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Edited Transcript of CLI.L earnings conference call or presentation 5-Mar-20 9:00am GMT

Full Year 2019 CLS Holdings PLC Earnings Call

London Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of CLS Holdings PLC earnings conference call or presentation Thursday, March 5, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Michael David Kirkman

CLS Holdings plc - CFO & Director

* Fredrik Widlund

CLS Holdings plc - CEO & Director

* Simon L. Wigzell

CLS Holdings plc - Head of Group Property

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Conference Call Participants

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* Andrew Murphy

Whitman Howard Limited - Head of Research

* Christopher Michael Spearing

Liberum Capital Limited, Research Division - Research Analyst

* Kieran Adrian Lee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Fredrik Widlund, CLS Holdings plc - CEO & Director [1]

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Good morning, everyone, and welcome to this presentation of CLS Holdings plc full year results 2019. And thank you for those of you attending in person. I wasn't sure we would have anyone showing up this morning, but it's good. I'm Fredrik Widlund, Chief Executive. To my right is Andrew Kirkman, CFO, who will present his first full year numbers today. And to my left is Simon Wigzell, Head of Group Property.

Today, we look forward to presenting you with the results for 2019, progress during the year and an update on our 3 markets as well as how we are progressing against our strategic goals. The high level structure is, as you can see on the slide. And firstly, I would like to set the scene by giving you a high-level overview on the next slide.

Last year was a very active year for our portfolio management, and we made significant progress in refocusing the portfolio to our core activities. EPRA NAV was up 6.3% to 329.2p per share and was primarily driven by valuation uplift, capital gains and operational earnings.

Valuations were up 3% in local currency with Germany, again, showing strong progress with valuations up 8.4% in local currency. The valuation increases and the transactions during the year grew our portfolio to GBP 2 billion, with 53% in the U.K., 33% in Germany and 14% in France, as illustrated in the chart on the right-hand side.

As I mentioned, 2019 was a year of refocusing. And we exited our investments in Catena, First Camp, our regional U.K. portfolio at attractive prices. In total, we made 13 acquisitions for a total of GBP 257.2 million and disposed 28 properties for GBP 187.2 million.

Our vacancy levels were stable in all countries at 4% and below our target of 5%.

Net rental income increased by 3.1% to GBP 110.6 million, up from GBP 107.3 million in 2018. This was primarily driven by net acquisitions, but also for rental growth, with like-for-like ERVs growing 2.6%.

Profit before tax was up 9.7% to GBP 159 million, while EPRA earnings per share was down from 13.1p to 12.0p per share mainly from FX and less financing income from a smaller bond portfolio, which is now fully exited. All this gave an accounting return of 8.6%, and the Board is therefore proposing increasing the dividend 7.2% to 7.4p per share and in line with our progressive dividend policy.

On the next slide, I would like to give some more details about the valuations and what factors are driving the uplift across the countries. So overall, group valuations were up 3% in local currency, with Germany and France showing very healthy increases, while the U.K. headline number was slightly negative.

So starting with the U.K., where overall valuations dropped 0.3% as an effect of nonrecovery of acquisitions cost from the acquisitions we did in the second half of the year. On a like-for-like basis, the U.K. portfolio was up 0.3%, which we're very pleased with, given the overall challenging market situation in the U.K. last year.

ERVs were up 1.3%, with rental growth in the London portfolio. The portfolio yield hardened 22 bps to 5.4% net initial yield due to the portfolio mix after the disposal of our regional assets.

In Germany, we continue to see very healthy increases, with valuations up 8.4% over the year. This was driven by strong rental growth with ERVs up 5.1%, but also from yields hardening 41 bps, taking our net initial yield to 5%. We expect this pattern to continue in 2020, but probably to a lesser extent.

The French portfolio was up 3.8% over the year, with ERVs up 2.5%. Yields in the French portfolio hardened slightly by 4 bps, taking our net initial yield to 5.2%.

Worth mentioning is that our Lyon portfolio performed stronger than our Paris assets due to the very low office vacancies in the city.

