2,300
2,100
1,900
1,700
1,500
Property valuation
At 1 January 2016
U nderlying profit
FX
S hare buy-backs
Other
At 31 D ece m ber 2016
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BUSINESS
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CONTINUED
MOVEMENT IN LIQUID RESOURCES 2016
(£ million)
Bonds
Cash
40.1
100.7
73.4
250
200
150
100
50
39.4
-24.8
-45.7
23.7
-41.8
-0.9
99.0
65.1
0
N et dra w do w n of loans
B uy-backs
At 1 January 2016
Sale of properties
Property acquisitions
C apital expenditure
Fro m operations
At 31 D ece m ber 2016
Other
DEBT PROFILE AT 31 DECEMBER 2016
(£ million)
Dept Expiry
Debt Amortisation
2017
2018
2019
2020
2021
2022
2023
2024
2025
200
180
160
140
120
100
80
60
40
20
0
24
Cash Flow, Net Debt and Gearing Net cash flow from
operating activities generated £40.1 million, of which
£24.8 million was distributed to shareholders through
tender buy-backs or market purchases of shares; a further
£39.4 million was raised from disposals of investment
properties, and £24.7 million from net sales of corporate
bonds and equity investments. The main cash outflows were
£45.7 million spent on the four acquisitions in the year, and
£41.8 million on other capital expenditure. At 31 December
2016, the Group’s cash balances were £99.0 million,
virtually unchanged from twelve months previously, and
were supplemented by £65.1 million of corporate bonds
and undrawn bank facilities of £105 million.
Gross debt rose by £54.5 million to £854.5 million, of which
£49.6 million was due to foreign exchange rate movements.
£191.6 million of loans and a net £8.6 million of overdrafts
were drawn, replacing £199.6 million of loan repayments.
At 31 December 2016, the weighted average unexpired term
of the Group’s debt was 4.0 years, excluding overdrafts.
Balance sheet loan to value (net debt to gross assets less
cash) fell to 41.1% (2015: 42.5%), and the weighted average
loan-to-value on borrowings secured against properties was
a comfortable 49.8% (2015: 48.1%). Adjusted solidity was
52.1% (2015: 50.4%).
The weighted average cost of debt at 31 December 2016 was
2.91%, 49 basis points lower than 12 months earlier. The fall
was largely due to taking out new debt of £177 million at a
weighted average cost of 1.90%, and was further helped by
the weakness in sterling (our cheapest debt is in euros) and
by buying back early the zero coupon note taken out in 1992
at 11.2%.
In 2016, our low cost of debt led to strong recurring interest
cover of 3.4 times (2015: 3.2 times).
Financing Strategy The Group’s strategy is to hold its
investment properties predominantly in single-purpose
vehicles financed primarily by non-recourse bank debt in the
currency used to purchase the asset. In this way credit and
liquidity risk can most easily be managed, around 50% of
the Group’s exposure to foreign currency is naturally hedged,
and the most efficient use can be made of the Group’s assets.
Bank debt ordinarily attracts covenants on loan-to-value and
on interest and debt service cover. None of the Group’s debt
was in breach of covenants at 31 December 2016. The Group
had 55 loans across the portfolio from 24 banks, plus a
debenture, secured notes and an unsecured bond.
To the extent that Group borrowings are not at fixed rates,
the Group’s exposure to interest rate risk is mitigated by
the use of financial derivatives, particularly interest rate caps
and swaps. Since 2015, medium-term interest swap rates
have been close to short-term rates, and the Board chose to
take advantage of these conditions, fixing medium-term debt
taken out during the year predominantly with co-terminus
interest rate swaps. During the year the Group financed or
refinanced 14 loans to a value of £177 million at a weighted
average all-in rate of 1.90%, and of these £119 million
was fixed at a weighted average all-in rate of 1.75%.
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Consequently, at 31 December 2016, 63% of the Group’s
borrowings were at fixed rates or subject to interest rate swaps,
5% were subject to caps and 32% of debt costs were unhedged.
The Group’s financial derivatives – predominantly interest
rate caps and interest rate swaps – are marked to market
at each balance sheet date. At 31 December 2016 they were
a net liability of £9.3 million (2015: £5.3 million).
Distributions to Shareholders In April 2016, £13.4 million
was distributed as a final distribution to shareholders for
2015 by means of a tender offer buy-back of 1 in 57 shares
at 1,810 pence per share. In September, £7.2 million was
distributed as an interim distribution to shareholders for 2016
by means of a tender offer buy-back of 1 in 100 shares at
1,750 pence per share. The Board has decided to change the
nature of distributions to shareholders and the proposed final
distribution for 2016, which will be put to shareholders at the
Annual General Meeting in April 2017, is to be a dividend of
40 pence per share, representing £16.3 million. Accordingly,
distributions for 2016 will comprise £23.5 million in aggregate,
an increase of 23.0% over last year.
Share Capital At 1 January 2016, there were 45,028,684 shares
in issue, of which 2,888,103 were held as treasury shares.
Shares were cancelled during the year under the distribution
policy of tender offer buy-backs: in April, 739,396 shares, and
in September, 411,510 shares, were cancelled. Also during
the year, 255,099 shares were acquired in the market at an
average cost of 1,595 pence per share and were placed in
treasury, and 5,000 shares were issued from treasury shares
to a Director in compensation for incentives forfeited on
cessation of his previous employment.
Consequently, at 31 December 2016, 40,739,576 shares were
listed on the London Stock Exchange, and 3,138,202 shares
TOTAL RETURNS TO SHAREHOLDERS
remained held in Treasury.
The prospect of the possible fallout from Brexit adversely
affected the share prices of much of the property sector,
including that of CLS, and so for the first time in ten years
the share price ended the year below the level at which it
started it, and consequently total shareholder return in 2016
was a negative 16.0%. Nevertheless, in the five years to
31 December 2016, our total shareholder return of 159.1%,
which represented a compound annual return of 21.0%, was
one of the best performances in the listed real estate sector.
Since the Company listed on the London Stock Exchange,
it has outperformed the FTSE Real Estate and FTSE All Share
KEY PERFORMANCE INDICATORS
indices, as set out in the graph on page 11.
Our performance against our key performance indicators is
set out on page 4.
Annual Report & Accounts 2016
CLS Holdings plc
DEBT HEDGING 2016
Fixed rate
Floating rate – capped
Floating rate – unhedged
63
5
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ACTIVELY
MANAGING
OUR PORTFOLIO
Vauxhall Square, SW8
•
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Acquired 1988-2004
Multi-let office/industrial
Planning consent gained in 2012
for 1.54 million sq ft (143,000 sqm)
mixed-use scheme of residential,
office, hotels, retail and student
accommodation
In 2016:
•
Enhanced planning consent to
provide an additional 108,586 sq ft
(10,088 sqm) of Grade A offices in
place of a 4-star hotel
•
Increased total scheme to
1.6 million sq ft (151,700 sqm)
In 2017:
•
•
•
Demolition of Wendle Court
completed and construction
of new hostel under way
Enabling works and surveys
commenced on main site
Several options under
consideration on the future
of the scheme
26
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
Annual Report & Accounts 2016
CLS Holdings plc
CI Tower, New Malden
One Elmfield Park, Bromley
•
•
•
•
•
Acquired in 1988
Multi-let office building of 81,773 sq ft (7,597 sqm) over 15 floors
New reception completed in 2015
Upgrade of M&E systems and common parts under way
Internal refurbishments planned for 2017/18
•
•
•
Acquired in 2015
24,090 sq ft (2,238 sqm) of office space over 4 floors
Vacant possession gained; refurbishment and relaunch
in 2017
405 Kennington Road, SE11
•
•
Acquired in 2013
14,854 sq ft (1,380 sqm) of office space,
3,230 sq ft (300 sqm) of rental space and
15 residential flats (sold on long leaseholds)
•
Office space refurbished in 2015
27
PRINCIPAL RISKS
AND UNCERTAINTIES
THERE ARE A NUMBER OF POTENTIAL RISKS AND UNCERTAINTIES WHICH
COULD HAVE A MATERIAL IMPACT ON THE GROUP’S PERFORMANCE AND
COULD CAUSE THE RESULTS TO DIFFER MATERIALLY FROM EXPECTED
OR HISTORICAL RESULTS; THE MANAGEMENT AND MITIGATION OF THESE
RISKS ARE THE RESPONSIBILITY OF THE BOARD
PROPERTY INVESTMENT RISK
Risk
Areas of impact
Mitigation
Change in risk in year
>
Underperformance of investment portfolio
due to:
•
Cyclical downturn in property market
•
Changes in supply of space and/or
occupier demand
•
Poor asset management
OTHER INVESTMENT RISK
Cash flow
Profitability
Net asset value
Banking covenants
Rental income
Cash flow
Vacancy rate
Void running costs
Property values
Net asset value
Rental income
Cash flow
Vacancy rate
Void running costs
Property values
Net asset value
Geographically-diversified portfolio with
40% of the Group’s properties being outside
the UK.
51% of London and rest of UK income is
derived from Government tenants. Minimal
exposure to the type of tenant who may
want to relocate from the UK to elsewhere
in Europe. In-house asset management
enables management to highlight and
address tenant disquiet.
Asset management is not outsourced,
property teams proactively manage
customers to ensure changing needs are
met, and review the current status of all
properties weekly. Written reports are
submitted monthly to senior management
on, inter alia, vacancies, lease expiry profiles
and progress on rent reviews.
Corporate bond investments:
DEVELOPMENT RISK
•
Underperformance of bond portfolio
Net asset value
Liquid resources
In advance of the referendum, the Group
sold £47 million of bonds.
Failure to secure planning permission
Abortive costs
Reputation
Planning permission is sought only after
engaging in depth with all stakeholders.
Contractor solvency and availability
Downturn in investment or occupational
markets
Increased construction costs
TAXATION RISK
Increases in tax rates or changes to the
basis of taxation
28
Reduced
development
returns
Cost overruns
Loss of rental
revenue
Net asset value
Cash flow
Profitability
Net asset value
Reduced
development
returns
Cost overruns
Cash flow
Profitability
Net asset value
Only leading contractors are engaged.
Prior to appointment, contractors are
the subject of a due diligence check and
assessed for financial viability.
Developments are undertaken only after an
appropriate level of pre-lets have been sought.
All development appraisals contain
contingencies, and are subject to sensitivity
analysis. Monthly cost reports are produced
for the Executive Directors to identify and
address potential issues at an early stage.
The Group monitors legislative proposals and
consults external advisors to understand and
mitigate the effects of any such change.
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Risk
Areas of impact
Mitigation
Annual Report & Accounts 2016
CLS Holdings plc
>
Change in risk in year
Increasing building regulation
and obsolescence
Continual assessment of all properties against
emerging regulatory changes. Fit-out and
refurbishment projects benchmarked against
third party schemes.
Rental income
Cash flow
Vacancy rate
Net asset value
Profitability
Liquid resources
Increasing energy costs and regulation Net asset value
FUNDING RISK
Profitability
Liquid resources
Investment in energy efficient plant and building
mounted renewable energy systems.
Unavailability of financing at
acceptable prices
Cost of borrowing
Ability to invest
or develop
The Group has a dedicated treasury team
and relationships are maintained with some
24 banks, thus reducing credit and liquidity risk.
The exposure on refinancing debt is mitigated
by the lack of concentration in maturities.
Adverse interest rate movements
Cost of borrowing
Cost of hedging
63% of borrowings are at fixed rates and
5% are subject to interest rate caps
Breach of borrowing covenants
Cost of borrowing
Foreign currency exposure
Net asset value
Profitability
Borrowing agreements contain cure clauses to
rectify LTV breaches through part repayment
of the loan or the depositing of cash.
Property investments are partially funded in
matching currency. The difference between the
value of the property and the amount of financing
is generally unhedged and monitored on an
ongoing basis.
Financial counterparty credit risk
POLITICAL AND ECONOMIC RISK
Loss of deposits
Cost of rearranging
facilities
Incremental cost
of borrowing
The Group has a dedicated treasury team
and relationships are maintained with some
24 banks, thus reducing credit and liquidity risk.
The exposure on refinancing debt is mitigated by
the lack of concentration in maturities.
Break-up of the Euro
Impact of UK exit from the EU
OTHER CORPORATE RISKS
Net asset value
Profitability
Euro-denominated liquid resources are kept to a
minimum. Euro property assets are largely financed
with euro borrowings in the countries in which
they are situated.
Net asset value
Profitability
Availability of funding
51% of rents in London and the rest of the UK are
derived from central government departments.
On a macro level, the Group operates in the three
largest and most stable economies in Europe.
Failure to recruit and retain
key personnel
Net Asset Value
Profitability
Cyber attacks
Major health & safety incidents
TERRORISM
Security threat/attack
Net Asset Value
Profitability
Reputation
Profitability
Reputation
Net Asset Value
Profitability
The Remuneration Committee regularly reviews
and sets individual Executive Directors
remuneration packages. Annual reviews are
performed to assess competency, training
requirements, as well as employee satisfaction.
The Group’s IT systems are protected by anti-virus
software and firewalls that are regularly tested
and updated. Data is periodically backed up and
stored offsite.
The Health and Safety Committee meets regularly to
ensure ongoing compliance with health and safety
legislation as well as undertaking periodic risk
assessments across the business.
The Group adopts appropriate security measures
across the portfolio based on our experienced
Property Managers risk assessment, and takes
out insurance to cover losses of rent and service
charge from acts of terrorism where appropriate.
The Group has also developed a disaster recovery
plan to ensure business continuity.
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CORPORATE, SOCIAL
AND ENVIRONMENTAL
RESPONSIBILITY REPORT
THE GROUP IS COMMITTED TO ITS CORPORATE, SOCIAL AND ENVIRONMENTAL
RESPONSIBILITIES; THE BOARD ACTIVELY ENCOURAGES CSER INTEGRATION
INTO THE BUSINESS BY EMPLOYEES ACROSS THE GROUP
I am proud to note that this year our staff have supported
more community events than before, with 27 social and
charitable events raising £52,000 in the year. It is one of
our Group objectives that the majority of our employees
participate in a community event during 2017.
We have a busy year ahead, focusing on our energy mix across
the Group as we plan to install nine photovoltaic systems and
smart metering across our French and German assets.
Fredrik Widlund
Chief Executive Officer
8 March 2017
CHIEF EXECUTIVE OFFICER’S STATEMENT
The global climate change summit held in Paris during the
end of 2015 (COP21) was a significant milestone in addressing
worldwide environmental challenges. Europe continues to lead
the way in its efforts to transition towards lower carbon
economies, with record renewable generation. With no global
growth of fossil fuel generation there is a clear indication that
pledges made at COP21 are coming into effect.
As a business, we want to ensure that we also play our part
in reducing our impact on the environment whilst developing
our role within the communities in which we operate. I believe
sustainability is cultural and should be integral in our business
processes and I fully support our in-house sustainability team
to deliver on our commitments.
In support of our sustainability programme, we implemented
a number of technological innovations that have improved the
way we monitor, manage and reduce unnecessary energy
usage within the managed portfolio. Through the use of smart
metering we now have greater visibility to make energy
savings and are able to engage with our tenants at an early
stage. This has resulted in a Group wide carbon emissions
reduction in our managed buildings of 11.4% (2015: 7.7%),
which is an excellent achievement. We continue to make
improvements to the energy efficiency of our buildings and
have no investment properties that have an EPC rating
of D or below.
SUSTAINABILITY AT CLS
Our strategy is designed to deliver on the objectives of the Group’s Sustainability Charter
(the “Charter”) to make our business more sustainable. We also aim to improve the
working environment for all our stakeholders.
In order to implement our sustainability strategy, we have an in-house sustainability
department which reports to the Board and whose task is to achieve our key objectives.
30
Buspace Studio – Photovoltaic array
•
•
CLS’s first installation of photovoltaic array
43 kW system, generating approximately
43,000 kWh pa
•
165 panels covering 278 sqm of roof space
STRATEGIC REPORT
>
2 CLS at a glance
4 How we operate
6 2016 Business Highlights
7 2016 Financial Highlights
8 Chairman’s Statement
10 Investors
12 Business Review
26 Actively Managing our Portfolio
28 Principal Risks and Uncertainties
30 Corporate, Social & Environmental
Responsibility Report
THE SUSTAINABILITY CHARTER
The Sustainability Charter (the “Charter”) aims to promote
our sustainability aspirations through continuous improvements
which can influence and mitigate our impact on the
environment, the local community, the economy and key
stakeholders. The Group undertakes:
•
•
•
•
to mitigate our impact on climate change by reducing our
carbon footprint
to be accountable for our performance relating to climate
change by reporting regularly against measurable
indicators
to make the most effective use of our duties, powers and
resources to minimise the impact of our actions on the
environment, and to enhance the environment, community
and economy wherever possible
to monitor our progress by carrying out regular
assessments against the key actions of the Charter
Annual Report & Accounts 2016
CLS Holdings plc
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to use our Charter to influence the behaviour of our
partners, tenants, suppliers and other stakeholders,
to promote the principles on which it is based
to promote and support social and charitable events
to ensure we contribute in the communities in which
we invest
STAKEHOLDER INCLUSIVENESS
We define our stakeholders as anyone who occupies office
space in our buildings, works with us, or for us, or invests
in us. As our culture is entrepreneurial, professional, open
and friendly, this allows for constructive feedback to be
reviewed and implemented throughout all levels of the
business ensuring we are constantly improving. We also
carry out staff and customer satisfaction surveys across
the business to ensure that we understand and respond
to our stakeholders’ views.
Spring Mews – Combined Heat and Power Plant
•
•
•
•
CLS’s largest low carbon on-site generation
Generates approximately 376,000 kWh
electricity and 205 kW heating capacity
43% more efficient than conventional boilers
and grid generation
Used to heat domestic hot water for
378 student rooms at Spring Mews, London
31
CORPORATE, SOCIAL
AND ENVIRONMENTAL
RESPONSIBILITY REPORT
CONTINUED
2016 ACHIEVEMENTS
EMPLOYEES
Corporate
• Continued to achieve a fully de-risked portfolio
against the upcoming Minimum Energy
Efficiency Standard
• Installed automatic meter reading across 100%
of the UK portfolio. France and Germany will be
completed in 2017
• Set-up a pan-European energy data platform to
enable the management of utility costs for our
tenants and ourselves
Social
• Introduced our first environmental behaviour
change programme for our tenants in the UK
• Completed 27 CSR events throughout 2016 and
contributed £52,000 in support
• Increased the amount actively and social events
for staff to participate in across the Group
Energy
& Environmental
• Achieved a carbon emission reduction across the
Group of 11.4%, which is our fifth consecutive
year of carbon reductions
• Increased the amount of renewable & low carbon
energy generated on our sites by 32%
32
Culture
Our culture is entrepreneurial, professional, open and friendly.
We have employees from 15 countries which helps to foster
a diverse cosmopolitan environment with integrity and
responsibility at the heart of our business. We have fewer
than 100 employees looking after a property portfolio of
£1.6 billion, and we recognise that they make CLS what
it is and contribute significantly to its success.
Recruitment
Finding the right people is the key to our long-term success.
Having a diverse workforce is also a source of competitive
advantage. Therefore, we have developed appropriate policies
and procedures which underline our commitment to equal
opportunity and diversity in employment. Our recruitment and
interview policy ensures that these objectives are met and fully
understood by those recruiting. It seeks to ensure that no
employee or applicant is treated less favourably on the grounds
of gender, marital status, race, colour, nationality, ethnicity,
religion, disability or sexual orientation nor is disadvantaged
by conditions or requirements, including age limits, which
cannot be justified objectively. Entry into, and progression
within, the Group is solely determined by the job criteria,
personal aptitude and competence.
We apply best practice in the employment of people with
disabilities, which is reflected in our recruitment and
interview policy. Full and fair consideration is given to every
application for employment from disabled people whose
aptitude and skills can be used in the business, and to their
training and career development. This includes, wherever
possible, the retraining and retention of staff who become
disabled during their employment. We are proud that we
have been able to attract, motivate and retain high calibre
employees, which, in turn, has ensured the continued and
sustained improvement in the performance of the Group.
Engagement and Wellbeing
We promote all aspects of employee engagement and promote
an “open door” policy; we encourage all employees to share
ideas and get involved in developing our policies and practices.
With a predominantly flat management structure we are able to
ensure that all employees are informed of matters concerning
their interests and the financial and economic factors affecting
the business. In addition to the weekly departmental meetings
that are held across the Group, our Executive Directors present
our annual and half-yearly results to all employees which is
followed by a question and answer session. This gives everyone
an understanding of the business, and how everyone’s work
contributed to the Company’s performance during the period.
We want to make sure everyone works towards the same goal.
Every 12 months we undertake a performance review of each
employee, setting their objectives for the forthcoming year.
These individual objectives reflect the Group objectives set
by the Chief Executive Officer, which in turn are based on the
Group’s Key Performance Indicators and sustainability targets
contained in this report on page 35. We have a dedicated
Intranet which allows us to promote new policies, procedures,
Group activities and employee events.
Engagement is also about understanding the needs of
our employees. This enables us to create a better working
environment which, in turn, drives performance, loyalty and
success. In return, we reward our staff through a number of
reward structures including salary, bonuses, a cash loyalty
award for those who have been with the Group for more than
2 years and a share incentive plan.
We seek the views of our employees through staff satisfaction
surveys, conducted through a third party advisor so as to
ensure anonymity. In August 2016 all employees were invited
to take part in a survey which covered a range of topics
including: effectiveness, engagement, remuneration,
development opportunities, respect and recognition and
confidence in leaders.
We were pleased to note that 83% of our employees felt that
they were treated with respect; 86% felt proud to work for
the Group and 87% felt that there was good cooperation and
teamwork within the organisation. In order to distil the key
themes arising from the survey, we set up a workshop,
comprised of representatives from across the Group and
facilitated by an independent external advisor, to recommend
changes to the way we work. These were then presented to
the Chief Executive Officer, Chief Financial Officer and Head of
Group HR, who have set a timeframe for the implementation
of the recommendations during 2017.
Through the survey we noticed a trend for more flexible
and smarter working practices, the need to foster good
interdepartmental relationships and a wish to understand
the business by visiting properties within the portfolio.
During 2016 we held a Group-wide conference attended
by all employees, at which we promoted the Group’s culture
and values, provided specific presentations on areas of the
business and developed our team working skills with an
emphasis on bringing together our European offices.
Remuneration
Our overall remuneration and benefits package is designed
to attract, motivate and retain employees. Our remuneration
structure is simple, combining salary and benefits with an
annual discretionary bonus and a long-term retention bonus
based on the Group’s performance over a two year period.
Following feedback from employees, which focussed on
employee engagement within the business, we are also
recommending the implementation of a share incentive plan
for all employees at our 2017 Annual General Meeting.
Training and Development
All employees are actively encouraged to undertake training to
achieve professional qualifications and to keep up to date with
developments in their specialised areas. The staff survey results
showed that 81% of employees felt that we provided enough
training for employees to handle their jobs, which was 16%
higher than the external benchmark. We ensure that those
with direct reports undertake management training on areas
such diversity, appraisals and performance. We also promote
non-core training, such as foreign language skills, which,
whilst not central to a particular role, will allow an employee
to broaden their skills base. As part of our knowledge sharing
and personal development, we have set up internal workshops
at which departments will present to other departments on
their specific role within the organisation, thereby developing
employees’ wider business knowledge and understanding of
how the Group’s activities inter-relate.
Annual Report & Accounts 2016
CLS Holdings plc
EMPLOYEE GENDER RATIO
(at 31 December 2016 (Whole Group))
Male: 49.5%
Female: 50.5%
Total Staff is 84 people
97.2% are full time equivalent
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Training and Development
of staff completed professional training
125 days
of training completed
£84,000
spent on training
£2,210
Average spend per person trained
3.29 days
Average days spent training per person trained
537 hours
hours of CPD awarded
33
CORPORATE, SOCIAL
AND ENVIRONMENTAL
RESPONSIBILITY REPORT
CONTINUED
HEALTH & SAFETY
BUSINESS ETHICS
The Board recognises the importance of the Group’s
responsibilities as an ethical employer and views matters in
which the Group interacts with the community both socially and
economically as the responsibility of the whole Board. Following
the enactment of the Bribery Act 2010, the Group implemented
a suitable policy which further demonstrated its commitment to
business ethics. To ensure continued compliance with the
Bribery Act 2010, training is given to all new employees, and an
MODERN SLAVERY ACT 2015
annual online compliance check is completed by all employees.
The Modern Slavery Act 2015 came into effect on 29 October
2015 requiring any UK commercial organisation which
supplies goods or services with a turnover of more than
£36 million to prepare a statement setting out the steps
taken during the financial year to ensure that slavery and
human trafficking is not taking place in any of its supply
chains or its own business.
The Group has published its first statement in respect of the
year ended 31 December 2016, which can be found on our
website at www.clsholdings.com.
The Group upholds the highest standards of business ethics
and undertook a review of its supply chain during the period.
The Board is confident that as a result of the Group’s
management and reporting structure, there are no such
PROMPT PAYMENT CODE
practices taking place.
CLS is a signatory to the Prompt Payment Code (“PPC”),
a voluntary scheme backed by the UK Government to set
standards of best practice for payment of suppliers. The PPC
requires all signatories to pay 95% of their undisputed
invoices to suppliers within a 60 day period.
Since joining, the Group has made significant changes in
its payment processes and is currently paying 97% of all
undisputed invoices in the UK within 60 days, thus exceeding
the required terms for the PPC.
It is a primary focus of the Board that the Group manages
its activities in such a manner as to ensure that the health
and safety of its employees, customers, advisors, contractors
and the general public is not compromised. As part of this
process the Group employs specialist accredited advisers
to advise on all health and safety matters. The Group also
operates a Health and Safety Committee, which covers issues
related to the UK portfolio and its employees. Chaired by
the Company Secretary, the committee comprises Facility
Managers, Property Managers, employees and advisors, and is
responsible to the Chief Executive Officer. The Chief Executive
Officer also attends Health and Safety Committee meetings.
All regions maintain and follow local health and safety policies
and report issues to the Chief Executive Officer. This reporting
process has worked effectively throughout the year and has
ensured ongoing compliance with health and safety legislation.
Risk assessment summary for the UK
In the UK, the Group sets health and safety objectives covering
our workforce and portfolio and is monitored by the Health and
Safety Committee. Each managed or occupied property within
the UK portfolio undergoes an annual risk assessment against
which our targets can be measured. Our targets address three
key areas:
•
•
•
Risk Management & Control: at the annual risk
assessment, 90% of all identified risks are deemed to
be under control
Document Compliance: 100% of all required health
and safety site documentation is available on the
H&S Management System and is not out of date for
more than one month
Accidents: ensure that the Accident Frequency Rate
is below the national average.
These targets are testament to the work of our Facilities and
Property Management Teams which we believe underlines
the importance of active in-house management.
Health & Safety: 2016 Performance against objectives:
RISK MANAGEMENT
CONTROL RATE
ACCIDENT FREQUENCY RATE
(PER 100,000 PERSONS)
138
90%
95%
TARGET
ACTUAL
INDUSTRY
CLS
228
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CORPORATE OBJECTIVE PERFORMANCE AGAINST TARGETS
Annual Report & Accounts 2016
CLS Holdings plc
Objectives
Introduce a Group-wide energy software platform
which will be available for tenants to use
Install smart metering across all majors assets
in the Group by the end of 2016
Achievement
Achieved
Completed 100% smart metering
in the UK with Germany and France
to follow in 2017
Ensure every asset in the UK has an EPC rating
no worse than F-(136) rating
Achieved
>
Change
>
Pass
Partially pass
>
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Pass
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Set long-term sustainability targets in line with Group
strategy and wider country-level carbon roadmaps
Long-term sustainability targets continue
to be developed in each country
>
Partially pass
Promote health and wellbeing across our staff
and tenants
Continue to support CSR events in the community
we invest in
Carry out an annual staff survey to improve our
working environment
Reduce carbon emissions and water consumption by
5% year-on-year in the managed like-for-like portfolio
Divert 100% of waste from landfill in the managed like-
for-like portfolio
Recycle 70% of all UK waste collected from
the managed like-for-like portfolio
Achieved
Achieved
Achieved
Achieved
Achieved
>
Pass
>
Pass
>
Pass
>
Pass
>
Pass
At December 2016 CLS achieved 53%
recycling. More actions will be taken to
achieve this target in 2017
Ongoing
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EMISSION PERFORMANCE COMPARISON: MANAGED LIKE-FOR-LIKE PORTFOLIO
Year on year
(Improvement)/ % Change in
2015 2016 Worsening performance GHG Type
Gas (tonnes/CO
Electricity (tonnes/CO
2
e) 1,766 1,695 –70 –3.99% Scope 1
e) 4,484 3,840 –645 –14.38% Scope 2
2
Total (tonnes/CO
2
e) 6,250 5,535 –715 –11.44% Scope 1&2
Total (tonnes/CO
2
e/sqm) 0.0226 0.0200 –0.0026 –11.44% Scope 1&2/sqm
MANAGED LIKE-FOR-LIKE EMISSIONS
(000’s tonnes/CO2e)
7
6
5
4
3
2
1
0
Scope 1
Scope 2
Total
2015
2016
ON-SITE RENEWABLE & LOW CARBON
ELECTRICITY GENERATION
(million kWh)
0.6
0.5
0.4
0.3
0.2
0.1
0
Spring Mews CHP
Spring Mews x2 PV
Kings House PV
Falcon House PV
Crosspoint House PV
Chancel house PV
Buspace Studios PV
Total 2014
Total 2015
Total 2016
CSR REPORT ONLINE (FULL DETAIL)
To download the report, visit
www.clsholdings.com
BREAKDOWN OF 2016 MANAGED
LIKE-FOR-LIKE EMISSIONS BY COUNTRY
Germany
18%
UK
80%
France
2%
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DIRECTORS’ REPORT
for the year ended 31 December 2016
The Directors present their annual report and the audited
financial statements for the year ended 31 December 2016.
The Chairman’s Statement, Strategic Report and Corporate
REVIEW OF BUSINESS
Governance Report form part of this report and should be read
in conjunction with it.
•
•
•
•
•
The Group income statement for the year is set out on
page 78.
The Group objective, business model, strategy and KPIs
are set out on pages 4 and 5.
Important events affecting the Company are set out on
pages 8 to 27.
The principal risks and uncertainties are set out on
pages 28 and 29.
The use of financial instruments are set out on page 24,
and in note 23 to the Group financial statements.
DIRECTORS
•
The risk management objectives are also detailed in
note 23 to the Group financial statements.
•
•
•
•
Changes to Board composition during 2016 and subsequently
are set out on page 43.
