CLS valuations hold firm

With future working patterns still up in the air, it remains hard to judge prospects for office landlord CLS Holdings (CLI). Though a confident management team pointed to excellent rent collection levels and stable valuations at the half year, the share price shows the market still expects a big write down in expected future cash flows.

On a tangible asset basis, the portfolio valuation dipped 2.3 per cent to 337p, but not for the reason investors might fear. A stronger pound, rather than valuer pessimism, was the true culprit, leading analysts at Peel Hunt to conclude the decline will be “reversed in short order”.

A £2.8m dip in the investment portfolio cancelled out an uplift a year earlier and passed through the income statement as a fair value loss. The rest of the statutory profit decline came from forex swings, and recognition of a £10.2m increase in deferred tax liabilities following HMRC’s planned corporation tax hike.  

“It’s been pretty resilient,” chief executive Fredrik Widlund told us. “In the circumstances, I don’t think it’s been a bad outcome.”

Certainly, tenant health could have been worse. Ninety-nine per cent of first-half rent has been collected and just 3 per cent of rent for the third quarter is outstanding. In turn, this has led to a small reversal in bad debt provisions.

A rise in the group-wide vacancy rate to 7.7 per cent was also largely due to the purchase of £165m-worth of properties. The net initial yield on the six acquired offices – all but one of which are in Germany – came in at 3.9 per cent, though a 6.1 per cent reversionary yield on the assets will provide an important litmus test for tenant appetite.

To that end, Widlund is “hopeful we will see some improvements in the second half of the year as people continue to return to the office and our recent increased level of enquiries translates into letting deals”.

Hope, as that hackneyed business saying goes, is not a strategy. But investors keen for more clarity will have to settle for persistent uncertainty for several years. Indeed, CLS deems the ultimate shape of office life as its chief business risk.

“Whilst the hybrid occupation market is now accepted, it is as yet not fully clear what this means in practice,” the landlord notes. One solution is to offer more break clauses, and greener, more comfortable spaces. But the company and investors must also play the waiting game.

After a narrowing in the discount to Peel Hunt’s full-year NAV forecast of 319p, we move back to hold.

Last IC View: Buy, 229p, 17 Mar 2021