And as you can see on the right-hand side, the valuations over a 5-year period have been driven by Germany and France, while the U.K., although positive, has been slightly less strong, especially in the last 2 years. This again illustrates the benefit of our diversified portfolio in 3 countries, but also that the U.K. now looks relatively attractive from a yield perspective.

Next, I would like to go into more detail about the acquisition and sales in the period. For -- 2019 was a very busy period for CLS and a significant year for property transactions, as part of this refocusing to our core areas and expertise. Over the year, we did 13 new acquisitions for a total of GBP 257.2 million at an average net initial yield of 5.8%.

We saw good value in the U.K. and completed 7 acquisitions in 2019 and further 2 that closed in the early part of 2020. We started the year with acquisitions in Crawley and at the City Fringe in Aldgate, and we also acquired a small property in Vauxhall that completed our ownership of the Spring Mews estate.

In the second half, we acquired in Hammersmith, Reading and, again, in the City Fringe at Lloyds Avenue.

In the fourth quarter, we acquired in Harrow and Staines. These acquisitions all had the degree of vacancy or required repositioning where we can add value.

In Germany, we acquired 2 properties: one in Munich and one in Cologne, both are in areas with low vacancies and with good rental growth prospects. The German market remains very competitive, and we continue to evaluate a large number of potential acquisitions to find the right ones.

In France, we acquired a smaller property in Lille that complemented our existing portfolio in the city. And we also acquired 2 further floors in our Park Avenue building in Lyon. Thereby taking our ownership to 86%.

During the year, we also agreed the sale of 28 properties for a total of GBP 187.2 million at the yield of 5.4%. This included a GBP 65 million regional portfolio in the U.K. And excluding this transaction, the yield on the other properties sold was 3.6%. The properties sold included Quayside, Grange and Sidcup in the U.K., and a property in Dusseldorf, that were all sold to developers for alternative use.

We also sold smaller properties in all countries as well as our development in Paris, Ateliers Victoires, that was by then fully completed and let.

The sale of the U.K. regional portfolio was done for strategic reasons. The properties had less active management opportunities. It means that we are now concentrating on our core markets in London and the Southeast. This active portfolio management reflects our focus on crystallizing profits that can be redeployed into other opportunities, and we grow the longer-term earnings capacity even if we do expect slightly lower earnings growth in 2020 before all proceeds are reinvested.

Before I hand over to Andrew, I would also like to talk about our ESG activities during the year. The CLS has always had a strong entrepreneurial company culture. And during the year, we have ensured that it is clearly described and understood by all stakeholders. Our vision is to be a leading office specialist and a supportive, progressive and sustainably focused landlord.

Since we employed our first sustainability manager in 2011, we have worked on improving the sustainability of the portfolio. The focus in 2019 was to embed this into all that we do. And examples include green lease clauses, investments to improve EPC ratings for all properties, installation of smart meters and photovoltaics and ensuring that all developments meet BREEAM Excellent. While there's more to do, our progress was recognized in our improved GRESB ESG scoring that increased from 63 to 70 in 2019.

That's also meant setting more ambitious targets around carbon and energy reduction, renewable energy, waste management and recycling. And Simon will be covering that in more detail as part of the property section. We have also established a workforce advisory panel with 8 representatives from all countries to ensure we are continuously listening and improving our workplace and the well-being of our employees.

On the governing side, we have a new independent non-Executive Chairman and have also recruited 2 new directors to the Board, which will share both the audit and remuneration committee as independent non-Executive Directors.

With that brief overview of our ESG actions, I would like to hand over to Andrew, who will take you through the financials in more detail.

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Andrew Michael David Kirkman, CLS Holdings plc - CFO & Director [2]

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Thank you, Fredrik, and good morning, everyone. This morning, I'm going to run you through the financial results for 2019, which, again, show another excellent performance, continuing our leading track record.

Turning to the financial highlights on Slide 8. This slide sets out a number of our key financial metrics for the business. As Fredrik articulated, EPRA net asset value grew particularly strongly, up 6.3% to 329.2p per share and a rise of almost 60% over the last 4 years.

EPRA earnings per share fell by 8.4%, largely as a result of foreign exchange movements, but still up over 40% over the last 4 years. I'll cover the movement in earnings in more detail on a later slide. Cost of debt fell to 2.42%, a new record low for the group, and interest cover was healthy at 3.4x.