Directors remuneration and interest in shares is set out on
pages 48 to 69.
Related party transactions are set out in note 33 to the Group
financial statements.
Biographical details of the Executive and Non-Executive
Directors at 31 December 2016 are set out below.
Executive Directors
Henry Klotz, aged 72, was appointed Executive Chairman in
March 2016, having previously been Executive Vice Chairman from
January 2011, and Chief Executive Officer from May 2008. He
joined the Group in 1999 with responsibility for the management
of the Swedish operation, and was involved in the setting up of the
German division and sourcing new business opportunities for the
Group. He is a qualified engineer and economist.
On behalf of CLS he is Non-Executive Chairman of Catena AB, a
Nordic real estate company quoted on Nasdaq Stockholm, and in
which CLS holds an interest in 11.2% of the issued share capital.
Fredrik Widlund, aged 49, is the Chief Executive Officer and
joined the Company in November 2014. His experience includes
senior roles in business leadership, property and finance and
prior to joining CLS he worked for 15 years at GE Capital
including two years as Finance Director and four years as
Managing Director of GE Capital Real Estate (UK), Regional CEO
for GE’s European leasing businesses and finally as Managing
Director and Global Commercial Leader at its trade finance
business, GE Capital International. Prior to his career with GE,
he worked for Shell in London and Sweden. Fredrik has a degree
in Economics from the University of Stockholm.
36
John Whiteley, aged 58, joined the Company in 2009 as Chief
Financial Officer. He has over 25 years’ experience in the real
estate sector: he was previously Finance Officer at Doughty
Hanson & Co Real Estate, and for ten years was Finance Director
of Great Portland Estates plc, a company listed on the London
Stock Exchange. He spent nine years with Ernst & Young, after
qualifying as an accountant with Spicer & Pegler. He is a member
of the Finance Committee of the British Property Federation and
a Fellow of the Institute of Chartered Accountants.
Sten Mortstedt, aged 77, was Executive Chairman of the Company
since its incorporation until 8 March 2016 when he stepped down
as Chairman but remained an Executive Director. He is also
Chairman of the Nominations Committee. He began his career in
1962 with Svenska Handelsbanken in Stockholm and within three
years had formed a property investment partnership. In 1968 he
was appointed Managing Director of the Mortstedt family property
company, Citadellet AB, which was floated on the Stock Exchange
in Stockholm in 1981. The company was sold in 1985 for a price
five times higher than the introduction price and was at that time
the largest property deal recorded in Scandinavia. Since 1977 he
has been involved in establishing and running property interests
in the UK, Sweden and France. He established CLS in 1987, and
took the Company to a listing on the main market of the London
Stock Exchange in 1994.
In addition to his focus on property, he has been commercially
active in a number of other investment areas. He has seen a
number of the companies in which he has invested through to
successful stock exchange listings or trade sales.
He runs his global interests from his residence in Switzerland.
Non-Executive Directors
Anna Seeley, aged 45, was appointed Non-Executive Vice Chairman
on 8 March 2016 having rejoined the Board on 11 May 2015. She is
also a member of the Nominations Committee. She is a qualified
Chartered Surveyor and has worked in the property industry for
over 20 years. She has held various positions within the property
departments of General Electric and the BT Group and, from 2001
to 2003, was the Company’s Group Property Director and Board
member. For the last 8 years she has been a Director of Skansen
Group Limited, a specialist office fit-out and refurbishment
company. She holds a degree in property valuation and finance
from City University and is the daughter of Sten Mortstedt.
Malcolm Cooper, aged 57, joined the Board in 2007 and is the
Senior Independent Director, Chairman of the Audit Committee
and a member of the Remuneration Committee. He is Project
Director, Gas Distribution Sales at National Grid plc where he
has worked for various predecessor companies since 1991.
Previously he worked for Andersen Consulting. He has a first
class degree in pure mathematics from Warwick University,
is a qualified accountant and is a member of the Association
of Corporate Treasurers. He is also a Non-Executive Director
of Morgan Sindall plc.
Joseph Crawley, aged 57, joined the Board in 2008. He is
Managing Director of Neat Developments Limited, a property
investment and development company active in London and
south-east England, and has over 25 years’ experience of the
central London property market. He was previously employed by
CLS for a number of years and was involved in the development
of the Spring Gardens site.
Elizabeth Edwards, aged 60, joined the Board in 2014 and is a
member of the Audit Committee and the Nominations Committee.
She is a qualified Chartered Surveyor with over 30 years’
experience in the banking industry. She was most recently Head
of UK Property Lending at Landesbank Berlin, having previously
held senior positions in London with National Australia Bank,
Berlin Hyp and Westdeutsche Immobilienbank. Prior to her
banking career, she worked for PricewaterhouseCoopers as a
management consultant. She is a Trustee of the Salvation Army
International Trust, a Fellow of the Royal Institution of Chartered
Surveyors, a member of the Association or Property Lenders, and
a Past Master of the Worshipful Company of Chartered Surveyors.
Christopher Jarvis, aged 61, joined the Board in 2008 and is
Chairman of the Remuneration Committee and a member of the
Audit Committee. He is a Partner of Jarvis & Partners, a boutique
real estate consultancy which he established in Berlin in 1994.
Previously he was Managing Director of Richard Ellis Germany
where he established the firm’s Frankfurt and Berlin offices.
His firm has acted as development partner for the HRO Group
in Germany.
Thomas Lundqvist, aged 72, joined the Board in November 1990
and was Finance Director of the Company until 1995, when he
became a Non-Executive Director. He was Vice Chairman from 2009
until 2011. Prior to joining CLS, he worked for the ASEA-Brown
Boveri Group (ABB) and from 1983 for Svenska Finans
International, part of Svenska Handelsbanken Group, where he
was a board member.
Philip Mortstedt, aged 30, is the son of one of the founders
of CLS, Bengt Mortstedt, and was appointed to the Board on
11 May 2015. He established an online media enterprise focused
on motorsport, managing professional events for the past
decade. He is also involved in the family’s hotel and land
developments in the Caribbean as well as in equity investments
and residential property.
Lennart Sten, aged 57, joined the Board in 2014 and is a member
of the Remuneration Committee and the Nominations Committee.
He has 15 years’ experience in the international property industry
having held senior positions at GE Capital and GE Real Estate
Nordic, most recently Chief Executive Officer of GE Capital Real
Estate Europe, from which he stepped down in 2014. Prior to his
time at GE Capital, he was a partner at Baker & McKenzie LLP,
Stockholm, and an Assistant Judge in the District Court of Solna.
He is a Non-Executive Director of Victoria Park AB, a company
listed on Nasdaq Stockholm, and of a number of private
companies, including Interogo Holding A.G, and is Chairman
of the Swedish Property Federation.
As explained in the Corporate Governance Report on page 43,
on 7 March 2017 Mr Bengt Mortstedt was appointed as a
non-executive director and Philip Mortstedt left the Board.
Consequently, Bengt Mortstedt will be subject to election and the
remaining Directors will be subject to annual re-election at the
Annual General Meeting in accordance with the UK Corporate
Governance Code.
In his role as Executive Chairman, Henry Klotz recommends the
re-election of the retiring Directors at the Annual General Meeting,
given their performance and continued important contribution to
the Company. The Senior Independent Non-Executive Director
recommends the re-election of Mr Klotz.
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Annual Report & Accounts 2016
CLS Holdings plc
DIVIDENDS
In lieu of paying cash dividends it has been the Company’s policy
to make distributions by way of tender offer buy-backs.
The final distribution for 2015 as set out in a Circular dated
18 March 2016 for the purchase of 1 in 57 shares at 1,810 pence
per share was completed on 5 May 2016. It returned £13.4 million
to shareholders, equivalent to 31.8 pence per share.
The interim distribution for 2016 as set out in a Circular dated
26 August 2016 for the purchase of 1 in 100 shares at 1,750 pence
per share was completed on 22 September 2016. It returned
£7.2 million to shareholders, equivalent to 17.5 pence per share.
On 8 February 2017, the Company announced that it intends to
make future distributions to shareholders by way of a twice yearly
dividend. A resolution will be proposed at the 2017 Annual
General Meeting to give the Company the relevant authority.
The Directors are proposing a final dividend in respect of the
financial year ended 31 December 2016 of 40 pence per share,
which will return £16.3 million to shareholders. Subject to
shareholder approval at the Annual General Meeting, the dividend
PURCHASE OF THE COMPANY’S SHARES
will be paid on 28 April 2017 to shareholders who are on the
register of members on 17 March 2017.
As described above, and under the relevant authority granted at
the 2016 Annual General Meeting, during the year the Company
made two tender offer purchases totalling 1,150,906 shares at a
cost of £20.6 million. Of these, 739,396 ordinary shares were
purchased on 5 May 2016 at 1,810 pence per share and 411,510
shares were purchased on 23 September 2016 at 1,750 pence per
share. These shares were subsequently cancelled.
Under the relevant authority granted at the 2016 Annual General
Meeting, during the year, the Company, over a period, purchased
255,099 shares at a cost of £4.1 million. These market purchases
of shares took place between 13 May 2016 and 31 May 2016.
There were no further purchases of the Company’s own shares
during the year.
A resolution will be proposed at the 2017 Annual General Meeting
to give the Company authority to make market purchases of up
to 4,073,957 shares.
Following the tender offer purchases that took place during the
SHARE CAPITAL
year, the aggregated authority for the purchase of shares in the
capital of the Company remained valid at the year end.
Changes in share capital are shown in note 24 to the Group
financial statements. At 31 December 2016, and at the date of
this report, the Company’s issued share capital consisted of
43,877,778 ordinary shares of 25 pence each, of which 40,739,576
held voting rights and 3,138,202 shares were held as treasury
shares, and all of which ranked pari passu. The rights (including
full details relating to voting), obligations and any restrictions
on transfer relating to the Company’s shares, and the powers of
the Directors in that regard, are set out in the Company’s Articles
of Association.
A resolution will be proposed at the 2017 Annual General Meeting
to sub-divide each share of 25 pence into 10 new shares of
2.5 pence each.
Details of the Directors’ interests in shares are shown in the
Remuneration Committee Report on page 65.
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DIRECTORS’ REPORT CONTINUED
for the year ended 31 December 2016
PROPERTY PORTFOLIO
INSURANCE OF DIRECTORS AND INDEMNITIES
A valuation of all the investment properties and properties held
for sale in the Group at 31 December 2016 was carried out by
Cushman and Wakefield for the UK (excluding Vauxhall Square)
and for Germany, Knight Frank for Vauxhall Square and Jones
CORPORATE GOVERNANCE
Lang Lasalle for France, which produced an aggregate market
value of £1,536.6 million (2015: £1,425.4 million).
The Company has arranged insurance cover in respect of legal
action against its directors and officers. The Company has
granted indemnities to each of the Directors and other senior
management, uncapped in amount but subject to applicable law,
in relation to certain losses and liabilities which they may incur in
AUDITOR
the course of acting as directors or employees of the Company or
one or more of its subsidiaries or associates.
The Corporate Governance Statement, prepared in accordance
EMPLOYEES, ENVIRONMENTAL AND SOCIAL ISSUES
with rule 7.2 of the FCA’s Disclosure Guidance and Transparency
Rules, is set out on pages 40 to 47 and forms part of this report.
2017 ANNUAL GENERAL MEETING
A resolution to reappoint Deloitte LLP as auditor to the Company
will be proposed at the forthcoming Annual General Meeting.
The Group’s policies on employment, environmental and social
issues (including the information required by The Companies Act
2006 (Strategic Report and Directors’ Report) Regulations 2013),
including charitable donations, are summarised in the Corporate,
Social and Environmental Responsibility Report on pages 30 to 35.
No political donations to any parties, organisations or candidates,
or political expenditure were made during 2016.
HUMAN RIGHTS
The Group has also published a CSR Report, which is available
on line at www.clsholdings.com.
The Board ensures the Group upholds and promotes respect for
human rights in all its current operating locations and aims to
prevent any negative human rights impact. As the Group operates
in the UK, Germany, France and Sweden it is subject to the
European Convention on Human Rights and the UK Human
Rights Act 1998. The Group respects all human rights and
in conducting its business regards those rights relating to
non-discrimination and fair treatment to be the most relevant
and to have the greatest potential impact on its key stakeholders,
which are deemed to be customers, employees and suppliers.
The Board has also noted its moral and legal obligations under
the Modern Slavery Act 2015. The Board has a zero tolerance
towards modern slavery, and throughout the year the Company
has contacted its first tier contractors and suppliers. Our full
statement on Modern Slavery can be found on our website at
www.clsholdings.com.
The Group’s policies seek to ensure that employees comply with
the relevant legislation and regulations in place to promote good
practice. The Group’s policies are formulated and kept up to date
and communicated to all employees through the Group Intranet
and, where appropriate, individual presentations. In the year to
31 December 2016, the Group was not aware of any incident in
which the organisation’s activities have resulted in an abuse of
human rights.
The 2017 Annual General Meeting will be held on Wednesday,
DISCLOSURE OF INFORMATION TO THE AUDITOR
26 April 2017. The notice of meeting, including explanatory notes
for the resolutions to be proposed, will be posted to shareholders.
Each Director has confirmed at the date of this report that:
•
•
so far as they are aware, there is no relevant audit
information of which the Company’s auditor is unaware; and
they have taken all the steps that they ought to have taken as
a director in order to make themselves aware of any relevant
audit information and to establish that the Company’s auditor
is aware of that information.
GOING CONCERN
This confirmation is given and should be interpreted in accordance
with the provisions of s418 of the Companies Act 2006.
The current macro-economic conditions have created a number
of uncertainties as set out on pages 28 and 29. The Group’s
business activities, and the factors likely to affect its future
development and performance, are set out in the Strategic Report
on pages 2 to 27. The financial position of the Group, its liquidity
position and borrowing facilities are described in the Strategic
Report and in notes 18 and 21 of the Group financial statements.
The Directors regularly stress-test the business model to ensure
that the Group has adequate working capital and have reviewed
the current and projected financial positions of the Group, taking
into account the repayment profile and covenants of the Group’s
loan portfolio, and making reasonable assumptions about future
trading performance. The Directors have a reasonable expectation
that the Company and the Group have adequate resources to
continue in operational existence for the foreseeable future
and further details of this analysis are set out in the Viability
Statement on page 45. Therefore, the Directors continue to
adopt the going concern basis in preparing the annual report
and accounts.
38
DISCLOSURES UNDER LISTING RULE 9.8.4R
Annual Report & Accounts 2016
CLS Holdings plc
The table below is included to comply with the disclosure requirements under Listing Rule 9.8.4R. The information required by the
Listing Rules can be found in the Annual Report at the location stated below.
Listing Rule
Information Required
Disclosure
9.8.4(1)
9.8.4(2)
9.8.4(4)
9.8.4(5)
9.8.4(6)
9.8.4(7)
9.8.4(8)
9.8.4(9)
9.8.4(10)
9.8.4(11)
9.8.4(12)
9.8.4(13)
9.8.4(14)
Interest capitalised by the Group
Publication of unaudited financial information
Long-term incentive schemes with directors
Director’s waiver of emoluments
Director’s waiver of future emoluments
Non pro rata allotments for cash (issuer)
Non pro rata allotments for cash (major subsidiaries)
Listed company is subsidiary of another company
Contracts of significance with a director
Contracts of significance with controlling shareholder
Dividend waiver
Waiver of future dividends
Relationship Agreement with controlling shareholder
Note 9
None
None
None
None
None
None
None
None
None
Not applicable
Not applicable
Page 46
The following table is included to comply with the additional disclosure requirements under the Listing Rule 9.8.6
Listing Rule
Information Required
Disclosure
Directors’ (and Connected Persons’) interests in CLS
shares at year end and at not more than one month
prior to the date of the AGM notice
Interests in CLS shares disclosed under DTR5 at year end
and not more than one month prior to the date of AGM notice
The going concern statement
Amount of authority to purchase own shares available at
year end
Off-market purchases of own shares during the year
Off-market purchases of own shares since year end
Non-pro rata sales of treasury shares during the year
Compliance with the Main Principles of the UK Corporate Governance Code
Details of non-compliance with the UK Corporate Governance Code
Directors proposed for re-election: the unexpired
term of any director’s service contract and a statement
about directors with no service contracts
The Company had the authority to
purchase 2,808,553 shares at year end
None
None
None
Page 40
Pages 41 to 47
Pages 36, 37 and 57
Page 65
Page 46
Page 38
9.8.6(1)
9.8.6(2)
9.8.6(3)
9.8.6(4)(a)
9.8.6(4)(b)
9.8.6(4)(c)
9.8.6(4)(d)
9.8.6(5)
9.8.6(6)(b)
9.8.6(7)
On behalf of the Board
David Fuller BA FCIS
Company Secretary
8 March 2017
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CORPORATE GOVERNANCE REPORT
GOVERNANCE IS AN INTEGRAL PART
OF THE WAY WE MANAGE OUR BUSINESS
CHAIRMAN’S INTRODUCTION
The Board has overall responsibility for corporate governance and is accountable to the Company’s shareholders for good governance.
We are committed to achieving high standards of corporate governance which best fit the Group. Your Board recognises that
through an effective structure of systems and controls which defines authority and accountability throughout the Group, risks are
appropriately managed and controlled whilst still promoting entrepreneurial behaviour and ensuring a successful and innovative
business. This, we believe, has been the key to our long-term success.
Corporate Governance is a key driver to the success of a listed company, but no two businesses are the same and no two boards
are the same. For example, the UK Corporate Governance Code recommends that the Chairman of a listed company should not
hold executive powers, and be “independent upon appointment”. Due to my previous Executive roles and my current role as
Executive Chairman, we do not comply with the Code. However, your Board believes that it is appropriate to have an Executive
Chairman because I have a valuable and in-depth knowledge of the business together with substantial experience of the European
property industry. Nevertheless, there are various independence safeguards in place to ensure proper processes and controls are
followed. These include the independent judgement of our Non-Executive Directors in all Board decisions, a schedule of matters
reserved for the Board where, for example, all property transactions above £5 million must be approved by the Board, robust
internal controls and a clear division of responsibilities between myself and our CEO. Your Board believes that, with the help
of my executive team, we focus on ensuring the Group succeeds in its business strategy whilst ensuring good governance.
During the year, we have implemented a number of processes which underline our governance commitment whilst recognising
the needs of the business and its stakeholders. For example we have established a Nominations Committee, consisting of two
independent Non-Executive Directors, our Founding Shareholder, Sten Mortstedt, and the Non-Executive Vice Chairman. Whilst we
understand that this is not fully compliant with the Code’s recommendation we believe that this represents our ownership structure.
In order to assist in meeting our obligations in relation to the introduction of the Market Abuse Regulations, we have established
a Disclosure Committee consisting of our Executive Directors, taking advice from a number of corporate advisers.
Finally, we wanted to ensure that we understood the needs and concerns of our key assets – our employees – and undertook a
staff satisfaction survey, taking into account all areas of working life. It showed us that 86% of our employees are proud to work
for CLS. Nevertheless, we take on board the feedback we received and are implementing changes to embrace a work/life balance.
It continues to be my belief that an effective Board should include members who have a detailed knowledge of the Company’s
business and its relationships, so that there can be effective challenge and searching questions asked of the Executive Directors.
We recognise that the composition of our Board is not aligned to the Code’s requirement in this regard. However, from a
governance perspective, I consider the balance between non-executives and “independent” non-executives to have been one of
our key strengths and is underlined by the Group’s performance since listing in 1994. As in previous years, I thank our long-term
shareholders for sharing this view.
Henry Klotz
Executive Chairman
COMPLIANCE WITH THE CODE
The principal corporate governance rules which applied to the
Company in the year under review were those set out in the UK
Corporate Governance Code published by the Financial Reporting
Council (“FRC”) in April 2016 (the “Code”), the UK Financial
Conduct Authority (“FCA”) Listing Rules and the FCA’s Disclosure
Guidance and Transparency Rules.
The Board fully supports the principles of good governance as set
out in the Code, which is publicly available on the FRC’s website
(www.frc.org.uk). The Company became a constituent of the FTSE
350 index on 22 December 2014. Save as identified and explained
below, the Board considers that throughout 2016 it complied with
the Main Principles and the supporting principles as set out in
Section 1 of the Code.
40
GOVERNANCE STRUCTURE
Annual Report & Accounts 2016
CLS Holdings plc
THE BOARD
HENRY KLOTZ (EXECUTIVE CHAIRMAN)
3 other Executive Directors
4 Independent Non-Executive Directors
4 other Non-Executive Directors
Ensuring company growth and shareholder value
AUDIT COMMITTEE
REMUNERATION COMMITTEE
NOMINATION COMMITTEE
3 Independent Non-Executive Directors
Monitors the arrangements for
corporate reporting, risk management
and internal controls
Maintains a direct relationship
with the external auditor
3 Independent Non-Executive Directors
Develops the Company’s policies
on executive remuneration and sets
the remuneration packages
of individual Executive Directors
2 Independent Non-Executive Directors
1 Executive Director
1 Non-Executive Director
Monitors and evaluates the
Board’s skills and experience
to ensure full Board discussion
EXECUTIVE COMMITTEE
Reviews the daily running
of the Group’s business
DISCLOSURE COMMITTEE
Monitors inside information
and close periods
INVESTMENT COMMITTEE
ASSET MANAGEMENT
COMMITTEES
HEALTH & SAFETY
COMMITTEE
LEADERSHIP
Analyses financial investment opportunities
and reviews investment portfolios
Reviews the Group’s property
investments in each country
Reviews and moderates the Group’s policy
and best practices for Health and Safety
The Board, its composition and responsibilities are set out in a formal schedule of matters specifically reserved to it for decisions. Matters reserved
for Board decisions include identifying strategic long-term objectives, approving the annual Group budget, and approving substantial property
transactions and investment decisions over £5 million.
The implementation of Board decisions and the day-to-day operations of the Group are delegated to the Executive Directors.
EXECUTIVE
CHAIRMAN
HENRY KLOTZ**
Proposing the overall strategy of the Group and ensuring
the effective running of the Board
NON-EXECUTIVE
VICE CHAIRMAN
ANNA SEELEY**
Supporting the Executive Chairman with developing Group strategy
and managing the effective running of the Board
CHIEF EXECUTIVE
OFFICER
FREDRIK WIDLUND
Implementing Group strategy and the day-to-day running of the Group
CHIEF FINANCIAL
OFFICER
JOHN WHITELEY
Implementing Group strategy in relation to and ensuring compliance
with all financial matters
EXECUTIVE
DIRECTOR
SENIOR
INDEPENDENT
DIRECTOR
NON-EXECUTIVE
DIRECTORS
STEN MORTSTEDT
Supporting the Executive Chairman with proposing the overall Group strategy
MALCOLM COOPER*
Providing another channel of communication for shareholders who do not wish to
approach the Executive Chairman, Executive Vice Chairman or Chief Executive Officer
Leads the Non-Executive Directors, and provides feedback to the Executive
Chairman on his performance
Providing independent oversight, objectively challenging the Executive Directors
in Board discussions and decision-making
JOSEPH CRAWLEY
ELIZABETH EDWARDS*
CHRISTOPHER JARVIS*
‡
THOMAS LUNDQVIST
†
BENGT MORTSTEDT
PHILIP MORTSTEDT
ANNA SEELEY
LENNART STEN*
* Determined by the Board to be Independent in accordance with Code provision B.1.1.
** With effect from 8 March 2016
†
‡
Resigned on 7 March 2017
Appointed 7 March 2017
G
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41
CORPORATE GOVERNANCE REPORT CONTINUED
PRINCIPAL ACTIVITIES OF THE BOARD IN 2016
March
Key Agenda items
Approval of the Annual
Report and Accounts 2015,
April tender offer and notice
of AGM
Approval of going concern
and viability statements
Report on Vauxhall Square
development and strategy
May
August
November
Nominations Committee
established
Approval of the Half-Yearly
Financial Report and
September tender offer
Approval of 2017 Budget and
Forecasts for 2018 to 2020
Approval of going concern
statement
Review of Internal Controls
and Risk Management
Reports from:
Group policies update
Audit Committee on
Annual Report and
feedback from auditors
Remuneration Committee
on bonus plan
Keeping the Board updated through presentations
UK Valuers
Group Treasurer on
current borrowing market
and trends
Standing Agenda Item s
b a s i s
k l y
e
e
w
Monitored on a
Cash Flows
Risk
Divisional Asset
Management
n
a
m
o
n
t
h
l
y
b
a
s
is
Financial
Forecasts
PERFORMANCE
MONITORING
Man a g e m e
t
n
Liquid
Resources
M
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n
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t
o
r
e
d
o
n
a
Budgets
q
u
arterly basis
Conflicts of Interest
Establishment of a
Disclosure Committee
Results on the Staff
Satisfaction Survey
Report from the Audit
Committee on the
Half-Yearly Financial Report
and feedback from auditors
Reports from:
Non-Executive Directors’
Committee providing
feedback on Board Evaluation
Audit Committee on the
audit planning process and
audit matters
UK valuers
Vauxhall Square Valuers
Report on impact of Brexit
French valuers
German valuers
Henry Klotz
Anna Seeley
Fredrik Widlund
John Whiteley
Sten Mortstedt
Malcolm Cooper
Joseph Crawley
Elizabeth Edwards
Christopher Jarvis
Thomas Lundqvist
Philip Mortstedt
Lennart Sten
4/4
4/4
4/4
4/4
3/4
4/4
4/4
4/4
4/4
3/4
4/4
4/4
Executive Reports covering markets, investments, portfolio developments, financing and operational matters
Corporate Governance, including monitoring of principal risks and uncertainties, internal controls and risk management, health
and safety and investor relations
Performance Monitoring
Meetings
M
o
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it
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d
o
The attendance of Directors at Board meetings during the year is
set out below:
Meeting Attendance during the year
Number of Meetings
The Company’s Articles of Association contain procedures to deal
with Directors’ conflicts of interest. The Board considers that
these have operated effectively during the year.
In addition to attending Board meetings, senior management
meet regularly to discuss management issues relating to the
Group both formally and informally.
42
Annual Report & Accounts 2016
CLS Holdings plc
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Insurance
The Company has arranged insurance cover for its Directors and
officers, as set out in the Directors’ Report on page 38.
Division of Responsibilities
The responsibilities of the Executive Chairman, who is
responsible for the overall strategy of the Group, the Non-
Executive Vice Chairman who supports the Executive Chairman,
and the Chief Executive Officer, who is responsible for
implementing the strategy and for the day-to-day running of the
Group, are specifically divided. A written statement of the division
of these responsibilities is reviewed and approved by the Board
each year.
The Company does not comply with provision A.3.1 of the Code,
as the Executive Chairman was not independent on appointment.
There have been no significant changes to the commitments of
the Executive Chairman during the year. From 1 January 2016,
the Executive Vice Chairman carried out his responsibilities on
a part-time basis. On 8 March 2016 the role of Executive Vice
Chairman reverted to a non-executive role and a revised
statement was subsequently approved.
Non-Executive Directors
A formal meeting of the Non-Executives took place during the
year, without the Executive Directors or the Chairman present,
and at which a thorough review of the performance of the
Executive Chairman took place. Several meetings with the Non-
Executive Directors and the Executive Chairman took place during
the year to discuss, amongst other things, the performance of the
Group’s strategy, the performance of the other Executive
Directors and the performance of the Board as a whole.
As highlighted by this year’s board evaluation, the Board was
satisfied with the experience, expertise and performance of each
Board member; they continue to add significant value to the
operation of the Company through their combined knowledge and
EFFECTIVENESS
experience, and exercise objectivity in decision-making and
proper control of the Company’s business.
Tenure of the Board
9+ Years
3
6 – 9 Years
4
0 – 3 Years
5
The Board is assisted by the Audit, Remuneration and Nominations
Committees, the terms of reference for which can be obtained
from the Company Secretary or our website.
Independence
Guidance to the Code recommends that for FTSE 350 companies
at least half the Board, excluding the Chairman, should comprise
independent Non-Executive Directors.
At the year end, the Board comprised four Executive Directors, four
independent Non-Executive Directors and four other Non-Executive
Directors. The Company was not compliant, therefore, with
provision B.1.2. However, the Board considers that having a
mix of Non-Executive Directors who are either “independent”
as defined by the Code, or have an in-depth knowledge of the
Company, provides better oversight and governance than having
predominantly independent Non-Executive Directors.
In accordance with provision B.2.3, the Board undertook a
rigorous review as to whether it considered Malcolm Cooper and
Christopher Jarvis to be independent, having served on the Board
for more than six years. Based on Mr Cooper’s current full time
role with National Grid plc, and Mr Jarvis’s full time role with
Jarvis and Partners, together with the amount of time dedicated
to their roles as a Non-Executive Director and their contributions
to the Board in discussions generally, the Board were satisfied
that they maintained the necessary levels of independence in
addition to the Code’s independence criteria.
Mr Cooper has served on the Board for more than nine years.
In light of provision B.1.1, and for the reasons set out above, the
Board determined that he continued to remain independent.
Directors Independence
Non-Executive
Independent
34%
Non-Executive
Non-Independent
33%
Executive
33%
Appointments to the Board
On 8 March 2016, Mr Sten Mortstedt stepped down as Executive
Chairman but remained an Executive Director and was replaced
by Mr Klotz. The role of Executive Vice Chairman reverted to a
non-executive role, to which Ms Seeley was appointed.
On 7 March 2017, Mr Bengt Mortstedt, a co-founder shareholder
and holder of 6.89% of the shares in the Company, was appointed
to the Board as a non-executive director, and Mr Philip Mortstedt
left the Board.
Nominations Committee
As recommended by the Code, in May 2016 the Board established
a Nominations Committee to lead the process for Board
appointments and make recommendations to the Board.
Its members were Sten Mortstedt, Committee Chairman,
Anna Seeley, Elizabeth Edwards and Lennart Sten. Whilst the
Nominations Committee was not fully compliant with provision
B.2.1, its composition was deemed appropriate as it reflected
the Company’s shareholder base and also provided a balanced
independent perspective.
Following the annual board evaluation in November, and having
had regard to stakeholder feedback, the Committee received the
views of the Board in relation to succession planning, and its
balance of skills, knowledge and experience. Since the year end
the Nominations Committee met to consider the appointment
of Mr Bengt Mortstedt and the departure of Mr Philip Mortstedt.
The Committee believed that Bengt Mortstedt would bring a
broad experience of the property industry and knowledge of
the Company which would enhance the composition and balance
of the Board.
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43
CORPORATE GOVERNANCE REPORT CONTINUED
Diversity
Information, Support and Development
In accordance with the Company’s policy on diversity, it will continue
to make changes to its composition irrespective of gender or any
other form of discrimination and to appoint the best candidate
to the post. It, therefore, considers that setting measurable
objectives based on diversity would not be in the best interests
of the Group.
