CLS Holdings' office values continue their freefall

Pretty much any way you look at it, CLS Holdings (CLI) is headed in the wrong direction.

The landlord's portfolio of European office assets outside big city centres is nosediving in value even faster than last year as high interest rates and questions around post-Covid working continue. Its net asset value (NAV) has been slashed by 28.5 per cent from its 327p high point in 2021, while its shares have lost well over two-thirds of their value since a high of 311p in late 2019.

IFRS earnings per share (EPS) do not cover its flat dividend, but adjusted earnings per share (EPS) stripped of valuation changes does. However, that adjusted EPS fell from 11.6p to 10.3 because its net rental income growth failed to offset rising finance costs from its growing net debt mountain, which is now larger than its equity value. This enormous leverage makes it unique in the UK-listed property sector. Not in a good way.

Consensus forecasts are for adjusted EPS to nudge up to 10.6p by 2025 and for the dividend to hit 8.22p, but even this limited growth looks overly bullish. CLS' vacancy rate has climbed to 11 per cent from 7.4 per cent the year before, driven by its empty UK offices, where vacancy climbed from 10 per cent to 15.8 per cent. When there is so much space in your portfolio, it becomes hard to raise rents, something retail landlords know all too well. The discount to NAV might tempt some, but we believe this is a fair reflection of the strong possibility that CLS will need to offload its emptying assets into a depressed market to chip away at its debt. Sell.

Last IC view: Sell, 146p, 8 Mar 2023