Finally, we are proposing a final dividend of 5.05p per share, resulting in a full year dividend of 7.4p, a rise of 7.2% from last year. The total dividend is more than 1.6x covered by EPRA earnings.

The rise in EPRA NAV plus the dividends paid in 2019 results in a strong total accounting return of 8.6%.

Over the next few slides, I look at some of these numbers in more detail and the drivers behind them.

The waterfall chart on Slide 9 sets out the main components of the movement in EPRA net asset value, which demonstrates that the 6.3% growth was largely driven by fair value uplifts and earnings.

As already highlighted, property values [increased by 3%] in local currency, which equates to 14.1p per share. Dividends paid in the year were GBP 28.7 million or 7.1p, which was more than covered by earnings of 12.0p.

As highlighted, we refocused the group in 2015, disposing our stake in Catena. We also disposed our remaining bonds and our First Camp stake, which is shown within the discontinued operations. These disposals more than offset the 6.3% strengthening of sterling against the euro, which results in a 7.7p per share reduction in NAV.

On this next slide, we have set out the movement in EPRA earnings per share. While most foreign exchange movements go through other comprehensive income, movements on U.K.-based euro-denominated bank accounts go through the income statement. The strengthening of sterling by 6.3% against the euro resulted in this 1.3p per share reduction.

The increase in net rental income was driven by greater acquisitions and disposals and securing leases ahead of ERVs. The rental increase more than covered the increase in net expenses, much of which was personnel costs to respond to growth in the group.

Lastly, it is worth highlighting that finance income was lower in 2019 as we received less interest income from the comparatively smaller corporate bond portfolio. Going forward, following the sales of our stake in Catena and the remaining corporate bonds, finance income will be significantly reduced. However, we should see a marked increase in net rental income as we invest the cash proceeds into new acquisitions.

Talking of our cash position, Slide 11 sets out the movements in CLS' liquid resources during 2019. Overall, adding together cash, bonds and our stake in Catena, our liquid resources increased by about GBP 50 million during the year to end GBP 259 million. This movement can be viewed as a result of 3 different drivers.

Firstly, after the payment of dividends, interest, tax, et cetera, we retained about GBP 20 million of operational cash flow in the business to continue to drive the growth in NAV.

The biggest movements were around the 3 bars in the middle relating to the property transactions, where we invested roughly a net GBP 10 million. We would expect further net outflows in 2020 as we target more acquisition opportunities.

Finally, the disposals of our stake in Catena on remaining corporate bonds realized about GBP 14 million more than their value at the start of the year.

On Slide 12, we have set out our debt activity in the year. It was another busy year with 5 refinancings, 4 new financing through acquisitions and the repayment of 3 loans associated with disposals. Particular highlight was the early refinancing of Spring Gardens, which both reduced the cost of debt and increased the maturity by 3 years. Across our countries, the cost of debt fell, resulting in a weighted average cost of debt falling by 1 basis point to 2.42%, as stated a record low for the group. This was despite the proportion of higher cost U.K. financings increasing from 45% to 49%. We are well advanced at the refinancing activity for the year, but we are also exploring wider financing options, more of which on the next slide.

My penultimate slide summarizes our debt position, showing that we are well positioned with very low cost of debt, good interest cover, over 3/4 of our debt is fixed and we have strong banking relationships with loans from 27 different lenders.

Given the refocusing in the year, we have finished with a higher cash balance. However, we expect our gearing level to increase this year as this cash is deployed, when we make further acquisitions.

In 2020, we will also explore options for our U.K. financing strategy, particularly through secured or unsecured portfolios, covering existing loans, unencumbered properties and new acquisitions.

My final slide, Slide 14, shows the growth in our property portfolio during 2019, with the portfolio ending the year with over GBP 2 billion. As highlighted, there was a significant refocusing during the year with the completion of 24 disposals for GBP 163 million, but an overall net investment of circa GBP 70 million, with the acquisition of 11 properties completed for GBP 233 million.