Board members are sent Board packs in advance of each Board
and Committee meeting, and senior executives attend Board
meetings to present and discuss their areas of speciality. In
making commercial assessments the Directors review detailed
plans including financial viability reports which, amongst other
things, detail the return on capital, the return on cash and the
likely impact on the income statement, cash flows and gearing.
Directors are able to obtain independent professional advice at the
Company’s expense and have access to the services of the Company
Secretary. They are given appropriate training and assistance on
appointment to the Board and later, if requested.
Female
17%
Board Gender Diversity
Male
83%
Board Evaluation
In November, the Board undertook its annual performance
evaluation survey led by the Senior Independent Director, with
assistance from the Company Secretary. The evaluation was
based on a questionnaire which addressed three key areas:
membership of the Board, Board performance and Board
operation. The questionnaire enabled the Directors to score
performance in each of these areas and also provided an
opportunity to raise any other issues. The confidential responses
were compiled into a non-attributable report by the Senior
Independent Director and provided to the Executive Chairman.
Based on the results, the Directors considered that the Board
and its committees were working effectively and that there was a
good mix of personalities, skills and experience. The Board would
keep under review the need for further development experience.
It recognised that the size of the Board, and balance of
independence amongst its non-executives, should be considered
when making any new appointments. The Directors were pleased
with the way in which the Executive Chairman led the Board and
had concluded critical strategic decisions. Since the previous
evaluation, the Board had improved interaction with those below
executive level, and would continue to do more.
The key themes arising from this year’s evaluation, which will
form an action plan for 2017, were: to continue to review
succession planning in respect of employees below Board level;
to continue to improve the Board’s interaction with all employees;
to continue to hold meetings with only the Non-Executive
Directors and the Executive Chairman present; and to receive
additional information on employee issues.
The Board notes provision B.6.2 of the Code, requiring an
externally facilitated evaluation for FTSE 350 companies every
three years under which the Company would not require an
externally facilitated evaluation until December 2017.
The Company offers all Directors the opportunity to update their
skills and knowledge, and familiarity with the Company, in order
to fulfil their role on the Board. In addition, meetings with senior
managers within the Company have been arranged to further
familiarise Non-Executive Directors with the Company. As part
of every new Board member’s induction, we encourage them to
meet with the Head of Property in each of the UK, France and
Germany so as to understand the portfolio. Board members also
attended site visits to properties.
Re-election
Under the Articles of Association, which can be amended by a
special resolution of the shareholders, the Board has the power
to appoint Directors and, where notice is given signed by all the
other Directors, to remove a Director from office.
All Directors are subject to election by shareholders at the first
Annual General Meeting following their appointment. In accordance
with the Code’s requirements for FTSE 350 companies, all
directors must seek re-election by shareholders annually.
Accordingly, all Directors will be seeking election or re-election
at the forthcoming Annual General Meeting. Their details are
contained in the Directors’ Report on pages 36 and 37.
The terms and conditions of appointment of Non-Executive
Directors are set out in a letter of appointment, which provides
for their removal in certain circumstances, including under
s168 Companies Act 2006. Their letters of appointment also set
out what is expected of them and the time expected for them to
meet their commitment. Non-Executive Directors are expected to
serve two three-year terms, although the Board may invite them
to serve for an additional period, subject to a rigorous review.
The terms of appointment of the Non-Executive Directors can
ACCOUNTABILITY
be obtained on request to the Company Secretary and will be
available for inspection 15 minutes before, and during, the AGM.
The Board is required to present a fair, balanced and
understandable assessment of the Company’s position and
prospects, which are explained in this Annual Report.
The Audit Committee
The Board has established an Audit Committee to monitor the
formal and transparent arrangements for its corporate reporting
and its risk management and internal control principles, and for
maintaining an appropriate relationship with the Company’s Auditor.
Full details of the Committee’s
work are given in the Audit
Committee's Report on page
44
>
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Annual Report & Accounts 2016
CLS Holdings plc
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Risk Management and Internal Control
Risks
The Company has internal control and risk management systems
in place for its financial reporting process and the preparation of
the Group accounts. It considers these systems appropriate for
the size, diversity and complexity of the Group’s operations, and
they are monitored, reviewed and recommended by the Audit
Committee in the first instance, and then approved by the Board
as a whole on an annual basis.
It is the Company’s aim to manage risk and to control its business
and financial affairs economically, efficiently and effectively so
as to be able to exploit profitable business opportunities in a
disciplined way, avoid or mitigate risks that can cause loss,
reputational damage or business failure, and enhance resilience
to external events. The Board acknowledges that the Directors
are responsible for the Group’s systems of internal control and
risk management and has established procedures which are
designed to provide reasonable assurance against material
misstatement or loss. These procedures have operated for the
entire financial year and up to the date of signing the Annual
Report and Accounts.
The Directors recognise that such systems can only provide a
reasonable and not absolute assurance that there has been no
material misstatement or loss. The Board regularly reviews the
management structure, HR policies and reward systems so as
to ensure that management is aligned to the Group’s values and
supports the risk management and internal control systems.
The key elements of the process by which the systems of internal
control and risk management are monitored are set out below.
Internal Controls
The Company has an established framework for internal controls,
which is regularly reviewed and monitored by the executive
management and the Audit Committee, who update the Board
on its effectiveness during the year.
The Board is responsible for the Company’s overall strategy,
for approving budgets and major investment decisions, and for
determining the financial structure of the Group.
The Audit Committee assists the Board in the discharge of its
duties regarding the Group’s financial reports and provides a
direct link between the Board and the Company’s Auditor through
regular meetings. The Board has requested that the Audit
Committee reviews the content of the Annual Report and
Accounts and advises it on whether, taken as a whole, it is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy. Following its 2016
review, it recommended the same to the Board.
There is an established organisational structure which has clearly
defined lines of reporting and responsibility. The Group has in
place control processes in relation to all aspects of its financial
dealings, such as the authorisation of banking transactions,
capital expenditure and treasury investment decisions.
The Group has a comprehensive system for budgeting and
planning whereby quarterly and annual budgets are prepared,
monitored and reported to the Board at Board meetings.
Three-yearly rolling cash flow forecasts are updated and distributed
to the Executive Directors on a weekly basis to ensure the Group
has sufficient cash resources for the short and medium term.
Set out on pages 2 to 27 is the Strategic Report, describing the
Group’s operations and the strategy which it employs to maximise
returns and minimise risks.
In line with the most recent guidance on risk and internal controls
from the FRC, the risks which the Group faces are reviewed and
monitored in Board and executive meetings on an ongoing basis
throughout the financial year.
Each business area operates a process to ensure that key risks are
identified, evaluated, managed and reviewed appropriately. This
process is also applied at Board level to major business decisions
such as property acquisitions and disposals, and significant
strategy implementations. Furthermore, a monthly property activity
portfolio update is circulated to the Board which identifies key
business risks, developments and opportunities. Additional risk
management processes, which include health and safety and
sustainability risk management, are employed within the
businesses and updates are reported to the Board at each meeting.
Whilst there were no areas of weakness or failings identified by
the Audit Committee and reported to the Board during their
review of the Group’s risk management and internal controls,
management has set up a rolling programme to review and test
the principal areas of internal control risks throughout the Group.
The results are reported to the Audit Committee and reviewed by
the Board during the year.
In accordance with provision C.2.1, and as supported above, the
Directors confirm that they have carried out a robust assessment
of the principal risks facing the Group, including those which
would threaten its business model, future performance, solvency
or liquidity. The Group’s principal risks and uncertainties, the
areas which they impact and how they are mitigated are
described on pages 28 and 29.
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Viability Statement
In accordance with provision C.2.2 of the Code, the Board has
assessed the prospects of the Group over a longer period than
the twelve months that has in practice been the focus of the
Going Concern statement.
The Board concluded that the Viability Statement should
correspond with the way in which the Group models its forecasts.
The Group produces a budget for the current year and forecasts
over a further three years reflecting the Group’s business model,
strategy and risk appetite.
The forecasts provide a comprehensive view of the Group’s entire
operation, covering:
cash flows
financial resources
long-term funding
capital expenditure commitments
administration costs
•
•
•
•
•
Cash flow forecasts are updated weekly and circulated to the
Board. The budget and three year forecasts are set in November
and updated in May and August to take into account foreign
exchange movements, changes to the portfolio, interest rate
expectations and development cost assumptions and the changes
are reviewed by the Board.
As explained in the Audit Committee report, the forecasts are also
stress-tested to reflect our principal risks, ensuring the Group
has sufficient resources in severe cases, such as a steep property
downturn, the loss of key tenants and significant rises in the costs
of medium-term funding.
As a result, the Directors can confirm that they have a reasonable
expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment.
45
CORPORATE GOVERNANCE REPORT CONTINUED
REMUNERATION
MAJOR INTERESTS IN THE COMPANY’S SHARES
Other than Mr Sten Mortstedt’s 50.99% interest referred to in the
Directors’ Remuneration Report on page 65, as at 8 March 2017
the Company has been notified of the following interests above
3% in the Company’s issued share capital:
No. of shares
%
FIL Limited
Bengt Mortstedt
F&C Asset Management plc
Schroder Investment
Management Limited
3,557,331
2,807,255
2,124,509
8.73%
6.89%
5.21%
1,796,075
4.40%
There are no shareholders who carry special rights with regard
to control of the Company and there are no restrictions on voting
rights. The Company knows of no agreements between holders
RELATIONSHIP AGREEMENT
of securities which would result in restrictions on the transfer of
securities or on voting rights.
In April 2016, the Company was informed that Sten Mortstedt
had undertaken a reorganisation of certain companies of which
he was the sole direct and beneficial owner Mr Mortstedt
transferred all of his shareholdings to Creative Value Investment
Group Limited (“CVIG”), which at the time of such transfer was
directly held and beneficially owned by him (the “Transaction”).
Immediately following the Transaction, Mr Mortstedt settled his
entire shareholding in CVIG into The Sten and Karin Mortstedt
Family & Charity Trust, in which Mr Mortstedt has a beneficial
interest.
In order to continue compliance with the Listing Rule provision
9.2.2AR, the relationship agreement between the Company and
Mr Mortstedt was terminated and a new relationship agreement
was entered into with CVIG, as controlling shareholder.
As at 31 December 2016, CVIG held 50.99% of the Company’s
shares in issue, and was therefore seen as a controlling
shareholder under the Listing Rules.
The relationship agreement shall only be terminated in the event
that CVIG ceases to be a controlling shareholder, or if the
Company ceases to be admitted to listing on the premium
segment of the Official List.
Throughout the period under review, the Company has complied
with the mandatory independence provisions and procurement
obligations in the relationship agreement, and as far as the
Company is aware, Mr Mortstedt and, since 28 April 2016, CVIG
has also complied.
The Remuneration Committee
The Board has a Remuneration Committee which develops the
Company’s policies on executive remuneration and sets the
remuneration packages of individual Executive Directors.
Full details of the Committee’s work
are given in the Remuneration
Report on page
RELATIONS WITH SHAREHOLDERS
>
48
The Company values its dialogue with both institutional and
private investors. The Board’s primary contact with institutional
shareholders is through the Chief Executive Officer and the Chief
Financial Officer, along with the Head of Group Property, who
have regular meetings with institutional shareholders. They
also undertake analyst presentations following the Company’s
half-yearly and annual financial results. They are supported by a
financial relations adviser and two corporate brokers, all of whom
are in regular contact with institutional and retail shareholders,
and with analysts. A report of feedback from each institutional
investor meeting is prepared by the broker who organised it,
and a report of unattributed feedback from analysts on analyst
presentations is prepared by the financial relations advisor.
All such reports and coverage of the Company by analysts are
circulated to the Board. Consequently, all Directors develop
an understanding of the views of institutional shareholders
and commentators.
Analyst presentations following the announcement of half-yearly
and annual financial results are webcast and available on the
Company’s website.
The Group issues its annual financial report to each of its
shareholders. In accordance with the UK company disclosure
regulations the Group does not distribute its half-yearly financial
report to shareholders but makes it available on its website.
Copies are available on request.
All financial reports and press releases are also included on the
Group’s website at www.clsholdings.com.
All shareholders have at least 20 working days’ notice of the
Annual General Meeting at which all Directors who are available
to attend are introduced and are available for questions. All
shareholders are welcome to attend the Company’s Annual
General Meeting and to arrange individual meetings by
appointment. The views received at such meetings are fed back
to the Board.
Proxy Voting
The proxy forms for the Annual General Meeting and General
Meetings which were held in 2016 included a “vote withheld” box.
Details of the proxies lodged for these meetings were announced
to the London Stock Exchange and are on the Company’s website
at www.clsholdings.com. Shareholders may also choose to
register their vote by electronic proxy on the Company’s website.
At the 2017 Annual General Meeting, the Company will comply
with the Listing Rules in respect of the voting requirements for
the re-election of independent Directors where a Company has
a controlling shareholder.
46
Annual Report & Accounts 2016
CLS Holdings plc
SIGNIFICANT AGREEMENTS – CHANGE OF CONTROL
A change of control of the Company may cause a number of
agreements to which the Company or its active subsidiaries
is party, such as commercial trading contracts, banking
arrangements, property leases and licence agreements, to alter
or terminate or provisions in those agreements to take effect.
In the context of the Group as a whole, only the banking
arrangements are considered to be significant. There are no
agreements between the Company and its directors or employees
JOINT VENTURE AND ASSOCIATES
providing for compensation for loss of office or employment that
occur because of a change of control.
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.
DIRECTORS’ RESPONSIBILITIES
This Corporate Governance report applies to the Company and
its subsidiaries. It does not include associates.
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 2017.
On behalf of the Board
David Fuller BA FCIS
Company Secretary
8 March 2017
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the
IAS Regulation, and have elected to prepare the parent company
financial statements in accordance with FRS101 of United
Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law). Under
company law the Directors must not approve the accounts unless
they are satisfied that they give a true and fair view of the state
of affairs of the Group and of the profit or loss of the Group for
that period.
In preparing the parent company financial statements, the
Directors are required to:
•
select suitable accounting policies and then apply them
consistently;
• make judgments and accounting estimates that are
reasonable and prudent;
•
•
state whether applicable UK Accounting Standards have
been followed, subject to any material departures disclosed
and explained in the financial statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
In preparing the Group financial statements, International
Accounting Standard 1 requires that Directors:
•
•
•
properly select and apply accounting policies;
present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable
users to understand the impact of particular transactions,
other events and conditions on the entity’s financial position
and financial performance; and
• make an assessment of the Group’s ability to continue as a
going concern.
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REMUNERATION COMMITTEE REPORT
for the year ended 31 December 2016
ANNUAL STATEMENT
•
•
•
During the year, the Committee were made aware of a
minor error in the calculation of the budgeted forecast
Administration Cost Ratio (as % of net rental income)
against which the respective 2016 targets were set.
It was agreed that the 2016 KPI targets should be
recalibrated and adjusted downwards on a pro-rated
basis by 80 basis points. The Committee felt that the
revised targets were more challenging given the
information provided by the Company;
As set out in last year’s Report, meeting the KPI targets
would also have triggered the release of a further 5,000
shares as part of Mr Widlund’s appointment as Chief
Executive Officer. On the basis that not all of the KPI
targets were met, no shares were released during 2016
and this element of the award lapsed. There are no further
recruitment remuneration awards for Mr Widlund; and
The Committee determined that Henry Klotz’s outstanding
contribution to the Company over 2016 had not been fully
recognised through his Executive Chairman fee given that
he did not participate in any incentive arrangement for 2016.
To recognise his exceptional contribution to the Company
during 2016, the Remuneration Committee determined
that Mr Klotz should receive a one-off, exceptional
£160,000 cash payment equivalent to 80% of his Executive
Chairman fee. This award is subject to shareholder
approval at the 2017 AGM.
In our assessment, the overall remuneration payments for
2016 represent a balanced outcome. The annual report on
remuneration together with this annual statement is subject
to an advisory shareholder vote at the 2017 AGM.
2017 Remuneration Policy
The Remuneration Policy disclosed in this report has been
revised during the year and will be put to shareholders for
approval at the 2017 AGM, in line with normal timescales.
The variable element of our existing Policy is provided through
the PIP which provides a combination of annual cash payouts
and a deferral into Company shares. The Company has not
operated a traditional UK long-term incentive plan in the
past due:-
•
•
•
to the cyclicality of the business making the setting of
long-term performance targets challenging;
the desire of the Committee to use a holistic approach to
performance measurement (in practice the number of
measures which can be used with an LTIP are limited due
to the need to disclose at grant for a three year period); and
the Committee’s objective of operating a simple incentive
programme.
However, after undertaking a remuneration review the
Committee believes that the inclusion of an additional element
to the PIP which retains the advantages of the current Plan but
is paid in long-term equity will help generate an appropriate
focus by the executives on ensuring annual performance flows
through to long-term sustainable performance.
Dear Shareholder,
As the Chairman of the Remuneration Committee, I am pleased
to present the report of the Board covering our revised Directors’
Remuneration Policy and the implementation of our existing
policy for the year ended 31 December 2016.
In this year’s report, we set out the following:
•
•
•
The Annual Statement by the Remuneration Committee
Chairman;
The revised Directors’ Remuneration Policy; and
The Annual Report on Remuneration setting out in more
detail payments and awards made to the Directors under
the existing Remuneration Policy and the link between
Company performance and remuneration for the 2016
financial year.
2016 Company Performance
As set out in the Chairman’s Statement, our 2016 results
reflected a positive year for the Group with EPRA earnings
per share and EPRA NAV rising to their highest ever levels
and the vacancy rate and cost of debt fell to record lows.
2016 Remuneration Outcomes
The Company’s pay structure is clear, consistent with the
market and aims to align the interests of the Executive Directors,
senior managers and employees with those of shareholders.
In line with this commitment to link executive remuneration
to annual corporate performance and long-term shareholder
returns, the performance levels outlined above have resulted
in lower pay outcomes in 2016. This ensured that the 2016
remuneration outcomes fairly reflect our corporate performance.
The main remuneration outcomes are given below:
•
Executive salaries will be increased by the Group employee
average rate of 2.7% for 2017;
• Non-Executive fee levels will be increased by 9% for 2017,
which reflects their increased responsibilities since the
Company joined the FTSE 250 index, and the comparatively
low level of fees currently;
•
•
As outlined above and in more detail in the Strategic
Report, the Committee determined that all but one of the
Key Performance Indicators (KPIs) for 2016 had been met
and that Performance Incentive Plan (PIP) plan account
contributions of 76% and 73.5% of maximum to Mr Widlund
and Mr Whiteley accurately reflected the performance of
the Group through 2016;
The KPI that fell short of the target was TSR at -13.8%.
In line with not achieving this KPI no contribution was
made to the Executive Director’s PIP accounts for 2016
in respect of this element. This performance level was
also below the minimum threshold performance level in
respect of the forfeiture provision on deferred PIP amounts.
However, the Committee has determined that it will exercise
its discretion not to apply forfeiture to the deferred PIP
balance after undertaking a holistic assessment of the
Company’s underlying financial and strategic performance
for 2016 and against the backdrop of significant value
creation (both absolute and relative) for shareholders
since the introduction of the PIP (159% TSR growth
compared with 92% for FTSE350 Real Estate Index);
48
Annual Report & Accounts 2016
CLS Holdings plc
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As explained in the Executive Chairman’s statement, the
Company aims to grow the property portfolio significantly over
the next five years in order to generate long-term returns to
shareholders. In order to support the strategy the Committee
believes that the new Remuneration Policy should retain,
motivate and reward executives to deliver this strategic objective
and facilitate the recruitment of key talent. This breaks down
into the following:-
•
•
•
•
•
•
in order to ensure the achievement of the Company’s key
strategic objectives, the executives need to be motivated
and rewarded for the successful delivery of key annual
objectives which given the current instability in the
property sector is imperative to the future growth of
the Company;
the requirement to provide a lock-in for the executives
given the recent changes to the Board structure which
means their continued retention is key for the on-going
success and growth of the Company;
the alignment of the executives with the shareholder
experience through the build-up and retention of
meaningful shareholdings in the Company;
the need to ensure that the total compensation levels
are competitive in the industry in which the Company
competes for talent. The Committee is therefore mindful
that the total remuneration opportunity for Executive
Directors’ remains market competitive compared to
peers in the FTSE 250 real estate sector. The Committee
review of the current Policy highlighted that there was a
remuneration gap to the market. Therefore, the introduction
of new equity elements under the PIP helps to ensure a
more competitive market positioning provided that the
executive team deliver the annual performance objectives
and that these lead to long-term sustainable performance;
the requirement of the new Policy to reflect the diverse
nature of roles on the Executive Board and an increased
time commitment for some of those roles; and
there are no changes to base salary, pension and benefits
for the Executive Directors beyond the standard awards
for all employees.
As such, we have made some changes to the previous
Remuneration Policy (see below) which are primarily designed
to address these issues:
•
Introduction of PIP Element B which provides an annual
award of shares up to 100% of salary vesting after 3 years
with a further 2 year holding period. Award levels will be
determined against the same annual scorecard of
performance targets as Element A. The Committee
believes that the advantages of this new Element B are:
–
Annual assessment of performance allowing:-
•
•
Incorporation of a wider range of operational and
strategic objectives;
Assists in the management of any cyclicality in
the business.
–
–
Simple.
Retentive as the sole condition once the deferred
shares have been earned over the period of deferral
is continued employment.
–
–
One of the alternative models suggested by the
Executive Reward Working Group in their report.
Supportive of corporate governance and best practice:-
•
•
•
•
Simplicity;
Deferral of a proportion of annual bonus in
shares supporting the alignment of the interests
of executives and shareholders;
The support of the build-up of a long-term locked
in shareholding by executives;
The facilitation of malus and clawback by having
a significant amount of the incentives earned
deferred in shares and under the control of the
Company post the determination of the bonus for
a particular year.
–
Increases the competitive position of the Company.
• No material change to the existing PIP which continues
to provide a combination of annual cash payouts and
deferral into Company shares subject to forfeiture
provisions with a maximum annual contribution of 150%
of salary (this is now termed Element A). The forfeiture
provisions under Element A of the PIP will now be based
on the Committee’s holistic assessment of performance.
The Committee feels that this change will provide it with
the ability to ensure that pay outcomes in any year will be
commensurate with long-term Company performance.
The Committee believes that the advantages of Element A
have been already proved and are largely the same as for
Element B above;
•
•
•
Increased shareholding requirement of 250% of salary for
Chief Executive Officer and 150% of salary for Executive
Chairman and Chief Financial Officer;
Introduction of an all employee share plan whereby
participants can benefit from 1 Matching Share for each
Partnership Share purchased; and
Clarifying the difference in policy between the founder
shareholder and the other Executive Directors in the policy
table to reflect the diverse nature of roles on the Executive
Board and an increased time commitment for some of
those roles. This clarification results in no change in
remuneration level.
The Committee also undertook its annual review of the
appropriateness of the Key Performance Indicators (KPIs)
that form the basis of Executive Directors’ bonuses under the
Performance Incentive Plan (PIP) and their associated targets,
which also formed part of the shareholder consultation.
The Committee received information from its advisers and
brokers and considered market forecasts and shareholder
responses to its consultation. We concluded that a differential
in weightings of the KPIs between the CEO and CFO should
be retained, that some targets needed to be reset and there
should be fewer KPIs overall whilst still maintaining a good
spectrum of Group performance. The Committee decided that
the Return on Equity, NAV Growth and Core profit over budget
KPIs should be removed to avoid duplication or the potential
for short term decision making. Following shareholder
feedback, the scorecard weightings were rebased to focus on
TSR, with the additional relative TSR KPI measure such that
there was a clear alignment between management and
shareholders’ interests.
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49
REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
The Administration Cost Ratio KPI targets for 2017 were
tightened such that they were realigned with the Group budget.
The EPRA NAV Growth and Absolute TSR KPIs have been
marginally relaxed to take account of market conditions and
forecasts. The Committee considers that they remain
sufficiently challenging but attainable. The amendments to
the targets and removal of three KPIs and the addition of the
relative TSR KPI are set out on pages 67 and 68.
The Committee undertook a thorough and detailed consultation
with our major shareholders in relation to these changes and
received positive responses. We are confident that we have
created a Remuneration Policy that balances the needs and
expectations of management and shareholders, links directly
to the Company’s strategy and continues to provide the
Committee with the ability to deal with the uncertainty of the
real estate sector. I very much hope you will support our
proposed Remuneration Policy at the 2017 AGM.
Membership
The Committee’s membership remains unchanged,
comprising three independent Non-Executive Directors.
The Committee met once during 2016 although it held a number
of informal discussions with Executive Directors and the Sten
and Karin Mortstedt Family and Charity Trust during the year.
Committee members attendance during the year ended
31 December 2016
Chris Jarvis (Chairman)
Malcolm Cooper
Lennart Sten
1/1
1/1
1/1
Remuneration Committee regular attendees for part
(by invitation)
Marcus Peaker
PwC
Fredrik Widlund
Chief Executive Officer
David Fuller
Company Secretary and Secretary
to the Remuneration Committee
Christopher Jarvis
Chairman
Remuneration Committee
50
PART 1: POLICY ON DIRECTORS REMUNERATION
THE PRINCIPLES OF OUR REMUNERATION POLICY
Annual Report & Accounts 2016
CLS Holdings plc
Competitive
Total remuneration should be competitive when compared with industry peers and companies of similar size and scale.
Performance linked
A significant part of the Executive Directors’ reward is determined by the Company’s success. Failure to achieve threshold levels
of performance may result in both no bonus under the PIP and partial forfeiture of earned deferred elements from previous years.
The fixed element of the Policy remain conservative against industry and cross-sector peers.
Shareholder aligned
A considerable part of the reward is paid in shares that have to be retained until minimum shareholding requirements have been met
and in the case of Element B for 5 years from grant.
Simple and transparent
NEW POLICY
By operating only one executive incentive plan all aspects of the remuneration structure are clear to participants and openly communicable.
In accordance with the regulations, a new Policy on Directors’ Remuneration (the “Policy”) as set out below will operate from 1 January
2017 and be put to a binding shareholders vote and become formally effective if approved at the 2017 Annual General Meeting in April.
The existing Policy, which was approved on 16 April 2014, remains operative until this time and can be found on our website at
www.clsholdings.com and on pages 48 to 56 of our 2013 Annual Report.
The Company’s policy on remuneration is to set overall remuneration packages at a level sufficient to attract, retain and incentivise high
calibre staff with a view to enhancing long-term shareholder value. The Committee also considers the level of pay and employment
conditions throughout the Group when setting Executive Directors’ remuneration, consistent with the Company’s general aim of seeking
to reward all employees fairly according to the nature of their role, their performance and market forces.
The Committee will review the remuneration arrangements for the Executive Directors and key senior management periodically in
line with the three year Policy cycle, drawing on trends made to all employees across the Group and taking into consideration the
following factors:
•
the business’s strategy over the period;
overall corporate performance;
•
• market conditions affecting the Company.
The Committee uses the following comparators for executive remuneration:
– FTSE 350 Real Estate Supersector
– U + I plc, Helical Bar plc, Hansteen plc, Workspace Group plc, St Modwens plc, Londonmetric plc, Grainger plc, Shaftsbury plc,
Great Portland Estates plc, Derwent London plc. These companies are of a similar size and/or complexity to the Group, but the
comparator group is kept under review as different companies enter the market or change their size or the main characteristics
of their business; and
– FTSE 250
•
•
•
•
changing practice in the international market where the Company competes for talent;
pay conditions elsewhere in the Group;
changing views of institutional shareholders and their representative bodies; and
the recruitment market.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Key components of Directors’ Remuneration
Element
Purpose and Link to Strategy
Operation
Opportunity
Performance Matrix
Executive Directors (excluding the Founder Shareholder)
Base
Salary
Provides a base level of
remuneration to support
recruitment and retention
of Directors with the
necessary experience and
expertise to deliver the
Group’s strategy.
Reviewed annually and usually
fixed for 12 months commencing
1 January.
Factors taken into account include:
• remuneration practices
within the Group;
Key element of core fixed
remuneration.
• the general performance
of the Group;
• experience and individual
performance;
• changes in the scale,
scope or responsibilities;
• salaries within the ranges
paid by the companies in the
comparator groups used for
remuneration benchmarking
(when the Committee
determines a benchmarking
exercise is appropriate); and
• the economic environment.
The key benefits provided to the
Executive Directors include
private medical insurance, life
insurance, income protection,
gym contribution and staff
lunch provision.
The Committee recognises the
need to maintain suitable flexibility
in the determination of benefits
that ensure it is able to support
the objective of attracting and
retaining personnel. Accordingly,
the Committee would expect to
be able to adopt benefits such
as relocation expenses, tax
equalisation and support in
meeting specific costs incurred
by Directors to ensure the
Company and the individuals
comply with their obligations in
the reporting of remuneration.
Employer retirement funding is
determined as a percentage of
gross basic salary, up to a
maximum limit of 10%. Where
this exceeds the maximum
annual pension contribution that
can benefit from tax relief, any
excess may be provided in the
form of a salary supplement,
which would not itself be
pensionable or form part of
salary for the purposes of
determining the extent of
participation in the Company’s
incentive arrangements.
Benefits
Provides a base level of
remuneration to support
recruitment and retention
of Directors with the
necessary experience and
expertise to deliver the
Group’s strategy.
Pensions Provides a standard UK
market level of retirement
funding to enable the
Company to recruit and
retain Directors with the
experience and expertise to
deliver the Group’s strategy.
52
None, although
individual’s
performance and
contribution are
taken into account.
Competitive in the range for the
Company’s comparator groups.
The Committee intends to
review the list of companies
each year and may add or
remove companies from the
groups as it considers
appropriate. Any changes to
the comparator groups will be
disclosed in the part of the
report setting out the operation
of the policy for the future year.
In general salary rises to
Executive Directors will be in
line with the rise to UK based
employees.
Maximum increase of 5% of
salary per annum unless there
is a significant change to the
role and responsibilities.
Market level in the range for the
Company’s comparator groups.
None.
The maximum will be set at
the cost of providing the
benefits described.
None.
Market level in the range
for the Company’s
comparator groups.
The maximum Company
contribution is 10%.
The maximum employee
contribution is 5%.
Key components of Directors’ Remuneration (continued)
Element
Purpose and Link to Strategy
Operation
Opportunity
Performance Matrix
Annual Report & Accounts 2016
CLS Holdings plc
All employee
share
plan
Performance
Incentive
Plan
(the ‘PIP’)
The Company’s Share
Incentive Plan (“SIP”) allows
all employees, including
Executive Directors, to share
in the potential value created
by the Company.
