CLS Holdings needs to hold onto its tenants

Like many of its peers, developer CLS Holdings (CLI) swung to a loss in 2022 due to the higher interest rate environment. However, the office landlord, which owns assets in the UK, Germany and France, also faces additional problems that its competitors do not.

First, while there is arguably little a landlord can do about a short-term portfolio valuation drop in a wider real estate market downturn, the fact that its net rental income also dipped last year is a concern. Many other real estate investment trusts (Reits) – Tritax (BBOX), Unite Group (UTG), Derwent London (DLN) and PHP Properties (PHP) – posted chunky valuation falls over the past few weeks in their results for the last calendar year, but all of them still recorded an uptick in net rental income.

CLS’s comparatively worse performance is due to the amount of unlet space in its portfolio by value growing to 7.4 per cent. For its UK assets, that figure is 10 per cent, a worrying increase on 5.4 per cent the previous year. CLS blamed this on some of its downsizing and, with £29.5mn of contracted rent expiring over the next two years, other tenants could also downsize – or leave. After all, the need for offices in the post-Covid world is still an open question especially with recessionary pressures and low growth looming across Europe.

These worrying trends are accompanied by an increase in net debt to a level that is much higher than other FTSE 350 Reits. The saving grace is the hefty discount to net asset value, but we feel this is justified considering its weak operational performance. Sell.

Last IC view: Hold, 212p, 22 Aug 2022