The valuation uplift of 3% in local currency equated to GBP 60.8 million, with particularly strong growth in Germany and a good uplift in France, again, demonstrates the merits of our diversified approach.

And with that, I will hand you over to Simon to continue to give you further information on our property portfolio.

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [3]

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Thank you, Andrew. Good morning, everybody. So Slide 16, I mean, a familiar picture, I think, pretty worked for everybody here, but a resilient, diversified tenant base with just under 780 and occupiers across the 3 markets generating about GBP 110 million a year of contracted rent. And approximately 23% of our rents are coming from government, 25% from major corporations. In the U.K., for information, despite selling the regional government portfolio, we still have a robust 34% rent growth coming from Central Government Departments.

The bottom left there, 32% of our contracted rent comes from 15 tenants, which are excellent covenants, many of which you will recognize. Following recent acquisition activity last year, there were some new entrants straight into the charts at #6 and #7, Barts NHS and Hammersmith & Fulham Council.

Across the group, on the right there, the portfolio, the average rent per square foot is tracking nicely upwards, 3.7% per annum on a cumulative basis since 2015. Now whilst clearly, this can be influenced by new investments and disposals, much relates to securing new lettings above ERV, which I'll come on to. 89% of our properties are office use by rent, with the remainder spread across high income-generating student and hotel and a little bit of retail, which is important communities for some of our office occupiers. So same picture, it's a strong, diversified tenant mix, which makes our portfolio very resilient.

Let's turn the slide and look at what the teams have been doing. So our in-house asset management team continued to add value. We signed new leases and regears on 870,000 square feet in the year, and including rent reviews, we closed 158 transactions, securing GBP 14.7 million of annual rent. And on average, negotiated deals were 3.3% above December ERVs.

Lease extensions accounted for 57% and new leases 43%. And our weighted average unexpired lease term was 4.75 years, slightly lower than a year ago, primarily due to the burn off of some larger government lettings, such as Spring Gardens and New Printing House Square.

The top-right chart is a walk-through from contracted rent to ERV. Our value is, I think there's a little bit of over-renting in the portfolio. But importantly, we have 5 million of vacancy and about 10 million of reversionaries. So there's 15 million there of potential upside for us to capture.

And we won't capture all the vacancy, that's an important point because we think it is right to have about 3% to 5% vacancy in the portfolio because that creates opportunities and churn.

And looking at the bottom right graph, you can see that there were some very minor upticks in the U.K. and German vacancy, and that was influenced really by the sale of the regional portfolio, which was fully let and new acquisitions. Otherwise, like-for-like, it would have been down.

France was impacted, as Fredrik indicated, by the sale of Ateliers Victoires, which was our Paris development, which was fully let at a very high rent.

Now let's turn on to sustainability. A leaner greener portfolio. So important to note, I mean, we clearly operate in some of the most densely populated environments in Western Europe, faced with undisputable climate change, the need to become leaner and greener is more important than ever. We made further progress in 2019. Renewable and low-carbon generation was up by more than 32% to 718,000 kilowatt hours. What does that mean? It's about 200 houses you could be running every year.

94% of our energy is purchased on green tariffs. Water usage per square meter is down, 4.5%. Further carbon reductions of 214 tonnes. Solar PV capacity up at 349-kilowatt panels invested. The target is to hit 500 by the end of the year, this year.

U.K. operational recycling up from 71% to 73%. And on the right there, total carbon we've reduced is 3,213 tonnes, which is a reduction of 25% over the last 5 years.

EPC improvements throughout the portfolio with no E- or F-rated properties. So very simply, we -- everyone in this room, our tenants must use less resources. And the energy we use must eventually be net 0 carbon. We're imposing tougher standards, providing training for our staff, actively looking to improve EPCs on our assets. We're undertaking BREEAM ratings on all our managed assets this year, and we're launching a CLS design guide to help our teams and consultants focus on sustainability.

Turning on to the next slide. Some live examples of where we're investing in sustainability and amenities. And our occupiers also continued to place far more importance on design and sustainability. So we're constantly looking at ways to create flexible and more sustainable workspaces.

In Germany, Mittler Pfad, Stuttgart, we're investing GBP 2 million for repositioning the building. Plans include converting 19,000 square feet of redundant storage space to revenue-generating offices, external façade enhancements and external communal areas.