Increase share ownership
throughout the organisation.
The PIP provides a
significant incentive to the
Executive Directors linked to
achievement of delivering
goals that are closely
aligned with the Company’s
strategy and the creation
of value for shareholders.
In particular, the PIP
supports the Company’s
objectives by:
• allowing the setting of
annual targets based on
the businesses’ strategic
objectives at that time,
meaning that a wider
range of performance
metrics can be used that
are relevant and suitably
stretching whilst also
providing sufficient
incentive linked to
potential to be achievable;
• providing substantial
deferral in shares and
ongoing adjustment by
requiring a threshold
level of performance to
be achieved during the
deferral period. Amounts
deferred in shares are
also forfeitable on a
Director’s voluntary
cessation of employment
which provides an
effective lock-in; and
• enables the Company
to recruit top executive
talent in a highly
competitive market.
In line with the legislation
for this type of plan.
The maximum opportunity
will be in line with the
limits set by HMRC.
None.
Maximum 250% of salary
(150% of salary under
Element A and 100% of
salary under Element B).
At threshold 41% of the
maximum is payable.
At on target 68% of the
maximum is payable.
The PIP consists of two
elements (Element A and
Element B);
A. an immediate element
in cash and/or shares;
and
B. deferred share-based
element subject to
pre-grant annual
performance
assessment, which
is subject to a 3 year
vesting period and
a further 2 year
holding period.
Market Standard malus and
clawback provisions apply
to the PIP (all Elements)
Under Element A, there
are forfeiture provisions if
minimum thresholds are
not achieved. This holistic
assessment will take
account of relative TSR,
absolute TSR, strategic,
financial and operational
performance.
The Committee has
discretion to provide
dividend equivalents on
Element A and B shares.
The performance metrics
for both elements of the PIP
are set individually by the
Committee and are based on
a combination of measures,
based on the Company’s
KPIs (the performance
conditions for the 2016
financial year will be detailed
in the Annual Remuneration
Report as will the conditions
for 2017 in the section on
how the policy will be
operated for the future year).
The PIP is measured over a
period of one financial year.
In order for the Company
to be successful, the
Committee believes
Executive Directors should
be focused on the delivery of
the Company’s strategic and
operational KPIs which is the
basis on which performance
conditions are selected for
the PIP.
The Committee retains
discretion in exceptional
circumstances to change
performance measures and
targets for each element and
the weightings attached to
performance measures part-
way through a performance
year if there is a significant
and material event which
causes the Committee to
believe the original
measures, weightings and
targets are no longer
appropriate. Discretion may
also be exercised in cases
where the Committee believe
that the PIP outcome is not a
fair and accurate reflection
of business performance.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Element
Purpose and link to strategy
Operation
Opportunity
Performance Matrix
Founder
Shareholder
Base Salary
As above.
As above.
Other
remuneration
Provides for specific
duties outside letter
of appointment
Approval by the Remuneration
Committee of any fees and the
basis of these fees, which will be
disclosed in full to shareholders.
As above.
Market rates.
As above.
None.
Non-Executive Directors (including Non-Executive Chairman and Non-Executive Vice Chairman)
Element
Purpose and Link to Strategy
Operation
Opportunity
Performance Matrix
Fees
Provides a level of fees to
support recruitment and
retention of Non-Executive
Directors with the necessary
experience to advise and
assist with establishing
and monitoring the Group’s
strategic objectives.
Fees are reviewed annually and
fixed for 12 months commencing
1 January. The fees are based
on equivalent roles in the
comparator groups used to
review salaries paid to the
Executive Directors. Fees
are set at a competitive level
to the comparator groups.
The Board as a whole is
responsible for setting
the remuneration of the
Non-Executive Directors.
Non-Executive Directors are paid
a base fee and additional fees for
chairmanship and membership
of committees and other specific
work outside their role as a
Non-Executive Director. The
Senior Independent Director
also receives an additional fee.
Competitive in the range for the
Company’s comparator groups.
None.
Non-Executive Directors do
not participate in any variable
remuneration or benefits
arrangements.
Fees related to consultancy will
be agreed in advance and no
higher than the market rate.
In general the level of fee
increase for the Non-Executive
Directors and will be set taking
account of any change in
responsibility and the general
rise in salaries across employees.
The Company will pay reasonable
expenses incurred by the
Non-Executive Directors and
may settle any tax incurred in
relation to these. Other benefits
include travel, accommodation
and membership subscriptions
related to the Company’s business.
Notes to the Policy Table
1. Performance Incentive Plan
Currently only the Chief Executive Officer and Chief Financial Officer will participate in the PIP; the Founder Shareholder and the
Executive Chairman do not participate.
The Executive Chairman Henry Klotz was previously a participant in the PIP but upon transferring from the full time role of
Executive Vice Chairman to part time Executive Chairman, it was determined that he would no longer participate in the PIP.
At present, it is not anticipated that he will participate in the PIP in the future.
2.
Shareholding Requirement
Within five years of approval of the revised Remuneration Policy, Executive Directors are expected to hold Company shares with
a value of 250% of basic salary in respect of the Chief Executive Officer and 150% of basic salary in respect of the Executive
Chairman and Chief Financial Officer. The Committee takes into consideration achievement against these targets when making
awards under the PIP.
54
Annual Report & Accounts 2016
CLS Holdings plc
3. Changes from existing Remuneration Policy
Element
Proposed Policy and operation for 2017
Base Salary
Introduction of 5% maximum increase per annum.
Performance
Incentive Plan
(“PIP”)
Policy revised to incorporate PIP Element B (where Element A has the same structure as the current PIP).
Both elements are outlined below:
Element A
• Maximum annual contribution into a Participant’s Plan Account of 150% of salary;
• Contributions will be earned based on the Corporate KPIs and the individual’s personal performance rating;
• Contributions will be made for three years with payments made over four years;
• 50% of the value of a Participant’s Plan Account will be paid out annually for three years with 100% of the
residual value paid out at the end of year four;
• 50% of the unpaid balance of a Participant’s Plan account will be at risk of annual forfeiture, the application
of which will take account of relative TSR, absolute TSR, strategic, financial and operational performance.
Element B
• Maximum annual deferred share award of up to 100% of salary;
• Deferred share award will be earned based on the same performance conditions as set for Element A;
• Shares earned under Element B are subject to a three year vesting period during which the Participant must
remain employed by the Company and cannot be sold for five years from the date of award irrespective
of employment status. Awards under Element B will be made in March / April of the year following the year
during which performance was measured.
• It is proposed that the first grants under Element B will be made in 2017 based on the level of satisfaction
of the Element A targets set for 2016
All Employee
Share Plan
Founder
Shareholder
The Company is proposing to introduce a Share Incentive Plan (“SIP”) to allow all employees, including
Executive Directors, to share in the potential value created by the Company.
The founder shareholders’ remuneration package will consist of the following elements :
• Base salary in line with the other Executive Directors; and
• In certain circumstances the Company may pay additional fees for specific duties outside the letter
of appointment. Any fees and the basis of these fees will be disclosed in full to shareholders.
There are no changes to the Policy in relation to Non-Executive Directors’ remuneration.
Discretion
The Committee has discretion in several areas of the Policy as set out in this report. The Committee may also exercise operational and
administrative discretion under relevant plan rules approved by shareholders. In addition the Committee has the discretion to amend
the policy with regard to minor or administrative matters where, in the opinion of the Committee, it would be disproportionate to seek
or await shareholder approval.
It is the Committee’s intention that commitments made in line with its policies prior to the date of the 2017 AGM will be honoured, even
if satisfaction of such commitments is made after the AGM and may be inconsistent with the above policies. Such commitments include
but are not limited to any deferred balanced already held in the PIP. Such commitments remain subject to the share plan rules and
terms and conditions under which they were granted.
Differences in policy from the wider employee population
The Group aims to provide a remuneration package for all employees which is market competitive and operates the same core
structure as for Executive Directors, with the exception of Element A of the Performance Incentive Plan. It is the Company’s intention
that Element B of the Performance Incentive Plan will extend to Senior Management within the Company, with the number of employees
eligible to participate being approximately 12. The Company’s remuneration philosophy for all management from the Executive Directors
downwards is that all employees should have a significant annual element of performance-based pay with part provided in deferred
shares to ensure a focus on long-term sustainable value creation and to align their experience with those of shareholders.
For all employees, the Group operates a performance-based discretionary bonus scheme and a loyalty bonus scheme based on
employment longevity. The Company is also proposing to launch a Share Incentive Plan (SIP) in order to increase levels of share-ownership
throughout the Company and allow employees to share in the success of the Company in a tax-efficient manner.
Additionally the Group’s pension contributions to an employee’s pension scheme are determined by their length of service from a
minimum of 5% up to a maximum of 10%.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Approach to Recruitment Remuneration
The Committee’s approach to recruitment remuneration is to pay no more than is necessary to attract candidates of the appropriate
calibre and experience needed for the role. The remuneration package for any new recruit would be assessed following the same
principles as for the current Executive Directors. The Committee is mindful that it wishes to avoid paying more than it considers
necessary to secure the preferred candidate and is aware of guidelines and shareholder sentiment regarding one-off or enhanced
short or long-term incentive payments made on recruitment and the appropriateness of any performance conditions associated with
an award.
Where an existing employee is promoted to the Board, the Policy would apply from the date of promotion but there would be no
retrospective application of the Policy in relation to subsisting incentive awards or remuneration arrangements. Accordingly, prevailing
elements of the remuneration package for an existing employee would be honoured and form part of the ongoing remuneration of the
employee. These would be disclosed to shareholders in the following year’s Annual Report on Remuneration.
The Company’s detailed policy when setting remuneration for the appointment of a new director is summarised in the table below:
Remuneration element
Recruitment policy
Base salary and benefits
Pension
PIP
The salary level will be set taking into account the responsibilities of the individual,
experience and the salaries paid to similar roles in comparable companies. The Committee
will apply the Policy set out on salaries for the current Executive Directors in the
Remuneration Policy table. The Executive Director shall be eligible to receive benefits
in line with the Company’s benefits policy as set out in the Remuneration Policy table.
The Executive Director will be entitled to receive contributions into a pension plan
or alternatively to receive a supplement in lieu of pension contributions in line with
Company’s pension policy as set out in the Remuneration Policy table.
The Executive Director will be eligible to participate in the PIP as set out in the
Remuneration Policy table. The maximum potential opportunity under this Plan is
250% of salary.
Maximum Variable Remuneration
The maximum variable remuneration which may be granted is 250% of salary under
the PIP (excluding the value of any buy-out awards).
“Buy Out” of incentives forfeited on
cessation of employment
Relocation Policies
The Company’s policy is not to provide buy-outs as a matter of course. However, should
the Committee determine that the individual circumstances of recruitment justifies the
provision of a buy-out, the equivalent value of any incentives to be forfeited on cessation
of a previous employment will be calculated taking into account the following:
• the proportion of the performance period completed on the date of the Executive
Director’s cessation of employment;
• the performance conditions attached to the vesting of these incentives and the
likelihood of them being satisfied; and
• any other terms and condition having a material effect on their value (“lapsed value”).
The Committee may then grant up to the equivalent value as the lapsed value, where
possible, under the PIP. To the extent that it was not possible or practical to provide the
buy-out within the terms of the Company’s PIP, a bespoke arrangement would be used.
Where the new Executive Director is required to relocate from one work-base to
another, the Company may provide one-off/ongoing compensation as part of the
Director’s relocation benefits to reflect the cost of relocation for the Executive Director
in cases where they are expected to spend significant time away from their country
of domicile.
The level of the relocation package will be assessed on a case by case basis but will
take into consideration any cost of living differences/housing allowance and schooling.
The Company’s policy when setting fees for the appointment of new Non-Executive Directors is to apply the Policy which applies to
current Non-Executive Directors.
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Annual Report & Accounts 2016
CLS Holdings plc
Directors’ Service Contracts
Each of the Executive Directors has a service contract of no fixed term. There is no provision in the contracts of Mr Mortstedt, Mr Klotz,
Mr Widlund or Mr Whiteley for contractual termination payments, save for those payments normally due under employment law.
Each Non-Executive Director has a letter of appointment but, in accordance with best practice, none has a service contract. All of the
Non-Executive Directors are appointed until such time as they are not re-elected. In compliance with the Code, all Company Directors
will face re-election at the Company’s AGM in April. If a director fails to be re-elected the terms of their appointment will cease.
It is the Company’s policy not to offer notice periods of more than 12 months exercisable by either party.
Details of the service contracts or letters of appointment of those who served as Directors during the year are as follows:
Name
Henry Klotz
Fredrik Widlund
John Whiteley
Sten Mortstedt
Malcolm Cooper
Joseph Crawley
Elizabeth Edwards
Christopher Jarvis
Thomas Lundqvist
Philip Mortstedt
Anna Seeley
Lennart Sten
Executive
Executive
Executive
Executive
Non-Executive
Non-Executive
Non-Executive
Non-Executive
Non-Executive
Non-Executive
Non-Executive
Non-Executive
Contract Date
10 November 2015
3 November 2014
1 October 2009
1 January 2005
15 June 2007
25 November 2008
13 May 2014
25 November 2008
1 October 1995
11 May 2015
11 May 2015
1 August 2014
Notice Period
6 months
12 months
6 months
12 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
Executive Directors are not permitted to hold external directorships or offices without the prior approval of the Board. If approved,
they may each retain the fees payable.
Illustration of application of Remuneration Policy
CEO
£1,400,000
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
Element
Salary
£1,208,540
69%
£921,304
60%
£372,815
100%
40%
31%
Minim u m
O n Target
M axim u m
PIP Incentive
Total Fixed
CFO
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
£980,137
69%
£624,278
52%
£302,312
100%
48%
31%
Minim u m
O n Target
M axim u m
PIP Incentive
Total Fixed
Minimum
On Target
Maximum
2017 Base Salary
2017 Base Salary
2017 Base Salary
Pension and benefits
Included in Salary figure.
Pension is 10% of Base Salary
Included in Salary figure.
Pension is 10% of Base Salary
Included in Salary figure.
Pension is 10% of Base Salary
PIP Incentive
(Element A and Element B)
0%
68%
100%
As per the Policy, the Executive Chairman and Executive Director (Founder Shareholder) do not participate in the PIP incentive arrangements.
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57
REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Policy on Payment for loss of office
When determining any loss of office payment for a departing director the Committee will always seek to minimise the cost to the
Company whilst complying with the contractual terms and seeking to reflect the circumstances in place at the time. The Committee
reserves the right to make additional payments where such payments are made in good faith in discharge of an existing legal obligation
(or by way of damages for breach of such an obligation); or by way of settlement or compromise of any claim arising in connection with
the termination of an Executive Director’s office or employment.
Remuneration
element
Approach
Application of Committee discretion
In the event of termination by
the Company, there will be no
compensation for loss of office
due to misconduct or normal
resignation.
In other circumstances, Executive
Directors may be entitled to
receive compensation for loss of
office which will be a maximum
of twelve months salary.
Such payments will be equivalent
to the monthly salary and benefits
that the Executive Director would
have received if still in
employment with the Company.
These will be paid over the notice
period. Executive Directors will be
expected to mitigate their loss
within a twelve month period of
their departure from the Company.
Pension contributions or
payments in lieu of pension
contribution will be made during
Good leavers:
the notice period.
The Company has discretion to make a lump sum payment in lieu.
The Company has discretion to make a lump sum payment in lieu.
Discretion:
For the Year of Cessation
For the Year of Cessation
Performance
the Committee has the following elements of discretion:
conditions will be measured at the
measurement date. The Company
bonus contribution will normally
Other leavers:
be pro-rated for the period worked
during the financial year.
No Company
bonus contribution payable for
year of cessation.
Good leavers:
Deferred Balances in Participant’s
Plan Account
The balance in
the Participant’s Plan account
Other leavers:
will be payable on cessation
of employment.
The balance in
the Participants’ Plan Account
will be forfeited on cessation
of employment.
• to determine that an Executive Director is a good leaver. It is the Committee’s
intention to use this discretion only in circumstances where there is an
appropriate business case which will be explained in full to shareholders; and
• to determine whether to pro-rate the Company bonus contribution to time.
The Remuneration Committee’s normal policy is that it will pro-rate for time.
It is the Remuneration Committee’s intention to use discretion not to pro-rate
in circumstances where there is an appropriate business case which will be
explained in full to shareholders.
Discretion:
Deferred Balances in Participant’s Plan Account
the Committee has the following elements of discretion:
• to determine that an Executive Director is a good leaver. It is the Remuneration
Committee’s intention to use this discretion only in circumstances where there
is an appropriate business case which will be explained in full to shareholders;
• to determine whether the payment of the balance of the Participant’s Plan
Account should be in cash or shares or a combination of both;
• to determine whether to pro-rate the balance of the Participant’s Plan account
payable on cessation. The Committee’s normal policy is that it will not pro-rate.
The Committee will determine whether to pro-rate based on the circumstances
of the Executive Director’s departure.
Salary and
benefits
Pension
Element A
of the PIP
58
Annual Report & Accounts 2016
CLS Holdings plc
Remuneration
element
Element B
of the PIP
Good leavers:
Approach
Discretion:
Application of Committee discretion
For the Year of Cessation
For the Year of Cessation
Performance
the Committee has the following elements of discretion:
conditions will be measured
at the measurement date. The
award will normally be pro-rated
Other leavers:
for the period worked during the
financial year.
No Element B award
for year of cessation.
• to determine that an Executive Director is a good leaver. It is the Committee’s
intention to use this discretion only in circumstances where there is an
appropriate business case which will be explained in full to shareholders;
• to determine whether to pro-rate the Company award to time. The Committee’s
normal policy is that it will pro-rate for time. It is the Committee’s intention to
use discretion to not pro-rate in circumstances where there is an appropriate
business case which will be explained in full to shareholders;
• to determine whether the Element B award will vest on the date of cessation
or the original vesting date. The Committee will make its determination based
amongst other factors on the reason for the cessation of employment;
Good leavers:
• to determine whether to provide the Element B award in the form of cash
Discretion:
or shares.
Subsisting Element B awards
Subsisting Element B Awards
Element B awards
will vest on their original vesting
Other leavers:
dates and remain subject to the
sale restrictions.
Element B awards
will be forfeited on cessation
of employment.
the Committee has the following elements of discretion:
• to determine that an Executive Director is a good leaver. It is the Committee’s
intention to use this discretion only in circumstances where there is an
appropriate business case which will be explained in full to shareholders;
• to determine whether to pro-rate the Element B award to the date of cessation.
The Committee’s normal policy is that it will not pro-rate. The Committee will
determine whether to pro-rate based on the circumstances of the Executive
Director’s departure;
• to determine whether the Element B awards vest on the date of cessation or
the original vesting date. The Committee will make its determination based
amongst other factors on the reason for the cessation of employment.
Other
contractual
obligations
There are no other contractual
provisions other than those set
out above that could impact the
quantum of the payment.
None.
A good leaver is a person whose cessation of employment is for one of the following reasons:-
•
•
•
•
•
•
death;
ill-health;
injury or disability;
redundancy;
retirement;
employing company ceasing to be a Group company;
transfer of employment to a company which is not a Group company; and
•
• where the person is designated a good leaver at the discretion of the Committee (as described above).
A person who ceases employment in circumstances other than those set out above is designated an other leaver.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Change of Control
The Company’s approach to payments from the PIP under a change of control is as follows:
Element
Approach
Discretion:
Application of Committee discretion
Element A
Element B
For the Year of the Change
of Control
Performance conditions will be
measured at the date of the
change of control. The Company
bonus contribution will normally
be pro-rated to the date of the
change of control.
Deferred Balances in Participant’s
Plan Account
The balance in the Participant’s
Plan account will be payable on
the change of control.
For the Year of the Change
of Control
Performance conditions will be
measured at the date of the
change of control. The award will
normally be pro-rated to the date
of the change of control.
Subsisting Element B Awards
The awards will vest on the date of
the change of control and the sale
restrictions will fall away.
For the Year of the Change of Control
the Committee has the following element of discretion:
• to determine whether to pro-rate the Company bonus contribution to time.
The Committee’s normal policy is that it will pro-rate for time. It is the
Committee’s intention to use discretion to not pro-rate in circumstances
where there is an appropriate business case which will be explained in full
to shareholders.
Discretion:
Deferred Balances in Participant’s Plan Account
the Committee has the following elements of discretion:
• to determine whether the payment of the balance of the Participant’s Plan
Account should be in cash or shares or a combination of both;
• to determine whether to pro-rate the balance of the Participant’s Plan account
payable on change of control. The Committee’s normal policy is that it will not
pro-rate. The Committee will determine whether to pro-rate based on the
circumstances of change of control.
Discretion:
For the Year of the Change of Control
the Committee has the following element of discretion:
• to determine whether to pro-rate the Element B award to time. The Committee’s
normal policy is that it will pro-rate for time. It is the Committee’s intention to
use discretion to not pro-rate in circumstances where there is an appropriate
business case which will be explained in full to shareholders.
Discretion:
Subsisting Element B Awards
the Committee has the following elements of discretion:
• to determine whether the satisfaction of Element B awards should be in cash
or shares or a combination of both;
• to determine whether to pro-rate Element B awards on change of control.
The Committee’s normal policy is that it will not pro-rate. The Committee will
determine whether to pro-rate based on the circumstances of change of control.
Employment Conditions Elsewhere in the Group
The salary and benefits package provided to employees is taken into account when setting the Policy for executive remuneration.
The Committee considers the general basic salary increases for the broader employee population when determining the remuneration
for Executive Directors. It also considers the wider market conditions in order to ensure that employee remuneration below Board level
remains competitive. The Committee has not expressly sought the views of employees and no remuneration comparison measurements
were used when drawing up the Directors’ Remuneration Policy. Through the Board, however, the Committee is updated as to employee
views on remuneration generally.
Consideration of Shareholder Views
The Committee sought the views of shareholders on the 2017 Remuneration Policy incorporating the Performance Incentive Plan
Element B and made some amendments following their responses in relation to the reduction of the number of KPIs, the addition
of a relative TSR KPI and the amendment to the weightings for all scorecards to focus more heavily on Absolute and Relative TSR.
In setting the Policy, the Committee is aware of the views of shareholders generally in relation to pay and aims to ensure that it is fair
and reflective of market conditions and the ability to attract, retain and incentivise the best people to implement the Group’s strategy.
Any additional shareholder feedback is considered by the Committee and the Board as a whole.
60
Annual Report & Accounts 2016
CLS Holdings plc
PART 2: ANNUAL REPORT ON REMUNERATION
STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN 2016
For the year ended 31 December 2016, the Group’s existing Policy on remuneration was implemented as set out below.
Single Total Figure for Executive Directors’ Remuneration (audited information)
The following table shows an analysis of remuneration in respect of qualifying services for the 2016 financial year for each Executive
Director:
(4)
Bonus
Deferred
shares
£000
(5)
LTIP
£000
Pension
£000
2016
(1)
(2)
Henry Klotz
Fredrik Widlund
(3)
John Whiteley
Sten Mortstedt
2015
(1)
(2)
Henry Klotz
Fredrik Widlund
(3)
John Whiteley
Sten Mortstedt
Salary
£000
Taxable
Benefits
£000
192
354
264
313
Salary
£000
333
326
256
359
23
5
9
–
Taxable
Benefits
£000
12
4
7
–
Cash
£000
160
186
97
–
–
198
126
–
(4)
Bonus
Cash
£000
408
269
103
–
Deferred
shares
£000
–
–
–
–
Other
Fees
£000
–
–
–
450
Other
Fees
£000
–
–
–
425
Total
£000
377
828
566
763
Total
£000
1,208
656
635
784
–
81
44
–
(5)
LTIP
£000
452
40
243
–
2
4
26
–
Pension
£000
3
16
26
–
(1) Mr Klotz will receive a one-off cash bonus in respect of exceptional contribution during 2016. This payment is subject to shareholder approval at the 2017 AGM.
The Remuneration Committee, on behalf of the Board, is of the opinion that Mr Klotz’s contribution and time commitment has gone far beyond that expected
at the time of his appointment to Executive Chairman and his agreed fee level. The one-off award level has been set such that it represents Mr Klotz’s average
historical award level under the PIP Element A (which over its five year life has paid out on average 82.5% of maximum). Hence, the award is commensurate
with the bonus payments he has earned in recent years. Included in the Taxable Benefits column is a long service gift to the value of £9,249.
(2) Mr Widlund received total pension contributions of £32,550 (2015: £31,000) of which £4,069 was paid into his SIPP and, in accordance with the Policy, £28,481
was paid as salary
(4)
(3) Companies associated with Mr Mortstedt provided consultancy services which related to specific advice which was outside the terms of Mr Mortstedt’s contract
of employment. The Committee has reviewed the fees for these services, and is of the opinion that the market rate for the services would have far exceeded the
amount paid
The Bonus total comprises 50% of the Element A 2016 contribution into the Director's Plan Account and the award made of deferred shares in respect of
Element B (subject to shareholder approval) of the PIP (see below for details of calculations). The deferred shares do not vest until three years after the date
of grant. In accordance with the Regulations, as the Element B award has not been granted at the date of this Report, the value of the Element B award
disclosed in the table has been calculated using the average market value of a share for the 30 day period to 31 December 2016 of 1,559.9 pence
The LTIP is the difference between the values calculated in (4) above in respect of for PIP Element A and the 2016 payment (see page 63 for details of calculation)
and is the payment of part of the deferred performance-based element under the PIP. The date of payment will be 24 March 2017. The value of the notional
shares under Element A has been based on the average market value of a share for the 30 day period to 31 December 2016 of 1,559.9 pence in accordance
with the Regulations
ADDITIONAL REQUIREMENTS IN RESPECT OF THE SINGLE TOTAL FIGURE TABLE (AUDITED INFORMATION)
(5)
2016 PAYMENTS IN RESPECT OF THE PIP
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The Remuneration Committee determined the 2016 PIP contribution and forfeiture outcomes during 2016. A summary of the 2016 KPIs
and their achievement is as follows:
KPI
Total Shareholder Return
Effective management of the balance sheet (ROE)
Vacancy rate
Administration cost ratio (as % of Net Rental)
Personal Performance
EPRA NAV Growth
NAV Growth
Core Profit over Budget
Maximum
Forfeiture
5%
5%
10%
20.95%
2
0%
0%
-10%
Bonus/
Forfeiture
Threshold
On Target
Performance
Good
Performance
Maximum
Performance
2016
Achievement
7%
7%
8%
18.95%
2.5
5%
5%
-5%
12%
12%
5%
16.95%
4
7.5%
7.5%
0%
14%
16%
4%
14.95%
4.5
8.75%
8.75%
5.00%
16%
20%
3%
12.95%
5
10%
10%
10%
-13.8%
18.1%
2.9%
14.9%
Note 1
17.9%
18.8%
18.9%
Note 1: Personal performance is a grading of the Executive Director by the Remuneration Committee in a range of 1-5 with 5 being the highest rating. For 2016,
the CEO and CFO received ratings of 4.38 and 3.82, respectively. The CEO and CFO are assessed on an annual basis and in the same way as all employees.
They undertake an appraisals process which incorporates a scoring system whereby they are assessed by their line manager against each of the following
areas: annual objectives, quality and knowledge of their work, innovation, teamwork, staff development and communication.
61
REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
The following table sets out the maximum bonus which can be earned in respect of each KPI, expressed as a percentage of salary:
KPI
Total Shareholder Return
Effective management of the balance sheet (ROE)
Vacancy rate
Administration cost ratio (as % of Net Rental)*
Personal Performance
EPRA NAV Growth
NAV Growth
Core Profit over Budget
Available Bonus Target as a % of salary
Performance Breakdown (%)
CEO
(Max Bonus
Target)
CFO
(Max Bonus
Target)
30
10
25
25
15
10
10
25
20.0
10.0
5.0
25.0
10.0
7.5
7.5
15.0
150
100.0
The following table sets out the calculation of the second payment under Cycle 2 of the PIP which is disclosed in the Bonus column of
the Single Total Figure of Remuneration as the performance conditions are satisfied in respect of 2016:
Performance Breakdown
KPI
Total Shareholder Return growth
Effective management of balance sheet (ROE)
Vacancy rate
Administration cost ratio (as % of Net Rental)
Personal Performance Rating
EPRA NAV growth
NAV growth
Core Profit over Budget
2016 Total Bonus
Bonus as a % of Salary
Bonus Achieved as a % of Total Available Bonus
CEO
£
–
29,529
81,375
70,938
42,770
32,550
32,550
81,375
CFO
£
–
23,950
13,200
57,535
20,169
19,800
19,800
39,600
371,087
194,054
114.0%
76.0%
73.5%
73.5%
As set out in the table above, TSR performance fell short of the forfeiture threshold. In line with not achieving this KPI no contribution
was made to the Executive Director’s PIP accounts for 2016 in respect of this element. This performance level was also below the
minimum threshold performance level in respect of the forfeiture provision on deferred PIP amounts. However, the Committee has
determined that it will exercise its discretion not to apply the forfeiture to the deferred PIP balance after undertaking a holistic
assessment of the Company’s underlying financial and strategic performance for 2016. Since the introduction of the PIP, the FTSE 350
Real Estate Index grew by 92%, whilst the Company’s TSR had been 159%, of which, through awards being capped annually, Directors
had been paid for an increase of only 81%.
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Annual Report & Accounts 2016
CLS Holdings plc
The following table sets out the 2016 Company contribution for each of the participants:
Salary
Maximum Company Contribution
2016 Company Contribution
Percentage of Maximum Contribution earned
The following table sets out the contribution and deferred share balance for each of the participants:
Plan Accounts
Opening balance of Deferred Notional Shares
(1)
Value of opening balance of Deferred Notional Shares at Measurement Date
2016 Contribution
2016 Payment
Value of closing balance of Deferred Notional Shares
(2)
Closing balance of Deferred Notional Shares
CEO
CFO
325,500
488,250
371,087
76.0%
264,000
264,000
194,054
73.5%
CEO
CFO
10,404
5,698
£162,292
£371,087
£(266,689)
£88,883
£194,054
£(141,469)
£266,689
£141,469
17,096
9,069
(1)
(2)
The 2016 bonus performance conditions and their level of satisfaction are set out above
The price used at the Measurement Date to calculate the value of shares was the mid-market value of a share for the 30 day period to 31 December 2016,
which was 1,559.9 pence per share
In the context of the operation of the PIP, Deferred Notional Shares are a mechanism that allows the deferred cash element of the
award to be linked to the share price. The Committee confirms that there is no intention of issuing actual shares.
PIP Element B (subject to approval of revised Policy)
The revised Remuneration Policy, proposes an award of deferred shares under PIP Element B based on the achievement of the 2016
KPIs. Should the revised Policy be approved then the following awards would be granted under Element B as soon as practically
possible after the AGM. The awards are subject to the terms set out in the Policy table above. The Committee set the initial maximum
Element B award below the Policy maximum of 100% of salary.
CEO
CFO
Salary
Maximum Element B award (% of salary)
KPIs achievement as % of maximum
Face value of Element B awards to be granted (subject to approval)
Number of shares to be awarded (subject to approval)
325,500
80%
76.0%
197,904
12,686
264,000
65%
73.5%
126,126
8,085
Shares earned under Element B are subject to a three year vesting period during which the Participant must remain employed by the
Company and also cannot be sold for five years from the date of award irrespective of employment status. There are no further
performance conditions. The award made under Element B has been based on the average market value of a share for the 30 day
period to 31 December 2016 of 1,559.9 pence.
Pension Entitlements
The Executive Directors are entitled to participate in a defined contribution pension scheme of which one Director (John Whiteley) was a
member at the end of the year (2015: two). Participants are required to contribute 5% of basic UK salary (2015: 5%), which is matched
by a contribution from the Company of 10% (2015: 10%). The Company contributed 5% to Mr Widlund’s Self Invested Pension Plan (SIPP)
until March 2016, when he amended his pension to receive the full 10% as a salary supplement.
Henry Klotz is a deferred member of the scheme. On 1 August 2014, under the auto-enrolment process, Mr Klotz became a member of
the statutory scheme operated by the Company whereby he contributes 1% of basic salary which is matched by an equal contribution
from the Company.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Single Total Figure for Non-Executive Directors’ Remuneration (audited information)
Non-Executive Directors do not participate in any of the Company’s incentive arrangements nor do they receive any benefits.
The following table sets out the fees received for 2016:
Base
membership Fee
£000
Other
Committee Fees
£000
Additional Fees
£000
(7)
Taxable
Benefits
£000
Total
(1)
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
(2)
(3)
(4)
Malcolm Cooper
Joseph Crawley
Elizabeth Edwards
Christopher Jarvis
Thomas Lundqvist
Philip Mortstedt
Anna Seeley
Lennart Sten
(5)
(6)
28
28
28
28
28
28
28
28
23
23
23
23
23
23
14
23
18
–
10
13
–
–
3
8
18
–
1
13
–
–
–
1
–
–
–
–
6
–
–
–
–
–
–
–
6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
46
28
38
41
34
28
31
36
41
23
24
36
29
14
14
24
(1) Mr Cooper received the following fees: Board membership £27,500; Senior Independent Director £5,000; Audit Committee Chairmanship £8,000; and
Remuneration Committee membership £5,000
(2) Ms Edwards received the following fees: Board membership £27,500; Audit Committee membership £5,000; and, with effect from 17 May 2016, a pro-rated
Nomination Committee Membership fee of £3,170
(3) Mr Jarvis received the following fees: Board membership £27,500; Remuneration Committee Chairmanship £8,000; and Audit Committee membership £5,000
(4) Mr Lundqvist received £6,000 in respect of certain finance-related matters and, at the Remuneration Committee’s request, liaising with the Sten Mortstedt
family and charity investment company on executive remuneration issues
(5) Ms Seeley received the following fees: Board membership £27,500; and, with effect from 17 May 2016, a pro-rated Nomination Committee Membership fee
of £3,170
(6) Mr Sten received the following fees: Board membership £27,500; Remuneration Committee membership £5,000; and, with effect from 17 May 2016, a pro-rated
(7)
Nomination Committee Membership fee of £3,170
In accordance with the Company’s expenses policy, Non-Executive Directors receive reimbursement for their reasonable expenses for attending Board
meetings. In instances where those costs are treated by HMRC as taxable benefits, the Company also meets the associated tax cost to the Non-Executive
Directors through PAYE
External appointments
Set out below are details for Executive Directors who served as Non-Executive Directors in other companies during the year ended
31 December 2016 and were allowed to retain fees for their services:
• Mr Klotz received additional fees which he retained of £17,271 (2015: £15,517) in respect of his role as Non-Executive Chairman
of Catena AB and £8,635 (2015: £7,758) as Non-Executive Director of Note AB. As from 20 January 2017, Mr Klotz ceased to be
a director of Note AB.
Payments to Past Directors
There were no payments to past directors of the Company during the year, whether for loss of office or otherwise.
64
Directors’ Interests in Shares
Annual Report & Accounts 2016
CLS Holdings plc
The interests of the Directors in the ordinary shares of 25p each of the Company were as at 31 December 2016:
Director
(1)
Sten Mortstedt
Henry Klotz
Fredrik Widlund
John Whiteley
(2)
Malcolm Cooper
Joseph Crawley
Elizabeth Edwards
Christopher Jarvis
(3)
Thomas Lundqvist
Philip Mortstedt
Anna Seeley
Lennart Sten
Conditional
Unconditional PIP Element A PIP Element B
Shares
Conditional
Shares
Shares
20,774,174
55,763
22,749
14,000
4,050
229,608
–
4,844
76,899
3,566
–
2,850
–
–
17,096
9,069
–
–
–
–
–
–
–
–
–
–
12,686
8,085
–
–
–
–
–
–
–
–
Total
20,774,174
55,763
52,531
31,154
4,050
229,608
–
4,844
76,899
3,566
–
2,850
Sten Mortstedt’s interest in shares is held in certain companies which are directly held and beneficially owned by Sten Mortstedt
Joseph Crawley’s interest in shares is as a result of his wife being a beneficiary of a trust in which the shares are held
(1)
(2)
(3) Resigned 7 March 2017
There have been no movements in interests held by directors between 31 December 2016 and the date of this report. Mr Bengt Mortstedt
was appointed a director on 7 March 2017 and holds 2,807,255 shares.
The Committee has implemented a Policy of minimum shareholdings for Executive Directors. It is expected that within five years of
becoming an Executive Director, the Executive Chairman and Chief Executive Officer should build a holding with a value of at least 100%
of salary, and the Chief Financial Officer at least 75%. This further aligns the interests of Directors to those of shareholders and the
requirement is to be increased substantially in the revised Policy.
At the year end, the Executive Directors’ beneficial shareholdings, represented the following percentages of salary:
Henry Klotz: 428% (2015: 306%) – shareholding requirement met
Fredrik Widlund: 107% (2015: 120%) – shareholding requirement met
John Whiteley: 81% (2015: 84%) – shareholding requirement met
The Executive Director, Sten Mortstedt, has an interest in shares which is substantially in excess of the minimum requirement.
Share Price
The highest mid-market share price in the year was 1,804.0 pence, the lowest 1,170.5 pence, and the average was 1,531.5 pence.
The closing share price on 31 December 2016 was 1,536.0 pence.
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Total Returns to Shareholders 1994-2016
The Company’s TSR performance since it was listed on the London Stock Exchange is set out below, and is compared to the TSR
performance of the FTSE All Share Index and the UK Datastream Real Estate Index over the same period. The Committee believes that
these are the most appropriate as these are the Indices and Sector in which the Company has been included since listing. In addition,
to comply with the Regulations the same information has been provided for the period 2009-2016.
TOTAL RETURNS TO SHAREHOLDERS 1994-2016
(1994 = 100)
TOTAL RETURN TO SHAREHOLDERS 2010-2016
(2010 = 100)
CLS Holdings
FTSE Real Estate
FTSE All Share
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
2016
CLS Holdings
UK-DS Real Estate
FTSE All Share
Jan-10
Jan-12
Jan-14
Jan-16
450
400
350
300
250
200
150
100
50
0
2,500
2,000
1,500
1,000
500
0
Total Remuneration for the Chief Executive Officer
2016
2015
2014
2013
2012
2011
2010
2009
CEO’s total single figure (£000)
PIP contribution as % of maximum
828
76.0%
656
81.0%
349
89.0%
721
86.5%
352
83.5%
417
81.7%
481
100.0%
452
100.0%
The Company has not operated a share scheme other than the PIP over this period.
Percentage change in remuneration of the Chief Executive Officer
The table below shows how the percentage change in the Chief Executive Officer’s salary, benefits and bonus between 2015 and 2016
compares with the percentage change in the average of each of those components of pay for employees.
CEO
All Employees
2016
£000
326
4,058
Salary
2015
£000
Percentage
Increase
310
4,488
5.0%
-9.6%
2016
£000
5
182
Taxable Benefits
2015
£000
Percentage
Increase
4
162
13.6%
12.9%
2016
£000
186
3,098
Bonus
2015
£000
Percentage
Increase
269
1,722
-30.9%
79.9
The Group’s pay review taking effect from 1 January 2016 awarded average percentage increases in wages and salaries of 3.0%.
The nature and level of benefits to employees in the year ended 31 December 2016 was broadly similar to those of the previous year.
Relative importance of the spend on pay
Remuneration paid to all employees of the Group
(1)
Distributions to shareholders
Group revenue
(1) Representative of the Group’s cash-based operations which exclude unrealised fair value movements
2016
£000
2015
£000
% Change
10,440
23,497
128,500
9,376
19,115
118,900
11%
23%
8%
66
STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN THE FOLLOWING FINANCIAL YEAR
Annual Report & Accounts 2016
CLS Holdings plc
The Company intends to move a resolution to approve a new Policy at the AGM to be held on 26 April 2017 which if approved will be
effective from 1 January 2017. The amended Policy can be found on pages 51 to 60 of this Annual Report and its key components are set
out below:
Element
Proposed Policy and operation for 2017
No change to the current Policy, other than introduction of 5% maximum increase per annum over the Policy
Period. Following the annual review, salaries for the Executive Directors for 2017 are:
2016 Salary to
7 March 2016
2016 Salary from
8 March 2016
2017 Salary
%age Change
Base Salary
NED Fees
Benefits
Pension
Performance
Incentive Plan
(“PIP”)
Name
Henry Klotz
Fredrik Widlund
John Whiteley
Sten Mortstedt
Board Fee
Senior Independent Director
Committee Chairman
Committee Membership
No change to current Policy in the new Policy.
No change to current Policy in the new Policy.
£99,937
£325,500
£264,000
£369,600
£200,000
£325,500
£264,000
£300,000
£205,400
£334,290
£271,130
£308,100
2.7%
2.7%
2.7%
2.7%
2016 Salary
2017 Salary
%age Change
£27,500
£5,000
£8,000
£5,000
£30,000
£5,000
£8,000
£5,000
9%
0%
0%
0%
Policy revised to incorporate PIP Element B (where Element A has the same structure as the current PIP).
Both elements are outlined below:
Element A
• Maximum annual contribution into a Participant’s Plan Account of 150% of salary
• Contributions will be earned based on the Corporate KPIs and the individual’s personal performance rating
• Contributions will be made for three years with payments made over four years
• 50% of the value of a Participant’s Plan Account will be paid out annually for three years with 100% of the
residual value paid out at the end of year four
• 50% of the unpaid balance of a Participant’s Plan account will be at risk of annual forfeiture, the application
of which will take account of relative TSR, absolute TSR, strategic, financial and operational performance
Element B
• Maximum annual deferred share award of up to 100% of salary
• Deferred share award will be earned based on the same performance conditions as set for Element A
• Shares earned under Element B are subject to a three year vesting period during which the Participant must
remain employed by the Company and also cannot be sold for five years from the date of award irrespective
of employment status. Awards under Element B will be made in March / April of the year following the year
during which performance was measured
• It is proposed that the first grants under Element B will be made in 2017 based on the level of satisfaction
of the Element A targets set for 2016
• The initial annual deferred share awards to be set at 80% of salary for the Chief Executive Officer and 65%
for the Chief Financial Officer
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REMUNERATION COMMITTEE REPORT CONTINUED
for the year ended 31 December 2016
Performance
Incentive Plan
(“PIP”) (continued)
For 2017 the KPI Targets were reassessed and agreed as follows:
Absolute TSR
KPI
Old Target
New Target
Relative TSR (NEW KPI)
KPI
Maximum
forfeiture
Bonus/forfeiture
threshold
On target
performance
Good
performance
Maximum
performance
5%
1%
7%
3%
12%
12%
14%
14%
16%
16%
Maximum
forfeiture
Bonus/forfeiture
threshold
On target
performance
Good
performance
Maximum
performance
New Target
Lower Quartile
(linear)
Median
(linear)
Upper Quartile
The comparator group is the FTSE 350 Real Estate Supersector.
Administration cost ratio
KPI
Old Target
New Target
EPRA NAV Growth
KPI
Old Target
New Target
Maximum
forfeiture
Bonus/forfeiture
threshold
On target
performance
Good
performance
Maximum
performance
20.95%
18.5%
18.95%
17.5%
16.95%
16.5%
14.95%
15.5%
12.95%
14.5%
Maximum
forfeiture
Bonus/forfeiture
threshold
On target
performance
Good
performance
Maximum
performance
0%
0%
5%
3%
7.5%
6%
8.75%
7.5%
10%
9%
The 2016 KPI’s of Effective Management of the Balance Sheet (ROE); NAV Growth and Core profit over budget,
were removed as KPIs.
All other performance conditions and targets remain the same as for 2016, with the exception of the operation
of the forfeiture provisions as set out above.
The Company is proposing to introduce a Share Incentive Plan (“SIP”) to allow all employees, including
Executive Directors, to share in the potential value created by the Company. Matching shares will be offered
at a ratio of 1 for every partnership share purchased.
The founder shareholders’ remuneration package will consist of the following elements:
• Base salary in line with the other Executive Directors; and
• In certain circumstances the Company may pay additional fees for specific duties outside the letter
of appointment. Any fees and the basis of these fees will be disclosed in full to shareholders.
All Employee
Share Plan
Founder
Shareholder
The following table sets out the maximum bonus which can be earned in respect of each KPI for 2017, expressed as a percentage of salary:
KPIs
Total Shareholder Return (absolute)
Total shareholder Return (relative)
EPRA NAV Growth
Personal Performance
Vacancy Rate
Administration cost ratio (as % of Net Rental)
Available Bonus Target as a % of salary
68
Performance Breakdown (%)
CEO
(Max Bonus
Target)
CFO
(Max Bonus
Target)
37.5
22.5
30.0
15.0
22.5
22.5
25.0
15.0
20.0
10.0
10.0
20.0
150.0
100.0
CONSIDERATION BY THE DIRECTORS OF MATTERS RELATING TO DIRECTORS’ REMUNERATION
Annual Report & Accounts 2016
CLS Holdings plc
As set out in this report, the Remuneration Committee is responsible for recommending to the Board the remuneration policy for
ADVISORS TO THE REMUNERATION COMMITTEE
Executive Directors and for setting their remuneration packages. The Committee also has oversight of the remuneration policy and
packages for other senior members of staff.
During the year, the Committee sought advice from its remuneration consultants, PwC, whom the Committee appointed in relation
to the Performance Incentive Plan and general matters related to remuneration, and from the Company Secretary in relation to peer
group remuneration analysis. PwC is a founding member of the Remuneration Consultants’ Group and has signed up to that group’s
Code of Conduct. The fees for the advice provided by PwC were £40,800 (2015: £10,800). The fees were fixed on the basis of agreed
projects. The Committee reviews the objectivity and independence of the advice it receives from PwC at a private meeting each year.
It is satisfied that PwC is providing independent, robust and professional advice.
Shareholder Voting
The following table represents the voting at the 2014 and 2016 Annual General Meetings:
Directors’ Remuneration Policy
(2014)
Directors Remuneration Report
(2016)
In Favour
Against
Total votes cast
Votes withheld
Number of votes % of votes cast
Number of votes % of votes cast
32,260,368
6,900,471
39,160,839
194,020
82.4
17.6
29,269,589
4,171,338
33,440,927
74,104
87.5
12.5
The Committee noted that 17.6% of votes were cast against the resolution to approve the Directors’ Remuneration Policy at the AGM in
April 2014. Through feedback and meetings with institutional shareholders the Committee understands that the reasons were primarily
due to the benchmarking of Executive Directors’ salaries, which were increased with a one-off increment so as to bring them in line
with the market, and the maximum share options that could be granted. The Committee noted these comments from 2015.
On behalf of the Board
Christopher Jarvis
Chairman
Remuneration Committee
8 March 2017
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69
AUDIT COMMITTEE REPORT
Dear Shareholder
The Audit Committee reviews and reports to the Board on financial
reporting, including the valuation assumptions for the property
portfolio, internal control and risk management. It also reviews
the performance, independence, effectiveness and annual
remuneration of the external auditor.
Committee Membership
The Committee ‘s membership remains unchanged, and comprises
three independent Non-Executive Directors. For the purposes of
the Code, Mr Cooper, Ms Edwards and Mr Jarvis are regarded as
having recent and relevant accounting and financial experience.
The Chief Executive Officer, Chief Financial Officer, certain senior
management and the Company’s auditor are normally invited to
attend the meetings. At each meeting there is a standing agenda
item facilitating the opportunity for the Company’s auditor to
meet without management present. The Company Secretary
acts as secretary to the Committee.
For Board biographies see pages
The Committee’s terms of reference are available on the
Company’s website at www.clsholdings.com
>
36-37
OUR PRINCIPAL ACTIVITIES IN 2016
Committee members attendance during the year ended
31 December 2016
Malcolm Cooper (Chairman)
Chris Jarvis
Elizabeth Edwards
4/4
4/4
4/4
Audit Committee regular attendees for part (by invitation)
Mark Beddy
Deloitte LLP, independent
external auditor
Fredrik Widlund
Chief Executive Officer
John Whiteley
Chief Financial Officer
David Fuller
Company Secretary and Secretary
to the Audit Committee
Cushman & Wakefield
Knight Frank
Jones Lang LaSalle
Independent external valuers
(UK and Germany)
Independent external valuers
(Vauxhall Square)
Independent external valuers
(France)
January
March
August
November
Review of principal risks
and uncertainties
Review of year end results
Review of half-year results
External Audit tender
Review of the Company’s KPIs
Meeting the UK Valuers
Meeting the German Valuers
Meeting the French Valuers
Consideration and initiation
of Audit Tender process
Audit Tender decision
Review of:
Review of:
Review of:
• Property valuations
• Property valuations
• Principal risks
• Significant accounting,
• Significant accounting,
• Monitoring of internal
reporting and judgemental
matters including going
concern
reporting and judgemental
matters including going
concern
• Principal risks
• Code requirements
• Monitoring of internal
• Principal risks
controls and risk
management
• Reappointment of auditor
at AGM
• Fair, balanced and
understandable
• Monitoring of internal
controls and risk
management
Receive Auditor’s Report
Receive Auditor’s Report
controls and risk
management
• KPIs
• Internal audit function
• Committee performance
• Terms of reference
• Whistleblowing
• Non-audit fees
Receive Auditor’s planning
report, review the year end
audit scope and materiality,
and agree 2016 audit fee
70
Annual Report & Accounts 2016
CLS Holdings plc
Significant issues considered by the Committee
How they were addressed
Property Valuations
Accounting for other financial investments
Brexit
Revenue Recognition
The Committee met with the Group’s valuers, Cushman and Wakefield and Knight
Frank (UK), Cushman and Wakefield (Germany) and Jones Lang LaSalle (France)
to which it invited the whole Board, and discussed the methodology used for the
bi-annual valuations of the Group’s properties and developments.
The Committee was satisfied with the explanations in relation to the portfolio and
its associated key risks, such as specific local market updates, vacancy levels and
rental demand, which management were addressing.
The Committee reviewed how management accounted for its other financial
investments, principally in corporate bonds and in Catena AB. The Committee
agreed with the value of these investments.
The Committee discussed the impact of Brexit on the principal risks and
uncertainties and provided the full Board on its views at their wider discussion
as set out in the Strategic Review.
The Committee considered the appropriateness of the recognition of tenant
incentives ensuring that these were appropriately spread over the lease term and
of the accounting for material surrender premiums that had been received. The
Committee was satisfied that there was sufficient management oversight and that
revenue had been appropriately accounted for.
Management Override of Controls
AUDIT TENDER
The Committee assessed the framework for financial controls to be regularly
reviewed by management and brought to the Committee for review. The external
auditor confirmed to the Committee that there were defined lines of reporting and
control processes in place within the Group.
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The external audit was put out to tender in 2007 when the current auditor, Deloitte LLP, was appointed. The lead audit partner was
changed by rotation in 2012. There are no contractual obligations to restrict the Company’s choice of external auditor.
As explained in last year’s report and in compliance with The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Committee undertook a
competitive tender process, which would be effective for the financial year ending 2017.
The Committee’s key objectives of the audit tender process were to assess the firms’ real estate experience, compare the overall
competence of the teams, and understand how they made use of leading technology and analytical tools in the auditing process. The
Committee also addressed their previous transition experience. Following the selection process, the tender involved initial interviews
with three shortlisted professional auditing firms, including Deloitte LLP, from which two were selected to progress to the second
round. The two shortlisted firms then participated in a further round of interviews with a number of key senior managers within the
Group, followed by a final presentation to the Committee in November.
The Committee concluded that both shortlisted firms demonstrated a high level of competence on all audit matters. However, on
balance, the Committee believed that Deloitte LLP would provide a more consistent audit approach which was a better fit with the
Group’s culture. In addition the Committee were impressed with their wider real estate knowledge and use of leading edge analytical
technology to support the audit process.
KEY AREAS DISCUSSED AND REVIEWED BY THE COMMITTEE
As a result, a resolution to re-appoint Deloitte as external auditors at the 2017 Annual General Meeting will be proposed.
External Audit Process
The Committee reviewed the external audit strategy and the findings of the Company’s auditor from its review of the Half-Yearly Financial
Report and from its audit of the Annual Report and Accounts. It reviewed the letters of representation at both the full year and half year and
recommended the same to the Board for signature. Additionally, the Committee met with the Company’s auditor prior to the final sign-off
meeting for this Annual Report and Accounts in order to receive his report on the external audit process. The Committee is pleased to report
that at both the half year and the full year, after reviewing the significant risks identified by the Company’s auditor and how management had
mitigated them, there was no issue of a material nature which needed to be addressed or brought to the Board’s attention.
The Committee assessed the effectiveness of the full year and half year external audit processes, the performance of the Company’s
auditor and, separately, sought the views of senior management. The Committee concluded that the external audit strategy had been
met, and that key accounting and auditing judgments had been identified by the Company’s auditor. The Committee concluded that
Deloitte LLP had undertaken the external audit in line with the audit plan, and it was agreed to recommend to the Board that Deloitte
LLP be asked to continue as the Company’s auditor at the forthcoming AGM. The Committee discussed with management and
subsequently agreed the statutory audit fee and the scope of the statutory audit.
71
AUDIT COMMITTEE REPORT CONTINUED
Viability Statement
The Committee discussed how best to assess the Group’s prospects over a term which was considered appropriate. It was decided that
the statement should correspond with the way in which the Group models its forecasts, being the current year plus a further three
years. Further details are contained in the Corporate Governance Report on page 45.
Principal Risks
The Committee introduced a standing discussion item in relation to monitoring and reviewing the Group’s principal business risks,
challenging management on their appropriateness and how they were to be mitigated, details of which can be found on pages 28 and 29.
A key risk that the Committee discussed was the financial impact of Brexit and how the Group would mitigate its effects.
Internal Control and Risk Management
The Committee has a further standing discussion item in relation to monitoring and reviewing the Group’s internal controls and risk
management systems, with a continuous control testing and reporting programme throughout the organisation. Further details are
contained in the Corporate Governance Report on page 45.
Going Concern
Whilst a matter for the whole Board (see page 38), the Committee reviews the Group’s financial forecasts, debt maturity forecasts
and associated sensitivity analysis. With supporting reviews from the external auditor, and a recommendation from management,
the Committee remains of the view that the going concern risk was low. However given the concerns around Brexit, this would continue
to be monitored by the Committee.
Internal Audit
Following its annual review, the Committee recommended to the Board not to establish an internal audit function, due to the existence
of current controls and review systems in place and as the Company was neither of sufficient size nor complexity to warrant it. This line
of reasoning was consistent with other property companies of a similar size. The Committee will continue to review this assumption
annually following the Group’s inclusion in the FTSE 350.
In order to seek assurance that internal controls are rigorously tested, management have set up a rolling programme to review and test
the principal areas of risk, with the results reported to the Committee and subsequently reviewed by the Board. This ongoing review has
not highlighted any matters of concern.
Non-Audit Fees
The Committee is also responsible for monitoring the compliance of the Company’s policy on the provision of non-audit services by
the Company’s auditor, so as to safeguard the auditor’s objectivity and independence.
The Committee has reviewed its existing policy so as to ensure it complies with the EU Audit Regulations.
The revised policy categorises non-audit services as either:
•
•
•
excluded (as defined by the EU Audit Regulations); or
permitted, without approval from the Committee, but subject to approval by the Chief Financial Officer of up to 10% of the annual
aggregate Group audit fee; or
permitted with approval from the Committee.
The non-audit services provided by the Company’s auditor during the year were £23,738 (2015: £95,500)
All such fees were approved by the Audit Committee or Chief Financial Officer in accordance with the policy.
As set out above, the Committee considers that it has complied with the provision of The Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.
Anti-Bribery and Whistleblowing
The Company has implemented an anti-bribery policy and provided training for all staff. An additional annual compliance check is
undertaken for all staff. The Committee reviewed as being appropriate the Whistleblowing Policy, under which employees may report
suspicion of fraud, financial irregularity, modern slavery or other malpractice. No reports of any such matters were received during the year.
On behalf of the Board
Malcolm Cooper
Chairman
Audit Committee
8 March 2017
72
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF CLS HOLDINGS PLC
Annual Report & Accounts 2016
CLS Holdings plc
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Opinion on financial statements of CLS Holdings plc
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2016
and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including FRS 101 Reduced Disclosure Framework; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
The financial statements that we have audited comprise:
•
•
•
•
•
•
the Group Income Statement,
the Group Statement of Comprehensive Income,
the Group and Parent Company Balance Sheets,
the Group Statement of Cash Flows,
the Group and Parent Company Statements of Changes in Equity, and
the related notes 1 to 33 to the Group financial statements and 1 to 15 to the Parent Company financial statements.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent
company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice), including FRS 101 Reduced Disclosure Framework.
Summary of our audit approach
Key risk
Materiality
Scoping
The key risk that we identified in the current year was the assessment of the carrying value of the investment
property portfolio.
The materiality that we used in the current year was £17.5 million based on 2% of net assets. For testing of balances
that impacted EPRA adjusted profit before tax, we used a lower materiality of £2.6 million based on 5% of that measure.
We subject all locations in which CLS operates to a full audit scope; this accounts for 100% of the Group’s net
assets revenue and profit before tax.
Significant
changes in our
approach
In the prior year we included accounting for the Group’s other investments as a significant risk. We no longer
consider this to be a significant risk at the investments which are not traded in an active market are no longer
material. There has been no change to the basis upon which materiality is calculated or our approach is scoping
the audit from the prior year.
Going concern and the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group
As required by the Listing Rules we have reviewed the Directors’ statement regarding the
appropriateness of the going concern basis of accounting contained within note 2.1 to the
financial statements and the Directors’ statement on the longer-term viability of the Group
contained within the corporate governance statement on page 45.
We are required to state whether we have anything material to add or draw attention to in relation to:
•
•
•
•
the Directors' confirmation on page 45 that they have carried out a robust assessment of the
principal risks facing the Group, including those that would threaten its business model,
future performance, solvency or liquidity;
the disclosures on pages 28-29 that describe those risks and explain how they are being
managed or mitigated;
the Directors’ statement in note 2.1 to the financial statements about whether they considered
it appropriate to adopt the going concern basis of accounting in preparing them and their
identification of any material uncertainties to the Group’s ability to continue to do so over a
period of at least twelve months from the date of approval of the financial statements; and
the Directors’ explanation on page 45 as to how they have assessed the prospects of the
Group, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that the
Group will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
We confirm that we have nothing
material to add or draw attention
to in respect of these matters.
We agreed with the Directors’
adoption of the going concern
basis of accounting and we did
not identify any such material
uncertainties. However, because
not all future events or conditions
can be predicted, this statement
is not a guarantee as to the
Group’s ability to continue as
a going concern.
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CLS HOLDINGS PLC CONTINUED
Independence
We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and
confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities
in accordance with those standards.
We confirm that we are
independent of the Group and
we have fulfilled our other
ethical responsibilities in
accordance with those standards.
We also confirm we have not
provided any of the prohibited
non-audit services referred to
in those standards.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the
allocation of resources in the audit and directing the efforts of the engagement team.
In the prior year we included accounting for the Group’s other investments as a significant risk. We no longer consider this to be a
significant risk as the investments that are not traded in an active market are no longer material.
VALUATION OF THE INVESTMENT PROPERTY PORTFOLIO
Risk
description
The assessment of the carrying value of the investment property portfolio, specifically the process, assumption
and judgements used to derive the property valuations.
How the scope
of our audit
responded to
the risk
Investment properties are held at £1,536.6m at 31 December 2016 (31 December 2015: £1,366.8m), see note 13
for full disclosure making this the most quantitatively material balance in the financial statements.
Investment properties are held at fair value on the balance sheet. Fair value is by its nature subjective with
significant judgement applied in the valuation, especially with regard to properties currently under development,
of which the most significant is Vauxhall Square. The key judgements made are those relating to rental values,
occupancy rates, yields and the assessment of development and completion milestones.
Our identified risk also focusses on the accuracy and completeness of the information used by the external valuers
in their valuations.
Refer to the Audit Committee report on page 70 where this is included as a significant issue. The relevant
accounting policy for the Group is presented in note 2.4 on page 83.
We assessed management’s process for reviewing the valuations of the property portfolio.
We have utilised the expertise of a real estate specialist and chartered surveyor for our challenge of the investment
property valuations. We obtained the external valuation reports and met with the external valuers of the property
portfolio to discuss, understand and challenge the valuation process, estimated rental values, performance of the
portfolio, significant assumptions and critical judgement areas, including occupancy rates, yields and development
milestones. For the judgements made on the valuation of Vauxhall Square, we paid particular attention to the costs
of construction and contingencies.
As part of our meeting with the external valuers we assessed their competence, independence and integrity.
Our real estate specialist provided relevant industry data for the UK and drew on local expertise in the European
markets in which CLS operates. This was used to benchmark the portfolio performance and key assumptions used
to assess whether the external evidence supported the assumptions used by the valuers.
Finally, we performed audit procedures to assess, on a sample basis, the integrity of information provided to the
valuer relating to rental income ensuring that it was consistent with the leases.