In Great West House in Brentford, we launched our flexible workspace product called Base Offices. This offers plug-and-play prewired suites to let on flexible terms with communal meeting rooms and kitchen facilities. Five suites were launched literally last month, and 2 already in legals. Further rollouts are planned in Bracknell, New Malden and other buildings.

Moving over to New Malden. At Apex Tower, we are underpinning a significant refurbishment, investing GBP 12 million. Work has started and will provide a large modern reception with dropping work zones, meeting rooms, kitchen facilities, EVs or electric vehicle charging points being installed. And we're targeting an EPC B rating on this existing building. It's currently an EPC D rating.

On the next page, some more examples. The Technical Town Hall in Bochum, we're investing GBP 5 million on plans to build a new rooftop office for the city. And we expect planning this spring, and it will provide 20,000 square feet. The city are willing to trial an open plan concept, which I'm advised will be a first for a Bochum administration. The lease of the whole building will be extended to 2049. And importantly, we're looking at a sustainable timber frame and rooftop photovoltaics.

At 9 Prescot Street, close to here, in London, we are working on designs to invest circa GBP 20 million, improving the tide lower office floors currently occupied by Barts Hospital and window replacements, energy investments, targeting EPC B rating, full amenity provisions and the passing rent on those refurbished floors, we expect to increase up to 50%.

At Park Avenue in Lyon, we're planning to invest GBP 5 million, with a new firmly efficient façade, refurbishing 42,000 square feet office floors, communal areas, electric vehicle charging, bank facilities, lockers and showers, et cetera.

And just turning to my last slide now. We continue to work on our 3 office developments. And the total build cost would be circa GBP 60 million for a potential GBP 4.3 million of additional rent. At Vauxhall, we are awaiting planning permission on a -- for 29,000 square foot, 10-story building. The new scheme's ERV will be GBP 1.4 million, significant uplift from the current GBP 130,000 per annum, approximately GBP 12 million to build that. It will provide a little café, roof terraces, some showers, lockers. Here, as a new build, we're targeting an EPC A rating and a BREEAM Excellent score.

Again, PVs, electrification, we do have electricity, but what that means in the industry is that no gas supply. So no fossil fuels are going to come to this building, which is a big step. And EV charging, again, will be provided and potential delivery in 2022.

Over to Germany and Stuttgart at Vor Dem Lauch, we're also awaiting for planning permission for 140,000 square foot development. The new ERV will be about GBP 2.5 million a year. Approximately GBP 30 million to build that. Again, café, roof terraces, showers, EV charging and a certification, DGNB Gold, which is a German certification and potential delivery in 2022.

Unfortunately, our Maidenhead scheme faced a bit of opposition. So we're proposing a slightly smaller scheme, reducing from 10 to 6 floors, and it will provide 43,000 square feet. And similar story in terms of the EPC A target, BREEAM, PVs, electrification, no fossil fuels and potential delivery there is now 2023.

Thank you. And with that, I'll hand back to Fredrik.

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Fredrik Widlund, CLS Holdings plc - CEO & Director [4]

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So thank you, Simon. On Slide 23, markets. As you know, we operate in 3 countries: the U.K., Germany and France. And although they're all large western economies, they're also different markets with very different characteristics. So in the U.K., the economy has performed reasonably well, and the sentiment from discussions with both investors and tenants has portrayed a significantly more positive outlook after the election in December.

I don't need to point out that a Brexit negotiations remains a risk, but the fundamentals and values does look attractive in the U.K.

Our portfolio is now concentrated on London and the Southeast, an area that's the key driver for U.K. growth and with GDP exposure well above the national average, and our portfolio is well positioned to benefit from any economic uptick.

We're also seeing rental growth in the portfolio, at this stage, modest at 1.3% over 2018. With low average rents and limited supply, there is still room for continued growth.

On the acquisition side, we're also seeing value and expect to continue to acquire properties in 2020 despite the recent reduced transaction volumes in the market.