Our work on the valuation of the investment property portfolio was led by the Group audit team, supplemented by
specific procedures by component auditors
Key
observations
We concluded that the assumptions applied by the external valuers in arriving at the fair value of the Group’s
property portfolio, including development assets, were appropriate.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
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Annual Report & Accounts 2016
CLS Holdings plc
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group
materiality
Basis for
determining
materiality
Rationale for
the benchmark
applied
£883 million
(98%)
Net Assets
Group materiality
We determined materiality for the Group to be £17.5 million (2015: £15.4 million).
We continue to consider EPRA adjusted profit before tax to be a critical performance measure for the Group and
we applied a lower materiality of £2.7m (2015: £2.2m) for testing of balances impacting that measure, being most
balance sheet and income statement balances with the exception primarily of fair value movements on investment
property, investments and financial instruments.
We have determined materiality for the Group based on 2% of net assets (2015: 2%).
For testing of balances that impact EPRA adjusted profit before tax, a basis of 5% of that measure (2015: 5%) has
been used.
As an investment property company, the main focus of management is to generate long-term capital value from
the investment property portfolio and, therefore, we consider net assets to be the most appropriate basis for
materiality. The increase in materiality from the prior year reflects the increase in net assets driven by the uplift in
the valuation of the investment property portfolio, largely as a result of the favourable exchange rate movements.
£ million
20
17.5
£18 million
(2%)
15
10
5
0
8.9
4.0
0.8
M axim u m co m ponent
Group m ateriality
m ateriality
m ateriality
Threshold for reporting
audit differences to the
Minim u m co m ponent
A udit C o m
m ittee
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We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £875,000 (2015: £307,000),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. We have
reassessed our threshold for reporting audit differences to the Audit Committee to 5% of materiality (2015: 2% of materiality).
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and
assessing the risk of material misstatement at the Group level. Based on that assessment, and consistent with our conclusion on
scoping in the prior year, we focused our Group audit scope on the audit work at each of the Group’s principal business units, being the
UK, France, Germany and Sweden. These locations represent the principal business units and account for 100% (2015: 100%) of the
Group’s net assets, and 100% (2015: 100%) of revenue and profit before tax. All business units were subject to a full scope audit. This
approach provides an appropriate basis for undertaking audit work to address the risks of material misstatement identified above.
Our audit work at each of the four business units has been executed by Deloitte component auditors at levels of materiality applicable to
each individual business unit which were lower than Group materiality and ranged from £8.9 million to £4.0 million (2015: £10.8 million
to £6.1 million) with lower materialities being used for those items impacting EPRA adjusted profit before tax, consistent with the Group
audit approach.
The audit work on the key audit risk above has been led by the Group audit team, supplemented by specific procedures by the component
auditors. The reporting from all component auditors has been reviewed by the Group team and, where necessary, component auditors
carried out further testing at our request.
At the Group level we tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were
no significant risks of material misstatement of the aggregated financial information.
All component audit partners are included in our team briefing where their risk assessment is discussed and there is frequent two-way
communication between the Group and component teams. In the year, we have visited our component teams in Germany and Sweden
and have plans to visit the team in France in the next twelve months.
75
There has been no significant change in our scoping compared to the prior year.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CLS HOLDINGS PLC CONTINUED
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
•
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not
identified any material misstatements in the Strategic Report and the Directors’ Report.
Adequacy of explanations received and accounting records
Matters on which we are required to report by exception
Under the Companies Act 2006 we are required to report to you if, in our opinion:
•
•
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
•
the parent company financial statements are not in agreement with the accounting records
Directors’ remuneration
and returns.
We have nothing to report in
respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures
of Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report
Corporate Governance Statement
to be audited is not in agreement with the accounting records and returns.
We have nothing to report arising
from these matters.
Under the Listing Rules we are also required to review part of the Corporate Governance Statement
Our duty to read other information in the Annual Report
relating to the company’s compliance with certain provisions of the UK Corporate Governance Code.
We have nothing to report arising
from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if,
in our opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
We confirm that we have not
identified any such inconsistencies
or misleading statements.
•
•
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the
Group acquired in the course of performing our audit; or
otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between
our knowledge acquired during the audit and the Directors’ statement that they consider the annual
report is fair, balanced and understandable and whether the annual report appropriately discloses
those matters that we communicated to the audit committee which we consider should have
been disclosed.
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Annual Report & Accounts 2016
CLS Holdings plc
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with
International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control
procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review
team and independent partner reviews.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to
them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the
overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report
to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially
incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become
aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Mark Beddy FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
8 March 2017
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GROUP INCOME STATEMENT
for the year ended 31 December 2016
Continuing operations
Group revenue
Net rental income
Administration expenses
Other expenses
Group revenue less costs
Net movements on revaluation of investment properties
Profit on sale of investment properties
Gain on sale of corporate bonds and other financial instruments
Operating profit
Finance income
Finance costs
Share of loss of associates after tax
Profit before tax
Taxation
Profit for the year
Attributable to:
Owners of the Company
Non-controlling interests
Notes
2016
£m
2015
£m
4
13
8
9
15
10
6
128.5
107.1
(21.3)
(14.0)
71.8
36.1
9.1
3.2
120.2
13.6
(32.7)
(1.0)
100.1
(1.8)
98.3
97.8
0.5
98.3
118.9
99.0
(19.5)
(13.8)
65.7
98.0
4.3
0.7
168.7
10.0
(27.5)
–
151.2
(19.1)
132.1
129.9
2.2
132.1
Earnings per share from continuing operations (expressed in pence per share)
Basic
11
236.3
305.7
GROUP STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2016
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss
Foreign exchange differences
Items that may be reclassified to profit or loss
Fair value gains/(losses) on corporate bonds and other financial investments
Fair value losses taken to net gain on sale of corporate bonds and other financial investments
Revaluation of property, plant and equipment
Deferred tax on net fair value (gains)/losses
16
16
14
20
Total items that may be reclassified to profit or loss
Total comprehensive income for the year
Total comprehensive income attributable to:
Owners of the Company
Non-controlling interests
The notes on pages 82 to 108 are an integral part of these Group financial statements.
78
Notes
2016
£m
98.3
2015
£m
132.1
33.1
(8.7)
7.7
1.3
2.6
(3.8)
7.8
(0.2)
–
2.9
0.5
3.2
139.2
126.6
138.3
0.9
139.2
126.0
0.6
126.6
GROUP BALANCE SHEET
at 31 December 2016
Non-current assets
Investment properties
Property, plant and equipment
Goodwill and intangibles
Investments in associates
Other financial investments
Deferred tax
Current assets
Trade and other receivables
Properties held for sale
Derivative financial instruments
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Current tax
Borrowings
Non-current liabilities
Deferred tax
Borrowings
Derivative financial instruments
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
Equity attributable to owners of the Company
Non-controlling interests
Total equity
Annual Report & Accounts 2016
CLS Holdings plc
Notes
2016
£m
2015
£m
13
14
15
16
20
17
22
18
19
21
20
21
22
24
26
27
1,536.6
106.4
1.2
0.2
116.4
3.1
1,366.8
78.9
1.1
1.5
121.0
3.3
1,763.9
1,572.6
59.9
–
0.5
99.0
159.4
13.5
58.6
0.5
100.7
173.3
1,923.3
1,745.9
(50.5)
(9.9)
(125.8)
(54.2)
(7.7)
(220.3)
(186.2)
(282.2)
(120.7)
(724.1)
(9.8)
(114.7)
(575.2)
(5.8)
(854.6)
(695.7)
(1,040.8)
(977.9)
882.5
768.0
11.0
83.1
125.9
656.4
876.4
6.1
882.5
11.3
83.0
85.1
583.4
762.8
5.2
768.0
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The financial statements of CLS Holdings plc (registered number: 2714781) were approved by the Board of Directors and authorised for
issue on 8 March 2017 and were signed on its behalf by:
Mr E H Klotz
Executive Chairman
The notes on pages 82 to 108 are an integral part of these Group financial statements.
GROUP STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2016
Arising in 2016:
Total comprehensive income
for the year
Issue of share capital
Purchase of own shares
Expenses thereof
Total changes arising in 2016
At 1 January 2016
At 31 December 2016
Arising in 2015:
Total comprehensive income
for the year
Issue of share capital
Purchase of own shares
Expenses thereof
Total changes arising in 2015
At 1 January 2015
At 31 December 2015
Share
capital
£m
Note 24
Share
premium
£m
Note 26
Other
reserves
£m
Note 27
Retained
earnings
£m
Non-
controlling
interest
£m
Total
£m
Total
equity
£m
–
–
(0.3)
–
(0.3)
11.3
11.0
–
0.1
–
–
0.1
83.0
83.1
40.5
–
0.3
–
40.8
85.1
125.9
97.8
–
(24.7)
(0.1)
73.0
583.4
656.4
138.3
0.1
(24.7)
(0.1)
113.6
762.8
876.4
0.9
–
–
–
0.9
5.2
6.1
Share
capital
£m
Note 24
Share
premium
£m
Note 26
Other
reserves
£m
Note 27
Retained
earnings
£m
Non-
controlling
interest
£m
Total
£m
–
–
(0.2)
–
(0.2)
11.5
11.3
–
0.1
–
–
0.1
82.9
83.0
(3.9)
–
0.2
–
(3.7)
88.8
85.1
129.9
–
(16.1)
(0.1)
113.7
469.7
583.4
126.0
0.1
(16.1)
(0.1)
109.9
652.9
762.8
0.6
–
–
–
0.6
4.6
5.2
139.2
0.1
(24.7)
(0.1)
114.5
768.0
882.5
Total
equity
£m
126.6
0.1
(16.1)
(0.1)
110.5
657.5
768.0
The notes on pages 82 to 108 are an integral part of these Group financial statements.
80
GROUP STATEMENT OF CASH FLOWS
for the year ended 31 December 2016
Cash flows from operating activities
Cash generated from operations
Interest received
Interest paid
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Purchase of investment properties
Capital expenditure on investment properties
Proceeds from sale of investment properties
Purchases of property, plant and equipment
Purchase of corporate bonds
Proceeds from sale of corporate bonds
Purchase of equity investments
Proceeds from sale of equity investments
Dividends received from equity investments
Distributions received from associate undertakings
Costs on foreign currency transactions
Net cash outflow from investing activities
Cash flows from financing activities
Purchase of own shares
New loans
Issue costs of new loans
Repayment of loans
Net cash (outflow)/inflow from financing activities
Cash flow element of net (decrease)/increase in cash and cash equivalents
Foreign exchange gain/(loss)
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The notes on pages 82 to 108 are an integral part of these Group financial statements.
Annual Report & Accounts 2016
CLS Holdings plc
2016
£m
2015
£m
Notes
28
62.0
5.8
(20.5)
(7.2)
40.1
(45.7)
(20.9)
39.4
(20.9)
(35.9)
54.3
(1.1)
7.4
1.4
0.3
(1.5)
(23.2)
72.1
6.9
(22.9)
(7.2)
48.9
(81.4)
(16.6)
34.8
(9.3)
(40.9)
28.5
(6.2)
0.5
1.0
–
(0.1)
(89.7)
(24.8)
200.2
(1.5)
(199.6)
(16.2)
301.6
(2.8)
(236.2)
(25.7)
46.4
(8.8)
7.1
(1.7)
100.7
99.0
5.6
(5.1)
0.5
100.2
100.7
18
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NOTES TO THE GROUP FINANCIAL STATEMENTS
31 December 2016
1
GENERAL INFORMATION
CLS Holdings plc (the “Company”) and its subsidiaries (together “CLS Holdings” or the “Group”) is an investment property group
which is principally involved in the investment, management and development of commercial properties, and in other
investments. The Group’s principal operations are carried out in the United Kingdom, Germany and France.
The Company is registered in the UK, registration number 2714781, with its registered address at 86 Bondway, London, SW8 1SF.
The Company is listed on the London Stock Exchange.
2
SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these Group financial statements are set out below. These policies
have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
The financial statements have been prepared on a going concern basis as explained in the Directors’ Report on page 40 and
have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European
Union, International Financial Reporting Interpretations Committee (“IFRIC”) interpretations, and the provisions of the
Companies Act 2006 applicable to companies reporting under IFRS.
New standards and interpretations
In the current year, the Group has adopted the following amendment for the first time which has not had a material impact
on the results for the year:
•
Annual improvements to IFRSs: 2011-2013 cycle
At the date of authorisation of these financial statements, the following Standards and Interpretations, which have not been
applied in these financial statements, were in issue but not yet effective. In some cases these standards and guidance have
not been endorsed by the European Union:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
IFRS 9 Financial Instruments (2009, 2010 and 2014)
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)
Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)
Equity Method in Separate Financial Statements (Amendments to IAS 27)
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
Disclosure Initiative (Amendments to IAS 1)
Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28)
Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
Disclosure Initiative (Amendments to IAS 7)
Classification and measurement of share-based payment transactions (Amendments to IFRS 2)
Annual Improvements to IFRSs: 2010-2012 Cycle
Annual Improvements to IFRSs: 2012-2014 Cycle
These pronouncements, when applied either will result in changes to presentation and disclosure, or are not expected to have
a material impact on the financial statements. In respect of IFRS 15, the Group’s contracts with customers are all within the
scope of IAS 17.
82
Annual Report & Accounts 2016
CLS Holdings plc
2.2 Business Combinations
(i) Subsidiary undertakings
Subsidiary undertakings are those entities controlled by the Group. Control is assumed when the Group has the power
to govern the financial and operating policies of an entity or business to benefit from its activities. Subsidiaries are fully
consolidated from the date on which control is transferred to the Group until the date control ceases. All intra-Group
transactions, balances, income and expenses are eliminated on consolidation.
(ii) Associates
Associates are those entities over which the Group has significant influence but which are not subsidiary undertakings
or joint ventures. The results and assets and liabilities of associates are incorporated in these financial statements
using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted
by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value
of individual investments.
(iii) Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair
value of identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. It is initially recognised
as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is
recognised as an asset is reviewed for impairment at least annually.
2.3 Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated into sterling using the exchange rate prevailing at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated
into sterling at the exchange rate ruling at that date, and differences arising on translation are recognised in profit
before tax.
Changes in the fair value of monetary securities classified as available-for-sale and denominated in foreign currencies
are recognised in profit before tax where the translation difference results from changes in the amortised cost of the
security, and are recognised in equity where it results from other changes in the carrying amount of the security.
(ii) Consolidation of foreign entities
The results and financial position of all Group entities which have a functional currency different from sterling are
translated into sterling as follows:
(a) assets and liabilities are translated at the closing rate at the date of the balance sheet;
(b)
income and expenses for each income statement are translated at the average exchange rates; and
(c) all resulting exchange differences are recognised directly in equity in the cumulative translation reserve.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of
borrowings and other currency instruments designated as hedges of such investments, are taken to the cumulative
translation reserve. When a foreign operation is sold, such exchange differences are recognised as part of the gain or
loss on sale in profit before tax.
2.4 Investment properties
Investment properties are those properties held for long-term rental yields or for capital appreciation or both. Investment
properties are measured initially at cost, including related transaction costs. Additions to investment properties comprise
costs of a capital nature; in the case of investment properties under development, these include capitalised interest and
certain staff costs directly attributable to the management of the development. Capitalised interest is calculated at the rate
on associated borrowings applied to direct expenditure between the date of gaining planning consent and the date of
practical completion. The acquisition of an investment property is recognised when the risks and rewards of ownership have
been transferred to the Group, typically on unconditional exchange of contracts or when legal title passes. Profit on sale of an
investment property is recognised when the risks and rewards of ownership have been transferred to the buyer, typically on
unconditional exchange of contracts or when legal title passes.
Investment properties are carried at fair value, based on market value as determined by professional external valuers at the
balance sheet date. Investment properties being redeveloped for continuing use as investment properties, or for which the
market has become less active, continue to be classified as investment properties and measured at fair value. Changes in
fair values are recognised in profit before tax.
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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
2
SIGNIFICANT ACCOUNTING POLICIES CONTINUED
2.5 Property, plant and equipment
Property, plant and equipment is carried at fair value, based on market value as determined by professional external valuers
at the balance sheet date, except for fixtures and fittings which are stated at historical cost less accumulated depreciation
and any recognised impairment loss.
Land is not depreciated. Depreciation on property, plant and equipment is calculated using the straight-line method to
allocate cost less estimated residual values over the estimated useful lives, as follows:
Fixtures and fittings
Freehold property
Hotel
4 – 5 years
6 years
20 years
Holiday cottages and cabins
20 – 30 years
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds
and the carrying amount of the asset and is recognised in profit before tax.
2.6 Financial instruments
(i) Derivative financial instruments
The Group uses derivative financial instruments, including swaps and interest rate caps, to help manage its interest rate
and foreign exchange rate risk. Derivative financial instruments are recorded, and subsequently revalued, at fair value.
Revaluation gains and losses are recognised in profit before tax, except for derivatives which qualify as effective cash
flow hedges, the gains and losses relating to which are recognised in other comprehensive income.
(ii) Available-for-sale investments
Available-for-sale investments are initially measured at cost, and are subsequently revalued to fair value. Revaluation
gains and losses are recognised in other comprehensive income, except for impairment losses and foreign exchange
gains and losses on monetary assets. On disposal, the cumulative gain or loss previously recognised in other
comprehensive income is recycled through profit before tax.
(iii) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, demand deposits and other short-term highly liquid investments
which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
(iv) Trade and other receivables and payables
Trade and other receivables are recognised initially at fair value. An impairment provision is created where there is
objective evidence that the Group will not be able to collect the receivable in full. Trade and other payables are stated at
cost, which equates to fair value.
(v) Borrowings
Borrowings are recognised initially at fair value less attributable transaction costs. Subsequently, borrowings are stated
at amortised cost with any difference between the amount initially recognised and the redemption value being
recognised in profit before tax over the period of the borrowings, using the effective interest rate method.
2.7 Revenue
(i) Rental income
Rental income from operating leases is recognised on a straight-line basis over the lease term. The cost of incentives is
recognised over the lease term, on a straight-line basis, as a reduction of rental income.
(ii) Service charge income
Service charge income is recognised on a gross basis in the accounting period in which the services are rendered.
84
Annual Report & Accounts 2016
CLS Holdings plc
2.8 Income tax
Current tax is based on taxable profit for the year and is calculated using tax rates that have been enacted or substantively
enacted by the balance sheet date.
Deferred tax is provided using the balance sheet liability method on temporary differences between the carrying value of
assets and liabilities for financial reporting purposes and the values used for tax purposes. Temporary differences are not
provided for when they arise from initial recognition of goodwill or from the initial recognition of assets and liabilities in a
transaction that does not affect accounting or taxable profit.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount
of assets and liabilities, and is calculated using rates that are expected to apply in the period when the liability is settled or
the asset is realised, in the tax jurisdiction in which the temporary differences arise. Deferred tax is charged or credited in
arriving at profit after tax, except when it relates to items recognised in other comprehensive income, in which case the
deferred tax is also recognised in other comprehensive income.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against
which the assets can be used. The deferred tax assets and liabilities are only offset if they relate to income taxes levied by the
same taxation authority, there is a legally enforceable right of set-off and the Group intends to settle its current tax assets
and liabilities on a net basis.
3
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
Critical accounting judgements
In accordance with IAS 1, the Directors have considered the judgements that have been made in the process of applying the
Group's accounting policies, which are described in note 2, and which of those judgements have the most significant effect on
amounts recognised in the financial statements.
In the Directors’ opinion for the year ended 31 December 2016 there are no accounting judgements that are material to the
financial statements.
Key sources of estimation uncertainty
The Group uses the valuations performed by its independent external valuers as the fair value of its investment properties.
The valuations are based upon assumptions including future rental income, anticipated maintenance costs, future development
costs and an appropriate discount rate. The valuers also make reference to market evidence of transaction
prices for similar properties.
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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
4
SEGMENT INFORMATION
The Group has two operating segments – Investment Property and Other Investments. Other Investments comprise the hotel at
Spring Mews, corporate bonds, shares in Catena AB and First Camp Sverige Holding AB, and other small corporate investments.
The Group manages the Investment Property segment on a geographical basis due to its size and geographical diversity.
Consequently, the Group’s principal operating segments are:
Investment Property – London
Rest of United Kingdom
Germany
France
Sweden
Other Investments
There are no transactions between the operating segments.
The Group’s results for the year ended 31 December 2016 by operating segment were as follows:
Investment Property
Germany
£m
France
£m
Sweden
£m
Other
Investments
£m
Rest
of UK
£m
11.5
1.7
–
–
13.2
(0.1)
(0.6)
12.5
20.4
–
4.6
(5.6)
19.4
(1.4)
(1.4)
16.6
14.7
0.9
4.8
(5.4)
15.0
(1.8)
(0.8)
12.4
(6.2)
12.4
11.6
–
–
6.3
–
(3.0)
–
3.3
–
–
29.0
–
(3.1)
–
25.9
(1.1)
–
22.9
0.1
(2.2)
–
20.8
1.3
–
0.1
(0.5)
0.9
(0.2)
–
0.7
–
5.4
–
6.1
1.4
(0.1)
–
7.4
–
16.8
–
–
16.8
(7.2)
(6.6)
3.0
–
–
3.2
6.2
12.1
(4.1)
(1.0)
13.2
Total
£m
91.3
21.4
15.8
(21.4)
107.1
(16.3)
(14.0)
76.8
36.1
9.1
3.2
125.2
13.6
(32.7)
(1.0)
105.1
(5.0)
100.1
London
£m
43.4
2.0
6.3
(9.9)
41.8
(5.6)
(4.6)
31.6
18.3
4.8
–
54.7
–
(20.2)
–
34.5
Rental income
Other property-related income
Service charge income
Service charges and similar expenses
Net rental income
Administration expenses
Other expenses
Group revenue less costs
Net movements on revaluation of
investment properties
Profit/(loss) on sale of
investment property
Gain on sale of corporate bonds
Segment operating profit/(loss)
Finance income
Finance costs
Share of loss of associates after tax
Segment profit/(loss) before tax
Central administration expenses
Profit before tax
86
Annual Report & Accounts 2016
CLS Holdings plc
The Group’s results for the year ended 31 December 2015 by operating segment were as follows:
Investment Property
Rental income
Other property-related income
Service charge income
Service charges and similar expenses
Net rental income
Administration expenses
Other expenses
Group revenue less costs
Net movements on revaluation of
investment properties
Profit/(loss) on sale of
investment property
Gain on sale of corporate bonds
Segment operating profit/(loss)
Finance income
Finance costs
Segment profit/(loss) before tax
Central administration expenses
Profit before tax
Other segment information:
Investment Property
London
Rest of UK
Germany
France
Sweden
Other Investments
London
£m
37.8
0.8
6.5
(9.7)
35.4
(4.2)
(4.3)
26.9
62.3
3.2
–
92.4
–
(17.0)
75.4
Rest
of UK
£m
13.0
0.2
–
–
13.2
(0.1)
(0.4)
12.7
8.7
1.5
–
22.9
–
(3.2)
19.7
Germany
£m
France
£m
Sweden
£m
Other
Investments
£m
16.2
–
3.3
(3.5)
16.0
(1.4)
(1.1)
13.5
19.5
(0.4)
–
32.6
–
(2.5)
30.1
13.8
0.1
4.5
(4.7)
13.7
(1.4)
(0.7)
11.6
6.7
–
–
18.3
–
(2.3)
16.0
4.5
0.4
0.3
(2.0)
3.2
(0.4)
–
2.8
0.8
–
–
3.6
–
(0.5)
3.1
–
17.5
–
–
17.5
(6.0)
(7.3)
4.2
–
–
0.7
4.9
10.0
(2.0)
12.9
Total
£m
85.3
19.0
14.6
(19.9)
99.0
(13.5)
(13.8)
71.7
98.0
4.3
0.7
174.7
10.0
(27.5)
157.2
(6.0)
151.2
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Assets
Liabilities
Capital expenditure
2016
£m
2015
£m
2016
£m
2015
£m
2016
£m
851.5
97.4
368.4
263.8
42.8
299.4
824.2
102.5
263.3
227.1
50.3
278.5
493.1
74.5
206.5
184.2
3.4
79.1
1,923.3
1,745.9
1,040.8
458.5
79.9
162.7
172.7
35.0
69.1
977.9
20.2
–
42.0
4.4
–
20.6
87.2
2015
£m
53.7
0.3
19.1
2.2
0.6
12.0
87.9
Included within the assets of other investments are investments in associates of £0.2 million (2015: £1.5 million).
The majority of the assets in Sweden at 31 December 2016 was an amount due on the disposal of an investment property.
87
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
5
ADMINISTRATION COST RATIO
The administration cost ratio is a key performance indicator of the Group. It represents the cost of running the property portfolio
relative to its net income, and is calculated as follows:
2016
£m
2015
£m
Administration expenses of the operating segments
Central administration expenses
Total administration expenses of the Group
Less: administration expenses of Other Investments
Property-related and central administration expenses
Net rental income
Less: net rental income of First Camp
Net rental income of Investment Properties
Administration cost ratio
6
PROFIT FOR THE YEAR
Profit for the year has been arrived at after charging:
Auditor’s remuneration
Fees payable to the Company’s auditor for the audit of the parent company and Group accounts
Fees payable to the Company’s auditor for:
Other services to the Group
The audit of the Company’s subsidiaries pursuant to legislation
Depreciation of property, plant and equipment (note 14)
Employee benefits expense (note 7)
7
EMPLOYEE BENEFITS EXPENSE
Wages and salaries
Social security costs
Pension costs – defined contribution plans
Other employee-related expenses
16.3
5.0
21.3
(7.2)
14.1
107.1
(12.5)
94.6
13.5
6.0
19.5
(6.0)
13.5
99.0
(14.0)
85.0
14.9%
15.9%
2016
£m
0.4
0.1
0.1
1.1
14.0
2016
£m
10.5
1.9
0.6
1.0
14.0
2015
£m
0.4
0.2
0.1
1.3
12.7
2015
£m
9.6
1.9
0.5
0.7
12.7
The Directors are considered to be key management of the Group.
Information on Directors’ emoluments, share options and interests in the Company’s shares is given in the Directors’
Remuneration Report on pages 48 to 69.
The monthly average number of employees of the Group in continuing operations, including Executive Directors, was as follows:
2016
2015
Property
number
Other
operations
number
First
Camp
number
Total
number
Property
number
Other
operations
number
First
Camp
number
Total
number
Male
Female
43
44
87
1
0
1
52
44
96
96
88
184
43
45
88
1
–
1
45
40
85
89
85
174
88
8
FINANCE INCOME
Interest income
Other finance income
Foreign exchange variances
9
FINANCE COSTS
Interest expense
Bank loans
Debenture loan
Zero coupon note
Secured notes
Unsecured bonds
Amortisation of loan issue costs
Total interest costs
Less interest capitalised on development projects
Loss on partial redemption of zero coupon note
Movement in fair value of derivative financial instruments
Interest rate swaps: transactions not qualifying as hedges
Interest rate caps: transactions not qualifying as hedges
10 TAXATION
Current tax charge
Deferred tax (credit)/charge (note 20)
A deferred tax charge of £3.8 million (2015: credit of £0.5 million) was recognised directly in equity (note 20).
Annual Report & Accounts 2016
CLS Holdings plc
2016
£m
7.4
1.4
4.8
13.6
2016
£m
15.2
2.8
0.8
2.9
3.8
1.5
27.0
(0.7)
26.3
2.4
4.0
–
32.7
2016
£m
8.9
(7.1)
1.8
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2015
£m
7.2
1.0
1.8
10.0
2015
£m
13.3
3.0
1.1
3.1
4.5
2.0
27.0
(0.4)
26.6
1.2
(0.4)
0.1
27.5
2015
£m
5.6
13.5
19.1
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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:
2016
£m
2015
£m
Profit before tax
100.1
151.2
Tax calculated at domestic tax rates applicable to profits in the respective countries
Expenses not deductible for tax purposes
Tax effect of fair value movements on investments
Change in tax basis of United Kingdom properties, including indexation uplift
Non-taxable income
Change in tax rate
Deferred tax on losses not recognised
Tax effect of losses in associates and joint ventures
Tax liability released on disposals
Adjustment in respect of prior periods
Other deferred tax adjustments
Tax charge for the year
22.2
1.5
(1.0)
(3.1)
(0.3)
(10.3)
0.5
0.2
(6.6)
(1.3)
–
1.8
31.9
0.1
(0.6)
(6.6)
(0.4)
(5.0)
(0.6)
–
–
–
0.3
19.1
The weighted average applicable tax rate of 22.2% (2015: 21.1%) was derived by applying to their relevant profits and losses the
rates in the jurisdictions in which the Group operated.
The tax rate in France fell from 33.3% to 28.0% and in the UK from 18.0% to 17.0%, the collective effect of which was a reduction
of the tax charge in 2016 of £10.3 million.
89
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
11 EARNINGS PER SHARE
Management has chosen to disclose the European Public Real Estate Association (EPRA) measure of earnings per share which
has been provided to give relevant information to investors on the long-term performance of the Group’s underlying property
investment business. The EPRA measure excludes items which are non-recurring in nature such as profits (net of related tax)
on sale of investment properties and of other non-current investments, and items which have no impact to earnings over their life,
such as the change in fair value of derivative financial instruments and the net movement on revaluation of investment properties,
and the related deferred taxation on these items.
Earnings
Profit for the year attributable to owners of the Company
Net movements on revaluation of investment properties
Other gains and losses
Profit on sale of investment properties, net of tax
Gain on sale of corporate bonds
Change in fair value of derivative financial instruments
Impairment of carrying value of associates
Deferred tax relating to the above adjustments
EPRA earnings
Weighted average number of ordinary shares
Weighted average number of ordinary shares in circulation
Earnings per Share
Basic
EPRA
12 NET ASSETS PER SHARE
2016
£m
97.8
(36.1)
–
(6.8)
(3.2)
5.4
1.0
(7.2)
50.9
2015
£m
129.9
(98.0)
(2.9)
(4.3)
(0.7)
(0.3)
–
12.3
36.0
2016
Number
2015
Number
41,379,855
42,494,950
2016
Pence
236.3
123.0
2015
Pence
305.7
84.7
Management has chosen to disclose the two European Public Real Estate Association (EPRA) measures of net assets per share:
EPRA net assets per share and EPRA triple net assets per share. The EPRA net assets per share measure highlights the fair value
of equity on a long-term basis, and so excludes items which have no impact on the Group in the long term, such as fair value
movements of derivative financial instruments and deferred tax on the fair value of investment properties. The EPRA triple net
assets per share measure discloses net assets per share on a true fair value basis: all balance sheet items are included at their
fair value in arriving at this measure, including deferred tax, fixed rate loan liabilities and any other balance sheet items not
reported at fair value.