Moving on to Germany. The Germany economy has slowed down given its dependency on global trade, but despite this unemployment is at record lows and property fundamentals still looks attractive. With current funding costs, these tractions are likely to remain in the foreseeable future. We have one of the best net yields in our portfolio when taking into account the cost of debt for our portfolio in Germany.

This in combination with rental growth due to low vacancies and limited supply, that means we will continue to seek acquisitions, although with a caveat that competition is high, and we will not compromise on our underwriting criteria. We are a long-term investor, and we can afford to be patient.

The French economy grew just below the U.K. in 2019, very much driven by domestic demand. We do consider domestic protest to be a negative for international tenants. And we have not seen the same positive fundamentals for office demand to date.

Saying that, low vacancy in the CBD areas are starting to trickle out with positive impact on rental, data and values. We started to look at selective acquisition opportunities. But overall, the picture is similar to the last few years that we see more value in the U.K. and Germany. And our main focus in France is on cash flow and future-proofing the portfolio with investments in our existing properties.

So in summary and to wrap up 2019, on Page 24, we had a good year with consistent and strong delivery of our objectives. So EPRA NAV growing 6.3% to 329.2p per share, and EPRA NAV has now increased nearly 60% over the last 4 years.

The performance last year, despite some FX headwinds, was driven by valuation uplift, capital gains and operational earnings. The refocusing of the portfolio was essentially completed with the sale of Catena, First Camp, corporate bonds and the regional U.K. portfolio. This not only gave more focus for the teams, but also gave the group significant resources that will be reinvested into our core areas and activities. We had a very active year with GBP 257.2 million of acquisitions and GBP 187.2 million of disposals in all 3 countries. This active approach is well integrated in the organization, and we will continue to acquire where we see opportunities and sell when we believe that we have maximized the potential of the properties or when they no longer meet our return criteria.

As you can see on the right-hand side, we have a healthy yield differential between net initial yield and cost of debt. With the portfolio now locate the areas display rental growth, we believe this will continue.

We have also increased the average lots at our property over the last few years, which drive the efficiency over time.

Total accounting return was 8.6%, and the Board is, therefore, proposing a final dividend payable on 29th of April of 7.4p per share, which is up 7.2% from previous year.

We have talked about our ESG framework and all of this is constantly evolving. We have a robust framework and action plans in place on how to continue to improve. The portfolio is well positioned and diversified in larger cities to capture rental growth, and there are good opportunities to add value to the properties by pursuing selective refurbishment and development that would delay the long-term value.

We also have a strong balance sheet with significant cash to fund future acquisitions. So in summary, we're in a good place.

With that, I'd like to conclude today's presentation. We thank you all for attending. And please let's open up for some questions.

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Questions and Answers

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [1]

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Kieran Lee from Berenberg. Just a few from me, actually. The main focus for yourselves is obviously acquisitions over the coming year. How quickly can you deploy these funds? And how much can you deploy given your LTV considerations? There are couple of follow-ups, you want me to do them all now or...

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Fredrik Widlund, CLS Holdings plc - CEO & Director [2]

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Or maybe we'll start with those to start with. So -- maybe start with how much we could deploy. I mean you obviously need a certain amount to be able to run the business on a day-to-day side, which probably is between GBP 75 million and GBP 100 million. If you exclude that from the GBP 260 million, just shy of GBP 200 million, and we'd say 50% leverage, that would be about GBP 400 million that you could potentially deploy.

How quickly will that happen? It depends a bit. As you know, the countries have quite different legal system, et cetera. So even if you find something today in Germany, it would take a bit longer to close that. If you find things in the U.K., they could exchange and complete within 4 to 6 weeks.

The pipeline is looking reasonably strong at the moment. So it's very hard to say an exact date, but I feel pretty optimistic in terms of deploying at least part of the cash pretty shortly.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [3]

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Perfect. And just as a follow-up, when you're actually deploying these -- sort of when you're actually going into the markets, who is it that you're coming up against? You've seen some of the other sort of Central London specialists move out into Brixton, for example, are you finding that you're competing against them more in London?

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Fredrik Widlund, CLS Holdings plc - CEO & Director [4]

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Yes, I would probably say that in the Greater London area, we are competing both with other listed property companies, private equity, and in some cases, even individuals. As you know, it's a very deep market with a big pool of buyers. I think in Germany, we tend to probably more be up against value-add private-equity-type investors and less sort of listed German sectors, which tend to focus more on the prime CBD areas.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [5]

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Perfect. Sorry, and have -- I know you mentioned that you won't be compromising on your underwriting criteria. If we look back at what your current underwriting criteria is versus, say, what it was in 2014, 2015, have your hurdle rates or target IRRs changed at all?

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Fredrik Widlund, CLS Holdings plc - CEO & Director [6]

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No. I mean as you saw, our net initial has moved down but so [our] cost of funds. We're still targeting about 12% return on equity and that's based on roughly between 50% and 60% loan-to-value.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [7]

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Perfect. Sorry, and last one, I promise. Your -- you mentioned that you've got this new sort of flexible Base Office brand, I gather it's mainly U.K. at the moment, do you see potential to roll that out across Germany...

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Fredrik Widlund, CLS Holdings plc - CEO & Director [8]

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I'll hand it over to Simon.

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [9]

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Yes, no, it is at the moment U.K. And we have a product called Instant Office which we're going to move into Base Office, which is a really very modern refresh. It is something we're looking at for the Vor Dem Lauch development in Stuttgart because we're keen to introduce a coworking concept floor. And I think there will be things that we can pull over from the U.K. for Germany.

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Andrew Murphy, Whitman Howard Limited - Head of Research [10]

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Andy Murphy from Whitman Howard. Two questions, if I may? Just looking at the -- one of the last slides here, talking about your reversionary income, it was quite an opportunity. Is -- does that unwind sort of steadily over a period of time? Or is there any sort of lumpiness to that and the sort of flip side to that is on the over rents, does that unwind sort of steadily at a similar sort of rate?

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [11]

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Yes. I mean the reversionary, it's probably slightly harder to capture in Germany and either in the U.K. and a lot of that is because of the leasing structure, the law. However, the German team there have been taking a much more proactive view, focusing on its reversionary ERV income. An example is a building called Tangentis in Munich, where we had a large occupier of about 25,000 square feet called [BAS] and there were break options, and we actually very proactively exercised the break option to stop them continuing in the space. It sounds a bit harsh. But they were paying a rent that was significantly below the ERV, and they weren't willing to pay an ERV rent. Now that's perhaps a one-off example, but I think there is more focus on it in capturing that. But it does depend on the leasing structures that you've got in place.

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Fredrik Widlund, CLS Holdings plc - CEO & Director [12]

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It might be worth mentioning, though, that it's pretty well spread out. It's not lumpy in terms of 1 or 2 properties. It's pretty much spread out over a larger number of properties, both on the over-rented and under-rented. As you know, the WAULT is 4.7 years. So it's not like you have to wait 10 years before you get there. It's in the next 2, 3 years.

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Andrew Murphy, Whitman Howard Limited - Head of Research [13]

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Perfect. And my second question was on the environmental things that you're putting in place. So it's great that you're seeing, you're doing and getting on the things, I think, by you that is extremely important. I was just wondering to what extent that's costing you money. I mean it clearly is. But I suppose the real question is, are you able to charge your customers for -- are you able to charge them a premium? Are they willing to pay for those kind of PVs, the charging points and the other bits and pieces that you're putting in?

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Fredrik Widlund, CLS Holdings plc - CEO & Director [14]

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Yes. I mean things like photovoltaics, they would have to meet the same normal underwriting criteria as any investment we do, and the payback time is normally 7 or 8 years for that. So we would assess that also from a financial perspective. So it is an income-producing investment. A lot of the other things, it's also about education, it's about having the right leases, it's about talking to the tenant. This is something that the tenants are asking for. So it's not just us saying, this is a good idea, they're asking us to do this.

If you could charge more for it? I guess in some ways, it's sequentially if you don't do this, you're going to have to charge less. So it's almost, I think, you're going to have to do these days, and it's being asked for by tenant. So yes, it is a way of maintaining and growing rental base. But if you don't do this, yes, you certainly going to have falling rents.