Net Assets
Basic net assets attributable to owners of the Company
Adjustment to increase fixed rate debt to fair value, net of tax
Goodwill as a result of deferred tax
EPRA triple net assets
Deferred tax on property and other non-current assets, net of minority interest
Fair value of derivative financial instruments
Adjustment to decrease fixed rate debt to book value, net of tax
EPRA net assets
Number of ordinary shares
Number of ordinary shares in circulation
Net Assets Per Share
Basic
EPRA
EPRA triple net
90
2016
£m
2015
£m
876.4
(28.3)
(1.1)
847.0
115.8
9.3
28.3
1,000.4
762.8
(27.7)
(1.1)
734.0
110.9
5.3
27.7
877.9
2016
Number
2015
Number
40,739,576 42,140,581
2016
Pence
2,151
2,456
2,079
2015
Pence
1,810
2,083
1,742
Annual Report & Accounts 2016
CLS Holdings plc
13 INVESTMENT PROPERTIES
At 1 January 2016
Acquisitions
Capital expenditure
Disposals
Net movement on revaluation of investment
properties
Rent-free period debtor adjustments
Exchange rate variances
Transfer from properties held for sale
At 31 December 2016
At 1 January 2015
Acquisitions
Capital expenditure
Disposals
Net movement on revaluation of investment
properties
Rent-free period debtor adjustments
Exchange rate variances
Transfer to properties held for sale
Transfer to property, plant and equipment
At 31 December 2015
London
£m
800.1
6.4
13.6
(13.9)
18.3
2.1
–
–
826.6
Rest
of UK
£m
97.6
–
0.3
(5.8)
8.7
0.1
–
(9.2)
–
91.7
Rest
of UK
£m
91.7
–
–
–
(6.2)
–
–
9.2
94.7
Germany
£m
235.5
18.5
0.6
(3.1)
19.5
–
(11.6)
–
–
Germany
£m
France
£m
Total
£m
259.4
39.3
2.7
–
12.4
0.1
43.0
–
215.6
–
4.4
(7.6)
11.6
0.2
34.2
–
1,366.8
45.7
20.7
(21.5)
36.1
2.4
77.2
9.2
356.9
258.4
1,536.6
France
£m
225.1
–
2.2
–
6.7
0.4
(11.5)
(7.3)
–
Sweden
£m
Total
£m
46.9
–
0.6
–
0.8
(0.1)
(0.9)
(42.1)
(5.2)
1,310.1
57.8
17.9
(30.5)
98.0
1.3
(24.0)
(58.6)
(5.2)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
259.4
215.6
–
1,366.8
A
C
C
O
U
N
T
S
London
£m
705.0
39.3
14.2
(21.6)
62.3
0.9
–
–
–
800.1
The investment properties (and the hotel, landholding and owner-occupied property detailed in note 14) were revalued at
31 December 2016 to their fair value. Valuations were based on current prices in an active market for all properties. The property
valuations were carried out by external, professionally qualified valuers as follows:
London: Cushman and Wakefield; Knight Frank
Rest of UK: Cushman and Wakefield
Germany: Cushman and Wakefield
France: Jones Lang LaSalle
Sweden: L Fällström AB
Property valuations are complex and require a degree of judgement and are based on data which is not publicly available.
Consistent with EPRA guidance, we have classified the valuations of our property portfolio as level 3 as defined by IFRS 13.
Inputs into the valuations include equivalent yields and rental income and are described as ‘unobservable’ as per IFRS 13. These
inputs are analysed by segment in the property portfolio information on the inside front cover. All other factors remaining constant,
an increase in rental income would increase valuations, whilst an increase in equivalent nominal yield would result in a fall in
value and vice versa.
Investment properties included leasehold properties with a carrying amount of £48.1 million (2015: £38.7 million).
Interest capitalised within capital expenditure in the year amounted to £0.7 million (2015: £0.4 million).
Where the Group leases out its investment property under operating leases the duration is typically three years or more. No contingent
rents have been recognised in either the current or the comparative year.
Substantially all investment properties (and the hotel detailed in note 14) are secured against debt.
In 2010 the Group purchased a property in London for £1.8 million. Under the terms of the purchase agreement, should the site
be developed additional consideration may become due to the vendor. The maximum liability in respect of this is estimated to be
£0.5 million. At the balance sheet date the fair value of the liability was £nil (2015: £nil).
91
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
14 PROPERTY, PLANT AND EQUIPMENT
Cost or valuation
At 1 January 2015
Additions
Acquired during the year
Transfer from investment properties
Exchange rate variances
Revaluation
At 31 December 2015
Additions
Exchange rate variances
Revaluation
At 31 December 2016
Comprising:
At cost
At valuation 31 December 2016
Accumulated depreciation and impairment
At 1 January 2015
Depreciation charge
At 31 December 2015
Depreciation charge
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
Land and
buildings
£m
Owner-
occupied
property
£m
Fixtures
and
fittings
£m
Hotel
£m
21.3
–
–
–
5.4
26.7
–
–
0.4
27.1
–
27.1
27.1
–
(0.2)
(0.2)
(0.2)
(0.4)
32.1
12.0
5.2
(0.5)
(4.4)
44.4
20.6
5.2
2.3
72.5
–
72.5
72.5
–
(0.4)
(0.4)
(0.4)
(0.8)
26.7
71.7
26.5
44.0
Total
£m
62.0
12.2
5.2
(0.5)
2.9
81.8
20.8
5.2
2.6
110.4
4.9
105.5
110.4
(1.6)
(1.3)
(2.9)
(1.1)
(4.0)
106.4
78.9
4.1
–
–
–
1.9
6.0
–
–
(0.1)
5.9
–
5.9
5.9
(0.2)
–
(0.2)
–
(0.2)
5.7
5.8
4.5
0.2
–
–
–
4.7
0.2
–
–
4.9
4.9
–
4.9
(1.4)
(0.7)
(2.1)
(0.5)
(2.6)
2.3
2.6
A hotel, an owner-occupied property and a landholding were revalued at each balance sheet date based on the external valuation
performed by Cushman and Wakefield, Knight Frank and L Fällström AB, respectively, as detailed in note 13.
The other land and buildings were revalued based on an external valuation performed by Forum Fastighetsekonomi AB.
15 INVESTMENTS IN ASSOCIATES
At 1 January 2016
Share of loss of associates after tax
Dividends received
Impairment
At 31 December 2016
At 1 January 2015
Share of loss of associates after tax
Exchange rate differences
At 31 December 2015
92
Net assets
£m
Goodwill
£m
Impairment
£m
0.6
(0.1)
(0.3)
–
0.2
1.3
–
–
(1.3)
–
(0.4)
0.1
–
0.3
–
Net assets
£m
Goodwill
£m
Impairment
£m
6.2
(5.2)
(0.4)
0.6
1.3
–
–
1.3
(6.0)
5.2
0.4
(0.4)
Total
£m
1.5
–
(0.3)
(1.0)
0.2
Total
£m
1.5
–
–
1.5
Annual Report & Accounts 2016
CLS Holdings plc
16 OTHER FINANCIAL INVESTMENTS
Investment type
Available-for-sale financial investments
carried at fair value
Listed corporate bonds
Listed equity securities
Unlisted investments
Destination of
Investment
UK
Eurozone
Other
UK
Sweden
Sweden
2016
£m
10.9
9.8
44.4
65.1
–
50.8
0.5
2015
£m
24.0
4.2
45.2
73.4
0.3
42.8
4.5
116.4
121.0
The movement of other financial investments, analysed based on the methods used to measure their fair value, was as follows:
At 1 January 2016
Additions
Disposals
Fair value movements recognised in reserves on available-for-sale assets
Fair value movements recognised in profit before tax on
available-for-sale assets
Exchange rate variations
At 31 December 2016
At 1 January 2015
Additions
Disposals
Fair value movements recognised in reserves on available-for-sale assets
Exchange rate variations
At 31 December 2015
* Unlisted equity shares valued using multiples from comparable listed organisations.
Level 1
Quoted
market
prices
£m
Level 2
Observable
market
data
£m
Level 3
Other
valuation
methods*
£m
43.1
1.1
(2.3)
4.7
(0.4)
4.6
50.8
73.4
35.9
(52.1)
3.0
1.7
3.2
65.1
4.5
–
(4.1)
–
–
0.1
0.5
Level 1
Quoted
market
prices
£m
Level 2
Observable
market
data
£m
Level 3
Other
valuation
methods*
£m
34.8
4.4
–
4.6
(0.7)
43.1
61.8
40.9
(25.6)
(4.8)
1.1
73.4
3.3
1.8
(0.5)
–
(0.1)
4.5
Total
£m
121.0
37.0
(58.5)
7.7
1.3
7.9
116.4
Total
£m
99.9
47.1
(26.1)
(0.2)
0.3
121.0
Corporate Bond Portfolio
At 31 December 2016
Sector
Banking
Insurance
Value
Running yield
£22.4m
7.6%
£1.8m
6.4%
Travel and
Tourism
£10.8m
7.5%
Telecoms
and IT
£13.1m
7.6%
Energy and
Resources
Other
Total
£15.2m
8.9%
£1.8m £65.1m
7.8%
6.5%
PGH Capital
Brit Insurance
Dell
SAS
Seagate
Hertz
Millicom
Stena
British Airways
Centurylink
Air France-KLM Telecom Italia
Western Digital
Enel
Seadrill
Transocean
ArcelorMittal
Freeport-McMoRan
Stora Enso
Issuers
RBS
HSBC
Lloyds
Investec
Barclays
Unicredit
Santander
Allied Irish
Credit Agricole
Bank of Ireland
Deutsche Bank
Societe Generale
A
C
C
O
U
N
T
S
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
93
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
17 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Prepayments
Accrued income
Other debtors
2016
£m
3.8
2.3
3.4
50.4
59.9
2015
£m
5.8
2.3
1.8
3.6
13.5
There was no concentration of credit risk with respect to trade receivables as the Group had a large number of customers spread
across the countries in which it operated.
There were no material trade and other receivables classified as past due but not impaired (2015: none). No trade and other
receivables were interest-bearing.
Included within other debtors is £0.2 million (2015: £1.0 million) due after more than one year, and £42.1 million (2015: £nil) due on
the disposal of an investment property.
18 CASH AND CASH EQUIVALENTS
Cash at bank and in hand
2016
£m
99.0
2015
£m
100.7
At 31 December 2016, Group cash at bank and in hand included £12.5 million (2015: £11.0 million) which was restricted by a
third-party charge.
19 TRADE AND OTHER PAYABLES
Current
Trade payables
Social security and other taxes
Other payables
Accruals
Deferred income
20 DEFERRED TAX
Deferred tax assets:
– after more than 12 months
Deferred tax liabilities:
– after more than 12 months
The movement in deferred tax was as follows:
At 1 January
(Credited)/charged in arriving at profit after tax
Charged/(credited) to other comprehensive income
Exchange rate variances
At 31 December
94
2016
£m
3.4
8.2
11.1
13.9
13.9
50.5
2015
£m
6.4
6.7
10.7
15.8
14.6
54.2
2016
£m
2015
£m
(3.1)
(3.3)
120.7
117.6
2016
£m
111.4
(7.1)
3.8
9.5
117.6
114.7
111.4
2015
£m
101.1
13.5
(0.5)
(2.7)
111.4
Annual Report & Accounts 2016
CLS Holdings plc
The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances
within the same tax jurisdiction, was as follows:
Deferred tax assets
Tax losses
£m
Other
£m
Total
£m
At 1 January 2016
Charged in arriving at profit after tax
Charged to other comprehensive income
Exchange rate variances
At 31 December 2016
Deferred tax assets
At 1 January 2015
Charged in arriving at profit after tax
Credited to other comprehensive income
At 31 December 2015
Deferred tax liabilities
At 1 January 2016
Charged/(credited) in arriving at profit after tax
Charged to other comprehensive income
Exchange rate variances
At 31 December 2016
Deferred tax liabilities
At 1 January 2015
(Credited)/charged in arriving at profit after tax
Charged to other comprehensive income
Exchange rate variances
At 31 December 2015
(0.1)
0.1
–
–
–
Tax losses
£m
(1.3)
1.2
–
(0.1)
Fair value
UK capital adjustments to
properties
allowances
£m
£m
10.5
0.5
–
0.1
11.1
102.8
(8.1)
2.8
9.4
106.9
Fair value
UK capital adjustments to
properties
allowances
£m
£m
10.6
(0.1)
–
–
10.5
91.8
11.3
0.1
(0.4)
102.8
(3.2)
–
0.2
(0.1)
(3.1)
Other
£m
(3.5)
1.1
(0.8)
(3.2)
Other
£m
1.4
0.4
0.8
0.1
2.7
Other
£m
3.5
–
0.2
(2.3)
1.4
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
(3.3)
0.1
0.2
(0.1)
(3.1)
Total
£m
(4.8)
2.3
(0.8)
(3.3)
Total
£m
114.7
(7.2)
3.6
9.6
120.7
Total
£m
105.9
11.2
0.3
(2.7)
114.7
A
C
C
O
U
N
T
S
Deferred tax has been calculated at a weighted average across the Group of 20.7%, and has been based on the rates applicable
under legislation substantively enacted at the balance sheet date.
Deferred tax assets are recognised in respect of tax losses carried forward to the extent that the realisation of the related tax benefit
through future taxable profits is probable. At 31 December 2016 the Group did not recognise deferred tax assets of £6.7 million
(2015: £5.6 million) in respect of losses amounting to £26.5 million (2015: £22.7 million) which can be carried forward against
future taxable income or gains. The majority of deferred tax assets recognised within the “other” category relate either to deferred
tax on swaps with a negative book value or to corporate bonds carried at below cost. Losses recognised as deferred tax assets can
be carried forward without restriction.
95
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
21 BORROWINGS
Bank loans
Debenture loans
Zero coupon note
Unsecured bonds
Secured notes
At 31 December 2016
At 31 December 2015
Current Non-current
£m
£m
Total
borrowings
£m
Current Non-current
£m
£m
Total
borrowings
£m
119.8
2.0
–
(0.1)
4.1
125.8
573.2
23.4
–
64.7
62.8
724.1
693.0
25.4
–
64.6
66.9
849.9
190.5
1.8
–
23.9
4.1
220.3
409.8
25.5
8.4
64.6
66.9
575.2
600.3
27.3
8.4
88.5
71.0
795.5
Arrangement fees of £4.5 million (2015: £4.5 million) have been offset in arriving at the balances in the above tables.
Bank loans
Interest on bank loans is charged at fixed rates ranging between 0.8% and 6.9%, including margin (2015: 1.4% and 6.9%) and
at floating rates of typically LIBOR, EURIBOR or STIBOR, plus a margin. Floating rate margins range between 0.8% and 3.8%
(2015: 0.8% and 3.8%). All bank loans are secured by legal charges over the respective 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.
Debenture loans
The debenture loans represent amortising bonds which are repayable in equal quarterly instalments of £1.2 million (2015: £1.2 million)
with final repayment due in January 2025. Each instalment is apportioned between principal and interest on a reducing balance
basis. Interest is charged at an annual fixed rate of 10.8%, including margin. The debentures are secured by a legal charge over a
property and securitisation of its rental income.
Zero coupon note
The zero coupon note accrued interest at an annual rate of 11.2%, including margin. It was unsecured and was redeemable as a
balloon repayment of principal and interest of £21.8 million in aggregate in February 2025. The element of the zero coupon note still
held by third parties was bought back in 2016; £9.0 million (2015: £4.0 million) of the zero coupon note was bought back in the year
at a cost of £12.0 million (2015: £5.2 million).
Unsecured bonds
On 11 September 2012, the Group issued £65.0 million unsecured retail bonds, which attract a fixed rate coupon of 5.5% and are
due for repayment in 2019. The bonds are listed on the London Stock Exchange’s Order book for Retail Bonds.
On 15 April 2011, the Group issued SEK 300 million unsecured bonds. The bonds attract a floating rate coupon of 3.75% over six
months’ STIBOR and were repaid in 2016. The bonds were listed on Nasdaq Stockholm on 5 July 2011.
Secured notes
On 3 December 2013, the Group issued £80.0 million secured, partially-amortising notes. The notes attract a fixed rate coupon of
4.17% on the unamortised principal, the balance of which is repayable in December 2022.
96
Annual Report & Accounts 2016
CLS Holdings plc
The maturity profile of the carrying amount of the Group’s borrowings was as follows:
At 31 December 2016
Within one year or on demand
More than one but not more than two years
More than two but not more than five years
More than five years
Unamortised issue costs
Borrowings
Less amount due for settlement within 12 months
Amounts due for settlement after 12 months
Bank loans
£m
120.9
112.2
368.5
95.0
696.6
(3.6)
693.0
(119.8)
573.2
Debenture
loans
£m
Zero coupon
note
£m
2.0
2.2
8.4
12.8
25.4
–
25.4
(2.0)
23.4
–
–
–
–
–
–
–
–
–
Unsecured
bonds
£m
Secured
notes
£m
–
–
65.0
–
65.0
(0.4)
64.6
0.1
64.7
4.2
4.2
12.5
46.5
67.4
(0.5)
66.9
(4.1)
62.8
At 31 December 2015
Within one year or on demand
More than one but not more than two years
More than two but not more than five years
More than five years
Unamortised issue costs
Borrowings
Less amount due for settlement within 12 months
Amounts due for settlement after 12 months
Bank loans
£m
Debenture
loans
£m
Zero coupon
note
£m
Unsecured
bonds
£m
Secured
notes
£m
191.5
57.1
186.2
168.8
603.6
(3.3)
600.3
(190.5)
409.8
1.8
2.0
7.6
15.9
27.3
–
27.3
(1.8)
25.5
–
–
–
8.4
8.4
–
8.4
–
8.4
24.1
–
65.0
–
89.1
(0.6)
88.5
(23.9)
64.6
4.2
4.2
12.5
50.7
71.6
(0.6)
71.0
(4.1)
66.9
Total
£m
127.1
118.6
454.4
154.3
854.4
(4.5)
849.9
(125.8)
724.1
Total
£m
221.6
63.3
271.3
243.8
800.0
(4.5)
795.5
(220.3)
575.2
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The interest rate risk profile of the Group’s fixed rate borrowings was as follows:
At 31 December 2016
At 31 December 2015
Weighted
average
fixed rate
Weighted
average
period for
of financial which rate is
fixed
Years
liabilities
%
Weighted
average
fixed rate
Weighted
average
period for
of financial which rate is
fixed
Years
liabilities
%
Sterling
Euro
5.6
1.3
5.1
5.7
5.8
1.8
6.2
6.0
The interest rate risk profile of the Group’s floating rate borrowings was as follows:
Sterling
Euro
At 31 December 2016
At 31 December 2015
% of net
floating rate
loans capped
10
11
Average
capped
interest
rate
%
4.1
3.8
Average
tenure
Years
% of net
floating rate
loans capped
1.0
1.9
20
65
Average
capped
interest
rate
%
3.3
3.4
Average
tenure
Years
0.7
0.9
97
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
21 BORROWINGS CONTINUED
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
Sterling
Euro
Swedish Krona
Other
At 31 December 2016
At 31 December 2015
Fixed rate Floating rate
financial
liabilities
£m
financial
liabilities
£m
182.7
92.8
14.6
–
290.1
296.3
223.8
39.7
–
559.8
Fixed rate
financial
liabilities
£m
Floating rate
financial
liabilities
£m
247.2
60.5
–
–
307.7
198.8
207.0
75.0
7.0
487.8
Total
£m
479.0
316.6
54.3
–
849.9
The carrying amounts and fair values of the Group’s borrowings are as follows:
Current borrowings
Non-current borrowings
Carrying amounts
Fair values
2016
£m
125.8
724.1
849.9
2015
£m
220.3
575.2
795.5
2016
£m
125.8
748.2
874.0
Total
£m
446.0
267.5
75.0
7.0
795.5
2015
£m
220.4
609.6
830.0
The valuation methods used to measure the fair values of the Group’s borrowings were derived from inputs which were either
observable as prices or derived from prices (Level 2).
Arrangement fees of £4.5 million (2015: £4.5 million) have been offset in arriving at the balances in the above table.
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 has the following undrawn committed facilities available at 31 December:
Floating rate:
– expiring within one year
22 DERIVATIVE FINANCIAL INSTRUMENTS
Non-current
Interest rate swaps
Current
Forward foreign exchange contracts
2016
£m
2015
£m
45.8
39.7
2016
Assets
£m
2016
Liabilities
£m
2015
Assets
£m
2015
Liabilities
£m
–
0.5
0.5
(9.8)
–
(9.8)
–
0.5
0.5
(5.8)
–
(5.8)
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 swaps
The aggregate notional principal of interest rate swap contracts at 31 December 2016 was £158.4 million (2015: £135.7 million).
The average period to maturity of these interest rate swaps was 4.9 years (2015: 6.1 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 2016 the Group had £18.4 million of outstanding net foreign
exchange contracts (2015: £20.0 million).
98
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CLS Holdings plc
23 FINANCIAL INSTRUMENTS
Categories of financial instruments
Financial assets of the Group comprise: interest rate caps; foreign currency forward contracts; available-for-sale investments;
investments in associates; trade and other receivables; and cash and cash equivalents.
Financial liabilities of the Group comprise: interest rate swaps; forward foreign currency contracts; bank loans; debenture loans;
zero coupon notes; unsecured bonds; secured notes; trade and other payables; and current tax liabilities.
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 available-for-sale
instruments such as listed corporate bonds and 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.
(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. The objectives have been met in the year.
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:
Debt
Liquid resources
Net debt
Equity
Net debt to equity ratio
2016
£m
2015
£m
854.4
(164.1)
800.0
(174.1)
690.3
882.5
78%
625.9
768.0
81%
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 and listed corporate bonds. Equity includes all capital and reserves of the Group attributable to
the owners of the Company.
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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
23 FINANCIAL INSTRUMENTS CONTINUED
Externally imposed capital requirement
At 31 December 2016 the Group was subject to a minimum equity ratio of total equity to total assets of 22.5% imposed by
unsecured bonds of £65.0 million (2015: £89.1 million). The Group was also restricted from making distributions to shareholders
if to do so would reduce net assets below £250 million, imposed by unsecured bonds of £65.0 million (2015: £65.0 million).
Additionally, 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
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. 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.
(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 is set
out below:
2016
Income
statement
£m
2015
Income
statement
£m
0.5
(2.8)
(0.5)
1.5
0.5
(2.4)
(0.5)
1.0
Scenario
Cash +50 basis points
Variable borrowings (including caps) +50 basis points
Cash -50 basis points
Variable borrowings (including caps) -50 basis points
100
Annual Report & Accounts 2016
CLS Holdings plc
(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 lesser extent, in Swedish kronor. 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 largely eliminates
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, such as the uncertainty surrounding the
euro in late 2011. 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 exposures are in respect of the euro and the Swedish krona. 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 1%
increase or decrease in the strength of sterling against these currencies is set out below:
Scenario
Net assets
£m
2016
2016
Profit
before tax
£m
2015
Net assets
£m
2015
Profit
before tax
£m
1% increase in value of sterling against the euro
1% increase in value of sterling against the Swedish krona
1% fall in value of sterling against the euro
1% fall in value of sterling against the Swedish krona
(2.0)
(0.4)
2.0
0.4
(0.4)
(0.1)
0.4
0.1
(2.2)
(0.3)
2.2
0.3
(0.4)
(0.1)
0.4
0.1
(iii) Other price risk
The Group is exposed to corporate bond price risk and, to a lesser extent, to equity securities price risk, because of
investments held by the Group and classified in the balance sheet as available-for-sale.
In order to manage the risk in relation to the holdings of corporate bonds and equity securities the Group holds a
diversified portfolio. Diversification of the portfolio is managed in accordance with the limits set by the Group.
The table below shows the effect on other comprehensive income which would result from an increase or decrease of
10% in the market value of corporate bonds and listed equity securities, which is an amount management believes to be
reasonable in the current market:
2016
Other
2015
Other
Comprehensive Comprehensive
Income
£m
Income
£m
(11.6)
11.6
(11.7)
11.7
Scenario: Shift of 10% in valuations
10% fall in value
10% increase in value
(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 rental deposits. 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.
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101
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
23 FINANCIAL INSTRUMENTS CONTINUED
At 31 December 2016 the Group held £116.4 million (2015: £121.0 million) of available-for-sale financial assets. 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.
The table below shows the external Standard & Poor’s credit banding on the available-for-sale financial investments held by
the Group:
2016
£m
2015
£m
6.8
43.7
65.9
9.4
56.6
55.0
116.4
121.0
S&P Credit rating at balance sheet date
Investment grade
Non-investment grade
Not rated
Total
(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 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. 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.
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 table below analyses the Group’s contractual undiscounted cash flows payable under financial liabilities and derivative
assets and liabilities at the balance sheet date, into relevant maturity groupings based on the period remaining to the
contractual maturity date. Amounts due within one year are equivalent to the carrying values in the balance sheet as the
impact of discounting is not significant.
Less than 1 year
£m
1 to 2 years
£m
2 to 5 years
£m
Over 5 years
£m
At 31 December 2016
Non-derivative financial liabilities:
†
Borrowings
Interest payments on borrowings
Trade and other payables
Forward foreign exchange contracts:
Cash flow hedges
– Outflow
– Inflow
At 31 December 2015
Non-derivative financial liabilities:
†
Borrowings
Interest payments on borrowings
Trade and other payables
Forward foreign exchange contracts:
Cash flow hedges
– Outflow
– Inflow
127.1
25.9
50.5
118.6
25.0
–
454.4
24.4
–
154.3
24.3
–
(18.4)
18.4
–
–
–
–
–
–
Less than 1 year
£m
1 to 2 years
£m
2 to 5 years
£m
Over 5 years
£m
221.6
27.1
54.2
(20.0)
20.0
63.3
27.0
–
–
–
271.3
30.4
–
243.8
33.9
–
–
–
–
–
†
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.
102
Annual Report & Accounts 2016
CLS Holdings plc
24 SHARE CAPITAL
Number
Ordinary
shares in
circulation
Treasury
shares
Total
ordinary
shares
Ordinary
shares in
circulation
£m
Treasury
shares
£m
Total
ordinary
shares
£m
At 1 January 2016
Issued
Cancelled following tender offers
Purchase of own shares:
– pursuant to market purchase
42,140,581
5,000
(1,150,906)
2,888,103 45,028,684
–
– (1,150,906)
(5,000)
(255,099)
255,099
–
At 31 December 2016
40,739,576
3,138,202 43,877,778
10.6
–
(0.3)
(0.1)
10.2
0.7
–
–
0.1
0.8
11.3
–
(0.3)
–
11.0
Number
Ordinary
shares in
circulation
Treasury
shares
Total
ordinary
shares
Ordinary
shares in
circulation
£m
Treasury
shares
£m
Total
ordinary
shares
£m
At 1 January 2015
Issued
Cancelled following tender offers
42,924,061
15,000
(798,480)
2,903,103
(15,000)
–
45,827,164
–
(798,480)
At 31 December 2015
42,140,581
2,888,103
45,028,684
10.8
–
(0.2)
10.6
0.7
–
–
0.7
11.5
–
(0.2)
11.3
The Directors are proposing a share sub-division of each of the existing ordinary shares of 25 pence each into 10 new ordinary
shares of 2.5 pence each. Subject to shareholder approval at the annual general meeting to be held on 26 April 2017, the share
sub-division will take place following the payment of the final dividend.
25 DISTRIBUTIONS TO SHAREHOLDERS
A tender offer by way of a Circular dated 18 March 2016 for the purchase of 1 in 57 shares at 1,810 pence per share was completed
in April. It returned £13.4 million to shareholders, equivalent to 31.8 pence per share.
A tender offer by way of a Circular dated 26 August 2016 for the purchase of 1 in 100 shares at 1,750 pence per share was completed
in September. It returned £7.2 million to shareholders, equivalent to 17.5 pence per share.
The Directors are proposing a final dividend in respect of the financial year ended 31 December 2016 of 40 pence per share,
bringing the total distribution in respect of 2016 to 57.5 pence per share. The final dividend will return £16.3 million to shareholders.
Subject to shareholder approval at the annual general meeting to be held on 26 April 2017, the dividend will be paid on 28 April 2017
to shareholders who are on the register of members on 17 March 2017.
Between 13 May 2016 and 31 May 2016, the Company bought 255,099 shares in the market at an average of 1,595 pence per share.
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26 SHARE PREMIUM
At 1 January
Ordinary shares issued from treasury shares
At 31 December
2016
£m
83.0
0.1
83.1
2015
£m
82.9
0.1
83.0
103
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
27 OTHER RESERVES
Capital
redemption
reserve
£m
Cumulative
translation
reserve
£m
Fair value
reserve
£m
Other
reserves
£m
At 1 January 2016
Purchase of own shares:
– cancellation pursuant to tender offer
Exchange rate variances
Property, plant and equipment
– net fair value gains in the year
– deferred tax thereon
Available-for-sale financial assets:
– net fair value gains in the year
– deferred tax thereon
At 31 December 2016
At 1 January 2015
Purchase of own shares:
– cancellation pursuant to tender offer
Exchange rate variances
Property, plant and equipment
– net fair value gains in the year
– deferred tax thereon
Available-for-sale financial assets:
– net fair value losses in the year
– deferred tax thereon
At 31 December 2015
Total
£m
85.1
0.3
32.6
1.7
(1.8)
9.0
(1.0)
22.4
0.3
–
–
–
–
–
24.6
–
32.6
–
–
–
–
22.7
57.2
10.0
28.1
–
–
1.7
(1.8)
9.0
(1.0)
17.9
–
–
–
–
–
–
28.1
125.9
Capital
redemption
reserve
£m
Cumulative
translation
reserve
£m
Fair value
reserve
£m
22.2
0.2
–
–
–
–
–
33.2
–
(8.6)
–
–
–
–
22.4
24.6
5.3
–
–
4.7
(0.4)
(0.2)
0.6
10.0
Other
reserves
£m
28.1
–
–
–
–
–
–
28.1
Total
£m
88.8
0.2
(8.6)
4.7
(0.4)
(0.2)
0.6
85.1
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 corporate bonds, other available-for-sale assets and
owner-occupied property 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 CASH GENERATED FROM OPERATIONS
Operating profit
Adjustments for:
Net movements on revaluation of investment properties
Depreciation and amortisation
Profit on sale of investment property
Gain on sale of corporate bonds
Non-cash rental income
Share-based payment expense
Other gains and losses
Changes in working capital:
Increase in receivables
(Decrease)/increase in payables
Cash generated from operations
2016
£m
2015
£m
120.2
168.7
(36.1)
1.1
(9.1)
(3.2)
(2.4)
0.1
–
(2.7)
(5.9)
62.0
(98.0)
1.3
(4.3)
(0.7)
(1.3)
0.2
(2.9)
(2.5)
11.6
72.1
29 CONTINGENCIES
104
At 31 December 2016 CLS Holdings plc had guaranteed certain liabilities of Group companies. These were primarily in relation to
Group borrowings and covered interest and amortisation payments. No cross-guarantees had been given by the Group in relation
to the principal amounts of these borrowings.