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Andrew Murphy, Whitman Howard Limited - Head of Research [15]

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Just a follow-up question to that. Across the portfolio, what proportion of your properties would you say you've got any meaningful amount of these kind of environmental assets already deployed? And what opportunity you have across the rest of the group to capture that value?

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Fredrik Widlund, CLS Holdings plc - CEO & Director [16]

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I mean where we refurbish something today or where we get floors back, we would implement it in more or less every single property unless we have identified for disposal at some point. But otherwise, if it's a long-term haul, we would deploy this. And it's not just at 1 to 2 properties, it wouldn't be in every single of our 97 properties.

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [17]

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We are -- as I mentioned, we are this year -- I don't know if people are familiar with the BREEAM certification. It's an environmental assessment method. And we're doing that for all of our managed assets in all 3 countries. It's quite a big exercise. And what will come with that is also options of improving the ratings, so we can look at quite a granular level and model each building to see what needs to be done and that might be changing the glazings at an extreme level. Very often, it's operational. It's all about operational usage in carbon and training people to manage the buildings. And yes, that will be a very interesting exercise to see what that path will look like going forward of improving the buildings. But it is -- the important thing is, it's not something just for one sustainability team. I think what we're sort of -- everyone is now embracing is everybody in our company, everyone has to be thinking along these lines and really challenging and pushing your consultants. When you -- we do rolling refurbs all the time. And it's really then making sure this is on the agenda, the design meetings and challenging the M&E chemical consultants is to why are you choosing that, why you look at an [associate] pump. And it's just -- it's training people to be like that. And actually, increasingly, it doesn't cost that much more. It -- in fact, often, it doesn't cost more. There's enough technology now that's being built that you have choices to put in as opposed to perhaps more traditional technology.

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Christopher Michael Spearing, Liberum Capital Limited, Research Division - Research Analyst [18]

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Chris Spearing at Liberum. Just -- sorry, more questions on sustainability. But just wondering, you've obviously made good progress over the year. But do you have any sort of specific targets for the group going forward? A lot of other companies have sort of talked about dates when they would like to be 0 carbon, et cetera?

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Fredrik Widlund, CLS Holdings plc - CEO & Director [19]

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We have not published a net 0-carbon target date, and the reason for that is that when we do that, we'd like to make sure we can deliver on it. First step is to make sure that we review every single property. So we know exactly what we have there. And we will then design a plan for the entire portfolio how to take there. So I would expect us to announce something at some point, but not at this stage. And I'd rather be very confident that we know what we're talking about before we throw out the number. And as you know, the numbers vary significantly between what different people announce these days. So...

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [20]

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We do have an existing target, which is to, again, reduce our carbon by the 20 -- further 25% by 2025 from a base of 2018, but we're still working on that. And I think it's really important that for the teams as well that you don't suddenly say, "Oh, let's scrap that target, we've now got a 2030 or 2035 or 2040. Otherwise, it's quite demoralizing for the teams." And I think there's a lot of greenwashing going on in our industry and property. There's lots of initiatives that people are grabbing hold of and saying, "Yes, we're signed up and supporting that." So I think we have to be careful, keep it focused and importantly, keep our teams motivated to hitting realistic targets.

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Christopher Michael Spearing, Liberum Capital Limited, Research Division - Research Analyst [21]

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And sorry, I have another follow-up on base, Simon. Can you be sort of specific as to sort of what percentage of the portfolio you'd expect it to sort of grow to over the next few years?

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Simon L. Wigzell, CLS Holdings plc - Head of Group Property [22]

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Gosh. That's a -- I mean it's not WeWork. It's not we're in a different marketplace for a start. But if we take the WeWorks of the world, and there's lots of those products around, I mean, in London, it's about 6% or 7% of the market. Now people probably because they got a lot of pay off probably think it's a huge chunk of the market. It's a small percentage. The industry thinks it might grow to sort of 10% to 15%, and that is sustainable. I think similarly, for us, it will be a small part of our market, of our portfolio, a low percentage. And we will see how it progresses over the next few years.

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Unidentified Company Representative, [23]

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Any more questions? Anyone? All right. Well, in that case, thank you all for attending. And today's call has come to an end. Thank you.