Annual Report & Accounts 2016
CLS Holdings plc
2016
£m
84.9
268.5
193.1
546.5
2015
£m
83.2
253.7
202.5
539.4
30 COMMITMENTS
At the balance sheet date the Group had contracted with customers for the following minimum lease payments:
Operating lease commitments – where the Group is lessor
Within one year
More than one but not more than five years
More than five years
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 2016 the Group had contracted capital expenditure of £9.3 million (2015: £4.7 million). At the balance sheet date,
the Group had conditionally exchanged contracts to acquire an investment property for £31.4 million (2015: £6.1 million). There
were no authorised financial commitments which were yet to be contracted with third parties (2015: none).
31 SUBSIDIARIES
The Group financial statements include the financial statements of CLS Holdings plc and all of its subsidiaries, which are listed
below. All are 100% owned unless otherwise stated:
United Kingdom
Registered Office: 86 Bondway, London SW8 1SF
62 London Road Limited
Apex Tower Limited
Brent House Limited
Buspace Studios Limited
Cassini Pascal Limited
Centenary Court Limited
Central London Securities
Limited
Chancel House Limited
Citadel Finance Limited
Citadel Holdings plc
CI Tower Investments Limited
CLS Bromley Limited
CLS Capital Partners Limited
CLS Chancery House Limited
CLS Cliffords Inn Limited
CLS England and Wales Limited
CLS Gateway House Limited
CLS Germany Limited
CLS Griffin House Limited
CLS Holdings UK Limited
CLS Horton Road Limited
CLS London Limited
CLS London Properties Limited
CLS Northern Properties
Limited
CLS One Limited
CLS Peterborough Limited
CLS Residential Investments
Limited
CLS South London Limited
CLS Spring Gardens Limited
CLS UK Properties Limited
CLSH Management Limited
Coventry House Limited
Crosspoint House Limited
Dukes Road Limited
Elmfield Road Limited
Falcon Quest Limited
Fetter Lane Apartments Limited
Great West House Limited
GWH Birkenhead Limited
Hygeia Harrow Limited
Ingrove Limited
Instant Office Limited
Kennington Road Limited
Larkhall Lane Limited
Melita House Limited
Mirenwest Limited
New Printing House Square
Limited
NYK Investments Limited
One Elmfield Park Limited
One Leicester Square Limited
Quayside Lodge Limited
Rayman Finance Limited
Reflex Bracknell Limited
Rex House Limited
Sentinel House Limited
Shard of Glass Limited
Southern House Limited
Spring Gardens Limited
Spring Gardens II Limited
Spring Gardens III Limited
Spring Mews (Block D) Limited
Spring Mews (Hotel) Limited
Spring Mews (Student) Limited
Spring Mews Limited
Three Albert Embankment Limited
Tweedwind (Three) Limited
Vauxhall Corporate Director
Limited
Vauxhall Homes Limited
Vauxhall Square Limited
Vauxhall Square One Limited
Wandsworth Road Limited
United Kingdom
Registered Office: 15 Atholl Crescent, Edinburgh EH3 8HA
CLS Aberdeen Limited
CLS Scotland Limited
Ladywell House Limited
Sidlaw House Limited
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105
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
31 SUBSIDIARIES CONTINUED
France
Registered Office: 120 Rue Jean Jaurés, 92300 Levallious, Paris
120 Jean Jaures Holding Sàrl
120 Jean Jaures Sàrl
Avenue du Park SCI
BV France Sàrl
Capitaine Guynemer Sàrl
Chorus Sàrl
CLS France Management Sàrl
CLS France Services Sàrl
Debussy SCI
De Musset Sàrl
EPP Levallois Sàrl
Euralille 2 Sàrl
Foch SCI
Forum France SCI
Georges Clemençeau Sàrl
Immobilière V SA
Immobilière 6 Sàrl
Immobilière 8 Sàrl
Immobilière 10 Sàrl
Immobilière 12 Sàrl
Immobilière 13 Sàrl
Le D’Aubigny SCI
Le Quatuor SCI
Le Sigma Sàrl
Leclerc SCI
Mission Marchand Sàrl
Panten Sàrl
Parc SCI
Petits Champs Sàrl
Petits Hotels Sàrl
Rhone Alpes Sàrl
Rue Stephenson Sàrl
Scala Sàrl
SCI Frères Peugeot
SCI Pierre Valette
Sego Sàrl
Solferino SCI
Germany
Registered Office: Brodschrangen 4, D-20457 Hamburg
CLS Germany Management GmbH
Jarrestrasse Immobilien GmbH
Luxembourg
Registered Office: 55 Avenue de la Gare, L-1611 Luxembourg
Adlershofer Sàrl
Albertina Sàrl
Cavernet Sàrl
Chronotron Sàrl
CLS Investments Sàrl
CLS Luxembourg Sàrl
CLS Palisade Sàrl
CLS Tangentis Sàrl
Freepost Sàrl
Frohbösestrasse Sàrl
Garivet Sàrl
Grossglockner Sàrl
Haydn Sàrl
Hermalux Sàrl
Kapellen Sàrl
Lipizzaner Sàrl
Naropere Sàrl
Prater Sàrl
Salisbury Hill Sàrl
Satimood Sàrl
Schönbrunn Sàrl
St Stephan Sàrl
Zillertal Sàrl
Netherlands
Registered Office: Burgemeester van Reenensingel 101, 2803 Da Gouda
120 Jean Jaures BV
Capitaine Guynemer BV
Chorus BV
CLS Management BV
Forum d’Aubigny BV
Hamersley International BV
Immobilière 8 BV
Malmros Property BV
Mission Marchand BV
Parc Avenue du Park BV
Petits Champs BV
Petits Hotels BV
Portapert Properties III BV
Portapert Properties UK BV
Rasstaf BV
Rhone Alpes BV
Runton Holdings BV
Sigma BV
Stockport Investments BV
Jersey
Registered Office: PO Box 167, 3rd Floor, 2 Hill Street, St Helier JE4 8RY
Hawkswell Limited
British Virgin Islands
Registered Office: PO Box 71, Craigmuir Chambers, Road Town, Tortola BVI
†
Pantheon Securities Limited
†
In liquidation
106
Annual Report & Accounts 2016
CLS Holdings plc
Sweden
Registered Office: Skönabäck 122, 274 91 Skurup
Auriolen AB
Förvaltnings AB Klio
Jarrestrasse Holding AB (94.5%)
Museion Förvaltning AB
Sweden
Registered Office: Västmannagatan 10, 111 24 Stockholm
Endicott Sweden AB
Rasstaf Sweden AB
Sweden
Registered Office: Saltmätargatan 9, 2 tr, 113 59 Stockholm
Wyatt Media Group AB (98.872%)
Wyatt Sales AB
Xtraworks AB
Sweden
Registered Office: Box 11132, 404 23 Gothenburg
First Camp Sverige Holding AB (58.02%)
100% subsidiaries of First Camp Sverige Holding AB (unless otherwise stated):
Brf Gunnarsö (83.45%)
Brf Kolmården
Brf Möllen
Brf Solcamp
Brf Solgläntan (96.7%)
Brf Umeå Stugor
Brf Wermelandia stugor
First Camp Ahus och Oknö AB
First Camp Bråviken AB
First Camp Gunnarsö AB
First Camp Holding Karradal AB
First Camp Karlstad AB
First Camp Kärradal AB
First Camp Kungshamn AB
First Camp Luleå AB
First Camp Malmö AB
First Camp Mölle AB
First Camp Sverige AB
First Camp Torekov AB
First Camp Tylösand AB
First Camp Umeå AB
First Camp Upplands-Bro AB
Solvik Camping och Stugby AB
Stugbyn Gunnarsö AB
Svalans Stugförmedling AB
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32 ASSOCIATES
The Group financial statements include the Group’s share of the results and net assets of the following associates:
Name
Country of incorporation
Bulgarian Land Development plc*
Nyheter 24 AB
Lociloci AB
*
Liquidated
Isle of Man
Sweden
Sweden
Holding
48.3%
20.0%
24.6%
107
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
31 December 2016
33 RELATED PARTY TRANSACTIONS
Associates and Joint Ventures
At 31 December 2016, the Group had a convertible loan of SEK 5.0 million (2015: SEK 5.0 million), due from Nyheter24 Media Network AB,
an associate company. Until 1 May 2015, this loan was interest free, and thereafter attracted Swedish base rate plus 2%. At any date
until 31 May 2017, the Group is permitted to convert the loan into shares in Nyheter24 Media Network AB at SEK 40.5 each.
Transactions with Directors
Distributions totalling £11,023,983 (2015: £9,235,402) were made through tender offer buy-backs in the year in respect of ordinary
shares held by the Company’s Directors.
During the year, a company owned by Sten Mortstedt rented office space to a Group company, Vänerparken Investment AB
(“Vänerparken”), at a cost of SEK 400,000 (2015: SEK 400,000). At the balance sheet date a Group company, Museion Förvaltning AB,
had signed an agreement to lease the office space until 30 September 2018 at a cost of SEK 400,000 per annum. No balances were
outstanding at the balance sheet date (2015: £nil).
Skansen Group Limited, a company in which Anna Seeley and Thomas Lundqvist are Directors, rented office space from a
Group company, Vauxhall Square Limited, at an arm’s length rent of £46,530 per annum (2015: £46,530) plus annual service charge
of £19,452 (2015: £21,650). No balances were outstanding at the balance sheet date. On 29 September 2016 the lease with Skansen
expired and they vacated.
Directors’ Remuneration
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of
the categories specified in IAS 24 Related Party Disclosures. Information about the remuneration of individual Directors is provided
in the audited part of the Remuneration Committee Report on pages 48 to 69. Directors fees of £450,000 (2015: £425,000) were paid
to a company owned by Sten Mortstedt.
2016
£000
2015
£000
Short-term employee benefits
Post-employment benefits
Other long-term benefits
2,377
32
125
2,534
2,421
45
736
3,202
108
COMPANY BALANCE SHEET
Annual Report & Accounts 2016
CLS Holdings plc
at 31 December 2016
Fixed assets
Investment in subsidiary undertakings
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Borrowings
Non-current liabilities
Borrowings
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Profit and loss account
Shareholders’ funds
Notes
2016
£m
2015
£m
6
7
8
9
9
10
11
12
12
354.5
256.5
5.5
0.1
360.1
(21.4)
(18.1)
(64.7)
(104.2)
255.9
11.0
83.1
27.3
134.5
255.9
116.1
0.1
372.7
(4.4)
(23.9)
(64.6)
(92.9)
279.8
11.3
83.0
27.0
158.5
279.8
The Company reported a profit for the financial year ended 31 December 2016 of £0.8 million (2015: £99.1 million).
These financial statements of CLS Holdings plc (registered number: 2714781) were approved by the Board of Directors and authorised
for issue on 8 March 2017 and were signed on its behalf by:
Mr E H Klotz
Executive Chairman
COMPANY STATEMENT OF CHANGES IN EQUITY
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for the year ended 31 December 2016
Arising in 2016:
Profit for the year
Issue of share capital
Purchase of own shares
Expenses thereof
Total changes arising in 2016
At 1 January 2016
At 31 December 2016
Arising in 2015:
Profit for the year
Issue of share capital
Purchase of own shares
Expenses thereof
Total changes arising in 2015
At 1 January 2015
At 31 December 2015
Notes
12
11
12
12
Notes
12
11
12
12
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
–
–
(0.3)
–
(0.3)
11.3
11.0
–
0.1
–
–
0.1
83.0
83.1
–
–
0.3
–
0.3
27.0
27.3
0.8
–
(24.7)
(0.1)
(24.0)
158.5
134.5
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
–
–
(0.2)
–
(0.2)
11.5
11.3
–
0.1
–
–
0.1
82.9
83.0
–
–
0.2
–
0.2
26.8
27.0
99.1
–
(16.1)
(0.1)
82.9
75.6
158.5
Total
£m
0.8
0.1
(24.7)
(0.1)
(23.9)
279.8
255.9
Total
£m
99.1
0.1
(16.1)
(0.1)
83.0
196.8
279.8
109
The notes on pages 110 to 113 are an integral part of these financial statements.
NOTES TO THE COMPANY FINANCIAL STATEMENTS
31 December 2016
1
GENERAL INFORMATION
These separate financial statements are presented as required by the Companies Act 2006 and prepared on the historical cost basis.
The Company has applied UK GAAP Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (“FRS 101”) incorporating
the Amendments to FRS 101 issued by the FRC in July 2015 other than those relating to legal changes and has not applied the
amendments to Company law made by The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 that
are effective for accounting periods beginning on or after 1 January 2016.
CLS Holdings plc is the ultimate parent company of the CLS Holdings Group. Its primary activity (which occurs exclusively within
the United Kingdom) is to hold shares in subsidiary companies.
2
BASIS OF ACCOUNTING
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation
to capital management, presentation of a cash flow statement, presentation of comparative information in respect of certain
assets, standards not yet effective, impairment of assets and related party transactions.
Where required, equivalent disclosures are given in the consolidated financial statements.
3
SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies are summarised below.
3.1 Going concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence
for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the annual report and
accounts as detailed in the Director’s Report on page 38.
3.2 Investments in subsidiaries
Investments in subsidiaries are accounted for at cost less, where appropriate, provisions for impairment. Dividend income is
recognised when received.
3.3 Pension costs
The Company operates a defined contribution pension scheme for all eligible employees. The pension costs charged
represent the contributions payable. Differences between contributions payable in the year and contributions paid are shown
as either accruals or prepayments in the balance sheet.
3.4 Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from
proceeds, net of tax.
Where a Group company purchases the Company’s equity share capital, the consideration paid, including any directly
attributable incremental costs (net of income taxes), is deducted from equity attributable to the owners of the Company until
the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration
received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in
equity attributable to the owners of the Company.
3.5 Foreign currencies
The financial statements are presented in sterling, which is the currency of the primary economic environment in which
the Company operates, known as its functional currency. Transactions in currencies other than the Company’s functional
currency are recognised at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in other currencies are translated into sterling at the rates prevailing at
that date. Non-monetary items carried at fair value that are denominated in other currencies are translated into sterling at
the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured at historical cost
in a foreign currency are not translated.
110
Annual Report & Accounts 2016
CLS Holdings plc
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4
PROFIT FOR THE FINANCIAL YEAR
As permitted by s408 Companies Act 2006, the Company’s profit and loss account has not been presented in these financial
statements. The Company’s retained profit for the financial year was £0.8 million (2015: £99.1 million).
Audit fees for the Company were £0.1 million (2015: £0.1 million).
Details of the Directors employed during the year and of their remuneration is included in the Remuneration Committee Report on
pages 48 to 69.
5
DISTRIBUTIONS TO SHAREHOLDERS
A tender offer by way of a Circular dated 18 March 2016 for the purchase of 1 in 57 shares at 1,810 pence per share was completed
in April. It returned £13.4 million to shareholders, equivalent to 31.8 pence per share.
A tender offer by way of a Circular dated 26 August 2016 for the purchase of 1 in 100 shares at 1,750 pence per share was completed
in September. It returned £7.2 million to shareholders, equivalent to 17.5 pence per share.
The Directors are proposing a final dividend in respect of the financial year ended 31 December 2016 of 40 pence per share,
bringing the total distribution in respect of 2016 to 57.5 pence per share. The final dividend will return £16.3 million to shareholders.
Subject to shareholder approval at the annual general meeting to be held on 26 April 2017, the dividend will be paid on 28 April 2017
to shareholders who are on the register of members on 17 March 2017.
Between 13 May 2016 and 31 May 2016, the Company bought 255,099 shares in the market at an average of 1,595 pence per share.
6
INVESTMENT IN SUBSIDIARY UNDERTAKINGS
At 1 January
Additions
Impairment
At 31 December
7
TRADE AND OTHER RECEIVABLES
Current
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Other debtors
8
TRADE AND OTHER PAYABLES
Current
Trade payables
Amounts owed to subsidiary undertakings
Accruals
Social security and other taxes
2016
£m
256.5
99.2
(1.2)
354.5
2015
£m
185.6
83.0
(12.1)
256.5
2016
£m
2015
£m
2.2
0.1
3.2
5.5
2016
£m
0.1
17.5
3.7
0.1
21.4
116.0
0.1
–
116.1
2015
£m
0.2
1.4
2.5
0.3
4.4
111
NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
31 December 2016
9
BORROWINGS
At 31 December 2016
Unsecured bonds
Arrangement fees
At 31 December 2015
Unsecured bonds
Arrangement fees
Current Non-current
£m
£m
Total
borrowings
£m
18.2
(0.1)
18.1
65.0
(0.3)
64.7
83.2
(0.4)
82.8
Current Non-current
£m
£m
Total
borrowings
£m
24.1
(0.2)
23.9
65.0
(0.4)
64.6
89.1
(0.6)
88.5
On 11 September 2012, the Group issued £65.0 million unsecured retail bonds, which attract a fixed rate coupon of 5.5% and are
due for repayment in 2019. The bonds are listed on the London Stock Exchange’s Order book for Retail Bonds.
On 15 April 2011, the Group issued SEK 300 million unsecured bonds. The bonds attract a floating rate coupon of 3.75% over six
months’ STIBOR and were repaid in 2016. The bonds were listed on Nasdaq Stockholm on 5 July 2011.
10 SHARE CAPITAL
Number
Ordinary
shares in
circulation
Treasury
shares
Total
ordinary
shares
Ordinary
shares in
circulation
£m
Treasury
shares
£m
Total
ordinary
shares
£m
At 1 January 2016
Issued
Cancelled following tender offers
Purchase of own shares:
– pursuant to market purchase
42,140,581
5,000
(1,150,906)
2,888,103 45,028,684
–
– (1,150,906)
(5,000)
(255,099)
255,099
–
At 31 December 2016
40,739,576
3,138,202 43,877,778
10.6
–
(0.3)
(0.1)
10.2
0.7
–
–
0.1
0.8
11.3
–
(0.3)
–
11.0
Number
Ordinary
shares in
circulation
Treasury
shares
Total
ordinary
shares
Ordinary
shares in
circulation
£m
Treasury
shares
£m
Total
ordinary
shares
£m
At 1 January 2015
Issued
Cancelled following tender offers
42,924,061
15,000
(798,480)
2,903,103
(15,000)
–
45,827,164
–
(798,480)
At 31 December 2015
42,140,581
2,888,103
45,028,684
10.8
–
(0.2)
10.6
0.7
–
–
0.7
11.5
–
(0.2)
11.3
The Directors are proposing a share sub-division of each of the existing ordinary shares of 25 pence each into 10 new ordinary
shares of 2.5 pence each. Subject to shareholder approval at the annual general meeting to be held on 26 April 2017, the share
sub-division will take place following the payment of the final dividend.
11 SHARE PREMIUM
At 1 January
Ordinary shares issued from treasury shares
At 31 December
112
2016
£m
83.0
0.1
83.1
2015
£m
82.9
0.1
83.0
12 PROFIT AND LOSS ACCOUNT AND OTHER RESERVES
At 1 January 2016
Purchase of own shares
Expenses thereof
Profit for the year
At 31 December 2016
At 1 January 2015
Purchase of own shares
Expenses thereof
Profit for the year
At 31 December 2015
13 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
At 1 January
Profit for the year
Issue of share capital
Purchase of own shares
At 31 December
14 CONTINGENCIES
Capital
redemption
reserve
£m
22.4
0.3
–
–
22.7
Capital
redemption
reserve
£m
22.2
0.2
–
–
22.4
Other reserves
Other
£m
4.6
–
–
–
4.6
Other reserves
Other
£m
4.6
–
–
–
4.6
Annual Report & Accounts 2016
CLS Holdings plc
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£m
27.0
0.3
–
–
27.3
Total
£m
26.8
0.2
–
–
27.0
2016
£m
279.8
0.8
0.1
(24.8)
255.9
Profit and
loss account
£m
158.5
(24.7)
(0.1)
0.8
134.5
Profit and
loss account
£m
75.6
(16.1)
(0.1)
99.1
158.5
2015
£m
196.8
99.1
0.1
(16.2)
279.8
A
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At 31 December 2016 CLS Holdings plc had guaranteed certain liabilities of Group companies, primarily in relation to Group
borrowings and covering interest and amortisation payments. No cross guarantees had been given in relation to the principal
amounts of these borrowings. Since the possibility of payment by the Company under any of these guarantees and warranties is
considered remote, no provisions in relation to these have been made in the Company’s financial statements and no reportable
contingent liability exists.
15 COMMITMENTS
At 31 December 2016, the Company had no contracted capital expenditure (2015: £nil) and no authorised financial commitments
which were yet to be contracted with third parties (2015: £nil).
113
FIVE YEAR FINANCIAL SUMMARY
31 December 2016
Group revenue
Net rental income
Administration expenses
Other expenses
Group revenue less costs
Net movements on revaluation of investment properties
Profit on sale of investment properties
Gain/(loss) on sale of corporate bonds and other financial investments
Gain arising from acquisition
Profit on sale of subsidiaries/joint venture/associates
Fair value gain on reclassification of associate
2016
£m
128.5
107.1
(21.3)
(14.0)
71.8
36.1
9.1
3.2
–
–
–
2015
£m
118.9
99.0
(19.5)
(13.8)
65.7
98.0
4.3
0.7
–
–
–
Operating profit
120.2
168.7
Finance income
Finance costs
Share of (loss)/profit of associates after tax
Profit before tax
Taxation
Profit for the year
13.6
(32.7)
(1.0)
100.1
(1.8)
98.3
10.0
(27.5)
–
151.2
(19.1)
132.1
2014
£m
99.6
82.2
(13.6)
(4.9)
63.7
186.0
8.7
–
1.2
–
0.2
259.8
7.7
(28.1)
(2.6)
236.8
(42.0)
194.8
2013
£m
91.2
73.1
(12.4)
(3.5)
57.2
(0.2)
4.5
14.1
–
1.8
14.9
92.3
7.6
(23.7)
(4.8)
71.4
(8.2)
63.2
2012
£m
80.2
62.9
(10.5)
(2.9)
49.5
16.2
–
(0.4)
–
–
–
65.3
10.6
(25.6)
5.8
56.1
(9.4)
46.7
Distributions paid and proposed
23.5
19.1
15.9
15.0
13.2
Net Assets Employed
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
1,763.9
159.4
1,923.3
(186.2)
(854.6)
1,572.6
173.3
1,745.9
(282.2)
(695.7)
1,477.8
111.0
1,588.8
(269.6)
(661.7)
1,257.0
142.8
1,399.8
(121.3)
(797.6)
1,110.5
115.2
1,225.7
(172.2)
(636.4)
882.5
768.0
657.5
480.9
417.1
Ratios
2016
2015
2014
2013
2012
Net assets per share (pence)
EPRA net assets per share (pence)
Earnings per share (pence)
EPRA earnings per share (pence)
Net gearing (%)
Adjusted net gearing (%)
Interest cover (times)
2,151
2,456
236.3
123.0
78.8
69.0
3.36
1,810
2,083
305.7
84.7
82.0
71.3
3.19
1,521
1,774
449.0
77.4
89.4
76.7
3.34
1,094
1,268
146.9
66.2
125.0
107.8
3.18
963
1,154
106.0
65.3
111.6
92.7
3.49
114
GLOSSARY OF TERMS
Annual Report & Accounts 2016
CLS Holdings plc
ADJUSTED NET ASSETS OR ADJUSTED SHAREHOLDERS’ FUNDS
EPRA NET INITIAL YIELD
Net assets excluding the fair value of financial derivatives, deferred
tax on revaluations, and goodwill arising as a result of deferred tax
ADJUSTED NET GEARING
Annual passing rent less net service charge costs on investment
properties expressed as a percentage of the investment property
valuation after adding purchasers’ costs
Net debt expressed as a percentage of adjusted net assets
ADJUSTED SOLIDITY
Adjusted net assets expressed as a percentage of adjusted
total assets
ADJUSTED TOTAL ASSETS
Total assets excluding deferred tax assets
ADMINISTRATION COST RATIO
Recurring administration expenses of the Investment Property
operating segment expressed as a percentage of net rental income
BALANCE SHEET LOAN TO VALUE
Net debt expressed as a percentage of total assets less cash and
short-term deposits
CONTRACTED RENT
Annual contracted rental income after any rent-free periods
have expired
CORE PROFIT
Profit before tax and before net movements on revaluation of
investment properties, profit on sale of investment properties,
subsidiaries and corporate bonds, impairment of intangible
assets and goodwill, non-recurring costs, change in fair value
of derivatives and foreign exchange variances
DILUTED EARNINGS PER SHARE
Profit after tax divided by the diluted weighted average number
of ordinary shares
DILUTED NET ASSETS
Equity shareholders’ funds increased by the potential proceeds from
issuing those shares issuable under employee share schemes
DILUTED NET ASSETS PER SHARE OR DILUTED NET ASSET VALUE
Diluted net assets divided by the diluted number of ordinary shares
DILUTED NUMBER OF ORDINARY SHARES
Number of ordinary shares in circulation at the balance sheet
date adjusted to include the effect of potential dilutive shares
issuable under employee share schemes
DILUTED WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
Weighted average number of ordinary shares in issue during the
period adjusted to include the effect of potential weighted average
dilutive shares issuable under employee share schemes
EARNINGS PER SHARE
Profit after tax divided by the weighted average number of
ordinary shares in issue in the period
EPRA
European Public Real Estate Association
EPRA EARNINGS PER SHARE
Profit after tax, but excluding net gains or losses from fair value
adjustments on investment properties, profits or losses on disposal
of investment properties and other non-current investment
interests, impairment of goodwill and intangible assets,
movements in fair value of derivative financial instruments and
their related current and deferred tax
EPRA NET ASSETS
Diluted net assets excluding the fair value of financial derivatives,
deferred tax on revaluations, and goodwill arising as a result of
deferred tax
EPRA NET ASSETS PER SHARE
EPRA net assets divided by the diluted number of ordinary shares
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EPRA TOPPED UP NET INITIAL YIELD
Annual net rents on investment properties expressed as a
percentage of the investment property valuation after adding
purchasers’ costs
EPRA TRIPLE NET ASSETS
EPRA net assets adjusted to reflect the fair value of debt and
derivatives and to include the fair value of deferred tax on
property revaluations
EPRA TRIPLE NET ASSETS PER SHARE
EPRA triple net assets divided by the diluted number of
ordinary shares
ESTIMATED RENTAL VALUE (ERV)
The market rental value of lettable space as estimated by the
Group’s valuers
INTEREST COVER
The aggregate of group revenue less costs, divided by the
aggregate of interest expense and amortisation of loan issue
costs, less interest income
LIQUID RESOURCES
Cash and short-term deposits and listed corporate bonds
NET ASSETS PER SHARE OR NET ASSET VALUE (NAV)
Equity shareholders’ funds divided by the number of ordinary
shares in circulation at the balance sheet date
NET DEBT
Total borrowings less liquid resources
NET GEARING
Net debt expressed as a percentage of net assets
NET INITIAL YIELD
Annual net rents on investment properties expressed as a
percentage of the investment property valuation
NET RENT
Contracted rent less net service charge costs
OCCUPANCY RATE
Contracted rent expressed as a percentage of the aggregate of
contracted rent and the ERV of vacant space
OVER-RENTED
The amount by which ERV falls short of the aggregate of
passing rent
PASSING RENT
Contracted rent before any rent-free periods have expired
PROPERTY LOAN TO VALUE
Property borrowings expressed as a percentage of the market
value of the property portfolio
RENT ROLL
Contracted rent
RETURN ON EQUITY
The aggregate of the change in equity attributable to the owners of
the company plus the amounts paid to the shareholders by way of
distributions and the purchase of shares in the market, divided by
the opening equity attributable to the owners of the Company.
SOLIDITY
Equity shareholders’ funds expressed as a percentage of total assets
TOTAL SHAREHOLDER RETURN
The change in the market price of a share
TRUE EQUIVALENT YIELD
The capitalisation rate applied to future cash flows to calculate the
gross property value, as determined by the Group’s external valuers
115
DIRECTORS, OFFICERS AND ADVISERS
Clearing Bank
Royal Bank of Scotland Plc
24 Grosvenor Place
London SW1X 7HP
Financial Advisers
Elm Square Advisers Limited
10 Queen’s Elm Square
London SW3 6ED
Stockbrokers
Liberum Capital
Ropemaker Place, Level 12
25 Ropemaker Street
London EC2Y 9LY
Panmure Gordon (UK) Limited
One New Change
London EC4M 9AF
Registered Auditor
Deloitte LLP
Chartered Accountants
2 New Street Square
London EC4A 3BZ
Financial and Corporate Public Relations
Smithfield Consultants Limited
10 Aldersgate Street
London EC1A 4HJ
Directors
Henry Klotz
Fredrik Widlund
John Whiteley
Sten Mortstedt
Malcolm Cooper ‡ * †
Joseph Crawley
Elizabeth Edwards †
Christopher Jarvis * †
Thomas Lundqvist
Bengt Mortstedt
Anna Seeley
Lennart Sten *
* member of Remuneration Committee
† member of Audit Committee
‡ Senior Independent Director
(Executive Chairman)
(Chief Executive Officer)
(Chief Financial Officer)
(Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
(Non-Executive Director)
Company Secretary
David Fuller BA, FCIS
Registered Office
86 Bondway
London SW8 1SF
Registered Number
2714781
Registrars and Transfer Office
Computershare Investor Services Plc
PO Box 82
The Pavilions
Bridgwater Road
Bristol BS99 7NH
Shareholder Helpline: 0870 889 3286
CLS Holdings plc on line:
www.clsholdings.com
email:
enquiries@clsholdings.com
116
The paper used in this report is produced using wood fibre from fully sustainable
forests in Finland, Sweden, Portugal, Spain and Brazil, with FSC certification.
The pulps used are Elemental Chlorine Free (ECF), and the manufacturing mill
is accredited with the ISO 14001 standard for environmental management and
with EMAS (The EU Environmental Management and Audit System).
Designed and produced by MAGEE
www.magee.co.uk
Printed by Boss Print Ltd
www.clsholdings.com
CLS Holdings plc
86 Bondway
London
SW8 1SF
Tel: +44 (0)20 7582 7766
Fax: +44 (0)20 7735 2779
email: enquiries@clsholdings.com
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CLS Holdings plc
Annual Report & Accounts
2016
2016
PORTFOLIO